What’s Wrong with the World

I'm confused. I was quite sure, Paul, that I remembered your saying on an earlier thread that you think it is misguided to use the word "austerity" ambiguously to refer both to tax increases and to spending decreases. Moreover, as I recall, at that time you also said that you think the economic effects of the one are quite different from the economic effects of the other. My impression had been at the time that you believed that the economic effects of tax increases were likely to be economically detrimental but the effects of spending decreases might be helpful, and you were agreeing that the word shouldn't just be used indiscriminately for both. I don't have time to look this up right now. This post, however, seems to be going in exactly the opposite direction from the position I had previously understood you to take. As for cuts in defense, I assume you only mean for the United States. Not every country has defense as as large a portion of its budget. I'm also curious as to why you zero in on defense rather than, for example, Medicare and social security. Aren't the latter much bigger budget-busters, even in the U.S.?

Any man who propounds his doctrine on Austerity, whether to damn or approbate, must acknowledge forthrightly that Austerity entails both (a) broad-based tax increases and (b) deep defense cuts, or reveal himself as a mountebank.

Just cutting budgets is a simplistic approach that will only make matters worse by making the federal government do business as usual on a smaller budget. Until the federal rules of procurement and civil service system are radically overhauled to streamline the procurement of goods and services and make the removal of bad workers easier, nothing will change. This is why the federal government will spend $250k in hourly billing to hire a contractor from a contracting firm whose salary is $100k, instead of paying $100k plus the cost of benefits. The waste caused by the bipartisan unwillingness to think outside the box on the nature of the civil service system and rules of procurement is the better part of a typical mortgage (assuming the benefits cost the federal government $50k).

People point to cost overruns on highly experimental work like the F22 program, but ignore the fact that the money lost to fraud (literally, felonious fraud) in Social Security, Medicaid and Medicare was estimated in 2011 or 2012 (can't remember) to be about $112B. That's probably more than all research programs (defense and non-defense) the federal government funds in a single year. Yet curiously, there is greater outrage over cost overruns on a fighter jet that is cutting into uncharted engineering territory than over criminal behavior raping the heck out of the entitlement budget. Likewise, the Senate is now considering putting the kibosh on federal contributions to our nuclear fusion research because--get this--having nuclear fusion reactors powering our electrical grid is not even remotely as important as another 6 months for people who've been sitting on their ass for 2 years on unemployment or occupying two jihadist ratholes on the other side of the planet.

Paul,

Like Lydia, I would push back against your definition of "Austerity". After all, that was basically the point of my big post -- austerity can and should mean just spending cuts. Now I happen to agree with your point (b), as much as it pains me to admit it I just don't think we can afford the expansive military we currently operate (at least not now).

So I would be willing to make the hard decisions (i.e. cuts) related to military spending, but I won't go along with the notion that we need tax hikes at this moment in American history.

I also think Mike T. makes an excellent argument and this is why Governor Walker was so successful in cutting his budget in Wisconsin -- he attacked the source of his spending inefficiecies (which happened to be union contracts).

Is Paul saying that national budgets can't be brought into balance simply through spending cuts? Why not? Or is he saying that they shouldn't be brought into balance only through spending cuts? If so, why?

I also think Mike T. makes an excellent argument and this is why Governor Walker was so successful in cutting his budget in Wisconsin -- he attacked the source of his spending inefficiecies (which happened to be union contracts).

I forgot to mention that one of the things that the left and right are equally guilty of is using federal employment as a way of patronizing favored groups. Awarding contracts and employment primarily on the basis of being a veteran, a woman, a minority or handicapped is very common. This is probably the single biggest reason why there is so much opposition to reform of the system. It would mean a lot of favored groups would suddenly get hit hard.

Three years ago David Cameron, his face a sanctimonious mask, said that an 'Age of Austerity' must be imposed so that government spending in the UK can be brought under control; and we've been told to get used to it for the indefinite future. Nothing much seems to have changed. Our standard of living is more or less the same. Bread and circuses still continue. Levity rules in this realm. Only savers and people on fixed incomes are losing out, and the insouciant multitude doesn't worry about them.

I tend to believe that the threat of 'austerity is, as Paul suggests, a bogeyman which is let out of the closet to frighten us from time to time. Eventually, like the scarecrow, austerity is recognized as an object of baseless fear and nobody pays attention to it anymore. The Greeks, buried under a mountain of debt and perhaps beyond the reach of German miners, are suffering from 'austerity fatigue' already.

In the places where austerity has actually been implemented (many American States and some Eurozone countries) it has entailed both spending cuts and tax hikes. This because the object is to balance a budget, or, failing that, to reduce the size of a deficit. The particular mix varies quite a bit, but in broad strokes both features are evident. The analogy to a household budget is instructive: to fix their finances a family may either increase their income or reduce their expenditures. I don't think it would be right to call a household policy of increased income and increased expenditure austerity.

I'm also curious as to why you zero in on defense rather than, for example, Medicare and social security.

Because defense cuts are the part that most media agitation leaves off mentioning. (I do agree that this aspect is peculiar to America, given that European defense budgets are miniscule in comparison.) For instance, the reader will search the Huffington Post's recent essay on austerity in vain for the words "defense" or "military." Similarly, while the Democrats in Congress bemoan the injustice of GOP austerity policies, their own policies inflict some austere cuts indeed on our defense budget. Meanwhile, the fact that most GOP leaders favor not tax increases but tax reductions undermines considerably their credentials as austerity advocates. Cameron's government in the UK supplies a useful contrast.

When necessity imposes austerity, as we see in Europe, neither revenue-raising (taxes) nor spending cuts are neglected. The US has not yet reached that point of necessity. The "fiscal cliff" is an artificial creation, easily remedied by legislation, not an inexorable pressure from outside.

Lydia, note that I am not addressing the wisdom of any of these policies. As you know, I am far less concerned about budget deficits than most people around here. It is not the fact of our deficits but their nature that imperils us. That nature is a series of huge middle-class entitlements made profoundly unsound financially because our demographics and private sector economy can no longer support them. The point about Governor Walker of Wisconsin is an important one in this context: the key successfully feature of his policy has been a reform of public-sector union privileges, not generalized austerity measures.

