On the ‘Asian Miracle’

Viking Vista:

IF there were a gold standard, the holder of the reserve could decree a different peg.

The holder of the reserve may not decree any peg he likes. Under a conventional gold standard, the state decrees the peg. Even if different gold bankers have different currencies, so my "dollar" is a milli-ounce of gold and your "dollar" is two milli-ounces, we may not repeg our dollars at will, because our circulating notes obligate us to the peg we established when issuing the notes. If our loans are bad, we lose the reserve. That's the whole point.

That would affect everybody equally and instantly.

It would affect all holders of a particular banker's notes, if a bankruptcy court allows the devaluation. My point is that your banknotes still lose value in this scenario, because you hold this banker's notes and not another banker's notes. You don't suffer "inflation", but you still suffer a loss.

With a central bank, all "dollars" are the same, and a devaluation (including gradual devaluation from inflation) does affect everyone.

And except for the transient confusion would be meaningless.

It's not meaningless to the holders of devalued notes, the ones promised two milli-ounces of gold per "dollar" held but now may expect only one.

What REALLY happens, is that the Federal Reserve creates money out of nothing. It then uses that money to buy from its preferred institutions.

Typically (until very recently), the Fed bought short term Treasury securities almost exclusively. I thought I understood the system then. Now, I'm back in the dark.

... those at the end of the transaction chain wind up with devalued money.

I agree with you here.

It is IDENTICAL to counterfeiting in every way except (1) it is legal ...

Legality makes all the difference in the world, doesn't it? What is property? Property is theft, except that it is legal. From Socrates to Proudhon, the story is the same.

Of course, "legal theft" (or "proper theft") is a contradiction in terms, but Proudhon still has a point. Since I favor both private property and markets, I must favor a bit of this legalized "theft". The question is: which "theft" do I favor?

And don't forget that high up in the counterfeiting food chain is the federal government who sells its bonds to the Fed's preferred institutions (or apparently in recent months directly to the Fed).

I see no reason for the preferred institutions at this point. The Fed can buy and sell Treasury securities online at its own web site. If the Treasury wants to sell securities to the Fed, it can use the same web site.

Central bank created inflation--the approximately 3% average annual inflation that we've experienced since 1913--is exactly that type of wholesale theft.

If you don't want to suffer this inflation, don't hold cash. If you prefer holding gold, hold gold. Hold the bullion itself. At $1000/ounce, how much could all of your gold weigh? If you want to insure the gold against theft, do that. If you want to pay for secure warehousing, do that. Security is not free.

MB, don't be obtuse, keep the context.

If you want a more specific context, specify one. You wrote "investor class" without further qualification. If you want an ever fatter bank account without investing, including the risks, I have no sympathy with you.

If I could expect my dollars to have about the same purchasing power in 30 years, I could stuff them in my mattress.

You may still bury gold in your back yard if you want. There's no law against it.

That was the case for a few decades before 1913.

No. Money in your mattress could lose value before 1913, because the issuer of your banknotes could extend credit poorly or suffer other misfortune. Your particular notes might or might not hold their value. "The dollar" held value relative to gold, because the price of gold in dollars was fixed by law, but your particular banknotes could lose value, and it happened all the time. If you want to go back to that, I might even join you, but we mustn't pretend that our promissory notes will be more secure.

Now I must spend money on accountants, brokers, and financial advisors to figure out how not to lose to the inflation created by my government. Those are the class of investors who benefit at my expense by deliberate steady government-created inflation.

Governments always benefit some interests over others, but they'll sell you some TIPS if you want them. I wish they wouldn't, but they will.

Those "slow, steady price rises" that don't bother you should bother anyone who is bothered by massive theft and wealth destruction.

Slow, steady price rises don't cost you anything if you hold assets with the same slow, steadily rising prices. Don't hold cash. Cash is only an accounting device. You aren't supposed to hold it. I don't want a monetary system encouraging people to hold cash, to perceive money itself as an intrinsically valuable asset.

