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Inflation means your purchasing power goes down, deflation means your purchasing power goes up. It's the only definition that makes sense, and per that definition BTC has been, on the whole, experiencing deflation.

Alright. If you insist on that definition please re-read my post substituting the word inflation for money supply growth.

The "central bankers" say this because it is true. Deflation encourages people to hold their currency.

Does it? Who told you that? Central bankers?

Here's some economists who tested the data and found it lacking in this regard. The consumer electronics industry is another market that's been in permanent extreme deflation since basically forever and yet is doing just fine. Having something today instead of tomorrow has real value.

But regardless, the argument is circular - if a closed economy used Bitcoin and prices fell because the economy grew and the money supply didn't, then if the hoarding theory was right the economy would stop growing and prices would stop falling. There'd be an equilibrium point.

Not every company which acquires capital is as useless as a company which makes coats for penguins. Consider most companies which manufacture electronics.

Such companies should make for good investments even when there's no inflation: if your option is to do nothing with your money and either get no return (but also no loss), or more generally a return that's no better than the general rate of economic growth, then you should still want to invest. The only kind of investments that inflation can trigger are investments that people would have left on the table, except having their money vanish was even worse. These are not the kind of "investments" our society needs.

Finally, if the goal of BTC is to avoid "massive booms and busts", I'd say that it has failed thus far. In fact, BTC is much more volatile than the national economy. If that is your criticism of the current financial system, what good is BTC?

Give it time. BTC is volatile because nobody knows its future. It could be anything from "world governments ban it" to "the future currency of humanity". In such an environment it's natural you'll get massive speculation, especially because there aren't many high risk/high yield investments kicking around right now. 10 years from now Bitcoin's future will be much clearer. Government policy will have stabilised, Bitcoin's competitiveness vs the current system will be much more established, it won't be covered in the press every day and in general will be boring. Then I'd expect the currency to be rather stable.

What, so they're going to hard-code the acceptable root CAs into the JVM? So entities like the Federal Reserve Bank who run their own CAs (including folks using Microsoft Certificate Services) won't be able to use Java to connect to their secure resources? Providers like zScaler that offer cloud-based security whose entire model is MITMing all SSL/TLS (with the device owner's permission) won't be able to provide 0-day protection against hostile Java code?

Don't forget that the CAs whose keys are trusted by Java today have agreed to stop issuing "internal server name" certificates -- so usage of technology like Microsoft Certificate Services will only increase! In the next few years, the only reasonable way to make https/SSL/TLS work within internal networks will be to roll your own CA and certs.

I wish I could say that I thought there was no way that Oracle would be so stupid as to make it impossible to operate an internal CA. I mean, self-signed is not the same as signed-by-a-CA-not-vetted-by-Oracle. Self-signed traditionally means signed-by-a-CA-not-in-the-OS/runtime-list-of-trusted-root-CAs. But I wouldn't put any bets on this, since the historical data suggests that Oracle is one of the two stupidest, least trustworthy software vendors in the world.

"Open". Then who was on the other side of these Fed bond purchases? There's no report out there that describes what the Fed buys and who they bought it from.

Here you go:
http://www.ny.frb.org/markets/openmarket.html

The Federal Reserve bank in the US measures the money supply using two formulas, neither of which include your "money from nothing" premise about lending: http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html As banks lend money, particularly the so-called "signature loans" (credit cards and other unsecured loans), they have to increase their cash-on-hand under minimum capitalization regulations by a corresponding percentage as well, and that only comes from operating capital, not thin air.

As far as inflation goes, a gold standard would certainly help, but would not address every motive in capitalistic economy that drives inflation, i.e., the rise in cost to the consumer for goods and services. The fact is there is no single solution that does that. The US economy was on a gold standard until 1972, and the reasons it was suspended had more to do with competing with other countries than with the domestic economy, and being on the gold standard did not result in "economic collapse".

Your assumptions about the UK banking system being applicable elsewhere are not entirely true either. While there are international standards on minimum capitalization, the US has additional standards in place, and while these standards appear shockingly low to the average person (6% and 10% respectively), they are sufficient to monetize an bank in a way that encourages it to operate in a risk-averse manner in both the short- and long-term. And the US Fed works differently than the Bank of England, as the US Fed is a private corporation, not an arm of the federal government.