I don't think it would be right to call a household policy of increased income and increased expenditure austerity.

I might, however, call it "austerity" if the father lost his job, had to take a lower-paying job, the income of the family decreased, and they cut their expenditure so greatly and with such skill, wisdom, and self-discipline as to balance their household budget anyway.

note that I am not addressing the wisdom of any of these policies.

If the different kinds of policies are likely to have strikingly different results, and if there is a controversy over whether it is a) possible and b) preferable to try to do most if not all of the balancing with one of them rather than the other, wouldn't it be helpful to clarity in discussion not to use the same term to cover all of them?

Ron Paul proposed a budget that would actually cut big chunks of Federal spending by phasing out 5 Federal agencies, drastically slashing overseas military spending, ending all foreign aid, and gradually transitioning government social programs to private solutions. No tax increases were required because he was talking about real spending cuts - not the phony 'cuts in the growth of government' that most politicians call "spending cuts".

Ron Paul was blacked out, sneered at or marginalized by most media sources.

The answer to so much of what's wrong with government is to make the 'big pot of free money' as small as possible. Of course the fact that there are so many interests with their hands in the cookie jar makes such cuts nearly impossible. Until it all comes crashing down (and it will - probably sooner than later), nobody will seriously talk about cutting government.

The other thing Ron Paul said (for anyone who's still reading) is that all spending IS taxation. If it's spent, it will be paid for somehow - whether by us or by our grandkids! Taxation is not the problem - spending is.

When necessity imposes austerity, as we see in Europe, neither revenue-raising (taxes) nor spending cuts are neglected.

I having trouble seeing it, Paul. When a household has a gross differential between its spending habits and it resources, it has to bring those into line. If it opts for austerity, it opts to reduce expenditures. If Dad has been a lazy bum relying on his Gran-daddy's trust fund to the tune of 50K a year, and decides that instead of austerity, he wants to continue their existing standard of living, he can go out and get a job, and increase income. Increasing income alone has nothing to do with austerity. Reducing expenditures alone IS austerity in the family context.

The problem for the analogy is that the government cannot "go out and get a job". It doesn't have that option. It can just cut spending. If it goes that route, if government decides to simply make do with fewer services and lesser handouts, it is being austere. If, as a tag along, it decides to raise TAX rates, that is an additional aspect of trying to balance need and resources, it is not austerity.

Overall, it is absolutely necessary to balance spending and resources, it is not fundamentally necessary to "reduce expenses". But given the fact that raising taxes is not, of itself, the same thing as increasing resources (it transfers resources from citizens to government), and it has impacts on business, which has impact on other taxes, you cannot equate raising tax rates to getting a job to improve resources.

Ultimately, a government that is failing to balance expenses and resources should look at whether any portion of the expenses are something outside of the fundamental, critical purposes of government. If so, that's where cuts should occur first. It is true that just because defense is a primary obligation of government, that doesn't mean ALL military spending is critical, essential spending on primary obligations. Overall good husbandry of resources demands considering cutting military along with cutting other things. And, good overall husbandry of resources implies at least the possibility of considering the question of whether there are critical, primary governmental activities we need to accomplish that we are not doing (safety from crime, maybe?). But it would be laughably silly to think that, with all the NON-critical government spending we have, that we even remotely in a position to determine that we need to raise taxes just to meet the basic governmental requirements. Our first obligation is to cut expenses, and then see where we are.

This analogy is an imperfection. What, in a household, corresponds to the taxing power? Nothing, properly speaking.

But I think it would be fair to say that removing the mortgage interest deduction would be a possible measure in a policy of belt-tightening. It would amount to a tax increase for tens of millions of Americans; but it would have a noticeably positive affect on revenues -- more income for the Treasury. In fact any number of conservative plans for tax simplification would have their austerity features: favored interests would find transfers withdrawn, beloved but distortive deductions would expire, new sales or excise taxes would appear, replacing other levies, etc.

Thus many measures in an overall austerity policy would come via the tax code, inevitably.

On the "get a job" question: we must remember that the state does possess at least one alienable resource: land. A recent conversation with my father has reminded me of the great blessings that Americans have derived from the principle in American property law that gives private owners some equity in mineral rights. Much of Europe does not grant this to the citizen: whatever's under the land is the state's by law.

Now, it is amply true that private enterprise is what allows mineral rights to even be a question. It is only because the engines of capitalism have produced effective ways of pulling oil and natgas out of shale formations, that men all over the country are finding great new wealth in the very land under their feet.

So the government may not be able to "get a job" but it sure can sell off some land.

So the government may not be able to "get a job" but it sure can sell off some land.

If you mean that literally, you won't get any argument from me. Could be a really good idea.

But I think it would be fair to say that removing the mortgage interest deduction would be a possible measure in a policy of belt-tightening. It would amount to a tax increase for tens of millions of Americans; but it would have a noticeably positive affect on revenues -- more income for the Treasury.

I don't know the effect on revenues, but I would support repeal too. Even if I thought it would bring in no revenues I would still support it because I think it has been terribly harmful for the moral hazard it has caused. Ditto for the capital gains exemptions on housing. Things like this have brought incalculable harm to people by leading them to think, along with real estate agents as cheerleaders, that real estate is a better and different sort of purchase than it really is and has been historically. And then there's the housing bubble. Not meaning to sidetrack, but just saying.

Politicians often talk about 'austerity' - cutting welfare payments, axing the defence budget, sacking bureaucrats, etc., but they seldom do anything. It's very difficult in a liberal democracy where politicians are in a permanent popularity contest, to impose austere economic policies on an electorate that is devoted to hedonism.

Tyrants can enforce austerity. Democratic governments can only wheedle and nobody is easily persuaded to part with more of his own money to help balance the nation's accounts.

"It's very difficult in a liberal democracy where politicians are in a permanent popularity contest, to impose austere economic policies on an electorate that is devoted to hedonism."

