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Ron Paul's best interview to date. Economics in one interview.

I just finished watching CNBC's "Meeting of the Minds" show with some of the most elitist people I've ever seen.  The video link is not the one I just watched, but the posted videos are typical of the republocrat solutions.
 
They were all a bunch of republocrat hardcore Keynesian statists.  Even former General Electric CEO sounded like a 80% free market / 20% socialist.  They had no solutions because they don't understand Austrian economics.  They don't understand capitalism.  That means that they don't understand that the customers are in charge in a capitalist society because they hold the most desirable commodity - money.  Government regulation prevents producers from competing against one another to please customers.  Regulaton does this by creating barriers to entry more commonly know as liceansing and bureaucratic redtape.
 
None of the so-called "minds" had anything to say about the crux of the problem.  The problem is a lack of sound money and individual liberty.  Ron Paul explains this better than any economist at the Federal Reserve.  See the video below.
 
The people calling themselves the government and the Federal Reserve are destroying the environment for accumulating capital.  This is not good because our standard of living will worsen due to the policies since 1913 (the creation of the Federal Reserve).

The Best Ron Paul Interview Ever?
Ron Paul schools neocon Chris Wallace, who is suddenly respectful of his surge

Recently by Ron Paul: The Illusion of Safety

Ron Paul joins Chris Wallace on Fox News Sunday to discuss his rise in the mainstream presidental polls (to #3 on the latest Gallup) and the hot issues of the day. It is impossible not to notice how these interviews have changed. The normally belligerent neocon host was respectful as Ron smoothly and convincingly stated his positions.

Since this interview coincided with the media hysteria about Hurricane Irene, Wallace first asked Ron why he was opposed to FEMA. As the representative of a Gulf Coast district, Ron knows full-well the damage the weather can do. Indeed, he says: "It has the worst reputation for a bureaucracy ever. It hinders local people keeps people away from their homes. It's a system of central economic planning that is deeply flawed.....and it's broke."

Ron also rips the US intervention in Libya. He schools Wallace about the consequences of our destructive foreign policy. When asked about Gaddafi, Ron reminds him that "we've been very bad at picking dictators around the world. We may be delivering al-Qaida another prize."

Regarding Austrian economics – which Ron is actually asked about – he describes his solution for a healthy economy as, government “hands off, free markets, property rights, no bailouts, and sound money.” The Fed has caused endless problems with its policy of keeping interest rates artificially too low for too long. It has to stop monetizing debt.

When asked if he's in it to win it, Ron says Yes – but he wants to take a different approach – Not to seek power, but to seek to diminish it, to diminish dependency on government. People are waking up and saying "Ron Paul is right," he notes. Darn right!

See the Ron Paul File

August 30, 2011

Dr. Ron Paul is a Republican member of Congress from Texas.

Short biography on Hazlitt and Keynes. Amazing!

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Lew Rockwell delivers an amazing speech on the lives of Henry Hazlitt and John Maynard Keynes.  Keynesian economic voodoo is destroying the world’s economies and later it will destroy your standard of living if you don’t take action to protect yourself.

Subscribe today at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets that will weather the Keynesian economic storms on the horizon.

Be seeing you!

Hazlitt and Keynes: Opposite Callings

by Llewellyn H. Rockwell, Jr.

Recently by Llewellyn H. Rockwell, Jr.: The Unthinking Right

 

 

 

This talk was delivered at the Mises Circle in Houston, Texas, on January 22, 2011.

John Maynard Keynes was born in 1883 and died in 1946. Henry Hazlitt was born in 1894, eleven years after Keynes, and lived much longer, until 1993. Their lives and loyalties are a study in contrast, and mostly of choices born of internal conviction, in Hazlitt’s case, or lack thereof, Keynes’s case.

Keynes became the most famous economist of the 20th century and the guru-crank whose work has inspired thousands of failed economic experiments and continues to inspire them today. He is the Svengali-like figure who implausibly convinced the world that saving is bad, inflation cures unemployment, investment can and should be socialized, consumers are fools whose interests should be dismissed, and capital can be made non-scarce by driving interest rates to zero – thereby turning the hard work of many hundreds of years by economists on its head.