Who do you think has been supporting the mighty US empire with loans for the last few decades?

Last few decades? UK and Japan. Chinese holding was a nonfactor until less than a decade ago. What was your point again?

Foreign banks with branches in the U.S. are treated as U.S. banks for some purposes, though they're no longer eligible for FDIC insurance (since 1991). Some more info here.

>>Here in the US for example, economic mobility has been steadily decreasing for 30 years.

Lies. (Or Socialist talking point, same thing.)

Here you go ShakaUVM - Some data to support my assertion from that well-known Socialist organization, the Federal Reserve Bank of Boston . I know that may not be as authoritative as the Wikipedia entry that you provided so triumphantly, ShakaUVM, but it's probably a little more reliable since it's less likely to have been edit-bombed by a bunch of interns at the American Enterprise Institute trying to work off that grant from the Koch Foundation.

For those of you who don't want to clickthrough and download a PDF file from the Federal Reserve Bank of Boston's website, the paper is called Trends in U.S. Family Income Mobility, 1967 - 2004. I'll give you a little taste from the abstract:

By most measures, we find that mobility is lower in more recent periods (the 1990s into the early 2000s) than in earlier periods (the 1970s). Most notably, mobility of families starting near the bottom has worsened over time. However, in recent years, the down-trend in mobility is more or less pronounced (or even non-existent) depending on the measure, although a decrease in the frequency with which panel data on family incomes are gathered makes it difficult to draw firm conclusions. Measured relative to the overall distribution or in absolute terms, black families exhibit substantially less mobility than whites in all periods; their mobility decreased between the 1970s and the 1990s, but no more than that of white families, although they lost ground in terms of relative income. Taken together, this evidence suggests that over the 1967-to-2004 time span, a low-income family's probability of moving up decreased, families' later year incomes increasingly depended on their starting place, and the distribution of families' lifetime incomes became less equal.

I added emphasis to the most important part because ShakaUVM tends to be a little thick. He likes to rely on Wikipedia when some really good primary sources are very easy to find.

You may want to read this report.

I don't think there was any "one cause" of the housing bubble, but certainly the way the CRA (combined with the Home Mortgage Disclosure Act, the Equal Credit Opportunity Act, and the Fair Housing Act) were modified and interpreted over time may have encouraged additional "creative underwriting". Here is an excerpt from Closing the Gap: A Guide to Equal Opportunity Lending from the Boston Fed:

"Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with CRA loans. Unfortunately, CRA loans do not fit neatly into the standard credit score framework . . . Do we automatically exclude or severely discount . . .loans [with poor credit scores]? Absolutely not."

I think CRA/HMDA/ECOA/FHA were a minor part of the bubble compared with the GSEs (and Congress pushing them into sub-prime), the mortgage interest deduction, the capital gains reduction on home sales, and good old bubble mentality in the private sector, but it all added up.

Don't blame the CRA, it only prohibited red-lining (denying a loan based on geographic area rather than individual credit rating), and only applied to banks, not independent mortgage companies.

The Home Mortgage Disclosure Act (HMDA) applied to banks, mortgage companies, and other lenders. Read what the Boston Fed was telling lenders about it...stuff like "Lack of credit history should not be seen as a negative factor...In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. ". There also was the Equal Credit Opportunity Act and the Fair Housing Act.

Let's also not forget the FHA zero-downpayment program.

Don't blame Fannie Mae or Freddie Mac either. They weren't the ones making the loans.

But they did buy or guarantee nearly $400 million of Alt-A and subprime mortgage investments. At a conference in spring 2005, Fannie Mae Executive Vice President Thomas Lund warned about the danger to borrowers, asking, "Are we setting them up for failure?"

Besides the desire of the GSEs to get into the >80% LTV loan secondary market on pure profit grounds, they were also pushed by Congress. For example, see Schumer Unveils New Freddie Mac Plan With HSBC That Includes Low-Interest Low-Downpayment Loans.

