$3 Trillion = 50%! ...Solution
Ed Bugos
In the wake
of the fateful demolition of the twin towers on September 11th 2001, oil
prices plummeted to US$17/bbl within weeks.
Wait.
Rewind.
After tripling to peak at US $35 by October
of the prior year (2000) they then began a year long correction that culminated
in the panic sell off lasting a month past the 9-11 attacks; stoked by
fears that the event would cause a recession in travel, as well as the
economy – falling stock prices were after all a bearish development
for economic growth and in particular “demand.”
For, it was demand that everyone was forecasting
to drop off, which at the time was convenient because the market was worried
over supplies even back then.
But we argued that could not happen; that
putting aside the advent of alternative fuels or a dramatic change in
the mode of civilization as we know it the only way you would see a demand
shock (meaning a softening of final or aggregate demand, in Fedspeak)
was by a price hike and that any fall off in prices caused by participants
speculating on a fall off in demand would actually boost real demand
especially since, we concluded, oil was too cheap already. Our conclusion
from the September 27, 2001 issue of The Goldenbar Report was:
“Oil markets are about as strong a buy as
The Goldenbar Report can issue… There is a way to make money hedging
this scenario, if we are correct about a rally in oil prices that is.
If the Dow rallies, oil (and gold) shares have been the leadership,
and should get impetus from the rising price of oil. If the Dow does
not rally, it is still likely wise to own oil shares as a countertrend
sector… The potential for a sustainable demand shock to affect
the price of oil is low on the probability scale compared with the effect
from potential supply problems in both the short and long term”
– Ed Bugos, September 27 2001
Unfortunately, oil was still trading at
$22 when we published that buy, just before plummeting further to a low
of about $17 on the front month Light Crude contract. In any case, our
first target was $40, and it went there 16 months later even while
stock prices fell, confounding all predictions for a wealth-defect
related demand shock.
Those analysts predicting demand retrenchments
later shifted gears and jumped on either the supply story or the Iraq
story; I don’t recall that the China story was making the rounds
quite as noisily yet. After peaking at $40, a top which we called on account
of our target and the behavior of the market, oil prices collapsed to
about $25 in Q1 2003 as the war premium deflated. Our interest shifted
increasingly to gold “equities” by then but soon afterwards
we put out a new target: $50.
All along our long term target has remained
at US$100 / bbl., meaning that’s where this oil bull is ultimately
headed, baby.
But today everyone’s talking about
oil. I would be careful in that market; most commodity bull markets are
very volatile – especially on the way down – and even in a
bull cycle. The market could go to $35 in a heart beat and still not break
the long term uptrend. Or it could pop another $10, like a tech stock.
The way it’s been trading I just
don’t know which way the next $10 might be, though I would suggest
that a stock market rout if not the China interest rate story would reinvigorate
the demand shock theorists – overbought or oversold markets are
susceptible to knee jerk reversals in sentiment.
There are three reasons that I wanted to
reference our 2001 call on the oil sector besides self promotion: 1) we
perceive the correction risk in oil to be high and wanted to remind our
readers we don’t only make gold calls, 2) the “demand shock”
talk is already coming out now in regards to China for many commodities,
and if our stock market call is right it’ll be aggravated in relation
to that event also, and 3) so that you can contrast how conservative our
$50 oil call looks today compared with how it might have looked back in
2001.
I’m telling you, I have this history
of making aggressive calls that end up looking conservative by the end
of it all. I think part of the reason is that in my position, if I’m
going to convince anyone about a bull market in gold when nobody wants
to hear of it I won’t get anywhere forecasting $5000 or $10000 per
ounce.
The same goes for brokers or anyone that
deals in raising money. For this reason most people in the financial business
are liable to tell you what is within the bounds of “plausibility.”
They want the sale. Of course, the easiest money has always been in discovering
and telling people what they really want to hear. I’ve never been
particularly good at that. I prefer to see that look on your face; you
know, the one that Wile E. Coyote used to get just when he realized that
he missed the Roadrunner and ran past the edge of a cliff. I like the
hard money!
Our long term $2,000 gold target might
still look nuts today.