Keynes had every privilege in life, and all the power and influence that an intellectual could have, and he used it all irresponsibly in service to the State.

Hazlitt was very nearly his foil. He did not come from privilege, did not enjoy a prestigious educational pedigree, and did not know any of the right people. He came from nowhere and worked his way up through sheer force of intellectual labor and moral determination.

Hazlitt eventually became one of the great public voices for free markets in the 20th century, writing in every popular venue he could and applying his enormous talents as a thinker and writer to defending and explaining free markets, showing how the classical economic wisdom was true and vastly improved by the Austrians, how sound money is essential for freedom, how market signaling works to achieve economic coordination, and how government policy is always and everywhere the enemy of freedom and prosperity.

Hazlitt’s great book Economics in One Lesson, written the year that Keynes died, boils down all of economics to a single principle and applies it across the board to all the policies of government. It is crystal clear in its language, designed to be read by anyone in an effort to achieve Mises’s dream of bringing economic wisdom to every citizen.

Keynes’s major work is The General Theory and it has been read by relatively few, mainly because it is so incomprehensible as to be nearly written in code. But then it wasn’t designed for everyone. It was written for the elites by a member of the most elite class of intellectuals on the planet. Even more effectively, it was written with an eye to impressing the elites in the one way they can be impressed: a book so convoluted and contradictory that it calls forth not comprehension but ascent through intimidation. Its success is a remarkable story of the bamboozlement of an entire profession, followed by the misleading of the entire world. If there are still believers in what Murray Rothbard called the Whig Theory of History – the idea that history is one long story of progress toward the truth – the success of The General Theory is the best case against it.

If I had to bet on which book will have greater longevity, however, I would go with Hazlitt. The same is true of Hazlitt’s great legacy. He died without much fame. In fact, his days of fame were far behind him, arguably reaching their height when he was an editorial writer for the New York Times. When he was told that he needed to write in defense of Keynes’s screwy plan for Bretton Woods, he balked and walked away. Thirteen years later, writing as a columnist for Newsweek, Hazlitt came out with a line-by-line refutation of Keynes’s General Theory. It is arguably his great work, the one begging to be written. He alone had seen the need. It continues to teach us today, and serves as something of a manual for the errors of government.

Both Hazlitt and Keynes began their educations with an intense interest in literature and philosophy, but eventually settled on economics. Both were in a position to make a choice of theoretical paradigms given the intellectual and political content of their times. Both were major public intellectuals. Both considered themselves to be liberals in the way that term was used before the New Deal, meaning a general disposition toward favoring human rights, free trade, and open societies.

In this spirit, Keynes wrote in opposition to the Treaty of Versailles that imposed savage terms on Germany after the war. He favored free trade and generally allied himself with that cause. Sadly, that tendency, which derived from the old world’s love of liberty, was incompatible with his life’s agenda, which he believed to be his birthright. That agenda was to rule the world through intellectual means by virtue of connections to the powerful. That essential humility that was at the core of the economics profession of the 19th century – the humility to embrace laissez-faire as a principle – was completely missing from his mind.

Keynes was born as a member of the ruling elite in Britain. His father, John Neville Keynes, and his father’s good friend Alfred Marshall were very powerful figures at Cambridge University. They shepherded him and introduced him to the right people, and the time came when he was inducted into the secret, super-elite society of top intellectuals in the English-speaking world. The group was called The Apostles, and this was the group that would come to shape his ideas and his approach to life. The group had been formed in 1820 and included top members of the British ruling class. They met every Saturday evening without fail, and spent most of the rest of their time during the week with each other. Membership was for life.

It is impossible to overestimate the extraordinary intellectual arrogance of this group. They would refer themselves as the only thing that is truly real in a Kantian sense, whereas the rest of the world was an illusion. Keynes as an undergraduate wrote to a fellow member as follows: "Is it monomania – this colossal moral superiority that we feel? I get the feeling that most of the rest [of the world outside the Apostles] never see anything at all – too stupid or too wicked."