Ironically, it was the repeal of the section of the Glass-Steagall Act (passed in response to the depression) which strictly separated banks from securities firms (to help assure the stability of banks) which exacerbated this mess and resulted in such massive failures.

No one has explained to me how this has changed the situation - "unified banks" have actually done a better job recently weathering the storm compared to banks with no investment side or pure investment banks. And they did better during the Great Depression as well. Glass-Steagall came from a war between the Morgans and Rockefellers rather than any actual data.

No honest person can say that government entities or regulations were "the cause" of the recent credit crisis, but certainly many regulations, Congress (in a bipartisan fashion), and the GSEs were on the side of "affordable housing" and "creative underwriting" for political profit, just as much as the private sector was in it for the monetary profit.

All I need is your routing number and checking acct number. Even the routing number can be obtained by calling the bank and asking for it. It's nearly public knowledge.

That's too much trouble.

Bank of America.

Wells Fargo Bank.

Search by name. See Wikipedia.

The Bear Stearns bailout is just one example. Does anyone realize that Jamie Dimon, the head of JP Morgan is on the board of directors of the NY Federal Reserve? http://www.ny.frb.org/aboutthefed/org_nydirectors.html

Yes, one of the people who oversees the Fed was responsible for approving the buy-out/bail-out of Bear Sterns by JP Morgan. He approved taxpayer funds to support a takeover by the company where he was CEO. They don't even bother to pretend to be honest any more.

I think as problems with public schools persist and the clear emprical advantages of competition become increasingly clear, there will have to be more support for school choice... but it never ceases to me amaze me how tolerant people are of the government run public school monopoly that year after year achieves such lackluster results.

In urban planning and economics, this is called location theory. See, for instance, "The Geography of Entrepreneurship in the New York Metropolitan Area," published last year in the Economic Policy Review, which describes one such model as you describe. (Warning, PDF with 3.4 MB of cool maps.)

Funny, I was just reading a paper on this exact subject. A couple of economists, having noticed that similar businesses tend to clump together even on an intra-city scale, studied the pattern of business siting decisions in New York. (For instance, graphic design-related businesses are concentrated in Chelsea and along 23rd Street. Why?) Skip the boring regression analyses, which just formalize what you already know intuitively, and you have a good summary of why geography still matters--and always will.

Wow, I half-way consider myself a libertarian, but that is a pretty grandiose statement to assume the cancellation of the federal reserve bank.

It's been a staple of our economy for over a hundred years, and is a primary player in the IMF and Worldbank. Even to begin discussing this topic would be the subject of multiple PhD dissertations.

While I agree with many of the social stances of the Libertarian party (such as privitization of schooling), I think it is unconsionable to bandy about the elimination of one of humanity's largest financial organizations based on a half-baked ideology.

If you can show me multiple BOOKS written about this subject by pre-emanant financial thinkers, arguing for and against, and would be willing to debate a panel of leading finance/business professors on the subject... then you might have a case.

I can't stress enough the totally unknown effect this would have on the world economy, exchange rates, securities investment, home ownership, the national debt, and almost every other critical aspect of our nation's economy.

It's possible I'm just not familiar enough with the party line yet, but that remark caught me WAY off guard.

E.g. Robert Hunt, Philadelphia Federal Reserve Bank, sees the the market equilibrium to be bad for software when patents come into play (he also quotes model calculations).

Also note that the US did not have software patents during the 70s/80s when many of today's big players grew up. Nor does India with its dynamic industry have software patents.

Attempts to defraud corporations almost always start with someone getting account information off a check. Electronic funds transfer (EFT) advocates argue that ACH security will improve only when more companies stop writing checks and start using ACH transactions exclusively.

From

The Relevance of Adam Smith by Robert L. Hetzel.
With added commentary by yours truly...