Tru dat. Look what happened with Carter and his "malaise" speech. I'm not even sure that "excess government spending" registers in the minds of folks who routinely run up their credit cards buying the latest pieces of crap on offer from Apple or Sony or Samsung or whoever. Demanding austerity on the government level while we ourselves spend like sailors on shore leave seems a tad surreal.

NM, that's true. A good share of the general population doesn't even know what virtue looks like in this area. So it is hard to speak about it in the public arena and have (that portion of) the population follow what you are pointing out. There is a little bit of the "chicken and the egg" scenario going on, but I think we can safely point to liberal spend now and pay later programs in politics as being, at least from the standpoint of culture-wide impact, a bit prior to the run up the credit card and pay later sentiment in personal finance.

nobody is easily persuaded to part with more of his own money to help balance the nation's accounts.

In line, however, with my attempt to use "austerity" in what seems to me its clearer sense (and here Tony's 8:45 p.m. comment is excellent), I would say that a bigger part of the problem is that few people are easily persuaded to do without government "goodies" to which they have become accustomed or to which they are told that they are entitled. It is not at all clear to me that there is a prima facie duty for large numbers of people to part with more of their own money to help balance the nation's accounts. Rather, the nation should not have gotten itself in over its head and should now think about how to get itself out as much as possible by scaling back the spending *of other people's money*. Otherwise it really is taking from Peter to pay Paul.

Yes, NM, I think government deficits go back farther in history than large credit card debt. And even when skyrocketing deficits in America (in, say, this administration) are happening at the same time as the credit card phenomenon, I don't think there's something causal going on there.

After all, you can find lots of people who are quite responsible in their personal finances who really see no big deal in huge government deficits or in the spend-borrow-print cycle. Very few of us decry that economically, and we're mostly regarded as nuts. So it's really more a matter of economic theory. See the many wearily-long discussions in threads here at W4 about these matters.

"even when skyrocketing deficits in America (in, say, this administration) are happening at the same time as the credit card phenomenon, I don't think there's something causal going on there."

I wouldn't say it's causal, but it's correlative. The move in consumer finance to get people to buy things they can't really afford "on the installment plan" goes back quite a ways. I'd say that the usury culture and avarice are inherently related to one another, and that if people don't recognize it in themselves, they may not see it in government either.

Nice,

Like you, I think too many Americans are bad consumers and need to change their spending habits. However, unlike you, I'm not as quick to condemn the options provided by the market.

"I'm not even sure that "excess government spending" registers in the minds of folks who routinely run up their credit cards buying the latest pieces of crap on offer from Apple or Sony or Samsung or whoever."

So this drives me crazy, as I personally had my daughter save up her chore money so she could buy an Apple product which I happen to think is a remarkable piece of technology and has provided her literally hundreds of hours of joyous entertainment. Shame on you.

Have you read Carr's The Shallows yet? Might be worth your time.

Like I said, Nice: The theorists have told us for many a decade that what would be fiscal irresponsibility in individuals and families is normal and even normative for governments. Don't talk to me. Talk to the theorists. I think you're straining to try to make one of your favorite connections between alleged "greed" and "consumerism" at the individual level and government deficits. It may well be that at this point individual people are also fiscally irresponsible and therefore have difficulty understanding the message that government needs to cut back. But government irresponsibility has a life of its own based in Keynesian economic theory. For that matter, such theories positively _push_ individual consumption as the key to economic recovery and bemoan the "paradox of thrift," so you of all people should be opposed to them. There is a reason why my kind of economics is called supply-side. As opposed to consume-side!

As far as the personal banking aspects, I'm not sure CC debt of itself is a problem. Banking is different than it used to be. I've had long-term CC debt over the past five years and my interest rate averages 4% long term. My assets exceed my debts significantly, and I'm convinced it is a good use of debt. People used to get loans like this from their banks, but banking has changed and CC are a part of that. I wouldn't assume that all CC is high interest and a bad idea. If CC companies are convinced you're a good risk I don't see the problem. The problem is when banks take risks they shouldn't because they know they'll get a government bailout anyway.

And student loans now equal or exceed CC debt, and many of them will never be paid back, or the student is saddled with an overpriced product that is a burden. This is a huge problem that many will defend on the grounds of the supposed worth of "education." Not wanting to start that discussion, but just saying that many who decry CC debt will defend student loans to the hilt, but in the end the main problem I see is government involvement brings a moral hazard.

The fact that Keynesians are wrong does not make supply-siders correct. Also, remember that Keynes believed that the age of avarice would pass as man became more prosperous. He was wrong, obviously, but at least he realized that the promotion of greed was an unpalatable temporary necessity as opposed to a permanent economic virtue. That his followers have made government spending a permanent component of macroeconomics cannot really be blamed on Keynes. And government and personal economic ethics do not exist independently in separate sealed compartments.

A related and somewhat amusing anecdote: working in finance I know a lot of people also in finance and a few months ago several of us were having dinner with a mutual friend who had recently moved from NYC to DC to work for Capital One and was back in town visiting. This mutual friend does credit marketing for Cap One, as he did for Citibank before this, and he was telling us about his new job.

At one point, one of us at the table asked him, jovially, if he could convince Cap One to go more digital with their marketing. Our friend proceeded to list all the ways, except one, in which Cap One was in fact doing this. "That's not what I mean", was the response. "Could you please tell Cap One to stop sending me credit card offers in the mail?". Our friend smiled, "No, of course not! That's our bread and butter."

Well, I think, with NM, that this fits very well indeed with the government economists telling us (perhaps more so in the 2000s than in the 20teens), that to have a really vibrant economy, we need to have consumer spend, spend, spend to drive up demand to drive up business investment to drive up production. And they were quite happy enabling that cycle by ever increasing consumer debt. People who don't know proper use of debt in personal affairs are likely to be blind to it in governance, and vice versa.

Now, if I had my druthers, we would move away from the 30 year mortgage to the 15 year mortgage, (so that young home buyers are done paying off the home when the kids hit college years) and then mostly curtail education loans for high school graduates (I will happily make an exception for medical school), and (incidentally) get on sane footing with home pricing. Which, I will admit (though it would sure hurt my pocket) may call for getting rid of the home mortgage interest deduction.