Those with large sums at risk know that long before they die they need to assign tax-deferred account beneficiaries, parcel out gifts in small sums over time, set up trusts, consume consume consume, etc. to reduce the impact of estate taxes. That IS what people do, and they do it because of estate taxes.

Exemptions for small gifts, trusts and the rest are all part and parcel of the same established proprieties of which estate taxes are a part. Congress could enact an estate tax without these exemptions, but it doesn't.

A tax deferred account does not imply consumption.

Yeah, financial independence OF those running the state!!

Of course.

Why you bring title holders into this discussion, I have no idea.

Because they're involved in running the state. What else does "entitlement" mean?

John Dewey:

... venture capitalists know how to filter the proposals ... they bring a lot of smarts to the table before they disburse their funds.

A venture capitalist has strategies for filtering proposals, but he doesn't decide the success of his strategies. The market decides. You can't predict the future when other people are free to make choices.

Furthermore, free markets are efficient. A rational expectation of the value of a particular strategy exceeds the expected value of other strategies only if proprietary information informs the particular strategy, but proprietary information doesn't remain proprietary for long in an efficient market.

Some strategies outperform others. That's a separate issue. Some strategies are far more valuable in retrospect without contradicting market efficiency. The issue is what investors know about their investments in advance.

Intelligent investors do contribute information to markets. Intelligent investors contribute all information to markets, and markets are efficient for this reason. That seems like a paradox, but it's not.

A venture capitalist disbursing funds is not a successful investment. The venture capitalist doesn't decide the success of his investment.

I make three assumptions here. First, an investment organizes resources to produce things that other people buy. No one is compelled to buy anything. Second, an investor cannot know what other people will decide to buy, because he is not these other people. An investor can only make educated guesses about buyer preferences. Third, an investor learns to make educated guesses in the same marketplace of ideas available to other investors, so he's unlikely to possess exclusive information for long. Maybe he profits from some exclusive bit of information, but he doesn't profit indefinitely from it, because the value of the information decays. The value decays precisely because he and others seek to profit from the information.

Yes, many wrong investment decisions are made, and investors learn from those decisions.

It's not about what you've learned in the past. It's about what free, independent actors choose in the future. An investor profits only by serving these other actors, unless he "invests" to organize resources in a corporative state essentially guaranteeing his profits. To be clear, this flow of funds in a corporative state is not what I call "investment", but it is what many "capitalists" call "investment".

But many right decisions are made as well, ...

Agreed.

... and my guess is that more right ones are made than wrong ones.

Can't agree with you here. I've heard throughout my life that most "managed funds" underperform market indices for example. This observation led lots of money into index funds, and this trend presumably had feedback effects. The entire S&P 500 begins to behave like a single volatile asset, and the expected value of betting on this asset declines, compared with strategies pursued by many managed funds. The index strategy is a strategy, and the value of this strategy can decay as well.

In this sense, there are no "unmanaged" funds, because index funds are managed by people pursuing the index strategy; however, the underperformance of "managed funds" (relative to particular indices) in the past indicates something about the number of "right" investments vs. "wrong" investments. When many "managed funds" start beating indices, then the index investors are "wrong", and if this pattern persists, the index investors change strategies. It can't be true that index investing always beats other strategies. Cost averaging the S&P 500 is not immune to market efficiency.

Large corporations such as 3M, FedEx, GE, Exxon, Walmart, and IBM have made thousands of smart investment decisions worth many billions of dollars over the past fifty years.

At some level, we aren't discussing market dynamics anymore. Saddam Hussein had golden toilet fixtures in his many Presidential palaces. He became richer and richer all the time he ruled Iraq, even while his rule wrecked the Iraqi economy.

If the rules of the game favor large corporations, then large corporations will emerge, and the more regulated environment in which businesses compete seems to favor larger corporations. I'm not saying that large corporations are "evil", like Saddam Hussein, but I am saying that forcible decrees of central authorities make them larger. Success then becomes a matter of gaming the decrees.

