Tuesday, March 31, 2009

Live Poor and Die: Debt Slavery for a New Generation

The title says it all: Financial Rescue Approaches GDP as U.S. Pledges $12.8 Trillion. That there is what they call a punch to the gut. My entire generation is being sold down the river by Washington politicians and the Federal Reserve's board of directors. We were running record deficits before this spending spree started. How do our parents and grandparents ever expect us to pay this back? How do they expect us to pay this back, and pay for their Social Security, Medicare, and Medicaid benefits!? How does President Obama expect me to pay this back, and pay for my parents' and grandparents' Social Security, Medicare, and Medicaid benefits, and pay for universal heathcare?!

Well, the Federal Reserve has a cute little trick to try and muddle the issue. The Fed has the power (by act of Congress) to print up new money. In the United States we have a "fiat" currency, so this new money doesn't have to be backed up by anything. They can just print as much as they want, no strings.

Now, let's say Congress and President Obama decide to go on a $12,800,000,000,000 spending spree (Yes, that's how many zeroes there are: $12.8 trillion = $12,800 billion = $12,800,000 million = $12,800,000,000,000). I'm going to go out on a limb here and say that it's going to be hard for the government to find buyers for $12,800,000,000,000 in bonds. Washington has another option though--the Federal Reserve.

The Federal Reserve can print up a bunch of cash at will, and use it however it likes...including buying government bonds. So if the government needs to borrow X dollars and no one will lend it to them, the Fed just prints up the money. The result is that the base money supply--ie, the total number of dollars the Fed has printed--increases by X, and the government's debt increases by X.

So how much has the Fed printed recently? I'm glad you asked. Here's a chart from the St. Louis branch of the Fed. Go take a peek. I'll wait.

Back? Ok. Did you see the nearly vertical jump starting around September 2008? The base money supply has more or less doubled since then. Ok, so if the money supply has doubled, why doesn't everything just cost twice as much as it used to? The answer is that base money doesn't tell the whole story. When the economy--especially the banking part of it--operates normally, a small change in base money will lead to a large effective increase in the money supply, because banks don't have to keep all of their deposits on hand--they can lend most of a deposit out to be spent by someone else and eventually deposited again by the person who ended up with the money that had been loaned out.

But the economy isn't operating normally. Banks are barely lending at all. To understand why, I need to digress for a while, beginning with a quick parable.

Let's say that last year, you had found a buried pirate treasure estimated to be worth a cool $1,000,000 dollars. The trick, however, is actually converting it from pirate treasure to dollars. Finding a buying for things like pirate treasure can be hard. Stuff that you own that isn't easy to convert to cash is called an illiquid asset. However, you don't want to wait around to convert your pirate treasure into dollars. You found a pirate treasure, by golly, and you want to be cruising around in a yacht and a new sports car. So, you take out a loan and buy yourself some cool stuff. You figure you're sitting fine. Sure, you've just run up $500,000 in debt, but your pirate treasure will cover it and then some.

Then, disaster strikes. A large portion of your pirate treasure is actually fool's gold. Instead of being worth $1,000,000, your pirate treasure is only worth $300,000. Uh oh. You can't cover your debts any more, even if you convert all of your pirate treasure into cash.

This, in a nutshell, is what happened to the banking system. They woke up to discover that their pirate treasure was worth a fraction of what they had assumed. A large number of banks discovered that the value of their assets (their pirate treasure) was worth less than the amount they owed (their debt).

So when a government official tells you that a bank "has a liquidity problem" or "needs an injection of liquidity," a very large portion of the time they're simply wrong. Liquidity isn't the biggest issue facing the bank at all; the bank is simply insolvent.

Presidents Obama and Bush and their advisors have refused to accept this. They insist that banks aren't lending because the things they own are difficult to convert to cash. If the government would just help out, they say, the banks could get cash for their assets at a fair market price, and start lending again.

There is a major flaw with this plan. Even if all of the banks' illiquid assets were turned into cash at market prices, many of them wouldn't have enough cash to pay off their debts, let alone start lending again. The only way Obama's plan can work is if he can get people to pay real-pirate-treasure prices for pirate treasure that is mostly fool's gold.