Consider the fact that "deleveraging" is considered _bad_ by theoretical economists. Which means "getting out of debt." Hmmm. I remember when a former commentator on here, the Masked Chicken, much missed, asked in his usual winning fashion, "What exactly is leveraging, why are companies and people deleveraging, and how can we make them start leveraging again?" It was a humorous question, but it really hit the nail on the head, perhaps unintentionally. When the government thinks it's a _problem_ that people and companies are getting out of debt and wants to find a way to get them to "start leveraging again," we may have a problem, Houston.

Well hang on. Speaking broadly, the whole huge process of a society's savers and retirees investing their accumulated capital in the rising generation's productive enterprises is partially a debt contract. The younger generation goes into debt on credit supplied by the older generation, and both together hope for returns on their enterprise.

I think we have made serious mistakes over the past 40 years in favoring debt securities over equity, but part of this comes back to the preference of savers for debt as against equity. Outside blue chips, equity is too risky; and especially with the chimera of perfect hedges through derivatives (really just more complicated debt securities), everyone gradually came to see the bond markets as way to go.

But the problem with deleveraging, as a broad pressure on the economy, is that it suggests that the older generation, far from being ready to invest in the rising generation's new enterprises, is content to store is wealth in "risk-free" government securities.

Correct me if I'm wrong, but my impression has always been that deleveraging arises not from people's inability to _get_ loans but rather from people's (or companies') reluctance to _take out_ loans and from their paying off the ones they have. Hence, not from the "older generation"'s or anyone else's desire not to invest but from the nervousness of those who might otherwise take the loans, or who might have the loans, and who hurry up to pay them off and not take anymore.

I think we have made serious mistakes over the past 40 years in favoring debt securities over equity, but part of this comes back to the preference of savers for debt as against equity. Outside blue chips, equity is too risky; and especially with the chimera of perfect hedges through derivatives (really just more complicated debt securities), everyone gradually came to see the bond markets as way to go.

Right, and I think that is valid in terms of profits, but may be flawed in terms of morality and proper human development. On the one hand, while it is perfectly legitimate morally to invest your surplus in a wealth-producing venture (which admittedly is risky), and expect profit on that, not so much for debt: so-called "investing" your surplus in enabling other people to buy consumer goods on credit, with a hoped for 10% profit (or whatever it happens to be) is degraded in the sense of real human goods. The profit that occurs in this is generally usury, and so the whole transaction is bad - bad for the lender who sins by intending to profit from usury and become greedy for money, bad for the consumer who is encouraged to live beyond his means and become materialistic and greedy for goods.

If everyone who had savings to invest were to invest it only in things that promised to produce a profit because it produced REAL (new) wealth, there would be a lot more room to find someone who also had some surplus, wasn't just at the moment interested in doing the work to find a good worthy venture, and thus would be more willing to lend simply for the good of society (not for profit) and expect only to get his money back. Not that I expect to see this happen this side of the 2nd coming.

Tony,
Very complex and though-provoking thought on "profits".

I would say that investing via stock market and particularly a mutual fund is not the same as investing directly in a business. The role of anonymous property in the current dislocations warrants investigating. To me, the very nature of anonymous property is towards instability and lack of stewardship.

I have been re-reading The Mind of the Maker, and Dorothy Sayers says that the artist is oriented to the work and not to the profit. Man is made in the image of a Creator and thus man must be creative.
She neglects the Curse of Adam, though.

"the very nature of anonymous property is towards instability and lack of stewardship."

yes, it is property in the abstract, even if it is real property. If some holding company in NYC owns 40,000 acres in Kansas or Kentucky, how can they be stewards of that property in any real sense? We all know the hazards that come with absentee landlordship. They don't go away as the scale gets larger.

Paul's comment from 7/27 at 6:14pm is spot on. "We have seen the enemy, and the enemy is us." Savers have chosen to save in paper and debt securities and the banks have moved heaven and earth to give us what we demanded. When savers (really, super savers, the giant surplus producers of the world) choose to save differently, the current international financial system will come to an end. This is the market event that I am waiting for and expecting.

But there is some useful background information available that helps explain how the West moved towards saving in paper. Jacques Rueff, financial attache for the French government from the 1920's to the 1950's (a true inside man), wrote a short book in the early 1960's called The Age of Inflation. It can be found, free of charge, here:

http://www.scribd.com/doc/96554552/The-Age-of-Inflation-Jacques-Rueff

In it Rueff discusses the monetary conference in Genoa in 1922, convened to discuss the rebuilding of the world financial system following WWI. It was decided that a return to the classical gold standard was best but there were concerns that the gold stocks of the world were insufficient to defend the pre-war gold price given all the inflation that had occurred. Rather than let the gold price float against the currencies (the correct solution) the conferees agreed to allow paper dollars and pounds (theoretically redeemable in bullion) to count as central bank reserves on par with actual bullion. As Rueff explains this allowed international capital transfers to occur without corresponding changes in purchasing power. The road was paved for the age of inflation and the dollar reserve system we have today.

Rather than a system of debt-based savings, what might a system of equity-based savings look like? Here's one description I've always liked:

Gold as Pure Equity

When (physical) gold is revalued by the free market, in order to give payment in full to the current surplus of claims (dollars), it will represent to its holder a pure equity position.

A pure equity position in what? In human value, no less.

A bold claim? Let's examine it a little.

The quantity of physical gold in the world is fixed. When one owns some physical gold, they own a fixed share of that quantity. It is an undilutable position, unlike currently traded equities, the supply of which is regularly inflated by their issuers to raise more capital, thus eroding the value held by existing shareholders.

Equity held in free floating physical gold is the very definition of “a hedge against inflation”, inflation of every description (except the inflation of real value). Every dilutable item in the world will depreciate against physical gold upon dilution. Gold retains its buying power.