But I bet our $100 oil price target seems
more reasonable – in fact analysts have been saying that at $80
it just gets back to where it should be on an inflation adjusted basis!
Hah. Call it keeping you from panicking.
In any case, perhaps it’s as good
a signal as you’ll get that the best trade now is to sell oil and
buy gold.
Having said that, it is probably unlikely
you’ll see an oil price correction until stock prices start heading
down convincingly and even then maybe not until after the election. The
noise is so loud it’s too hard to tell what all has been factored.
And this week’s action is encouraging for the bearish case on stocks
but far from decisive.
The
Oil Rally Is Already Monetized, Stupid
So where exactly was the top end of that OPEC price band? $28? Now it’s
the low end. Pretty soon the Fed will have the same trouble with interest
rates. The oil bull is behaving as if its sole goal was
to topple the Dow. But, ‘they’ say it has nothing
to do with inflation, still denounced regularly.
Note the performance of the entire commodity
complex in the table to the right ranked according to three year returns.
It should be clear from that alone that the oil price move is not an isolated
incident even if it has the spotlight today. The common thread is not
China, fundamentally.
It is the US dollar and monetary policy
regardless that it is denied, or perhaps especially is a better word.
It’s like, everybody knows that an
increase in the supply of something relative to demand leads to a decline
in its price; but as regards the good, money, politicians and central
bankers just stand there and say, no it doesn’t, fool…
for one thing, our mandate ensures that any unwelcome price fluctuations
in anything (caused by the volatile/irrational market of course) are stabilized
according to plan:
The Federal Reserve, the central bank of the United
States, was founded by Congress in 1913 to provide the nation with a
safer, more flexible, and more stable monetary and financial system
– FRB website
Recall the Reserve Bank of Zimbabwe’s
mission statement (where it’s quite common for prices to soar
six-fold annually – wages too, nominally at least, since real wages
tend to fall in any inflation):
…Bank maintains the internal value of the
Zimbabwe currency by ensuring stable interest and inflation rates and
by providing appropriate management of the monetary system. The Bank
enhances safety of banks through prudential supervision, and acts as
a banker to the State – Zimbabwe R.B. website
Obviously there are plenty of differences
between the two banks, and even in the statements. But there are similarities
too – they both avoid taking credit for inflation and its consequences,
and they both lie about the true reason for the existence of a central
bank. Sorry, there is no euphemism for the word “lie.”
There are lots of reasons why the inflation
in Federal Reserve Notes does not manifest as does the inflation of the
Zimbabwe currency. Many of them may be related to property (or economic
freedom) to the extent it unleashes productive forces that cause prices
to fall and offset the effects of the inflation in the United States.
Others may be related to the structure
of the banking system – the more developed the easier to hide inflation.
But in no way do the advantages of the Fed and US economy in this respect
change the fact that money supply expansions
tend to cause the currency to depreciate (though not uniformly), because
they invariably outpace any growth in the demand for money. Nor does it
change the fact that most central banks would
deny the fact that through interest rate policy
(and other avenues) they influence credit demand and thereby indeed
maintain control over the issue of notes… and that their
reason for existing is not to fight deflation or facilitate elasticity,
but rather to sustain inflation.
The mandate, “price stability”
as is the “full employment” doctrine, is a front.
I know you know. So get the word out, in
order that the Yardeni’s of the world can feel stupid denying it
on TV.
Oil is a good example of something monetary
officials claim certainly has nothing to do with their inflations. As
a result, its affect on the economy is reasoned to be deflationary
in terms of other prices and profits, which might be true if money
expansions weren’t the norm. If money supply was constant an
increase in some prices would come at the expense of other prices, and
maybe profits.
But the Fed exists to alleviate such hard
choices.
With the influx of fresh money, instead
of causing other prices to fall, the oil price spike is accommodated,
and more easily transmitted to other prices. Eventually such trends will
overcome the productive capacity of the strongest economy, and translate
into higher final prices despite offsetting competitive pressures.
The primary cause of the widening US trade
deficit, for instance, is not China’s inherently better competitive
position; it is inflation which just happens to be eroding America’s
competitive position in the international market for goods and services.