I don't want to get into the various nefarious ways that President Obama and Treasury Secretary Geithner have schemed up to get people to do this--it involves sticking the taxpayer with the bill if things go badly for the buyer--because it simply can't possibly work without totally destroying the economy.

Glenn Beck explains: http://www.youtube.com/watch?v=lrW6UO5Zkok.

At the peak of the housing bubble, prices were about double their historical levels. Housing prices are still very high above this level, but are falling. In fact, if the market is left alone, housing prices will probably fall below historical levels, since we overbuilt so much during the boom. Obama and Geithner think--or at least their strategy implies--that the fair market price of a house is twice the historical average market price for a house. Well all I can say to that is that they are very clearly wrong. Banks aren't having trouble getting a fair price for their assets (the price of which depends on housing prices). The market price is just substantially lower than the banks would like. Well, I'd like a billion dollars for my bellybutton lint, but no one is going to pay it.

Let's get back to the original point. The Fed is printing all this money, but it isn't being circulated through the economy. It's just papering over the giant gaping holes in the balance sheets of failed banks. Let's say that at some point in the future, we have a thriving financial sector again--the bad banks have gone under, new entrepeneurs have bought their assets at bankrupcy auctions, and we're undertaking a new economic era. Bank activity starts to rise up again to where it was before the collapse. What happens then? The trillions printed by the Fed enter the economy and start to affect price levels. If the Fed doesn't reign the money supply back in, we'll be hit with massive, crippling inflation. If the Fed reigns in too much though, liquidity really will dry up, and the recovery will be stunted. They have to figure out exactly how much to pull back, and they have to do it six months to a year ahead of when they think the effect of their policy needs to be felt (since that's about how long it usually takes for a Fed action to fully affect the economy). It seems likely that the Fed will err on the side of too much inflation. Ben Bernanke has a fear of deflation so intense that it would be risible if it wasn't horrifying. On top of that, to shrink the money supply back to normal, the Fed has to sell it's bonds in the market in echange for cash. For this to work, someone has to be willing to buy bonds. Time will tell if anyone is.

Things have gotten to the point where I just don't know what to say anymore. It money not even real to these people? We have to "save" the economy (read: give free money to the politically well-connected) no matter the cost! Even if the cost is the debt slavery of an entire generation of young Americans. Most of my classmates will be leaving school with huge debt in the form of college loans. On top of that, we're being asked to shoulder the cost--first in blood and then in dollars--of two wars. And then this bullcrap. We get to worry about the defferred cost of a spending binge equal to the nation's GDP and growing. I can hardly wait.

Monday, March 30, 2009

My Article for the Pitt Political Review Has Been Published Online

I started this piece in October 2008 and finished it in November after a substantial rewrite. It was scheduled to be in the Winter 2009 print edition, but the editorial board lost me in the shuffle. In any case, here it is.

Analysis of the Debt of the United States Federal Government, Fiscal Years 1977-2007

My inclination is to post (on this blog) a formal follow-up discussing what's changed since November. If there isn't a formal follow-up, I'll certainly be discussing some of the issues discussed in the paper in separately chunks.

Sunday, March 29, 2009

The Draft: It's Not Just for Soldiers Anymore

President Obama is keen on beginning a program for national service. This all seems fine and good on the surface...charity work builds character, "ask not what your country can do for you," and so on. If you're paying attention, though, buzzwords like "national service" and "public-private partnership" (the latter coming out of the Treasury, mostly) sound far more ominous.

Imagine my totally lack of surprise, then, upon discovering this Defense Department document and accompanying news story.

I want to pull out the most relevant bit:
The directive emphasizes, however, that volunteers be sought first for any expeditionary requirements, before requiring anyone to serve involuntarily or on short notice. Overseas duty tours shall not exceed two years.
Yes, you read that right. The Department of Defense now has a mechanism by which "defense civilians" can be conscripted and sent overseas to do the government's bidding. You can find a definition of "defense civilian" in your English Comp textbook under the same heading as "frictionless sandpaper" and "carnivorous vegan."