Walmart can still make more "wrong" decisions than "right" ones, selecting inventory to stock for example. Walmart only needs to be more successful in this regard than competing organizations. It can fail to sell most of the new items it decides to stock at a profit for example. If KMart and Target also make more "wrong" decisions than "right" ones this way, Walmart can still be more profitable, because all organizations on this scale account for these "wrong" decisions as a cost of doing business and set their prices accordingly.

No matter how often planned economies fall flat on their face you'll always find someone to defend them.

The Asian economic model is full employment funded by limitless debt. A consequence of this is that a huge portion of the debt is bad debt (because the debt was never incurred by even nominally profit-seeking institutions). We are getting a taste of this model.

There is limitless debt in China with massive bad bank loans to go along with that. But the two trillion dollars in U.S. dollar reserves allows a way for off book losses of Chinese banks to be hidden and easily paid off according to this author: http://seekingalpha.com/article/162913-big-loss...

The more important point was that resources are organized to promote employment rather than profits. Obviously some Asian countries are more insolvent than others.

From the paper linked by danielkuehn at IDB Docs.Org [edited]:

Our main intuition is that financial markets enhance productivity
through efficient capital reallocation in the process of creative destruction, shifting capital from declining industries to those with good growth prospects.

Recent work shows that the lower TFP (Total Factor Production) of developing countries can be explained by the misallocation of resources across productive units.

Many studies explain how financial restrictions lead to an inefficient allocation either across sectors or across activities with differential productivities. The empirical evidence generally supports the predictions of these models.

This supports free markets in finance, not government industrial policy. Said another way, finance should go where it is needed, not where directed by politics.

Japan continues to suffer from the 1990's miracle of government industrial policy, just as the U.S. will suffer from our current misdirection of resources through Keynesian "stimulus".

(posted in wrong place)

Directing resources under normal economic conditions and filling an output gap when interest rates are at or near zero are apples and oranges. You can't point to one not working and just assume the other doesn't.

My thought could have been clearer.

Instead of "finance should go where it is needed", I should have said
"finance should go where free participants decide it is justified and most useful, not to satisfy politicians".

Government directed investment almost always brings low or negative returns becase politicians care more about skimming the money than making a productive investment. Also, it is genuinely hard to identify and organize businesses that are highly productive.

Politicians see long-time political supporters in a failing business who need help. Free participants see a failing business model or bad management. Government wants to "invest' more. Free participants want to liquidate and/or reorganize.

I completely agree with martinbrock on this.

To danielkuehn,
I didn't know that I was pointing to one or the other. Pointing to both, I don't see government intervention helping to build wealth in an economy in either "normal" or "0 interest rate" conditions.

Maybe you have some examples.

Government is setting the 0% federal funds rate, and I don't see 0% interest as representing any fundamental fact about the "economy". Interest rates should reflect the availability of real resources for investment. A 0% rate pretends that resources are now free.

This supports free markets in finance, not government industrial policy. Said another way, finance should go where it is needed, not where directed by politics.

I agree, but "finance should go where needed" seems a reversal of the process to me. The Keynesian "stimulus" is wasted but not simply because statesmen spend it rather than "private" proprietors. The bailouts of insolvent institutions are as much a problem if not a larger problem.

Market capitalism is a selective process, like Darwinian evolution. Intelligence enters the system through disinvestment more than through investment, just as "fitness" enters species when organisms die (or live more reproductively), not when accidents of genetic recombination alter the organisms.

In the economic context, "investment" is more like a genetic mutation, but most mutations reduce fitness. The "security" offered capitalists by the continual resuscitation of unprofitable organization effectively disrupts the process of accumulating intelligence by preventing failed investments.

Most small businesses fail, and this plentiful failure is the secret of market success, but it's also the bane of rent seeking capitalists. If too-big-to-fail organizations become too attractive to investors, even more small businesses fail for want of capital, and progress eventually halts.

martinbrock: 'Intelligence enters the system through disinvestment more than through investment, just as "fitness" enters species when organisms die (or live more reproductively), not when accidents of genetic recombination alter the organisms."