MONOPOLY AND GOVERNMENT SUBSIDIES: The principal theme set forth in The Wealth of Nations is that a country most effectively promotes its own wealth by providing a framework of laws that leaves individuals free to pursue the interest they have in their own economic betterment. This self-interest motivates individuals? propensity to truck, barter, and exchange one thing for another and thereby leads them to meet the needs of others through voluntary cooperation in the market place:

...man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (p. 14)

Everyone realises and acknowledges that Microsoft is a business, there to make a profit to share with it's marjor stakeholders, from it's shareholders to it's employees. However ...

Smith also argues that the harmony between private goals and larger socially desirable goals promoted by voluntary cooperation between individuals in the market place is interfered with by monopoly and government subsidies. In contrast to competition, monopoly and government subsidies cause individuals to devote either too few or too many resources to particular markets:

....the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock. (pp. 594-5)
Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place; whether it be by repelling from a particular trade the stock which would otherwise go to it, or by attracting towards a particular trade that which would not otherwise come to it. (p. 597)

.... sometimes, because of the overiding profit motive, the end consumer can be put at a disadvantage, and the natural model can become unbal

... your assertion that there was a recession in the early nineties ... defined as three consecutive quarters of zero or negative growth ... rather than a brief period of slowed growth

I can understand that to believe your world view you must, like Reagan, repress the truth to the point of asserting that nobody is ("meaningfully") hungry in the U.S., and that the poor drive automobiles and wear designer clothing. And a way I can see how the powerful emotions stirred by those images have prevented you from reconciling them with facts. But must you also take issue with the Federal Reserve Board's definition of recession?

... your failure to provide a single statistical measure of Swedish or American cost of living....

I cited one Swedish government web page, one Swedish university web page, and one European Union web page pertaining to the cost of living in Sweden, and surveyed classified ads in three U.S. cities for comparison. I'm pretty sure you missed that.

But look, even if I'm completely wrong about the cost of living, they still have 3.5 years more lifespan and lower infant mortality, illiteracy, inflation, etc. Who cares if they can't afford a five bedroom house on 3 acres -- what good are earthly riches when you have so much less time to enjoy them? You can't take it with you.

Ignorance abounds... What you don't realize is that 70% of U.S. currency is held outside the U.S.

In addition, most of the counterfitting going on is happening in foreign countries. In many places around the world, people are happy to accept dollars, but try passing a 30 year old Benjamin on them - they won't take it. They know that our currency is constantly counterfitted. Here in the U.S. it's cheaper to let the old bills wear out and get out of circulation that it would be to recall them all and print replacement bills.

While the Great Depression of 1929 was certainly caused in large part by gov't intervention (the low interest rates of the late twenties which you cite, and the Smoot-Hawley tarrifs), you should note that when we had a laissez faire banking system, things were even worse. Most people have grandparents who remember the Depression of the 30's, so they know about it. However, we also had significant depressions and bank runs in 1893 and 1907, which were ~why~ the Federal Reserve system was set up. Remember that old story about J.P. Morgan locking all the big players in a room until they bailed out the stock market ? (pdf) See a quick summary here . The fact is that the business cycle has never been repealed, no matter how many times (1920's, 1990's) it has been predicted to be.

While the Great Depression of 1929 was certainly caused in large part by gov't intervention (the low interest rates of the late twenties which you cite, and the Smoot-Hawley tarrifs), you should note that when we had a laissez faire banking system, things were even worse. Most people have grandparents who remember the Depression of the 30's, so they know about it. However, we also had significant depressions and bank runs in 1893 and 1907, which were ~why~ the Federal Reserve system was set up. Remember that old story about J.P. Morgan locking all the big players in a room until they bailed out the stock market ? (pdf) See a quick summary here . The fact is that the business cycle has never been repealed, no matter how many times (1920's, 1990's) it has been predicted to be.

The above link also states that more than half of U.S. currency is in circulation *outside* of the U.S., so there's less than $330 billion in circulation within our country. Amazing isn't it? No, that doesn't mean that Bill Gates has 20% of the nation's wealth. It just demonstrates how money is created by the banking system. There are those that misunderstand this process (or don't believe it, amazingly enough!) and state that for someone to become rich someone else has to become poor. Thanks to the banking system this is NOT necessarily the case and also explains why a $10 trillion economy can work with only $330 billion in currency.