For those of us who have forgotten, Amendment 13 Section 1 says:
Neither slavery nor involuntary servitude, except as a punishment for a crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.
I registered with the Selective Service when I was 18. Every time I think of this I wish I could take it back. At the time, I simply didn't know any better. They taught us in school that the draft was authorized under the Constitution, through Article 1, Section 8. The relevant bits are:
The Congress shall have Power...To raise and support Armies...To make all Laws which shall be necessary and proper for carrying nito Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department of Offcer thereof.
The question becomes whether a military draft is both necessary and proper for carrying into execution the raising and supporting of an army. Well, we are fighting two simultaneous wars with an all-volunteer military right now, so a draft is patently not necessary for the raising and supporting of an army.

The Supreme Court has ruled on the matter, saying:
As we are unable to conceive upon what theory the exaction by government from the citizen of the performance of his supreme and noble duty of contributing to the defense of the rights and honor of the nation, as the result of a war declared by the great representative body of the people, can be said to be the imposition of involuntary servitude in violation of the prohibitions of the Thirteenth Amendment, we are constrained to the conclusion that the contention to that effect is refuted by its mere statement.
Essentially, this is a non-answer, a mere gainsaying of the undeniable fact that conscription is by definition involuntary and by definition servitude. In the Department of Defense news article the phrase "serve involuntarily" is even used verbatim.

The draft has also changed since the Vietnam era. From the Selective Service System website:

If a draft were held today, it would be dramatically different from the one held during the Vietnam War. A series of reforms during the latter part of the Vietnam conflict changed the way the draft operated to make it more fair and equitable. If a draft were held today, there would be fewer reasons to excused a man from service.

Before Congress made improvements to the draft in 1971, a man could qualify for a student deferment if he could show he was a full-time student making satisfactory progress toward a degree.

Under the current draft law, a college student can have his induction postponed only until the end of the current semester. A senior can be postponed until the end of the academic year.

If a draft were held today, local boards would better represent the communities they serve.

The changes in the new draft law made in 1971 included the provision that membership on the boards was required to be as representative as possible of the racial and national origin of registrants in the are served by the board.

A draft held today would use a lottery to determine the order of call.

Before the lottery was implemented in the latter part of the Vietnam conflict, Local Boards called men classified 1-A 18 1/2 through 25 years old, oldest first. This resulted in uncertainty for the potential draftees during the entire time they were within the draft-eligible age group. A draft held today would use a lottery system under which a man would spend only one year in first priority for the draft--either the calendar year he turned 20 or the year his deferment ended. Each year after that, he would be placed in a succeedingly lower priority group and his liability for the draft would lessen accordingly. In this way, he would be spared the uncertainty of waiting until his 26th birthday to be certain he would not be drafted.

So yeah, no more "hiding" in college. Anyway, I've already dwelled too long on something that still (mostly) hypothetical. Let me just end by saying that if the draft ever comes back, women had better be required to serve too, and that I hope that any move towards compulsory "national service" of any kind will meet widespread resistance by my generation.

"The Quiet Coup" from The Atlantic

If you want to understand the difference between capitalism, which I like, and "crony capitalism," which is really just a form of nascent economic fascism, read this article.

The Quiet Coup

The only critique that I would have to offer is that the author neglects to note the role of central bankers in creating economic crises. The piece should be a wake-up call to people who think that the current crisis represents a failure of capitalism. Capitalism didn't fail us--we failed it.

Saturday, March 28, 2009

Nonviolent Resistance to Tyrannical Rulers

The whole MIAC report debacle got me thinking about how a country's citizenry can bring down an oppressive state apparatus. I often surprise people when I talk about gun rights, because I don't focus on hunting or self defense; the single most relevant issue is that the ownership of guns by the common citizenry is the final defense against totalitarianism.

We talked about this issue at a College Libertarians meeting a while back (I'm the sitting President of Pitt's College Libertarians) about the topic considered from this angle, and some people raised some compelling objections. Essentially the argument went "you seriously think we're going to fight off tanks and aircraft carriers with shotguns?" Now, there are historical examples of people using armed resistance fairly effectively against a vastly better-equipped and much larger force. The countries occupied by the Nazis in World War II did it with some success, for instance. However, I'm willing to concede that as strategies go, armed resistance is questionable on both moral and practical grounds.