I don't understand this, martin. Are you claiming that industries only learn through failure? that only the "wrong" decisions and not the "smart" decisions by venture capitalists in funding innovation move us along the path to prosperity?

No. I'm saying that the smart venture capitalists don't know that they're the smart venture capitalists until after the market declares them "smart". The market decides which venture is smart, not the capitalist. Venture capitalists don't predict the market. The market selects ventures.

The "wrong" ventures are the ones the market does not select, and a greater variety of options provides more developmental paths for markets to explore. There is no predetermined "path to prosperity", waiting for smart investors to discover it. Beyond subsistence, greater prosperity is a choice. We make it up as we go along. Venture capitalists don't make it up. They only supply some of the options. The idea that venture capitalists make it up is an illusion of selective hindsight, systematically ignoring all of the options we didn't choose.

I'm not saying that intelligence is irrelevant to investor success; however, markets are efficient, and even the best informed investors compete with other well informed investors on the margin, so the value of information is marginal. Yet informed investors are the reason markets are efficient in the first place. That sounds like a paradox, but it's not.

martinbrock: " I'm saying that the smart venture capitalists don't know that they're the smart venture capitalists until after the market declares them 'smart'. "

I'm sure most venture capitalists know how to filter the proposals they receive. I'm not saying that they do not learn from their wrong bets. But they bring a lot of smarts to the table before they disburse their funds.

Again, my disagreement is with your claim that:

"'Intelligence enters the system through disinvestment more than through investment"

Yes, many wrong investment decisions are made, and investors learn from those decisions. But many right decisions are made as well, and my guess is that more right ones are made than wrong ones. I'm not referring to just startups, or to just to individual investors. Large corporations such as 3M, FedEx, GE, Exxon, Walmart, and IBM have made thousands of smart investment decisions worth many billions of dollars over the past fifty years.

See below.

""investment" is more like a genetic mutation"

Interesting analogy.

I'd add that the economic selection process in a market economy is not fatal to the people in the less competitive endeavors. Rather it shows those individuals how better to redirect their efforts to be productive. When a business fails, those resources, including its labor and suppliers, do not die, but find themselves instead employed by more productive firms.

I only add that because of the irrational fear of failure that leads democratic governments to protect and bailout businesses. Participants in a market economy would do good to see themselves as repeatedly jumping from one productive endeavor to another as consumer desires change, rather than as facing oblivion at the hands of cold merciless market competition.

And governments would do better to avoid hindering people's agility in making those jumps. In particular, our own government should focus on removing government disincentives to:

1. switch employment (i.e. employer-only deductibility of non-wage compensation, and #2 & 3 below),

2. hire (which are identical to disincentives to fire).

3. save (e.g. purposeful inflation, estate taxes, payroll tax, and soon, health insurance mandates).

I agree. Economic organizations are not individual human beings. Free individuals move from unprofitable organizations to profitable organizations as the unprofitable organizations dissolve. This "economic Darwinism" doesn't involve anyone starving, and I personally don't oppose some compulsory support for the unproductively disabled along with compulsory respect for property rights, but I certainly don't support the far costlier welfare for wealthy "capitalists" characteristic of the fascist states that became the norm in the 20th century, the U.S. being no exception. Maybe I have too little faith in human nature to trust the welfare of the disabled entirely to private charity, but I don't expect respect for private property to be entirely voluntary either.

1. Encouraging corporate health insurance and corporate retirement planning seem counterproductive to me. These systems seem more designed to create "secure" corporations than to encourage the dynamic market organization from which rising prosperity emerges. The cradle-to-grave corporate security model is only a modern reinvention of feudalism.

2. Of course, if your employer may fire you only on condition that he find you another job first, you are practically his slave. If employees in a corporative state accept this "security" while surrendering their right to leave an employer without his consent, we've come full circle right back to slavery and feudalism, but frankly, many people would accept this bargain.