But free floating physical gold (Freegold) actually does much better than this. It is often claimed that gold pays no dividend, no return on investment. Freegold needs no return on investment for the traditionally cited reason - the offsetting of loss to currency inflation, because it automatically offsets inflation anyway.
Freegold likewise has no need to allow for losses incurred through malinvestment or misallocation of capital - being fully hedged against inflation automatically - there is no longer a need for any capital to ever be deployed in anything other than the soundest of productive ideas. Capital written off on “speculative” investments gone sour will be almost non-existent, for two reasons: the lack of impetus for such investing as described, and the severe punishment of losing some of your golden equity in a less than sound venture.

Why will this be regarded a severe loss?

Because the vast majority of investment made will be productive, and to be productive means to be valued by the market. Thus investment will produce new value, exclusively. And the excess of this new value will be stored in the safest possible place... gold.

The owner of physical gold will experience continual capital gain through their pure equity holding for as long as humanity can continue to create value. Pretty big incentive to protect your holdings. Pretty big incentive to create some value in the world yourself, in order to buy in, no matter how meager the quantity, considering the direction of the capital gain and the fact that you can never be diluted out.

Looks a better buy than any other form of equity position currently available... and it’s currently available at pre-float valuation (for a limited time only).

In the absence of a strong dollar (absent soon for indisputable reasons), gold will find its function as the settler of those claims, as the master proxy for monetary value in the collective mind, and the current ridiculous dollar/physical gold exchange rate will be history. Literally.

What are you waiting for?

Blondie

http://flowofvalue.blogspot.com/2010/11/gold-as-pure-equity.html

Andrew, maybe one reason people save in paper and even in debt securities is because of the various penalties for saving in collectibles. And gold counts as collectibles. A 28% tax on any gains when you cash in? Seriously? Can't the profit even be treated like profit on stocks, securities, or capital gains?

Frankly, I think people should be able to save in the form of buying paintings or Faberge eggs. I really can't see a good rationale for the exorbitant collectibles gains tax. If that were repealed we'd _only_ have to think about issues like insurance, since most homeowners insurance doesn't cover such things if stolen, etc.

I'm sure the tax code influences behavior as you point out. Gold was illegal to own in the U.S. for 40 years. That went a long way towards removing the function of gold as a wealth asset from our collective consciousness. The full picture is huge and complex. But for instance, the paper gold markets were created in the late 70's/early 80's with the idea that they would divert much gold demand away from physical so the physical could flow to the producers (oil) who would otherwise crash the dollar system before the backup (euro) was online. And it worked, big time! Even when investors buy gold, they prefer the electronic version to the real thing. In many cases they do so just so they can say their portfolios are "hedged". The savers have to recognize how overpriced their claims on the system are and withdraw what they can while they can.

Very interesting as usual, Andrew E. But why should I accept the basic premise that "the quantity of physical gold in the world is fixed"? I suppose that's true from pristine geological perspective, but the key question is whether any new gold can be brought to the market. And the answer to that is yes. Mining still goes on. New deposits are discovered, new techniques designed to exploit older deposits more fully. The quantity of oil in the world is fixed, geologically speaking, as well: but just in the past decade there's been huge advancements making enormous new reserves available to production.

Paul, the important difference between gold and oil (or any other commodity) is that oil is consumed (consumed as soon as it is brought to the surface) and gold is not. Gold is mined, refined, minted, sold and then stored away forever. The above ground stock of gold is known to be something like 170,000 tonnes or so. Annual mine production is somewhere around 2500 tonnes. It's all about the stock-to-flow ratio and nothing else comes close to a 70-year ratio (pretty much everything else has a ratio

(sorry -- post continued)

...(pretty much everything else has a ratio less than 1 year). Eliminate the supply-side shocks of a commodity and its value becomes incredibly stable...perfect if you're looking for an excellent store of value.

A pure equity position in what? In human value, no less.

Andrew, yes, an investment in pure human value would be very valuable. But even gold is not that. It's pretty good, but not "human value" per se. In the infrequent times when food is not only expensive but actually limited in quantity below the level that will supply the people who usually have plenty and always expected to have plenty, food becomes more valuable than gold. You can eat food when you are hungry, you cannot eat gold. If a city is under siege, and cannot get food in, and what is in your pantry is all you are going to get for a long time, you'll value a full pantry more than you'll value a full box of gold. You may want to bring your gold to market to find sellers, and find no takers.

Same goes for safety, when all hell breaks loose and the revolutionaries are attacking anyone who has a vested interest in the old system, including having stores of GOLD. You'll wish you had more guns and ammo and less gold.

Human value is inherently dependent on circumstances. Different circumstances, different values. Now, as long as a system remains stable, you can go along on the hypothesis that the critical circumstances won't change drastically. But outside that hypothesis you can't. Problem is, if the assumption that the system will continue indefinitely leads precisely toward the sort of behavior that takes advantage of the system, and undermines the basis for the system, then that behavior will bring down the system. Which is a fair description of the incessant greed of unrestrained capitalism / unrestrained consumerism that we have been trying to erect as if it were "normal".

But even closer to home, gold is valuable on one hand because it has a number of useful applications, in electronics and so on. It is also valued as an object of beauty, in jewelry and art. But clearly the second category of value is much more susceptible to modification than the first: if people were to be convinced by an intense ad campaign to look down their noses at gold the way they have been taught to disapprove of furs, gold would no longer be so universally loved for jewelry and art. And once you take THAT sort of value off the table, the value found as a basis for monetary exchange would become just as volatile as other types of goods. It has ALWAYS been the case that gold as money is effective as a store of value by resting on the value people place in it for ornamentation and ostentation. And that is a purely subjective position.

Frankly, I think people should be able to save in the form of buying paintings or Faberge eggs.

Lydia, I know you were talking about taxes, but to riff off this I'd say that aside from that there isn't anything preventing someone from using any given thing as an alternative currency. It all depends on what will be valuable in the future, and that all depends on what happens in the future. The gold specie standard rose out of a general acceptance that gold was useful as a universal currency, but commodities compete for the role of money. Typically, the one that over time loses the least value takes over the role: oil was called "black gold." And then technique has a role, and who best harnesses it. Transportation was the big thing in its day, first the railroads, then cars, and then aviation. Then computers. Many think Apple stock has been an alternative currency for years now. Many of the disbelievers that AAPL could continue to rise have given the argument that nothing would be able to rise above ExxonMobil (black gold), but yet it seems like something made of sand and symbolic language indeed should, given what humans are and what we wish to do. Apple has been over 150B in excess of XON in terms of market cap for awhile now. After all, IBM stock doubled 15 times since 1943.