So if armed resistance probably isn't the best option for bringing down a tyrannical government, what would be better? The best work I've ever found on the topic is a book called From Dictatorship to Democracy: A Conceptual Framework for Liberation. It's available for free online at the Albert Einstein Institution's website. The single most important observation its author makes is that by engaging in violent resistance, citizens are choosing the field on which a dictatorship is best equipped to deal with them, and that a more sensible plan would be to attack where dictatorships are weak.

I don't want to go into the details of the book, but I do want to remark that it's apparently been effective. The text was a key tool to the groups that brought down Milosevic.

MIAC Militia Report Retracted

The now-infamous (well, if you run with the same crowd politically as I do) report on citizen militias produced by Missouri's MIAC bureaucracy has been retracted. It controversially lumped together antisemitic and/or racist fundamentalist Christians and "New World Order" conspiracy theorists with people who support 3rd party candidates, people who strongly oppose the income tax, and people who believe that the US military is preparing for active-duty deployment domestically (for "disaster relief").

On that last point, apparently readers of Time Magazine, the Washington Post, and Stars and Stripes are probable members of dangerous citizen militias.

Should the Military Be Called in for Natural Disasters?
Pentagon to Detail Troops to Bolster Domestic Security
Specialized teams to train for possible WMD attacks

Our protections against devolving into a fascist state are falling away all the time. The John W. Warner Defense Authorization Act of 2006 gutted the Posse Comitatus Act, which prevented the military from participating in domestic law enforcement.

The Campaign for Liberty, one of the organizations named in the MIAC document, sent the following e-mail to its mailing list.

March 28, 2009

Dear Friend of Liberty,

Although it sometimes seems that freedom is shrinking everywhere we turn, the fact is a powerful grassroots stand can still stop Big Government bureaucrats in their tracks.

That is exactly what happened to the Missouri Highway Patrol this week after being forced by your vocal outrage to retract the incendiary Missouri Information Analysis Center (MIAC) report.

This report identified peaceful, freedom-loving Americans as possible security threats, simply for supporting Ron Paul or opposing tyrannical government.

Faced with an overwhelming public outcry, Missouri officials quickly started backpedaling, removing references to Ron Paul and Campaign for Liberty.

Then, just hours before Dr. Paul’s plane touched down in St. Louis to lead our Celebration of Freedom rally Friday night, the Missouri Highway Patrol officially retracted the entire offending document.

The Missouri Highway Patrol will be performing an investigation into the origin of the report. Lieutenant Governor Peter Kinder has even called for the suspension of the Director of Public Safety until those responsible have been identified.

Click here to read the news report.

It is no surprise that oversight and accountability are in short supply at the MIAC, a Big Government “fusion center” combining federal, state and local agencies into an unconstitutional mess of a bureaucracy. But government disorganization is no excuse for making political profiling and persecution into official policy.

This victory for the grassroots freedom movement, coupled with this weekend’s Campaign for Liberty Regional Conference in St. Louis, marks a great moment for liberty in Missouri and all of America.

This week we saw that politicians still respond to the voices of their constituents.

This week we saw that freedom can triumph over tyranny when we unite to take a stand.

In Liberty,

John Tate
President, Campaign for Liberty

That's a fairly good summary of the issue. I don't know if I'd ever join a citizen's milita--as strongly supportive of the 2nd Amendment as I am, I can take or leave guns--but I'm glad, to an extent, that they exist. The government should be afraid of us, not the other way around. On top of that, political profiling of the type MIAC participated in is simply indefensible.