If the value of the dollar has dropped
30 percent and wages were to rise by 30% in the US, real wages could be
said to have not changed. In other words, it wouldn’t “really”
cost 30 percent more to employ workers in the US than in China. The real
impact on labor costs might be more or less depending on other prices
and currency relationships.
However, this is only true to the extent
that markets are allowed to reflect such things freely. Since China’s
currency is still pegged to the US dollar, any price increases in the
US economy due to inflation are going to result in a growing trade gap
to the extent they are not matched within the Chinese economy. Thus we
would attribute the resistance to stronger wage growth in the US to the
USd-Yuan peg, which in light of the monetary trends has the effect of
1) making it more attractive for US interests to invest in (or move jobs
to) China, 2) making Chinese goods cheaper to import, 3) sustaining pressure
on US wages.
The blame for the thinning of capital and
loss of jobs is shared equally between US-Chinese economic policies. But
the fact is protectionism is on the rise in the United States; the blame
has gone to the government for not “protecting” industry enough.
If the US government gives in to these
political pressures America will become less competitive and lose more
jobs, and then, if the government’s original policies don’t
change, it will become more protectionist, and on and on. Economists can
claim that unions don’t have the power they did in the seventies
– we’d argue that the way things are going they will rise
again. Or maybe not; but money wages will!
The Chinese economy is growing and probably
will grow faster than most for years to come. More and more goods are
becoming available. If money were sound, prices would fall as a result
because there would invariably be more goods than money. But that’s
not going on. The Chinese central bank is as profligate in its monetary
policies as the Fed is, though it is clearly more willing to take a tightening
position from time to time.
The point is that the global commodity
boom is the result of monetary factors, not economic growth as such…
the latter probably exists on some level and explains the growth in trade
overall, but it is money that explains the commodity bulls. Nevertheless,
consistent with its modus operandi, the China story is a convenient one
for the Fed to the extent that the blame for price increases – ACROSS
THE BOARD even – can be pinned on it; and it can because most people
are probably convinced that economic growth is GDP and does indeed cause
prices to rise.
In an interview last week on CNBC Ron Insana
asked Morgan Stanley’s Stephen Roach, who I think is still bearish
on everything, about the impact of oil prices on the economy… importantly,
he asked him something like, “why wouldn’t the Fed just
monetize the oil price rise rather than introduce a whole bunch of other
complications by raising interest rates.” Now, since you know
that monetary policy is partly responsible for the oil price shock in
the first place this question may seem counterintuitive, because you should
see the policy of monetizing oil as further increasing the pressure particularly
for rates to rise. In other words, we’d see it as the cause
of making the complications which he seeks to avoid inevitable and ever
more forceful.
The trouble is, that’s exactly what
the Fed has already done effectively. Their broadest measure of money
supply has increased by $3 Trillion (or 50 percent) since January 1999
when the price of oil was bouncing around $12. That’s huge. 50 percent!
Think about it.
They’ve been monetizing oil for years.
And this they would call news on
CNBC.
Insana pretends he does not understand
that the monetary impact on prices exists and originates from an entirely
independent source – the change in the quantity of money supply
relative to demand – that has nothing to do with economic growth.
I use the word pretend loosely. That’s just what it feels like when
I watch those people tell the news these days. But in any case, such a
point of view if it is representative is dangerously bullish for gold,
for bond yields, and you know the rest…
The Trouble with US dollar Bulls
is that they’re Long Stocks and the Economy
It makes them particularly willing to embrace an easy Fed (as opposed
to a rate hike). Monetize oil recall.
We all live in a yellow submarine, yellow submarine,
yellow submarine. As we live a life of ease, every one of us has all
we need, sky of blue and sea of green, in our yellow submarine…
Sing it Alan!
That’s
why the dollar’s falling. ‘Cause we live in a yellow submarine
in a “sea of green.” 50
percent!!
Remember, that’s how much the total
stock of money (M3) has expanded since Y2K. Maybe gold should just double,
like in a month. That would hurt. I
wouldn’t be surprised that my medium term targets are conservative.
It’s the consequence of battle wear that I’m probably a little
gun-shy. The break down out of the small triangle you see in the graph
of the dollar index here in mid September has neither been confirmed (with
follow through below 87) nor rejected.