I'm not endorsing a weak currency; I know that the interest rates are a fiction and who it hurts, and the WSJ has been a vociferous critic of our weak dollar policy for as long as I can remember. But at the end of the day I'm not sure that gold would actually solve what we wish it to, and I suspect in the end we all just have to place our bets for what we think the future brings and live with the consequences. It seems to me we're seeing the parable of the talents writ large.

Gold is mined, refined, minted, sold and then stored away forever.

Mostly true, but gold is used widely in electronics. The main reason it's not harvested from electronics garbage is, AFAIK, that the cost to deal with the toxic components created by extracting the gold would greatly exceed the value of the gold.

Many of the disbelievers that AAPL could continue to rise have given the argument that nothing would be able to rise above ExxonMobil (black gold), but yet it seems like something made of sand and symbolic language indeed should, given what humans are and what we wish to do.

Apple's profit margin is, IIRC, about 2-2.5x higher than Exxon's. I like Apple's products a lot (been using MacOS since 8.6; OS X since 10.0), but it has always pissed me off to no end that many of their fans are the type who will how like baboons at "big oil" while buying Apple products that have ridiculous markups.

Food for thought for y'all, check out the controversy over the Accumulo database. From what I can gather, the real reason that it is being targeted for annihilation is not that its competitors are better but that it is the first NoSQL database to implement security mechanisms that make it a direct competitor to Oracle.

Tony,

I hear what you're saying. From my view gold has been seen as a wealth asset (mostly) or a currency (during various gold standards) by humanity for going on 5000 years. So the transition from ornamentation to store of value as its primary function occurred a long time ago. That's why the existing stock is so huge compared to flow. It's interesting to discuss how gold's function has evolved but it's merely academic. Even if a Mad Max apocalypse scenario were to unfold, as long as trade was taking place people would need to store value. Though gold wouldn't be worth as much as it is today because there would be less value to store.

It's true that gold has a few industry applications for which it is used but bullion has been underpriced for a long time. Enormous amounts of value have been created over the last 100 years and this has not been reflected in the gold price. The price has been held down in various ways at various times by the dollar reserve system, as a condition of the continuing existence of the dollar system. Necessary because if the gold price were to rise too high, too fast it would become clear to everyone saving in dollar debt that they were placing their savings in the wrong place. And the system cannot continue unless the bulk of new savings are plowed back in. (This is not a conspiracy by powerful interests to loot the people. Monetary authorities made an honest mistake in 1922 when rebuilding the financial system.) But when bullion breaks free of the paper gold markets and the dollar it will be priced out of its current, meager industrial uses the same is it is already today priced out of the toilet bowl industry.

. . . buying Apple products that have ridiculous markups.

Markup? No. Other vendors fritter away their profits cobbling together alliances to supply core functions that Apple does itself. Just look at the exceedingly poor quality of their competitor's notebook trackpads. It's the software. Many people use mouse because they are so bad, which defeats part of the purpose of having a notebook. Or the scrolling or battery life on many competitor's smart phones, or the fact that vendors sell old software they refuse to update. Talk about work ethic, there isn't any other vendor who takes care of details like that. Other vendors have handed parts of the development to people who have less stake in how the parts work, and the parent company feels less responsible for the result. The result is less profit because you have a fragmented commodity product that doesn't please people who use them the most. Apple designs all aspects that have a significan effect on the usability of the product, and doesn't fritter away it's profits in the process.

Apple designs all aspects that have a significan effect on the usability of the product, and doesn't fritter away it's profits in the process.

This may be true in the iPhone and iPad, but it's not true with the Macs. The Mac of 2012 is a commodity PC with engineering focusing mainly on things like decreasing the weight without wiping out the cooling capacity. I cannot think of a single component in it that Apple actually engineers themselves except the case (maybe the "retina display" on the new MBPs).

Apple's build quality is also down substantially from where it used to be. My MacBook Pro has had serious problems that caused it to fail twice; my PowerBook G3 never had a single hardware issue except a battery that is probably dead by now (you can forgive a 12 year old laptop for such a problem).

Or the scrolling or battery life on many competitor's smart phones, or the fact that vendors sell old software they refuse to update.

Valid points, but if you buy Android phones that are comparable in price range to an iPhone the support is really not that bad. That is mainly a problem with the cheap ones which retail at half or less the cost of an iPhone at retail ($600 is the bare minimum for a retail iPhone).

I'm not here to attack Apple and claim they should charge less. I am attacking many of their users who think it is wrong for Exxon to make 8% profit on a product that is absolutely essential to the normal functioning of modern civilization while cheerfully helping a luxury phone and computer vendor make 17%+ returns. Emphasis on luxury. There is nothing that a Mac will do that a half price PC with Windows 7 or maybe even Ubuntu (games aside) cannot do.

The Mac of 2012 is a commodity PC with engineering focusing mainly on things like decreasing the weight without wiping out the cooling capacity. I cannot think of a single component in it that Apple actually engineers themselves except the case (maybe the "retina display" on the new MBPs).

Way off-topic, but the last thing on that is that they design the motherboard and the software, so I have no idea how you could get from there to what you've said. My anecdotal experience is that none of my three consecutive macbooks have failed over the years in any way after three years of service each, including the one that dropped four feet onto a concrete floor onto its side (still worked perfectly, but had to have case replaced).

I am attacking many of their users who think it is wrong for Exxon to make 8% profit on a product that is absolutely essential to the normal functioning of modern civilization while cheerfully helping a luxury phone and computer vendor make 17%+ returns. Emphasis on luxury.

I got that, but a better example would have been soft-drink vendors who sell sugar water with no nutritional value at 60% gross profit.

There is nothing that a Mac will do that a half price PC with Windows 7 or maybe even Ubuntu (games aside) cannot do.