I don't know about that 4 different versions thing... according to this, the average lifespan of a 20 dollar bill is 4 years. Two different types could be in circulation at the same time, but 4?
For that matter, when was the last time you saw an "old-style" 20 from before the last redesign?

From The Relevance of Adam Smith by Robert L. Hetzel.
With added commentary by yours truly...

MONOPOLY AND GOVERNMENT SUBSIDIES: The principal theme set forth in The Wealth of Nations is that a country most effectively promotes its own wealth by providing a framework of laws that leaves individuals free to pursue the interest they have in their own economic betterment. This self-interest motivates individuals? propensity to truck, barter, and exchange one thing for another and thereby leads them to meet the needs of others through voluntary cooperation in the market place:

...man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (p. 14)

Smith also argues that the harmony between private goals and larger socially desirable goals promoted by voluntary cooperation between individuals in the market place is interfered with by monopoly and government subsidies. In contrast to competition, monopoly and government subsidies cause individuals to devote either too few or too many resources to particular markets:

....the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock. (pp. 594-5)
Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place; whether it be by repelling from a particular trade the stock which would otherwise go to it, or by attracting towards a particular trade that which would not otherwise come to it. (p. 597)

Smith describes the actions of monopolists as follows:

The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. (p. 61)

The natural price is the lowest which the sellers can commonly afford to take, and at the same time continue their business. (p. 61) Today we would use the word competitive for natural. The effectual demand is the demand of those who are willing to pay the natural price of the commodity. (p. 56) Monopoly, as well as a governmentally subsidized activity, contrasts with a competitive market where a commodity is...sold precisely for what it is worth, or for what it really costs the person who brings it to market. (p. 55)
The Wealth of Nations contains three general kinds of criticism of monopolies. The first is that the higher prices in a monopolized market reduce the welfare of consumers:

If...capital is divided between two different grocers, their competition will tend to make both of them sell cheaper, than if it were in the hands of one only; and if it were divided among twenty, their competition would be just so much the greater, and the chance of their combining together, in order to raise the price, just so much the less. Their competition might perhaps ruin some of themselves; but to take care of this is the business of the parties concerned, and it may safely be trusted to their discretion. It can never hurt either the consumer, or the producer; on the contrary, it must tend to make the retailers both sell cheaper and buy dearer, than if the whole trade was monopolized by one or two persons. (pp. 342-3)
In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interest sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. (p. 461)

The second criticism of monopoly is that it engenders inefficient management:

Monopoly...is a great enemy to good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defence. (p. 147)

The third criticism of monopoly is that it is inequitable because it increases arbitrarily the inequality in individuals? incomes:

...The policy of Europe occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labour and stock, by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them. (pp. 118-19)

Monopoly has always been a contentious issue in debates on public policy in the United States. It is interesting to examine the way in which the ideas of Smith appear in current debates over monopoly. In general, proponents of government intervention in the market place argue that monopoly is endemic in capitalism and that its elimination requires significant intervention by the government in the market place. An opposing group argues that free markets effectively restrain monopoly power and that it is in fact government intervention in the market place that is chiefly responsible for monopoly. The first group assumes that large size, fewness of firms, and operation over an extensive geographic area automatically imply monopoly power and thus supports its position by citing the existence of industries dominated by a few large firms and the existence of multinational corporations. The opposing group supports its position by trying to show that where monopoly power exists it is made possible by particular governmental actions, e.g., in the United States by marketing orders that fix the price of milk above what it would be otherwise, or FCC regulations restricting the growth of cable TV, thereby preventing competition with the established networks.