HR 1207: An Introduction

Congressman Paul has introduced legislation in the house to facilitate an audit of the Federal Reserve by the GAO (the office headed by the Comptroller General). The current law insulates the Fed from any serious auditing. The bill currently has 46 cosponsors.
Rep Abercrombie, Neil [D, HI-1] - 2/26/2009
Rep Akin, W. Todd [R, MO-2] - 3/19/2009
Rep Alexander, Rodney [R, LA-5] - 3/10/2009
Rep Bachmann, Michele [R, MN-6] - 2/26/2009
Rep Bartlett, Roscoe G. [R, MD-6] - 2/26/2009
Rep Blackburn, Marsha [R, TN-7] - 3/16/2009
Rep Blunt, Roy [R, MO-7] - 3/24/2009
Rep Broun, Paul C. [R, GA-10] - 2/26/2009
Rep Buchanan, Vern [R, FL-13] - 3/17/2009
Rep Burgess, Michael C. [R, TX-26] - 3/19/2009
Rep Burton, Dan [R, IN-5] - 2/26/2009
Rep Castle, Michael N. [R, DE] - 3/17/2009
Rep Chaffetz, Jason [R, UT-3] - 3/6/2009
Rep Culberson, John Abney [R, TX-7] - 3/26/2009
Rep Deal, Nathan [R, GA-9] - 3/23/2009
Rep DeFazio, Peter A. [D, OR-4] - 3/9/2009
Rep Duncan, John J., Jr. [R, TN-2] - 3/6/2009
Rep Fleming, John [R, LA-4] - 3/18/2009
Rep Foxx, Virginia [R, NC-5] - 3/10/2009
Rep Franks, Trent [R, AZ-2] - 3/23/2009
Rep Garrett, Scott [R, NJ-5] - 3/5/2009
Rep Grayson, Alan [D, FL-8] - 3/11/2009
Rep Heller, Dean [R, NV-2] (R) - 3/6/2009
Rep Jones, Walter B., Jr. [R, NC-3] - 2/26/2009
Rep Kagen, Steve [D, WI-8] - 2/26/2009
Rep Kingston, Jack [R, GA-1] - 3/6/2009
Rep Lummis, Cynthia M. [R, WY] - 3/19/2009
Rep Marchant, Kenny [R, TX-24] - 3/11/2009
Rep McClintock, Tom [R, CA-4] - 3/6/2009
Rep McCotter, Thaddeus G. [R, MI-11] - 3/19/2009
Rep Miller, Jeff [R, FL-1] - 3/24/2009
Rep Peterson, Collin C. [D, MN-7] - 3/19/2009
Rep Petri, Thomas E. [R, WI-6] - 3/10/2009
Rep Platts, Todd Russell [R, PA-19] - 3/19/2009
Rep Poe, Ted [R, TX-2] - 2/26/2009
Rep Posey, Bill [R, FL-15] - 2/26/2009
Rep Price, Tom [R, GA-6] - 3/10/2009
Rep Rehberg, Denny [R, MT] - 2/26/2009
Rep Rohrabacher, Dana [R, CA-46] - 3/6/2009
Rep Sessions, Pete [R, TX-32] - 3/23/2009
Rep Stark, Fortney Pete [D, CA-13] - 3/26/2009
Rep Stearns, Cliff [R, FL-6] - 3/6/2009
Rep Taylor, Gene [D, MS-4] - 3/6/2009
Rep Wamp, Zach [R, TN-3] - 3/16/2009
Rep Woolsey, Lynn C. [D, CA-6] - 2/26/2009
Rep Young, Don [R, AK] - 3/6/2009
8 of these 46 are Democrats, which is nice, if you care about that sort of thing. I'm of the opinion that the Democrats and Republicans are basically the same party anyway, but I'm pretty sure most people in office disagree, so it says something when a congressperson is willing to look past deeply ingrained prejudices and cosponsor a bill from the opposition.

The bill is very short, only a page or two. I encourage you to look it up at the Library of Congress's website.

Okay, so why should anyone care? Well, for starters, the bill's author predicted the housing crisis in 2003. Check out Congressman Paul's statements before the House Financial Services Committee. Furthermore, the Federal Reserve is at the center of the current economic maelstrom. It's essentially a fourth branch of government and is accountable to nobody. I personally don't believe that we need a central bank controlling the economy, but its hard to debate the subject when no one has any idea what the Federal Reserve has done and is doing. Congressman Paul is the ranking member on Financial Service's subcommitee responsible for overseeing monetary policy--i.e. Federal Reserve actions--and has repeatedly said that the Federal Reserve is more secretive than the CIA (ex. this interview).

I could continue to talk about the role of the Fed in the economy and the ways central economic planning hurts us, but that would only complicate the issue. This is about opening up an exceptionally secretive part of government to Congress and the citizens of the US--and that's something that everyone should get behind.

More on this as it develops.

Friday, March 27, 2009

Daniel Hannan's Awesome Rant

So apparently the EU has it's own parliament. Being the ignorant backwater American that I am, I had always thought that when the EU met it was just a bunch of ambassadors, not elected officials. You learn something new all the time.