Well if I were a gambling man --oh wait, I am-- I'd put some real money against you doing what I'm doing right now with my MacBook on either Win or LInux, though I use all three. I'm mirroring my display wirelessly to a TV in the next cube. Good luck. But the real issue is even if what you said were true, it's the same old tired assumption that time and patience don't matter. As if doing something better, more elegantly, or easily is the same as doing it poorly. We all know this isn't true, and why some insist that it must be true with computers is just silly. Thinking like that by people that should know better are why Apple's competitors do so poorly against them and also explain the conspiracy theories trying to explain why they sell so many.

Say what you want, I'm out on this off-topic stuff.

As if doing something better, more elegantly, or easily is the same as doing it poorly. We all know this isn't true, and why some insist that it must be true with computers is just silly.

Mark, you're right of course, it's not the same. At the same time, there are (and always will be) people who can and will trade that elegance and speed for low-cost and clunky, simply because they can afford low cost and they can afford the extra time and patience it takes, but they cannot afford the cost of speed and elegance. There is nothing wrong with a market that manages to feed both needs. (Same with Lexus vs Toyota Corolla, they both get you there but they do it differently). The issue shouldn't be whether there is a real market for high quality, it is whether the high-quality market should pay a higher percentage profit margin on the admittedly higher cost of producing the better quality. It has often been the case that in a young, still developing product line luxury products tend to have a higher profit margin - until competition manages to eat away at the difference with almost-as-good products at significantly lower cost, and just-as-good products at slightly lower cost. What we are seeing is monopolies in place that prevent sufficient competition to enable that leveling out process. Any intelligent producer will want to keep a monopoly as long as he can, but society as a whole should not tolerate very much of that. Sooner or later both Apple and Microsoft operating systems will have to be subject to major competition from multiple angles before a mature market environment exists.

Way off-topic, but the last thing on that is that they design the motherboard and the software

The motherboard is just their take on an EFI-based motherboard. OS X by itself is just a damn good UNIX-like desktop. What really differentiates Apple is their commitment to the total product. There is literally nothing stopping Dell in 2000-2003 from doing their own super secret "Manhatten Project" to create a radical new desktop OS based on the Linux kernel and their own proprietary components built on top (in other words, doing with Linux exactly what Apple did with Mach and FreeBSD).

I got that, but a better example would have been soft-drink vendors who sell sugar water with no nutritional value at 60% gross profit.

Apple kool aid drinkers (*cough*John Gruber*cough*) tend to be much more vocal about their feelings about the profit margins of companies than does the average soft drink buyer.

As if doing something better, more elegantly, or easily is the same as doing it poorly. We all know this isn't true, and why some insist that it must be true with computers is just silly.

It depends on the needs, obviously. As I have Linux, Windows and Mac machines in my house, I have a good idea of what each is capable of doing. I was using hyperbole when I said that there is "nothing" that a Mac can do that others cannot do. However, the point remains that for many buyers the Mac is simply not worth their money in this economy. For the vast majority of users, Windows 7 is scary close to Mountain Lion in terms of elegance and what they can do with it.

FWIW, I say that as someone whose next computer will (hopefully/probably, budget permitting, be another MacBook Pro).

** OK, it might be unfair to make the jump from John Gruber's role as Chief Kool-Aid Mixer to big oil critic, but anyone who's read Daring Fireball knows the man has an unhealthy attachment to Apple.

There is literally nothing stopping Dell in 2000-2003 from doing their own super secret "Manhatten Project" to create a radical new desktop OS based on the Linux kernel and their own proprietary components built on top (in other words, doing with Linux exactly what Apple did with Mach and FreeBSD).

I would bet every last cent I have that Dell will never accomplish this and sleep like a baby. Dell is the last company that could do it, and many far better have tried. Dell is a one-trick pony who spent all his career mocking companies for doing their own design, and then after his company is successful decides he wants the respect of an IBM, only then realizing the ability to design and engineer is what gave companies like IBM respect. Oh and if you mostly assemble stuff he suddenly realizes that the company is vulnerable to cheap labor since it isn't that hard to do. So then he tries to do it with a company culture not even remotely friendly to design and engineering, and not even any management experience is guiding them. The result? Nothing but failure. Do you have any idea of the complexity of the software frameworks in Apple's operating system that is layers on FreeBSD? Not doing the entire OS allowed them to specialize in the most important stuff. Dell has never even approached this level of complexity in anything, and fails every time it tries to cobble together something original.

It has often been the case that in a young, still developing product line luxury products tend to have a higher profit margin - until competition manages to eat away at the difference with almost-as-good products at significantly lower cost, and just-as-good products at slightly lower cost. What we are seeing is monopolies in place that prevent sufficient competition to enable that leveling out process. Any intelligent producer will want to keep a monopoly as long as he can, but society as a whole should not tolerate very much of that.

Tony, I'd disagree with you here. Monopolies are bad for the companies that make them too. A snippet of a Steve Jobs interview has one of his most incisive and revealing comments on just this point:

--------
People always ask me why did Apple really fail for those years, and it's easy to blame it on certain people or personalities. Certainly, there was some of that. But there's a far more insightful way to think about it. Apple had a monopoly on the graphical user interface for almost 10 years. That's a long time. And how are monopolies lost? Think about it. Some very good product people invent some very good products, and the company achieves a monopoly.

But after that, the product people aren't the ones that drive the company forward anymore. It's the marketing guys or the ones who expand the business into Latin America or whatever. Because what's the point of focusing on making the product even better when the only company you can take business from is yourself?

So a different group of people start to move up. And who usually ends up running the show? The sales guy. John Akers at IBM (IBM ) is the consummate example. Then one day, the monopoly expires for whatever reason. But by then the best product people have left, or they're no longer listened to. And so the company goes through this tumultuous time, and it either survives or it doesn't.

Q: Is this common in the industry?
A: Look at Microsoft (MSFT ) -- who's running Microsoft?