In the time of Keynes, according to those who have studied this carefully, the Apostles was dominated by an ethos that included two general traits: first, the bond that held the world together and would push it forward was the friendship and love that the Apostles had for each other, and that there were no other principles that really mattered, and, second, an intense disdain for religion and bourgeois values, institutions, ideas, and tastes.

It was in this period that Keynes met G.E. Moore, a philosopher at Trinity and Apostles member. His magnum opus was called Principia Ethica, published in 1903. It was a philosopher’s attack on all fixed principles and a defense of immoralism. This was the book that changed Keynes’s life completely. He called it "exciting, exhilarating, the beginning of a new renaissance, the opening of a new heaven on earth." It was this book that led him to believe that it was possible to completely reject morality, conventions, and all traditions. It might even be considered a kind of prototype of his later work.

These same values migrated to the famed Bloomsbury Group that Keynes joined after graduation. As many historians of the period have said, it was the most influential cultural and intellectual force in England in the 1910s and 1920s. The emphasis here was not on science but on art and the overthrow of Victorian standards in order to embrace the Avant-Garde. Keynes’s contribution to their efforts was mainly financial, for he had made a fortune in speculation and spent lavishly on Bloomsbury causes. He also provided members with contacts in the world of finance and economics.

In discussing how immoralism and the rejection of principles applied to economics, Rothbard draws attention to Keynes’s position on free trade. As a good Marshallian, he was a proponent during most of his early public life. Then suddenly in 1931, all that changed with a paper that loudly and aggressively called for protectionism and economic nationalism, a total reversal of what he had previously said. The press ridiculed him for his shift, but this never troubled Keynes, for as an Apostle and a champion of immoralism, he contended that there was no contradiction worthy of notice. He believed that he could take any position he wanted on an issue, and could live his life unhinged from any standards or rules. He was always ready to change his opinion given the new make-up of the political constellation and felt no burden to explain himself.

It was precisely because of this tendency to change his point of view on a dime that critics became tired of dealing with him. Hayek spent a great deal of time refuting him on various subjects, particularly Keynes's book on money, only to have Keynes dismiss the criticisms on grounds that he Keynes no longer held these views. He praised FDR and urged all governments to follow the New Deal. But when pressed on the details of programs such as the National Industrial Recovery Act, he would back away and grant that it was ill-conceived. His opportunism was palpable and infuriating.

As the Depression deepened, he began to see himself as the philosopher king of the world economics establishment, advising governments all over on their politics. His main target was the gold standard, which he regarded as a relic of a bygone era, the ultimate symbol of Victorianism, the monetary embodiment of morality and standards, a restraint on the ability of government to tinker with the economy, and therefore, from his point of view, the ultimate enemy of everything he hoped to accomplish. He had long ago written that "A preference for a tangible reserve currency a relic of a time when governments were less trustworthy in these matters than they are now." What he meant, of course, that with himself at the helm, gold would not only be unnecessary but an impediment to the ambitions of economists.

Now we come to The General Theory that made its appearance in 1936. Let me introduce this book with a question. What would we call a person who believed that government policy can completely eliminate the scarcity of capital? Most all economists in history and even today would call this person a nut. The whole economic problem that economic theory grapples with concerns the invincible reality of the scarcity of capital. The idea that we can somehow concoct a system in which there would be no scarcity amounts to the belief that government can create a permanent utopia by pushing a few buttons. It is no different in kind from a belief in some kind of magical land of fantasy. It represents a fundamental failure to grapple with reality.

And yet this is precisely what Keynes hoped to achieve through his policy prescriptions in The General Theory. His idea was to create this land of universal happiness by: 1) driving the interest rate to zero, and thereby 2) achieving his sought-after "euthanasia of the rentier class" – that is, the killing off of people who live on interest, and thereby, 3) eliminating what he considered to be the exploitative aspect of capitalism, that which rewards investors for their sacrifices.

As Keynes wrote, driving interest to zero would mean

the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land…, [T]here are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run.... I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work.