A member of the EU's parliament made a splash recently with this invective against Britain's Prime Minister, Gordon Brown.

Can you hear me cheering over your modem? This is what liberty-minded individuals have been dying to say to American politicans for ages. Thanks, Daniel, for giving us such an eloquent voice.

Mr. Hannan maintains a blog, which I found informative and well written. I wish all politicians made the same effort to explain themselves on a regular basis.

He has a habit of liberally quoting Shakespeare, and ends most speeches with the latin phrase "Pactio Olisipiensis censenda est," which translates roughly as "The Treaty of Lisbon must be put to a referendum." It's a reference to a rhetorical tactic of the Roman statesman Cato the Elder, who made a point of ending every speech with the phrase "Carthago delenda est," "Carthage must be destroyed." Carthage was a military rival of Rome situated in northern Africa. Hannibal of alps-crossing fame was a Carthaginian general.

Can you imagine what people would say about a Shakespeare-quoting Latin-speaking conservative in the States? He or she'd be lambasted as an academic elitist and a snob. No wonder we seldom get to hear rhetoric as well-written as this.

My Letter to Andrew Cuomo

There's a big hullabaloo about some bonuses that are being paid out to employees at AIG. Compared to the amount of the bailout funds AIG has received, the total amount spent on bonuses is trivial--but it makes a good story, and politicians love an easy punching bag.

The combination of grandstanding politicians and sensationalist journalism has ignited a furor. AIG employees are receiving death threats. Eager to look tough on greedy executives, New York State Attorney General Andrew Cuomo threatened to release the names, addresses, and bonus amounts of those recieving compensation under the pretense of legal action against the company.

CNBC has a passable article on the matter, and here is an AP report.

I sent Mr. Cuomo a letter using his office's online email form.

Mr. Attorney General,

I was surprised to discover that your
office is now in the business of
blackmail and extortion. Apparently a
lot has changed back home since I left
for college; I had been under the
impression that one of your mandates was
to facilitate the enforcement of
contracts; I had thought that your
office was responsible for protecting
New York's citizens from intimidation
and fraud.

Since apparently the galling immorality
of what you've done with regards to the
AIG bonuses fiasco is totally beyond
your grasp, allow me to offer a more
practical argument. What private entity
in its right mind would enter into an
agreement with the government if the
government is allowed to unilaterally
change the terms of any agreement it
enters? By blackmailing AIG bonus
recipients--and it is blackmail,
regardless of your protestations--you
are not merely lowering yourself to the
role of a mafia thug collecting on
behalf of his boss, you are undermining
the very fabric of civilized society.

Congress very clearly misappropriated
public funds when they "bailed out" AIG.
It would be a shame if your office
compounded the mistake by turning the
rule of law into a laughingstock. Your
approach to this incident is equivalent
to an endorsement of vigilantism.

You have two choices: apologize and
reverse course, or, if you find that
your personal outrage makes you unable
to faithfully execute the duties of your
office, resign.

Thank you for your time and attention.

Grant Babcock
If you wish to give the Attorney General a piece of your mind, and I encourage you to do so, use the form here.

Finding My Soapbox

Hello. My name is Grant Babcock. I am a student at the University of Pittsburgh majoring in physics and philosophy with minors in economics and computer science. In this blog, I hope to chronicle my continuing efforts to advance the cause of liberty, for myself and for the generations that follow.

As Americans, we are the inheritors of a spectacular legacy. It is the duty of each generation to jealously defend the torch of liberty so that it may be passed to the next. As I write, we are at risk of losing civilization's greatest achievement: the protection, by enshrinement in law, of natural rights against assault by criminals and tyrants.

Simply put, we face a choice. We can choose cowardice, and the rule of men; or courage, and the rule of law. If we shrink from the defense of liberty in the face of this day or that's transitory crisis, we will be complicit in the enslavement and exploitation of a whole generation of human beings.

A mighty charge to undertake, to be sure--but one gladly undertaken. To do so is the duty and honor of every human being.

If you find my ramblings worthy of your attention, thank you. Champions of liberty often feel they are shouting into the wilderness; your comments are appreciated. Finally, I ask that you read my scribbles generously; please don't mistake my passion for arrogance, my sarcasm for cynicism. In any case, it's just a blog.


Grant Babcock