The highs continue to occur successively
lower and the tone (the way it reacts to news and other market events)
is bearish.
Weighing on the dollar is the fateful combination
of weak share prices, falling bond yields, and strong commodity markets.
The news itself turned bearish for it again on Thursday with the release
of yet another record trade gap. I can’t imagine that the PPI is
going to be bullish for the greenback almost regardless of what it reads
– nobody will believe anything less than or equal to status quo
and upside surprises would be unwelcome in my assessment of the tone and
chart. Maybe the best that dollar bulls can hope for there is that somehow
it turns into a non event, whatever actual number or distraction that
would take.
No Sell Signal for Gold in COT’s
As reported yesterday, the commitments of traders’ report revealed
that the commercials (bullion banks and hedgers) got more bearish and
the funds more bullish since the May low – the next release is due
out this afternoon.
They
haven’t reached any extremes but they are rising off extremes,
within a bull market, so they could stay up here for a few months. The
small odd-lot positions (figuratively) in the third graph to the bottom
right are up from then as well but they have yet to recover to the haute
levels of early 2003 when the noise was all about the Iraq invasion. I’m
not sure what it means but it can’t be bearish.
This odd-lot category has been a surprisingly
strong leading indicator in gold at crucial points in the past –
note for instance that it turned up before the others in 2001. Perhaps
the best way to use this data is in order to gauge an entry point, once
the main trend has been determined independently.
In a bull market, for instance, the COT’s
would invariably cause premature sell signals but the buy signals are
quite reliable. Vice-versa in a bear – the buy signals would be
premature; the sell signals would probably be reliable.
On the other hand, and extending that line
of thinking, if a sell signal turned out to be right on time maybe the
bull should be presumed over. Okay okay, I didn’t mean to twist
both our brains in a knot. I’m just hypothesizing from anecdotal
experience since I devote a slight eye to these reports on occasion.
At any rate, the COT’s for the US
dollar index continue to favor the bears generally, even more so than
when we last reported on them in early September, while in bonds they’re
moving to the bulls’ favor. In other words, if you discount the
gold COT’s as neutral the data for the other “financial”
markets is basically dollar bearish.
Uh, What’s A Bearish Monetary
Environment?
It’s time to find out since the stock
and bond markets are not exactly priced for one.
It is truly amazing to see how stock bulls
can stomach pricing earnings at levels (PE ratios and such) that are known
historic extremes, even as one by one the pillars of justification
crumble. One of the predominant themes
that characterized bullish sentiment in the nineties was the idea of a
Goldilocks Economy – low inflation and interest rates. Or, it would
be more correct to say the strong dollar and low interest rates, or the
“perception” of low inflation and the resulting decline in
interest rates. In any case, the main feature was an ostensibly benign,
or stable, monetary environment – strong economic growth amid falling
commodity prices, and falling interest rates.
The monetary climate was perceived so safe
that the equity risk premium fell below 1:1 (earnings yields relative
to bond yields). It was this misleadingly labeled disinflation that justified
low dividend yields and high PE ratios (note the inverse correlation
between PE ratios and commodity returns in the graph below – this
statistic in my opinion almost completely characterizes stock bull and
bear cycles).
If you breezed over this chart, stop, go
back, and study it. It’ll be the most important thing you do today
(unless of course you already know the implications). Now, as suggested
by the current upturn in the bottom statistic above, the impetus to the
illusion of disinflation is disappearing. The monetary environment has
changed.
The baby boomers and their governments
are now in hock because their expectations were inflated throughout
the nineties; technological advances did little to really improve either
the predictability of earnings or their consistency; the peace dividend
fund has ran out of money; most earnings gains amount to recovering past
losses - the big profit gains that were expected during the new economy
bull have yet to materialize in the broad sense or for those issues where
they were expected to come; the thrust of the productivity benefit from
the Internet climaxed years ago; and because the government itself is
trying to recreate all of these things artificially
it is quickly eroding the last remaining pillar of the goldilocks environment
that explained the record low equity risk premiums and record high earnings
multiples - the strong dollar, low inflation and interest rates. Naturally,
one could conceive that if all of these things occurred and the only thing
that didn’t was that interest rates stayed down, then there would
be no compelling reason for the PE ratio to contract but speculation.