As you can see, Keynes was far more extreme in his views than the media generally presents him. And the ghastly situation in which we find ourselves today, where saving earns virtually nothing and the Fed holds rates down to zero in perpetuity, seems to be the fulfillment of the worst of the Keynesian dream.

As for the contribution of the book to theory, Rothbard writes that "The General Theory was not truly revolutionary at all, but merely old and oft-refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon."

Mises further pointed out that even Keynes’s old and refuted ideas had already had a good run of it. "Keynes’ General Theory of 1936 did not inaugurate a new age of economic policies," he writes, "rather it marked the end of a period. The policies which Keynes recommended were already then very close to the time when their inevitable consequences would be apparent and their continuation would be impossible."

What bad economic policies lacked was a prestigious economist to come to their defense, and this is precisely the role that The General Theory played. Governments all over the world welcomed and celebrated the book. As for the success of the book within economics itself, there are important sociological reasons to consider. Keynes’s language was nearly impenetrable. He coined new terms on nearly every page. Rather than being a disadvantage, this is often an advantage in a profession that has lost its way.

Keynes set out to divide the world into two broad class of people: stupid consumers whose behavior is determined by external force, and savers who are a drag on economic growth. The job of government policy is to goad the first group into a different set of behaviors and pretty much destroy the second group. Everything else in the Keynesian system follows from those two general propositions. This accounts for his hatred of the gold standard, of traditional capitalism, and of the price system that functions as a signaling mechanism for the production and allocation of resources.

It also accounts for why Keynes was one of the world’s most passionate advocates of the rise of the fascist impulse in the 1930s. He celebrated the "enterprising spirit" of Sir Oswald Mosley, the founder of British fascism. He joined the New York Times in praising the central planning of Mussolini. Thus it was not a surprise when Keynes wrote a foreword to the German edition of his book in 1936, after the Nazis had come to power. He said that his book is more easily "adapted to the conditions of a totalitarian state" than to free competition and laissez-faire. Nor should it be surprising that Keynes also dabbled in anti-Semitism, praising even openly anti-Jewish tirades of prime minister Lloyd George and his brutal and public attack on the Jewish French finance minister Louis-Lucien Kotz.

A puzzling aspect of academia is how a sector that lives on its reputation for objectivity and love of science can be so easily bamboozled by charlatans, and the success of this book is a great case in point. Most economists over the age of 50 dismissed the book, but the younger ones regarded it as a kind of revelation that gave them a career advantage over their elders. Keynes’s personal prestige had a lot to do with this. As Rothbard wrote, "It is safe to say that if Keynes had been an obscure economics teacher at a small, Midwestern American college, his work, in the unlikely event that it even found a publisher, would have been totally ignored." But coming from a Cambridge professor and student of Marshall, Keynes had huge advantages.

The Keynesian magnetism was so powerful that it even drew most of the former followers of F.A. Hayek, who was then teaching in London too. Most tragic of all was the conversion of Lord Robbins to the Keynesian cause. Robbins had written a great book on the Great Depression, one that the Mises Institute publishes to this day. It is written entirely in the Misesian spirit. But after having worked with Keynes on economic planning during the war, Robbins fell victim to his personal charisma, later writing of Keynes "unearthly" brilliance and "godlike" personal stature. He wrote that Keynes "must be one of the most remarkable men that has ever lived." Robbins ended up repudiating his best work, and only coming back to his senses late in life.

Hayek wrote many times that Keynes himself before his death was on the verge of repudiating what had become of the Keynesian system. This is based on Keynes’s positive review of Hayek’s Road to Serfdom as well as Keynes’s own private words to Hayek himself.

In analyzing the evidence, Rothbard concludes that no such conversion was oncoming but rather that this was Keynes doing the Keynesian thing: shifting, moving, dodging, and changing, with no attachment to standards or principles or morality. He would believe anything and say anything and do anything to advance himself and put his class of technicians in charge of the world economy. It is remarkable that after a lifetime of writing, his views would still be so difficult to pin down that even Hayek could believe, however briefly, that there was a modicum of sincerity in this man’s words or actions.

