Staggering Job Losses

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So far, about 20% of the people who had jobs 6 weeks ago, are unemployed. This is in addition to the 96,000,000 who had no job even before the lockdown, but who aren’t counted as being in the workforce.

And the reality is worse than even this, for three reasons. One, unemployment offices are not able to keep up. More people are being added to the rolls who already lost their jobs.

Two, government at all levels has not begun laying off yet (if they ever will). So these people were laid off almost entirely from the productive sector.

Three, many businesses are still paying salaries hoping for a quick resolution. But every day, they drop, depleted of capital. No one knows how many there are, or how many workers still receive paychecks from such businesses.

This is really bad. Really really bad. Worse than 1930’s bad. And it comes at a time of record high leverage. Deleveraging has hardly even begun.

How Wide is the Margin?

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Economics discusses the margin, and the concept of marginal all the time. For example, the marginal worker is the one who loses his job, at a downtick in revenue.

Well, since the government response to the virus, over 26,000,000 people have lost their job.

It is not just one worker who occupied the role of marginal worker. It was over 26M workers (and counting).

The concept of margin also implies the concept of width: how wide is the margin? All those included within this finite space are at risk of loss of their job, business, etc.

And due to a number of factors, including decades of falling interest and margins, with rising net present value of all liabilities including debt and wages, the margin has grown quite wide indeed. And of course a months-long shutdown widens the margin much more than a week-long shutdown.

Perhaps 30% of the US economy (we shall see how big it is) was included in this wide margin. The fallout will be felt for many decades.

When Government Has All the Powers

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I wrote only one paper that was rejected by Professor Antal Fekete. It was nominally about duration mismatch. He asked me to write it as a guide for a course at his New Austrian School of Economics in 2012.

I argued that when banks borrow short to lend long, they harm themselves and their clients. This is in accord with what Fekete taught. However, I made an additional point with which he did not agree. I said that government should not have the power to ban everything that every special science lobbied to prohibit.

Today, the special science most in the public spotlight is epidemiology. Like in economics, controversy sometimes splits epidemiology on certain issues. That does not prevent it from calling for bans on behaviors that epidemiologists don’t like, including those related to the spread of contagious disease.

Little did I know, back in 2012, that this side point to my paper would become so important. Based on the work of certain epidemiologists, the government has shut down our economy.

Unfortunately, the government has taken for itself and the people have willingly given it, a terrible power. Government can now ban all the things. In 2012, I was focused on a potential ban of a banking practice. But I argued that a government which has the power to ban one thing, in fact, has the power to ban all the things. If you doubt me, just ask those who sell food in restaurants, clothing in clothing-only stores, haircuts in salons, and much more.

Today, every practitioner of every special science has taken note.

Whatever the threat of coronavirus may be, history surely teaches us of the dire threat of a government with unlimited power. A government with unlimited power is a totalitarian government. Whatever your view of coronavirus, I hope we can at least agree that government must be limited.

I have never asked anyone to call their legislators or governors, but now I implore you to call and ask them to honor the limits placed on government power by some wise men in 1776.

Flattening the Curve is Central Planning

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It may be getting lost in the noise now, but there was a principle behind locking down most of the people (except those deemed “essential”). It was not to “fight” the coronavirus. The locker-downers conceded that everyone will be exposed to this virus sooner or later, anyways. They just wanted to *slow* the spread of the virus.

Got that? We are laying off millions (or tens of millions) of people, ruining hundreds of thousands of businesses, wiping out trillions in capital, impoverishing the people. Not to stop the virus. Just to SLOW it.

And why is slowing it so important that we cause this much harm to so many people? It is important, we are told, because the hospitals have too few beds. Worse, they are inflexible and unable to expand capacity due to shortages of everything from doctors to ventilators.

This harm is inflicted to manage demand at hospitals.

The reason why the health care industry is so brittle is the countless regulations that require permitting, licensure, Certificates of Need, armies of bureaucrats that can approval of anything. Such as the manufacturing of masks. It would not be exaggerating by much to say that everything which isn’t mandatory is prohibited.

In other words, the central planners have managed the supply at hospitals. And now their managed supply is insufficient, so they seek to manage the demand. Your job, your life savings, your business, your dreams and goals–are just collateral damage.