3. I'm not sure about inflation and estate taxes. If you want to avoid inflation, don't hold cash or cash equivalents. Hold real assets. Too much inflation certainly destroys the information in price signals, but a little inflation isn't necessarily a bad thing, and I'm not sure that a freer monetary system necessarily guarantees price stability. Health insurance mandates for individuals could be no less reasonable than automobile liability insurance mandates, but they seem likely to be far less reasonable in practice. I'd love to scrap the payroll tax along with Social Security.

"Health insurance mandates for individuals could be no less reasonable than automobile liability insurance mandates"

It is a government handout to insurance company and health industry cronies at the expense of consumers. As a practical matter it will serve to drive up demand and accelerate the growth in health care costs. That will serve the state by making it even harder for people to be independent of the state in health care consumption.

And the justification for it is a myth. It will not decrease the Medicaid rolls (as costs grow, it will more likely increase them). Instead of targeting Medicaid users who, together with Medicare users, are responsible for almost all of the cost shifting that hits private consumers, it targets the uninsured, who mostly pay their bills, who are probably in the only group that does not over consume, and who add less than 2% to your and my insurance premium for the minority of times that they don't pay.

The insurance mandate is bad for everyone except the fascists.

Choosing not to drive is not nearly as problematic as choosing not to live. But, one thing the auto insurance mandates do teach us is that they not only don't work well, but are unnecessary. In spite of the law, uninsured motorist insurance is alive and well, because uninsured motorists are alive and well. And frankly, insurance should be a unilateral decision. Each person should decide for himself the value of the risks of driving.

Your 1 & 2 are spot on.

Monetary inflation is a transfer of wealth from those furthest to those nearest the central bank. It isn't about price stability (although central bankers spew all kinds of drivel in their own defense). Price stability is neither a necessarily good thing, nor is it something central banks are good at. But if you want long term price stability for savings--over terms encompassing the length of a person's working years--that was abolished precisely when the the central bank was created.

Monetary inflation is also the means by which the state loots its citizens without having to publicly vote for an overt tax increase.

Being able to use a currency as a store of value is a great efficiency, because of its abstract nature. It means individuals don't have to make specific investment decisions on hard assets, which requires much diversification and active management. Inflation destroys that efficiency for individuals to the benefit of the investor class.

Inflation is most definitely the enemy of the common citizen, and one of the greatest confiscatory tools of the state and their corporate cronies.

And of course estate taxes are a disincentive to save. People usually don't know when they are going to die. That creates an incentive to save to the very end, to ensure they can provide for themselves to the very end. The estate tax is an incentive to dispose of assets long in anticipation of death. It is a tax on--and therefore disincentive for--savings in its purest form. Anyone with millions in assets knows that they don't want to be caught dead with them.

Of course, inheritance is also one way for people to help provide some financial independence for their heirs. Since independence is the bane of the state, states have always liked estate taxes.

Re: "Monetary inflation is a transfer of wealth from those furthest to those nearest the central bank."

Well, from creditors to debtors, right? I'm not sure debtors are necessarily closer to the central bank.

And even then it's not necessarily a transfer from creditors to debtors I suppose - it's only such a transfer if monetary inflation overshoots expectations. If it undershoots expectation it's a transfer from debtors to creditors.

But I'm not sure what proximity to the central bank has to do with it, or what being a common citizen has to do with it. If you're a common citizen with all your money in a savings account it's bad for you. If you're a common citizen with debts it's good for you. It's not your commonness or elitism that matters - it's your finances.

"Well, from creditors to debtors, right?"

Wrong. Creditors price in the expected inflation as well as some uncertainty in its growth.

Take the time to read the complete post. I wrote: "And even then it's not necessarily a transfer from creditors to debtors I suppose - it's only such a transfer if monetary inflation overshoots expectations."

Besides, debtors price in expected inflation as well as creditors. What's your point. If they both expect the same monetary inflation and they both price it in and that monetary inflation comes to pass it doesn't make a difference if creditors price it in.

You think contradicting yourself in a post allows you to have it both ways. Instead, it only guarantees that you are wrong.