Comparing his life and works to Henry Hazlitt is like night and day. Hazlitt never held an academic position, had no family connections, and was never formally schooled in economics, but he was an extremely hard worker who read passionately and extensively, making an extraordinary career for himself, given that he was forced to drop out of school to support his widowed mother. He read in all his spare time: Mill, Aristotle, Nietzsche, Gibbon, and anyone else he could get his hands on, and kept extensive diaries of all his thoughts on their work. In all his studies, he presumed an old-fashioned view of his goal: to discover what is true, as a means to guiding his life and judgments.

All the while, he was also working. His first series of jobs followed in quick succession lasting only a few days. At each job, he would acquire a bit more knowledge than he had previously before getting fired for not having enough skills. Keep in mind that this was long before the minimum wage and other interventions. So his average salary grew a bit at each position: $5 per week, $8 per week, $10 and $12 per week. He finally worked his way up to become a reporter at the Wall Street Journal. He was paid 75 cents for every story, and he soon became invaluable to the staff.

It was in 1910 that he received his first real exposure to economics in Philip Wicksteed’s great book The Common Sense of Political Economy. This is the book that would firmly embed him in a classical and marginalist perspective on economic issues and prevent him from ever falling away. He was also trying his skills as a writer. Sure enough, he managed to get his first book published at the age of 22: Thinking as a Science. The Mises Institute keeps this book in print and it remains one of the most inspirational and instructive books ever written on self-education and the obligation to learn.

He opens the book as follows:

Every man knows there are evils in the world which need setting right. Every man has pretty definite ideas as to what these evils are. But to most men one in particular stands out vividly. To some, in fact, this stands out with such startling vividness that they lose sight of other evils, or look upon them as the natural consequences of their own particular evil-in-chief. ...I, too, have a pet little evil, to which in more passionate moments I am apt to attribute all the others. This evil is the neglect of thinking. And when I say thinking I mean real thinking, independent thinking, hard thinking.

Here we have the tone and approach of a man with integrity, intellectual integrity, a man who is determined to find his way to what is true. The entire book reads this way. I’m particularly struck by his analysis of why some people attach themselves to error and will not let go. He might as well have been describing the seduction of the economics profession by Keynes:

In this passage, from this book he wrote at the age of 22, he is speaking of the prejudice that in particular affects intellectuals: their propensity to imitate the ideas that seem fashionable at the moment.

We agree with others, we adopt the same opinions of the people around us, because we fear to disagree. We fear to differ with them in thought in the same way that we fear to differ with them in dress. In fact this parallel between style in thought and style in clothing seems to hold throughout. Just as we fear to look different from the people around us because we will be considered freakish, so we fear to think differently because we know we will be looked upon as weird.

He recalls a conversation he had with an intellectual in which he raised a point made by Herbert Spencer. The person recoiled and said that surely Spencer’s ideas had been superseded. Hazlitt discovered that this person had never read Spencer and had absolutely no idea what Spencer actually believed about anything. Clearly Hazlitt, like most nonacademics, had a tendency to have higher expectations of the integrity of the intellectual classes than they merited then or now.

Nonetheless, he condemns the tendency to absorb prevailing ideas uncritically as completely foolhardy, as a pathway toward making life meaningless.

I am willing to wager that most of these same people now so dithyrambic in their praise of James, Bergson, Eucken and Russell will twenty-five years hence be ashamed to mention those names, and will be devoting themselves solely to Post-neofuturism, or whatever else happens to be the passing fadosophy of the moment.

He goes on to speak what might have been the credo of his life.

If this is the most prevalent form of prejudice it is also the most difficult to get rid of. This requires moral courage. It requires the rarest kind of moral courage. It requires just as much courage for a man to state and defend an idea opposed to the one in fashion as it would for a city man to dress coolly on a sweltering day, or for a young society woman to attend a smart affair in one of last year's gowns. The man who possesses this moral courage is blessed beyond kings, but he must pay the fearful price of ridicule or contempt.