Flattening the Economy Because, Virus

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I write this on March 18, now having watched a 180-degree reversal of how we think about contagious disease. Formerly, we would put sick people in quarantine and respect the right of healthy people to go about their lives. Today (March 18, 2020), we are now on the brink of martial law. In our zeal to fight the corona virus, we are shutting down travel, public gatherings, restaurants, etc.
This is what a mass panic looks like.
Not to mention it is already wreaking massive economic damage. The economy was already faltering. The false boom stimulated by a decade of monetary meth was likely turning to bust, even before the virus. And then the government began to shut down whole industries: air travel, hotels, sports, bars, restaurants, etc. And likely more to come.
I write extensively at Monetary Metals about the risk of debt defaults cascading like Dominoes, so I will not further address that here. I will only say that whole industries are laying off (with much more to come) whole workforces in one giant dump. That is a lot of people who will suddenly experience hardship, not to mention stop spending on everything from clothes to computers, phones to tunes (never mind restaurants and bars, they wouldn’t be allowed even if they still had their paychecks). As always in a downturn, mainstream financial and economic analysis is useless. I think right now, they are predicting “slower growth.” Yeah, and if you slam the brakes in your car, it is “slower acceleration,” too.
Any why this draconian response? There is now a new technical expression, among the newly-minted tens of millions of experts who inhabit social media platforms. They seek to “flatten the curve.” That is, they say, it is inevitable that this virus will sweep the population. But if we can just slow its progress, then our health care system will be able to respond, there will be enough beds, ventilators, and health care professionals to care for the case load. If we allow it to progress at full speed, then the hospitals will be overwhelmed, and America will look like Cuba.
If you think that the govt must outlaw public gatherings, close the restaurants, and shut down half the economy … to “flatten the curve” … then you–yes YOU–are attempting to be a central planner.
 
In capitalism, people and industries are resilient. The reason is simple. They are free to act on their reason, and to seek a profit.
 
In socialism and central planning, there is no resiliency. The people starve if the crop yield is below quota, they drown if the tide rises, they suffer in darkness if an oil shipment is delayed. The reason is simple. They are not allowed to act, but must wait for orders from a central planner. And Mises proved that socialist planning is impossible, even if the planner is a wise, honest, caring genius. 
 
If it is indeed true that American hospitals are soon to be overwhelmed by virus patients then this is not a recommendation for more central planning, enforced by redirecting scant law enforcement resources to enforcing martial law.
 
It is a damning indictment of just how socialist–and hence sclerotic, rigid, and brittle–our health care industry has been forced to become under the degree of socialized medicine we already have. We are not fully socialist yet. Hence we are not Cuba yet.
I fear the kind of government that can shut down public gatherings and centrally plan healthcare and everything else. I fear it much more than a virus.

Distortion Due to Minimum Wage Law

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In an attempt to raise wages, the government imposes a minimum wage by law. Socialists imagine that this increases wages paid. But the fact is that it increases, not the wage paid to a given worker, but the threshold. That is, it raises the bar on what employment is legally permissible. This is well understood (at least by those who don’t substitute their notion of morality for economics).
Today I write about a different problem: what happens when there is a layoff.
In a free market, a layoff causes a downtick in the bid for labor. Recall that the bid is set by the competition among sellers. Most of the newly-unemployed workers who are seeking a job will take the bid price on their labor. So the bid is depressed a bit. That is, they choose to take a lower wage rather than no wage. In a free market, there is no such thing as structural unemployment.
As an aside, if this seems bad, you may be substituting moral notions for economics. Economics works the way it works, and doesn’t work the way it doesn’t work (e.g. the way socialists feel it should work).
Anyways, each laid-off worker finds a job. His new employer is able to employ him, because the worker accepted the employer’s bid. Over time, the employer may increase its efficiency or the value of its product, and be able to pay more. This employer would not have had the opportunity, if it had to match the wage of the established company.
And this leads us to the problem with minimum wage law which I want to focus on today. Prices move in a free market. Each and every move is for a reason, even if the observer—or central planner—does not know what that reason is. If allowed to move—i.e. not fixated by a central planner—the new price is a signal. If the bid is pressed down, it tells buyers to increase their volume. If the offer is lifted, it tells sellers to bring more goods to market.
Of course, the very response of buyers stepping up will tend to push the price up, and sellers bringing goods will tend to push the price down!
To the untrained eye, it may seem like the price is stable. Or stable with a bit of noise in the signal. This seeming-stability is the effect caused by the actions of the buyers and sellers. And their inactions, as in the case of the layoff, when they stop buying or selling.
A price fixing scheme like minimum wage is based on the idea that stasis is a goal. That there is a magically right wage—nowadays called “living” in an attempt to mobilize those moral notions. And the government, of course, has the job to ensure it is paid. Of course, the government cannot guarantee any such thing. What it does is deliver the stasis that people imagine is the ideal condition.
However, it is a stasis of price only. Not of outcomes achieved by participants in the market. On one side, there are people who go without work. They suffer the hardships of poverty (not counting that the government may dole out free goodies to them, like pouring food onto a wound). On the other side, there are entrepreneurs who go without workers. They suffer hardships too, including they may be out of business entirely.
By fixing price, they think to fix the economic outcomes. But the reality is the opposite. The claim to to good to the workers. But they actually inflict harm on them. And the employer. And everyone else, who does not have the goods and services that the would-be workers are not producing for the companies who are not allowed to hire them.
And (I discuss this in much greater length in my dissertation), notice how government intrusion into the market causes discoordination. There are people who lack for work, and at the same time companies who lack for workers. This is an extraordinary thing, for all that we take it for granted and accept it as if it were normal.
That downtick is necessary. It is moving off a local maxima to get to a higher point. A free market delivers generally-rising wages, but not monotonically rising.