The view of the world suggested in The Wealth of Nations is that monopoly power cannot persist without the assistance of government. The specific examples of monopoly that Adam Smith attacked required the police power of the state for their maintenance. These monopolies were of three kinds. One kind of monopoly depended upon the mercantilistic system of laws which England used to monopolize trade with its colonies: Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system. (p. 595) Another kind arose from the monopoly power granted guilds (referred to by Smith as corporations), which allowed them exclusive rights to produce a given commodity:

The exclusive privilege of an incorporated trade necessarily restrains the competition, in the town where it is established, to those who are free of the trade. To have served an apprenticeship in the town, under a master properly qualified, is commonly the necessary requisite for obtaining this freedom. The bye-laws of the corporation regulate sometimes the number of apprentices which any master is allowed to have, and almost always the number of years which each apprentice is obliged to serve. The intention of both regulations is to restrain the competition to a much smaller number than might otherwise be disposed to enter into the trade. The limitation of the number of apprentices restrains it directly. A long term of apprenticeship restrains it more indirectly, but as effectually, by increasing the expence of education. (p. 119)
The government of towns corporate was altogether in the hands of traders and artificers; and it was the manifest interest of every particular class of them, to prevent the market from being overstocked, as they commonly express it, with their own particular species of industry; which is in reality to keep it always understocked. (p. 124)

A final kind of monopoly depended upon tariffs and quotas that prevented foreign producers from competing with domestic producers:

The superiority which the industry of the towns has every-where in Europe over that of the country, is not altogether owing to corporations and corporation laws. It is supported by many other regulations. The high duties upon foreign manufactures and upon all goods imported by alien merchants, all tend to the same purpose. Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be under-sold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. (p. 127)

Competitive markets restrain monopoly because the above-average profits associated with the exercise of monopoly power attract new producers who increase output and thereby lower prices:

When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price.... Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept. (p. 60)

Monopolists can preserve their favorable position only if the government prevents potential competitors from entering the monopolized activity:

The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency...They...may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.

Such enhancements of the market price may last as long as the regulations of police which give occasion to them. (pp. 61-2)

Free markets make the formation of monopoly difficult because monopoly requires the adherence of all actual and potential sellers in a market. Self-interest makes achievement of such adherence difficult because each seller has an incentive to undercut the monopoly price in order to increase his share of the market. Monopoly power is increased or made possible if enforced by the government. In the following passage Smith refers to the guilds, or corporations, of his day:

An incorporation...makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. (p. 129)

Smith?s ideas appear in current public debate over monopoly. Advocates of deregulating the transportation and communications industries by eliminating or reducing the power of Federal regulatory agencies argue that these agencies promote monopoly by limiting the entry of new firms and by fixing prices for all producers. Government regulations enforced upon all firms in an industry have the effect of allowing producers to eliminate competition and to raise prices. At the same time, lack of competition reduces incentives for efficient production.

"If the states can't operate on their current budgets, should we just be forced to pay more to make ends meet? "

Why not? The citizentry already can't live within a budget.



Can we expect our government to do something we can't?

Not lately, todays New York Fed exchange rate is:

0.9974 Euro to the Dollar.

Who's gonna quibble over ¼ of a cent?

MONOPOLY AND GOVERNMENT SUBSIDIES: The principal theme set forth in The Wealth of Nations is that a country most effectively promotes its own wealth by providing a framework of laws that leaves individuals free to pursue the interest they have in their own economic betterment. This self-interest motivates individuals? propensity to truck, barter, and exchange one thing for another and thereby leads them to meet the needs of others through voluntary cooperation in the market place:

...man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (p. 14)

Smith also argues that the harmony between private goals and larger socially desirable goals promoted by voluntary cooperation between individuals in the market place is interfered with by monopoly and government subsidies. In contrast to competition, monopoly and government subsidies cause individuals to devote either too few or too many resources to particular markets:

....the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the different regulations of the mercantile system, necessarily derange more or less this natural and most advantageous distribution of stock. (pp. 594-5)
Every derangement of the natural distribution of stock is necessarily hurtful to the society in which it takes place; whether it be by repelling from a particular trade the stock which would otherwise go to it, or by attracting towards a particular trade that which would not otherwise come to it. (p. 597)

Smith describes the actions of monopolists as follows:

The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. (p. 61)

The natural price is the lowest which the sellers can commonly afford to take, and at the same time continue their business. (p. 61) Today we would use the word competitive for natural. The effectual demand is the demand of those who are willing to pay the natural price of the commodity. (p. 56) Monopoly, as well as a governmentally subsidized activity, contrasts with a competitive market where a commodity is...sold precisely for what it is worth, or for what it really costs the person who brings it to market. (p. 55)
The Wealth of Nations contains three general kinds of criticism of monopolies. The first is that the higher prices in a monopolized market reduce the welfare of consumers:

If...capital is divided between two different grocers, their competition will tend to make both of them sell cheaper, than if it were in the hands of one only; and if it were divided among twenty, their competition would be just so much the greater, and the chance of their combining together, in order to raise the price, just so much the less. Their competition might perhaps ruin some of themselves; but to take care of this is the business of the parties concerned, and it may safely be trusted to their discretion. It can never hurt either the consumer, or the producer; on the contrary, it must tend to make the retailers both sell cheaper and buy dearer, than if the whole trade was monopolized by one or two persons. (pp. 342-3)
In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interest sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. (p. 461)

The second criticism of monopoly is that it engenders inefficient management:

Monopoly...is a great enemy to good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defence. (p. 147)

The third criticism of monopoly is that it is inequitable because it increases arbitrarily the inequality in individuals? incomes:

...The policy of Europe occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labour and stock, by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them. (pp. 118-19)

Monopoly has always been a contentious issue in debates on public policy in the United States. It is interesting to examine the way in which the ideas of Smith appear in current debates over monopoly. In general, proponents of government intervention in the market place argue that monopoly is endemic in capitalism and that its elimination requires significant intervention by the government in the market place. An opposing group argues that free markets effectively restrain monopoly power and that it is in fact government intervention in the market place that is chiefly responsible for monopoly. The first group assumes that large size, fewness of firms, and operation over an extensive geographic area automatically imply monopoly power and thus supports its position by citing the existence of industries dominated by a few large firms and the existence of multinational corporations. The opposing group supports its position by trying to show that where monopoly power exists it is made possible by particular governmental actions, e.g., in the United States by marketing orders that fix the price of milk above what it would be otherwise, or FCC regulations restricting the growth of cable TV, thereby preventing competition with the established networks.

The view of the world suggested in The Wealth of Nations is that monopoly power cannot persist without the assistance of government. The specific examples of monopoly that Adam Smith attacked required the police power of the state for their maintenance. These monopolies were of three kinds. One kind of monopoly depended upon the mercantilistic system of laws which England used to monopolize trade with its colonies: Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system. (p. 595) Another kind arose from the monopoly power granted guilds (referred to by Smith as corporations), which allowed them exclusive rights to produce a given commodity:

The exclusive privilege of an incorporated trade necessarily restrains the competition, in the town where it is established, to those who are free of the trade. To have served an apprenticeship in the town, under a master properly qualified, is commonly the necessary requisite for obtaining this freedom. The bye-laws of the corporation regulate sometimes the number of apprentices which any master is allowed to have, and almost always the number of years which each apprentice is obliged to serve. The intention of both regulations is to restrain the competition to a much smaller number than might otherwise be disposed to enter into the trade. The limitation of the number of apprentices restrains it directly. A long term of apprenticeship restrains it more indirectly, but as effectually, by increasing the expence of education. (p. 119)
The government of towns corporate was altogether in the hands of traders and artificers; and it was the manifest interest of every particular class of them, to prevent the market from being overstocked, as they commonly express it, with their own particular species of industry; which is in reality to keep it always understocked. (p. 124)

A final kind of monopoly depended upon tariffs and quotas that prevented foreign producers from competing with domestic producers:

The superiority which the industry of the towns has every-where in Europe over that of the country, is not altogether owing to corporations and corporation laws. It is supported by many other regulations. The high duties upon foreign manufactures and upon all goods imported by alien merchants, all tend to the same purpose. Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be under-sold by the free competition of their own countrymen. Those other regulations secure them equally against that of foreigners. (p. 127)

Competitive markets restrain monopoly because the above-average profits associated with the exercise of monopoly power attract new producers who increase output and thereby lower prices:

When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price.... Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept. (p. 60)

Monopolists can preserve their favorable position only if the government prevents potential competitors from entering the monopolized activity:

The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency...They...may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.