We have noted in the past that gold tends
to lead the interest rate cycle by up to two years and that this cycle
has been anomalous in that the lag between gold-CPI-interest rates is
longer than most. It is irrelevant what the explanation for it is –
whether productivity, hedonic accounting, or the management of inflation
expectations (our favorite). The main point is that the fact that interest
rates have refused to rise as fast as is usual in such an environment
explains exactly why the bear market in stocks generally is progressing
so slowly.
In other words, PE ratios can stay high
despite their strong negative correlation to commodity returns as long
as interest rates don't rise to fully reflect the inflationary facts.
Nobody is in a rush to discount a bearish monetary environment without
being pushed a little. So, to sum up, the bearish monetary environment
needs to see confirmation from interest rate trends perhaps in order to
become more manifest in stock values (earnings multiples).
It is inevitable (by most measures it is
already en route) as long as the monetary environment remains bearish;
but so long as higher rates can be forestalled it’s possible that
high multiples sustain. A monetary environment that is typically bullish
for PE ratios, on the other hand, is one where commodity prices are generally
in decline and the dollar is strong.
In such an environment interest rates can
stay low or fall… few opposing forces exist to disagree with the
Fed’s downward interest rate trajectory
(by the way, that Goldilocks environment,
as defined here, is typically what the monetarily challenged confuse with
deflation).
The last remaining variable that the Fed
can still control to keep the empty bull market nostalgia alive is the
interest rate. As long as rates don't rise as fast as gold bulls say they
should, and the dollar doesn't fall as fast as they say it should, investors
can stay focused on earnings even if their dollar quality is already deteriorating.
The stock and bond markets are overvalued
in light of the sort of monetary trends that have become ever more apparent
and gradually more entrenched since the turn of the millennium. It’s
just a matter of time before interest rates reflect it and accordingly
that stocks do too. For, those trends can now only change at great cost
to the stock market, and at the same time, the longer they last the more
bearish they are for the bond market.
50 percent!! That’s your post 2001
earnings recovery – it’s purely inflation and debasement.
Central banks cancel gold sales
agreement; join IMF in dumping all their gold!
Relax; I just wanted you to consider for a moment the psychological impact
of such a headline. Now that it’s out of your system, forget about
it. It won’t happen if only because the most devout gold bulls among
us would welcome it as signaling the approaching apocalypse for central
banking… and “they” know it.
But there is also more pragmatic resistance,
notably the political ramifications of the impact on the gold market of
such a decision, at least insofar as the purpose of the move would be
to help poor countries out. To be sure, if they wanted to I think they
could get a mandate for it, so the pragmatic political considerations
have limits.
For instance, they could elaborate a nice
argument for the sterilizing economic effects, as the relief of debt obligations
would offset the negative impact on gold prices from selling IMF gold.
The arguments would necessarily be fallacious and indefensible but that’s
par for the course.
Less cogent lobbies have succeeded in rallying
democratic populations.
At any rate we’re getting ahead of
ourselves.
There’s no sign of real conviction
on anything like that and as of this week gold bulls were wondering why
there hasn’t been an official announcement signaling the start of
the second gold sales agreement which many thought would be disclosed
at the G-7 two weeks ago. According to a press release in March, the agreement
was definitively signed and stipulated terms, including a ceiling.
However, no minimum was announced, and
only the Swiss and Holland have disclosed final intentions to sell under
the agreement.
The main conclusion being drawn is that
either there has been a change in policy with respect to transparency
(i.e. announcing the sales ahead of time) or the banks aren’t eager
to do much of anything beyond talk. Or they could be biding their time
for a more convenient moment. Who knows who cares?
Just keep it simple and buy the corrections.
The answer is blowing in the wind.
Concluding Remarks
We see no sustainable relief in oil prices ahead of the US election on
account that the supply news will likely not improve much in the seasonal
transition and that the geopolitical risk premium will stay sticky.
Although the correction risk is high, moreover,
it appears as if energy prices are unwilling to relent at least until
the stock market capitulates to the related pressures. Furthermore, the
US dollar is behaving poorly on the charts and a break down could be imminent.