Q: Steve Ballmer.
A: Right, the sales guy. Case closed. And that's what happened at Apple, as well.
------------

So your statement of monopolies and the nature of competition needs updating. It is the "innovators dilemma," and wise CEOs do not wish to maintain monopolies, because that is a defensive bureaucratic function that could only destroy a company. Even IBM has shifted into services mostly. Apple has killed its most successful products. If you only have yourself to compete with you'd better do it. A company may dominate an industry but not be a monopoly, and as Jobs says, will fail to the extent that it tries to maintain one. Apple may succumb to that in the end too, but at least they know enough not to try the same failed ideas that have ruined other companies. It is an old truth that success is harder to deal with than failure.

Apple will have competitors, but if they are to be serious competitors they will need to have absorbed some of the same lessons Apple has. It is hard to find any potential Apple competitors that aren't deeply into denial right now about the reasons for Apple's success. These reasons will be studied for years in business schools. Apple is as much a revolutionary force in American business as GM was in its heyday, and IBM it its time. The iPad was 30 years in the making. As long as business people are in denial about the practices and beliefs it takes to succeed with products like this they'll only ensure they won't be a serous competitor. If you study how Toyota became competition and eventually overcame GM, it wasn't by doing more of the same thing harder.

What we are seeing is monopolies in place that prevent sufficient competition to enable that leveling out process.

Here is a lecture called "Entrepreneurship and Competition" that is highly illuminating on the assumptions implicit in the way the term "competition" is mainly used in an erroneous way now.

Do you have any idea of the complexity of the software frameworks in Apple's operating system that is layers on FreeBSD? Not doing the entire OS allowed them to specialize in the most important stuff.

Yes, and most of the developers I know who aren't Apple kool aid drinkers don't think Apple's APIs are anywhere near as innovative as people claim. Objective-C, while a lot nicer than pure C for desktop and mobile apps, would be the laughing stock of the industry if Microsoft tried to call it "cutting edge and innovative." Another example: Core Data. Maybe I'm missing something, but it's mainly an ORM. Ohhhh lawdy, an ORM! Like no other platform has one of those...

It is the "innovators dilemma,"

Mark, I would take away a different conclusion from your illustration: that successfully doing a monopoly doesn't mean standing still on your advantage, and being long-range successful in it requires long-range strategies that take into account responses to your monopoly, as well as responses to your product itself. If Apple had been owned by a single person (so it hadn't had to answer to short-sighted stockholders complaints), and had taken steps to maintain innovative perspective not being swallowed up by salesmen, it need not have had its years-long doldrums:

Because what's the point of focusing on making the product even better when the only company you can take business from is yourself?

If the only reason you focused on innovation to begin with was "business" and money, you probably wouldn't have had the innovative, creative spirit that produced the monopoly-leading product. A Michaelangelo, an Einstein do not do their creative genius stuff simply for the sake of business and money, not at first. Google, for example, allows its people to "goof around" developing their own projects just for fun to some degree (on company time), and these projects are expressions of innate creativity.

It is possible that I was using "monopoly" for a strongly dominant position, rather than a formal monopoly. We all know that a Walmart moving to a small town has an impact LIKE that of a monopoly on the small competitive retailers, without being a formal monopoly.

I would take away a different conclusion from your illustration: that successfully doing a monopoly doesn't mean standing still on your advantage, and being long-range successful in it requires long-range strategies that take into account responses to your monopoly, as well as responses to your product itself.

It is possible that I was using "monopoly" for a strongly dominant position, rather than a formal monopoly. We all know that a Walmart moving to a small town has an impact LIKE that of a monopoly on the small competitive retailers, without being a formal monopoly.

Tony, I've quoted your first and last points together above, because I think "long-range successful" connects them and they support each other, which I have no quarrel with whatever. I think you're right to wonder if a better definition of monopoly can't be found. You're right. But you must realize that once you do that (shift the meaning from 'a company successful at producing X such that it has a monopoly on product X', to 'successful' simplicatur) you have now crossed into politics unquestionably. Not that politics was ever excluded, but now in our own memories (undistorted from the stories handed down to us) it is asserted with undeniable force. So now I think it becomes clear that the old questions have not disappeared. Who did the robber barons steal from? What harm did they do in delivering what had never been delivered so cheaply? Who was wronged, and how? And likewise, is the market a zero sum game so that those who rise sufficiently above the rest must have done something wrong, and have wronged someone? So you're onto something significant, but it shows the problem of some of the assumptions implicit in the common assumptions you expressed previously about the nature of "competition". And it shows the role of politics in business.

Business is in an absurdly odd state of primitive discourse at this point. In the military, they now speak of "asymmetric" war, threats, and actors. They speak of singular goals such as "getting inside the decision loop" of an antagonist. Things that trump all the traditional past advantages. But business has yet to catch up with the *logic* implied. It has nothing to do with violence whatever, though I'm sure someone like nicem will take the bait supplied by the metaphor. The fact is that before Apple stepped up its game the consumer was poorly served by the backwash of the deals made between large operators (telcos and large manufacturers) that didn't answer to him, and they are reaping the rewards. And so long as the "competition" fails to acknowledge the reasons for it and keeps doing more of the same they deserve to fail, as they have been failing for years, though the fact masked by profit.

So you see you've crossed a chasm when you go from the traditional view of "monopoly" to a new one. I think negative practices described as "anti-competitive" might well be a problem, but mere success as evidence of it? I think that is a very bad idea, a socialist idea. It is akin to the idea that "poor" means a certain percent of the average. But the point is that as the professor implied in the video I linked, certain definitions of "competition" merely import politics into our very discourse.

If Apple had been owned by a single person (so it hadn't had to answer to short-sighted stockholders complaints), and had taken steps to maintain innovative perspective not being swallowed up by salesmen, it need not have had its years-long doldrums:

But in fact Apple was run into the ground by single persons --their successive CEOs, by simply applying the lessons learned at Coca-Cola and other companies --traditional business practices-- to Apple. I'm not aware that anyone has ever suggested that the shareholders had anything to do with it, and I see no reason to think this. The reporting by tech pundits after Jobs' ouster was split into two camps. Some thought Jobs was too eccentric and holding back the bean counters, and some thing "gee, I dunno he was the head product guy in a product company I'm worried". The story of Apple's resurgence is far more complicated than that, but we know we had the better perspective at least.