If you want to know what I'm talking about, read my posts to others.

It's not really a contradiction, it's a clarification. In a simplified version of the world inflation transfers wealth to debtors. In a clarified version of the world it's unexpected inflation that transfers wealth to debtors.

Either way your non sequitor about creditors pricing in inflation doesn't debunk anything I said since debtors price in inflation just as surely as creditors do.

I'm a monetary authority. I lend money to you to buy an asset. You expect to repay me from the yield of the asset, but the asset doesn't yield the agreed upon interest and principal. In other words, you paid too high a price for it. Neither of us are happy. We both want to increase the nominal yield of the asset, and I can lend toward purchase of the yield, so I do.

If the two of us manage to raise the nominal value (price) of the yield of your asset, then we effectively raise the nominal value of the asset as well. Now you can pay me, and we're both happy. That's inflation.

But I'm the one who decides to extend credit to your customers rather than driving you into bankruptcy. I make this decision for my benefit, not for yours, so I'll benefit most from it. You avoid bankruptcy, but avoiding bankruptcy isn't necessarily the best outcome for you.

The people paying higher prices for your yield are neither of us, but they can gain a nominal wage increase in the bargain, because they're part of the resource organizations, and I can extend credit to these organizations as well. The nominal increase needn't translate into a real increase, of course.

Monetary inflation is a transfer of wealth from those furthest to those nearest the central bank.

Monetary expansion does not imply a central bank, but it could have the effect you describe here.

It isn't about price stability (although central bankers spew all kinds of drivel in their defense).

When I use the word "inflation", I intend a general rise in prices, so all prices rise roughly in the same proportion, as though every price and the nominal value of every bill of credit were simply doubled. I don't intend an increase in the money supply, which could be inflationary or not.

A decentralized monetary authority, like gold bankers issuing promissory notes for gold, can and will expand the money supply at times. The supply of gold does not limit this expansion. The supply of everything including gold limits it, and this supply can rise. Real value can also appear to rise when it hasn't, and holders of promissory notes can lose value in this scenario, even if prices do not rise.

A decentralized monetary authority subject to a gold standard might prevent the declining value of dollars generally, but it doesn't necessarily prevent the declining value of the dollars you hold. Under a free monetary system, notes from different banks, all promising redemption in the same quantity of gold, do not trade one for one.

But if you want long term price stability for savings--over terms encompassing the length of a person's working years--that was abolished precisely when the the central bank was created.

I don't want it. Excessive inflation is counterproductive, but I have no fetish for price stability. Slow, steady price rises don't bother me. Slow, steady price declines could be counterproductive and create accounting difficulties. If you want to hold gold, that's fine, but simply holding cash should not be a winning strategy.

Monetary inflation is also the means by which the state loots its citizens without having to publicly vote for an overt tax increase.

In our system, you're right, but the solution to this problem is a limitation of the state's authority to borrow.

Being able to use a currency as a store of value is a great efficiency, because of its abstract nature.

I can't agree. If you want a store of value, hold a durable commodity, not currency. Currency records current value, not future value.

It means individuals don't have to make specific investment decisions on hard assets, which requires much diversification and active management.

That's precisely the problem. If you don't want to make specific investment decisions, you lose value. I have no problem with that at all. Insecurity is essential to the effective operation of capital markets. If you want security, just be honest about it and openly advocate some statutory entitlement.

Inflation destroys that efficiency for individuals to the benefit of the investor class.

Everyone belongs to the investor class. I make an investment decision every time I get out of bed to go to work. I could also invest in more sleep, but sleep isn't always the best investment.

Inflation is most definitely the enemy of the common citizen, and one of the greatest confiscatory tools of the state and their corporate cronies.

In our system, I agree that it can be and often is.

The estate tax is an incentive to dispose of assets long in anticipation of death.

This disposal does not avoid estate taxes. Gift taxes are estate taxes imposed before death. To be clear, I favor title expiration, which isn't a conventional tax. With title expiration, deceased titles are sold at auction but the state receives no monetary proceeds of the sale. Any value exceeding the estate's liabilities are removed from circulation. We could cremate the deceased's body on a pire of paper money, a fitting end for someone like Ken Lewis who lives on piles on money.