Republicans Adopt Dirty Rotten Democrat Trick

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Do you remember budget debates, where the Democrat would say “it’s a severe budget cut”? He would claim a 3 percent cut. This was a dirty, rotten trick. Here is how it works.

For example, last year’s budget was $100. They project $105 this year, and for whatever reason—inflation, need, population growth—that is assumed to be the new baseline. Suppose the legislature passes a budget for this year, of $102. In reality, this is an increase of two percent.

However, the Democrats would spin it as a cut of three percent. If Republicans hold the majority, then they are so mean to hurt widows and orphans. If Democrats hold the majority, then they are showing fiscal responsibility.

But of course, it’s not a cut. It’s an increase.

Fast forward to today, when Republicans have found a way to exploit this ideas. It’s not the budget, but regulations. They claim that President Trump has cut regulations by 30 percent. This is a subtler use of the old dirty rotten trick, so let’s look at how it works.

Trump supporters point to the Federal Register. This is the government’s publication of new regulations. In 2017, the Federal Register contained about 30 percent fewer pages than in 2016.

We will ignore two problems with the quantity theory of pages in the Federal Register. One, the Federal Register contains other material than just new regulations. Two, not all pages are created equal. A page that repeals the monstrosity of Dodd Frank is good, whereas a page increasing the federal minimum wage to $15 is bad. Even new regulations are not all created equal. A hike of the minimum wage is more damaging than a rule saying employers must provide bathrooms for employees.

Anyways, for the purpose of this discussion, let’s accept page count as a proxy for regulation. The dirty rotten trick is that the Federal Register is the publication of new regulations. If the 2017 edition had over 30 percent fewer pages, that does not mean that Trump removed 30 percent of existing regulations.

It means Trump added over 60,000 pages of new regulations, which is 30 percent less than Obama’s over 95,000 pages!

The government publishes the complete set of all existing regulation. This is not the Federal Register, but the Code of Federal Regulations. The page count for 2017 is not available yet (that I could find in 15 minutes of Googling), but if you look at some of the years under President Reagan, you see lower Federal Register page counts but rising Code of Federal Regulations page counts. That is what is happening today also.

Indeed, promoters of the Trump Deregulation Story often quote work by the Competitive Enterprise Institute. Here is a link to their 9,999 Commandments. CEI has done a lot of analysis of page counts in the Federal Register. And they acknowledge that Trump did not deregulate. From 9,999 Commandments:

This analysis [by the Mercatus Center at George Mason University] found that “the numbers don’t show a massive deregulation—in fact, they show that the quantity of regulatory restrictions actually grew. But it grew by less than we might have expected based on historical patterns.”

Unfortunately, this subtle truth has been drowned out by the unsubtle cheering of Trump’s deregulation.

The confusion of Federal Register and Code of Federal Regulations is like the confusion of the deficit and the debt. The deficit is how much more we add to the debt this year. Proponents of the Paul Ryan budget plan in 2012, for example, sometimes said he was reducing the debt, when the plan proposed a lower deficit. That is, Ryan proposed to increase the debt—more slowly than President Obama did.