Fundamental factors (stocks, yields, news) are weighing too.
Gold bounced off nearby support yesterday
so we still favor our bullish runaway scenario. The structure of the market
is neither bullish nor bearish; there is scope in either direction in
terms of the COT’s.
The stock market, which has been stressed
by the daily new highs in oil & gas prices, was hit by news yesterday
that Eliot Spitzer was going to announce the details of a lawsuit on Friday
against American International Group, an insurance company and Dow component.
An already ailing insurance sector turned down sharply, and took the financials
down with it. The weak economic news, strong oil, and the Spitzer news
proved too much to bear and the Dow ended well below 10000.
Consequently, despite the recovery in gold
prices even the gold shares mostly ended down on the day yesterday. There
was the scent of a crash; it was faint but perhaps strong enough to jolt
the PPT into action again.
I don’t want to predict a crash –
unless it is event driven. But we do believe that this could be the beginning
of a new bear market leg we’re witnessing. Thus, unless something
happens to change the direction in the dollar, stock market, oil, and
gold itself, we’re still betting on the gold shares to buck the
broad market trend.
APPENDIX
Capitalism IS But the System of Voluntary Exchange, Nothing More
Lew Rockwell, president of the Mises Institute and editor of Lewrockwell.com,
has a terrific knack for lifting the veil on the shallow free market rhetoric
which just happens to so permeate the leading business papers.
Lew makes sure that you see through the
actions of politicians dishonestly crediting liberty or freedom as their
ideological basis (usually republican); he undresses those private entities
that benefit from government subsidies and monopoly privileges while masquerading
under the pretense of free enterprise. To paraphrase a quote from Dennett
that I’ve used for gold, there’s probably nothing
he likes less than bad arguments for a view he holds dear. However,
I believe he is trying to head off the probably inevitable attacks on
capitalism bound to come when people look to blame someone or something
for their growing economic misery.
In an article he published at Mises.org
last week he wrote a rejoinder to a Wall Street Journal editorial that
came to the defense of Halliburton, which the Kerry-Edwards ticket dragged
through the mud on account of Cheney’s past employment with the
firm. The Journal’s defense amounted to defending Halliburton on
the grounds that Kerry’s charges are just an example of socialist
mudslinging at free enterprising success stories.
But Rockwell, with the advantaged insight of a lighthouse on a dark rocky
shore, said this to the Journal’s rendition, making a sharp distinction
between free enterprise and government-big-business cronyism:
“If that's all you knew about the company,
you might think that this was Federal Express or a cell-phone company
that picked up the pieces after the government failed, instead of
the largest corporate welfare client in the history of the world.
For the two years following September 11, the company enjoyed at least
$2.2 billion in military subsidies. Overall, it enjoys $18 billion in
government contracts to support its offices in 70 countries. To look
at the details (there are hundreds of sites and organizations that track
its activities) is to see into the heart of the modern state run amok.
The history of Halliburton makes the food-stamp program look like good
government. Halliburton makes a mockery of the term private enterprise.
The profits are private, to be sure, but the risk is socialized.
It has very little to sell you and me or any other member of the consumer
class. It has vast amounts of stuff to sell the state, and what it produces
it does with that goal in mind. Call it the leading industry in the
military-industrial complex. Regard it as the prime player in the great
government-business partnership. View it as illustrative of the reality
that the real scandals in government are not what is illegal but
what is considered wholly legitimate. But whatever you do, don't call
it private enterprise” – Lew Rockwell Jr.
You tell ‘em Lew!
I could not have said it better me self
(note: Rockwell is not arguing whether or not the Democrats are right
about Cheney’s current relationship to the company, but rather that
it doesn’t matter if they are because Halliburton isn’t an
example of free enterprise to begin with). The reason it’s
in today’s report at any rate was that you often hear me talk about
free markets and capitalism on a different plane than contemporary conservatives
and conventional republicans.
And I thought it might be relevant to show
that I’m not just throwing out random opinions in order to take
a contrary viewpoint.