It is a tax on--and therefore disincentive for--savings in its purest form. Anyone with millions in assets knows that they don't want to be caught dead with them.

Estate taxes are not simply imposed at death. This is a common misconception.

Of course, inheritance is also one way for people to help provide some financial independence for their heirs. Since independence is the bane of the state, states have always like estate taxes.

Financial independence is hardly the bane of the state. It is the primary purpose of the state. Hereditary title holders are part and parcel of the state. For the statesmen, "freedom" has never meant your freedom. "Freedom" means their freedom to order the world around you, including their freedom to choose their successor to the entitlement.

The financially independent are not independent of the state. They are independent of you, i.e. they are entitled to consume your produce without producing anything of comparable value themselves.

Before we go on an inflation tangent, let's remember that we're talking about ways the government creates disincentives to save. IF there were a gold standard, the holder of the reserve could decree a different peg. That would affect everybody equally and instantly. And except for the transient confusion would be meaningless. Or if a fiat currency were digital and all networked together, the currency authority could execute a computer program to double all amounts at some specified time.

But that NEVER happens. What REALLY happens, is that the Federal Reserve creates money out of nothing. It then uses that money to buy from its preferred institutions. Those institutions then spend that money etc etc until it diffuses into the economy. When the Fed spends those dollars, the dollars have essentially the same purchasing power as before they created them. Likewise for the institutions they buy from. But after several transactions, it causes all dollars to decrease in value, so those at the end of the transaction chain wind up with devalued money. In other words, the Federal Reserve takes purchasing power away from those furthest way from them.

It is IDENTICAL to counterfeiting in every way except (1) it is legal and (2) it dwarfs any known illegal counterfeiting ring. And the other less common inflationary measures by the Fed have essentially the same effect.

And don't forget that high up in the counterfeiting food chain is the federal government who sells its bonds to the Fed's preferred institutions (or apparently in recent months directly to the Fed).

Central bank created inflation--the approximately 3% average annual inflation that we've experienced since 1913--is exactly that type of wholesale theft.


"Everyone belongs to the investor class."

MB, don't be obtuse, keep the context. If I could expect my dollars to have about the same purchasing power in 30 years, I could stuff them in my mattress. That was the case for a few decades before 1913. Now I must spend money on accountants, brokers, and financial advisors to figure out how not to lose to the inflation created by my government. Those are the class of investors who benefit at my expense by deliberate steady government-created inflation. That is therefore an unnecessary expense which by definition is an inefficiency.

Those "slow, steady price rises" that don't bother you should bother anyone who is bothered by massive theft and wealth destruction.


"This disposal does not avoid estate taxes."

Those with large sums at risk know that long before they die they need to assign tax-deferred account beneficiaries, parcel out gifts in small sums over time, set up trusts, consume consume consume, etc. to reduce the impact of estate taxes. That IS what people do, and they do it because of estate taxes.


"Estate taxes are not simply imposed at death."

I don't know what you're talking about. Taxes are almost never "simply" imposed. But they are imposed nonetheless.


"Financial independence is hardly the bane of the state. It is the primary purpose of the state. Hereditary title holders are part and parcel of the state."

Yeah, financial independence OF those running the state!! That independence is threatened by an independent population that doesn't want or need them. Why you bring title holders into this discussion, I have no idea.

See below.

"if Asian success reflects the benefits of strategic trade and industrial policies, those benefits should surely be manifested in an unusual and impressive rate of growth in the efficiency of the economy."

Strategic policies create economic efficiency. Now that's the Krugman I know.

I'm in favor of free trade, but I don't understand Krugman's argument here. I though that the Asian miracle was "an unusual and impressive rate of growth in the efficiency of the economy" that happened under protectionist policies. Is Krugman arguing that the impressive growth didn't happen? I'm afraid I don't know much about the Asian miracle, so I'd be grateful if someone could clear up my confusion.