The CEO Pay Ratio

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A popular metric is to compare CEO pay to the pay of the lowest-skilled–and hence lowest-paid–worker in the company. If the CEO makes $15,000,000 and a burger-flipper makes $15,000 then the CEO is making 1,000 times more.

This provides fuel for policy debate. As I often say, socialism is not about economics. There is no economics of socialism. It is nothing more than institutionalized envy. And the pay ratio of 1,000 appeals only to envy. It is offered without context, as none is deemed necessary. The very fact that he is paid so much more is taken as proof of … well it’s outrageous.

Something must be done!

Or so the Left argues. Get him because he’s rich. Impose a pay restriction on all companies, or at least all public companies. Tax the #$&%! out of him. Give all workers a so called guaranteed basic income (so called because socialism never delivers on its promises).

Libertarians are correct to note that if a wage is set in a free market, there is no fairer mechanism. And besides, it’s the company’s money to spend as it chooses. No good can come out of Washington meddling. They also point out that the CEO produces more value than the burger flipper, and his job is harder and more stressful.

This is true, but the very notion of a ratio of one person’s pay to another’s is meaningless. It tells us exactly nothing, while tantalizing us that it tells us something important.

I propose a different metric. A ratio of a worker’s pay to the value he produces. For example, suppose the gross profits (ex. cost of meat and ingredients) generated by the burger flipper’s work is $15 per hour. His pay is $7.50. Therefore this is a 2:1 ratio. He is paid half the value he creates.

Now consider his manager. The manager supervises 10 workers. Assuming all have equal productivity, the total gross value of these workers is $150. If the manager is paid $15, then this same ratio moves up quite a lot. It is 10:1.

Finally, let’s go all the way up to the CEO. If the firm’s gross profit is $15,000,000,000, then this ratio is 1000:1.

As we move up in the value chain, it is harder to measure the gross value contributed by each worker. For example, with the CEO, is the gross value simply gross profit? Or are we trying to look at just the difference he makes compared to his predecessor?

However, it should be clear that as you go up in value and salary, the ratio of value created to salary also goes up. That is, higher-value workers are paid less as a percentage of the value they create. Isn’t that a different view from the common envy view?

I am not sure what to call it. It may even exist, though I have not come across it. I am mulling “gross value capture ratio of wages”.

You Didn’t See That

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I don’t normally write about myself. Please bear with me as I get something off my chest.

My field is monetary science. I focus on two areas. One is the pathology of the dollar, which is in terminal decline. The other is a free market in money, a.k.a. the gold standard. Science is a quest to discover new principles. I work on understanding the processes and mechanisms of both the failing dollar and the unadulterated gold standard.

One of the greatest satisfactions in my life is to identify something, work out what it is, obsess until I truly understand it, and then communicate it. For example, why we need an objective unit of measure of economic value and how we can recognize it when we see it.

This is what I have done all my life. As an early teen, learning to program on the Apple ][+, I developed a way to write floppy disks that could not be read by any copy program (copy protection was important in those days). I studied how the disk drive mechanism worked, and traced the inner loop of the commercial copy programs (alas I did not have the discipline to finish and commercialize it, or I should have made a lot of money).

At my last company, DiamondWare, I envisioned what 3D audio would sound like, what it would do for voice communications. I remember the day when we finally put together all the code to implement it, and I heard it for the first time. It worked! Later, I architected a scalable realtime audio server to provide this 3D voice experience to a massive number of people.

After selling the business (and spending several years at Nortel, and then at Avaya), I applied myself to monetary economics. The gold world has a benchmark called the Gold Forward Rate (GOFO). It is as important to gold-using businesses as LIBOR in conventional finance. It was published daily by the London Bullion Market Association until a few years ago. Everyone said it could not be calculated using only public market data. I developed a way to do it. We now update a daily chart of GOFO.

I have worked out what a modern, 21st century gold standard will look like—and the path to get from here to there.

Without boasting, this is what I do.

So I must say the most frustrating experience for me is when someone denies my observation. What they are saying (without understanding what I am saying) is, “you didn’t see that.”

Obama infamously said “you didn’t build that.” It’s pure envy. He did not build anything, and says this to feel better about his own lack of achievement. When various and sundry alleged free marketers say “you didn’t see that,” they are trying to feel better about their own lack of vision. They hold to the conventional Quantity Theory of Money. Aside from being wrong, this theory does not encourage (or enable) seeing new phenomenon. It’s a dead-end.