There is an army of statists out there
operating under the facade that they are representing free enterprise;
and whenever it falls apart, they are more than happy to come out of the
closet to give their account of the evils of capitalism. It won’t
matter that what is actually falling apart is the progressive era (or
delusion might be more accurate) and its medieval cartel-like organizations,
since because they all claim to be practicing capitalism – which
to them is simply a system where greed is okay – it’ll be
capitalism as always that the vast majority of populists and demagogues
will blame.
Capitalism is under attack because its
phony reps are losing credibility.
Lew and others of his ilk are trying to
head it off as best they can.
In his concluding remarks, Rockwell says:
“Indeed, to call such companies as Halliburton
great examples of capitalist success is a sure-fire way to discredit
free enterprise. For the right to do this is nothing short of a gift
to the socialist left, which wants to characterize all business and
market exchange as an expression of a power relation. This is why socialists
have focused so heavily on the role of corporations in assisting the
warfare state in its dirty business. It is also why so many socialists
have written passionately against the "merchants of death."
Let us rephrase a point Mises often made: the problem isn't the merchant
part of the phrase; it is the death part. If Halliburton were cut off
the government payroll, I have no doubt that many of its intellectual
and physical resources could be profitably employed in a genuine market
setting. Let's forget about privatizing the warfare state and privatize
Halliburton instead. Let it, and all its far-flung clients the world
over, sink or swim in a genuine free-market economy. At that point,
we'll raise a glass to its profitability. Until then, it deserves all
the disdain ever heaped on any able-bodied welfare cheat” –
Lew Rockwell Jr.
What people have to understand about free
market capitalism is that it works through competition. No one individual
or corporation could wield the kind of power that many do today if it
weren’t for the special legal and monopoly privileges and other
subsidies they seek in order to protect their interests from “competition.”
Capitalism, in its pure application, is
still the unknown ideal even though it can be credited solely for bringing
the human species so much daily satisfaction – from the toilet paper,
tooth paste, and coffee you consume each morning to the car that gets
you to work to the multitude of amenities in your home to the entertainment
that helps you escape from the daily rat race to the cozy Simmons mattress
we lay to sleep on.
No other country in the world offers as
many conveniences and options to the individual than the one in which
capitalism is most pronounced. Yet in most countries the state still subjugates
the only basis of capitalism – the sovereign right of individuals
over their own persons and property – rather than secures it. Thus
cartels can exist, including labor cartels of course – it’s
not just big business that rapes the state.
As the libertarian economist Frederic Bastiat
said, and I paraphrase, the state is that great fiction allowing everyone
to live at the expense of everyone else.
People generally just do not understand
what capitalism is, which is what is dangerous.
They prefer to put faith in the state’s
ability to finance their delusions rather than accept that while the market
means tougher medicine in the short term, in the long run our children
will appreciate it. They will not believe the market could possibly deliver
cheaper healthcare, less volatility (financial and political), higher
“real” wages, more job opportunities, more and cheaper everything,
almost, more peace, more equality between races and sexes, and longer
lives for even the laziest and least motivated members of society simply
by applying the contemporary liberal idea that whatever two adults
consent to is okay beyond the social sphere and into the economic
one.
Before Marx branded it capitalism, it was
known as the system of voluntary exchange.
No liberal, republican, or democrat today would want it called that today
because then it would be clear on which side of freedom they really stand,
all of them… they just have different “plans.” This
doesn’t mean to argue that government has not brought any good.
I would argue merely that it necessarily brings a lot of evil if it is
not restricted in scope; and that whatever it can do, private enterprise
can do better.
Let all businesses – banks as well
– be subject to the market’s discipline. That would be fair,
and would fit best into what capitalism truly is: voluntarism and free
exchange – not this regulated and controlled contraption, which
does not level the playing field but rather tilts it to the advantage
of players like Halliburton. The world’s largest problems can all
be traced to the abuses stemming from this widely misunderstood issue.
According to Rockwell:
“Murray Rothbard asked the burning question
in his 1974 book For a New Liberty: "how can the rightist favor
a free market while seeing nothing amiss in the vast subsidies, distortions,
and unproductive inefficiencies involved in the military-industrial
complex?"”
Wake up world!
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
October 20, 2004
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