Whether our resident pompous ass thinks so or not, that reference to Krugman is amazing.

You really need to chill out. Krugman said there was no substantial change in the efficiency of the economy. I found some data suggesting that there is. How is that pompous? If raising a counterpoint is pompous, I'm not sure this is the right field for you. Besides, I'm not even arguing against that Krugman quote - just providing a little qualification and context (with another Krugman quote from the same damn article!)

http://idbdocs.iadb.org/wsdocs/getdocument.aspx...

Figure 1, page 30 compares "Asian Tiger" mean tfp to Latin American and Industrialized mean tfp from 1963 to 2003. Krugman appears to be precisely wrong. Productivity grew considerably faster in the Asian economies.

Should we really be surprised at this? They were hurling capital stock at workers at the time. Even in the mid-90s, when Krugman commented - well after they put their agrarian past behind them they were still doing a considerable amount of catch up growth, the way Europe did in the 50s and 60s. I think we'd be surprised if they didn't have tremendous productivity growth. Now, Krugman does point to the Japanese slowdown (again, comparable to the European slowdown once they essentially "caught up" and had to revert from extensive to intensive growth). Japan went first, then the "Asian Tigers", now China, and we should expect each to slow down in turn as they catch up. All that productivity growth is very, very real. I think this is the better summation of Krugman's argument:

"If growth in East Asia is indeed running into diminishing returns, however, the conventional wisdom about an Asian-centered world economy needs some rethinking. It would be a mistake to overstate this case: barring a catastrophic political upheaval, it is likely that growth in East Asia will continue to outpace growth in the West for the next decade and beyond. But it will not do so at the pace of recent years. From the perspective of the year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years."

And of course, simply pointing to Asian productivity that is growing faster than American productivity says nothing about which policies made it happen. My guess is all had some contribution.

Does Krugman refer to total factor productivity when he writes "efficiency"? TFP describes influences on output independent of labor and (other) capital, so simply hurling capital doesn't imply any increase in TFP. Something called "efficiency" might be a component of TFP but not the only component. I'm not sure what Krugman means by "efficiency growth".

When Krugman discusses the slowdown in Japanese growth, he never mentions population aging. The subject seems taboo generally. Why is that? Japan's population is actually shrinking now, and a shrinking labor force precedes shrinkage of the population, while more of the shrinking labor force supports the growing older population. How could these changes not retard output growth?

Krugman's analysis of growth in Singapore in the 70s and 80s follows.

"Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.

"Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore's growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated work force has been replaced by one in which the bulk of workers has high school diplomas; it is unlikely that a generation from now most Singaporeans will have Ph.D's. And an investment share of 40 percent is amazingly high by any standard; a share of 7O percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past."

I don't expect a population of Ph.Ds to be more productive anyway, but that's another story. Education is conventionally a component of labor's contribution to output rather than TFP, so Krugman argues here that Singapore's recent growth advantage is a matter of increased labor force participation and capital investment that fundamentally cannot be repeated. Increased labor force participation might fall into a broad "TFP" category, but I'm not sure about "efficiency".

Singapore also continues to lower its top marginal tax rate and doesn't create a huge welfare state and a massive bureaucracy to go with it. A business that would take 8 months and a knot of bureaucrats to create in the United States could be set up inside of two weeks in Singapore - and then they don't tax it to death.

Stalinist expansion or business friendly environment? You decide.

I think I'm starting to figure out where that place is that you plan to flee to if necessary.

RE: "Does Krugman refer to total factor productivity when he writes "efficiency"? TFP describes influences on output independent of labor and (other) capital, so simply hurling capital doesn't imply any increase in TFP."

Good point - I had originally had the BLS labor productivity numbers linked too before I posted it, but since that only included a couple Asian countries I cut it. That's here (ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/prodsuppt01.txt) if anyone is interested. But tfp is still associated with technological development. The capital investments of these countries aren't unrelated to that - but it was a poorly argued point, you're right.