Some of these folks are threatened by my seeing that, the way Obama is threatened by entrepreneurs who build that.

They have even tried to suggest that I am attacking Mises along with all economists. Sorry, guys, that’s not how science works. You do not get to deny an observation by such emotional appeal. You cannot just conjure up a picture of carnage, of economists slain by the dragon of a new idea.

Either I am right, or I am not. If not, show me where I made a mistake (which would first demand that you understand what I said). Failing to meet that standard, you’re just attacking what you don’t comprehend.

You cannot make me unsee something. Nor can you cow me into remaining silent. If there may have been a time when you could have marginalized me by browbeating my early audience with fear that if they follow my work they will be ostracized, that time is long past.

If what I say makes you feel uncomfortable, then it is not my sin. It’s all yours. It is you who ought to check your premises, oh you who would presume to utter “you didn’t see that” out of fear of seeing it for yourself. It is you who need to know why my ideas cause you such anxiety. If it were true that I saw nothing, and my work just rubbish, then you know that it would not vex you so.

And if you don’t want to know, if you don’t want to check your premises, and you don’t want to understand my ideas well enough to refute then, then you marginalize yourself. Monetary science is moving forward, whether you will or not.

I’ve got science to do, a business to build, and a world to help move towards the gold standard. What are the “you didn’t see that” crowd doing?

The Party of Spend More vs. the Party of Tax Less

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The Senate just passed a 500-page tax reform bill. Assuming it lives up to its promise, it will cut taxes on corporations and individuals. Predictably, the Left hates it and the Right loves it. I am writing to argue why the Right should hate it (no, not for the reason the Left does, a desire to get the rich).

The root of our problem is spending. The federal government spends much of our income, and an increasing amount of our wealth to the tune of over $4 trillion a year. That is over $11,000 for every man, woman, and child. But children don’t work and many adults don’t either (or they work for the government or a contractor). Assuming 100 million work in the productive sector, the government spends $40,000 in cash for each one, not counting the promises it racks up. This is the federal government only, and of course the people also bear the burden of spending at state, county, city, and municipal water district levels.

The government spends more than it takes in tax revenues. A lot more. The federal debt today is over $700 billion more than it was a year ago. The reason is simple. The people may love spending, but they hate taxes. So the government makes it up by borrowing.

I have written a lot about this concept, borrowing. They call it borrowing, but without the means or intent to repay it, it’s really a fraud. This is my definition of inflation—counterfeit credit. It is the compromise between the party of spend more, and the party of tax less: the policy of borrow more.

And that brings us to the present topic. Is it good to cut taxes? Economist Frederic Bastiat could have written this essay for me, in only 168 words. The first paragraph of the introduction to his 1850 book That Which is Seen, and That Which is Not Seen reads:

“In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.”

If they cut taxes, the seen is the lower tax you must pay. That is good and everyone is happy. But what is the unseen? What is that thing to which Bastiat refers as the “ultimate fatal consequence”?

It is an increase in borrowing. The “great evil to come” is the collapse of the debt, which is the backing for what we call money nowadays. When the debt is defaulted, our money will be worthless.

A reduction in tax revenues necessarily means an increase in net borrowing. Borrowing, of course, does not generate revenues. It is merely an addition to the debt.

To manage the rising debt—it’s rising exponentially—they suppress the rate of interest. This keeps the monthly payment down, but it has many other unseen but foreseeable consequences. Just ask a retiree trying to live on fixed income.

The bottom line is that when the government spends our income and our wealth, we are impoverished. That is a fact, and there cannot be any real debate over it. The debate is whether it is less bad to tax us or to borrow.

When the government taxes us, we know we are poorer. It is seen. We adjust downward our consumption and our quality of life. This is why everyone hates taxes.

When the government borrows, by contrast, we do not feel the pinch of the impoverishment. Instead, the government sells us bonds. The bond is a financial asset which not only pays interest, but has been in a bull market since Ronald Reagan took office in 1981. We not only don’t feel poorer, but we actually feel richer. The purchasing power of our investment portfolios is going up.

Borrowing is not a magic perpetual motion machine. It is not a way to spend above your revenues. It is not a way to consume without first producing. It is a just a way to deceive—to consume without the taxpayer realizing it.

It is Bastiat’s unseen.