Such enhancements of the market price may last as long as the regulations of police which give occasion to them. (pp. 61-2)

Free markets make the formation of monopoly difficult because monopoly requires the adherence of all actual and potential sellers in a market. Self-interest makes achievement of such adherence difficult because each seller has an incentive to undercut the monopoly price in order to increase his share of the market. Monopoly power is increased or made possible if enforced by the government. In the following passage Smith refers to the guilds, or corporations, of his day:

An incorporation...makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever. (p. 129)

Smith?s ideas appear in current public debate over monopoly. Advocates of deregulating the transportation and communications industries by eliminating or reducing the power of Federal regulatory agencies argue that these agencies promote monopoly by limiting the entry of new firms and by fixing prices for all producers. Government regulations enforced upon all firms in an industry have the effect of allowing producers to eliminate competition and to raise prices. At the same time, lack of competition reduces incentives for efficient production.

If anyone is interested in knowing where the American gold is kept, check out the Fed's site.

a highly inflationary tax cut,

Now that is an interesting state of affairs. Letting citizens keep their own money is inflationary. He have to take it away via taxes to "save the economy" from the ravages of inflation. Has anyone stopped to think that inflation exists because of hte federal reserve? Inflation is actually devaluation of the currency, and is a consequence of there being "too much money" available. Of course, the reason there is too much money available is because the fractional-reserve banking system, lead and controlled by the Federal Reserve, has created too much money. The Fed buys government debt and gives the treasury credits in its Fed accounts. This acts as "reserves" for lending and as backing for the issusance of currency. It is money created from nothing. Commercial banks borrow money at the Discount Window at the Fed -- again, a debt-for-credit swap. This creates more money out of nothing. Banks make more loans based on deposits and Discount Window loans, making more money from nothing.

The sad thing is, because the U.S. has had a debt-based monetary system since 1933 (and earlier, but only partially), we can never get out of debt because it would destroy the money supply. Before the advent of debt-based money, there was usually little debt on national, corporate or personal scales (wars excepted; they simply printed money to finance early wars). 70% of all business growth was self-financed (financed without borrowing from banks) in the 20s. The Fed put a stop to that by offering loans at below market rates with money created out of thin air.

To pay off the national debt, we will first have to switch back to a commodity-based money system, such as the original silver-backed money system. Commodity money systems don't let the government inflate the money supply at will. The other thing we'd have to do is reform banking. Banks should protect your money, offer useful services, and charge fees for doing so. If you want to invest your money, then do that. Currently, a bank invests 97% or more of your money when you deposit it. This is what causes bank runs; if more than 3% of depositors want to withdraw their money, the bank runs out, because it's given it away to other people. Essentially, when you deposit money at a bank, the bank issues to several people the right to withdraw it. It does this by telling you that you can get it back out, and then loaning the very same money to someone else, who immediately withdraws it to pay for their house or whatever. If the bank runs low on "liquid funds," it borrows from another bank. It may also borrow from the Fed's Discount Window. All the loaning out of the money promised to depositors creates more money on the fly. This process gets recycled several times. I borrow $100k to buy a house. I deposit it at my bank to pay for the construction. The bank then loans it back out to someone else. I write checks; the builder deposits them; his bank loans the money out. Repeat. Because of reserve-fraction regulations made by the Fed, this process has a terminus; but it creates nine dollars for every dollar put into the system (approximately). This is the deposit multipler.

Productivity is not profits. Productivity is output divided by labor used to produce it. There are several measures of productivity in use. One is GDP divided by size of the labor force. Output for manufacturing is generally easy to calculate. It is the value of product produced. The problem is the definition of output for service industries. It is generally taken to be the cost of the inputs. Spending more in a service industry to get more value per worker actually decreases productivity as we currently measure it. Here's a link to a paper on the problems with interpreting Productivity Stastistics and a short quote.

Zvi Griliches (1994) presented some evidence on the plausibility of the mismeasurement view. He classified output into sectors that were relatively "measurable," such as manufacturing, and "unmeasurable," such as finance. He then noted that the fraction of output in measurable sectors had declined over time.