After downtime during the war, he went back to work at the Journal and resumed his reading, tracing footnotes to ever greater books. He followed the notes in a Benjamin Anderson book all the way to discover Mises’s Theory of Money and Credit. He had fallen in love with economics in the same way that most of us did. He loved its elegance, explanatory power, its implicit love of liberty, and its central role in the rise of civilization. But it was not his only love. He read widely in literature and art as well, and found a market for his talents in this area. He moved from paper to paper until he eventually took a position as the literary editor at The Nation, which was then known as a liberal but not statist publication.

It was a high-prestige job for him, accepted at a period that would turn out to be a major turning point in our nation’s history and also in his own life. In 1932, after FDR’s election, the weekly would start to weigh in on various aspects of New Deal policy. It was Hazlitt’s internal constitution, that belief in truth, that led him to write in these pages what he believed about FDR’s policy. He wrote about the real cause of the Great Depression, which he saw not as a failure of capitalism but as correction from a credit-fueled bubble. The Nation itself was not yet firmly entrenched as a propaganda paper for economic central planners, and so the editors let Hazlitt have his say.

He warned of the results of protectionism, price controls, subsidies, and economic planning in general. Not only would these methods not work to dig us out of Depression, he wrote, but they were contrary to the spirit of human liberty that liberals embrace as a matter of their creed. In saying these things, he was saying pretty much what any economist would have said a few decades earlier, but he also knew full well that he was going against the existing Zietgeist that Keynes himself was helping to craft.

Sure enough, Hazlitt won the debate but lost his job at The Nation. This was the first of many such events in his life, and it was something to which he would become accustomed. He had worked too hard for too long, and believed too much in the power of truth, to turn away from it. He had established a dictum early in life that he would not go along with an opinion simply because powerful and influential people around him held to it. He would have courage now and always.

It was not only his writing ability that attracted H.L. Mencken but also this quality of moral determination. Mencken named Hazlitt as his successor in what was the greatest American publication in those years, The American Mercury. He was there for three years until he moved to the position he held for the next ten years. He became the lead editorialist for the New York Times. There he wrote several editorials per day, plus book reviews for the Sunday paper. It was a stunning display of productivity. It was also probably the last time that the New York Times was correct on the issues of the day.

In 1946, this job came to an end in a dispute over the Bretton Woods monetary agreement. Hazlitt was relentless in attacking its fallacies and in predicting its defeat. The publisher came to him and explained that the paper could not continue to oppose what everyone else seemed to support. Hazlitt knew this routine rather well, and so he left without bitterness or acrimony. He simply packed up and walked away, and proceeded to write what would become the best-selling economics book of all time.

In these years, too, he had met Ludwig von Mises who had come to our shores in 1940. Hazlitt recognized in Mises one of those men with moral courage, a man who, as Hazlitt put it in his early book, is "blessed beyond kings" for his willingness to stick up for truth even at great personal cost. He used his position at the Times to alert readers to Mises's books and ideas. He helped Mises find a publisher for English translations of his books, and became a promoter and champion of the Misesian worldview. As we look back on it, it seems clear that Mises’s life would have been very different without the help of Hazlitt. In some ways, Henry Hazlitt became a one-man Mises Institute.

But let’s return to Hazlitt’s succession of jobs. He went from The Times to Newsweek, where his BusinessTides column educated a full generation or two in economic theory and policy, me along with them. These were remarkable columns, beautifully written and spot on topic every week. I’m pleased to announce that the Mises Institute is publishing all of these columns in a single volume this year. I’m expecting this book to help reestablish Hazlitt’s rightful place in the intellectual history of the 20th century.

Now it was time for Hazlitt to take after the man whose ideas had dogged him for decades: John Maynard Keynes himself. Hazlitt was the first and still the only economist who has ever taken on the General Theory in a line-by-line analysis. He did this in a book published in 1959 which he called The Failure of the “New Economics.” He writes in the introduction that he was warned not to do this since Keynes’s ideas were already unfashionable but he decided to go ahead, based on an insight of Santayana that ideas aren’t usually abandoned because they have been refuted; they are abandoned when they become unfashionable. And so far as Hazlitt could tell, there was no stepping away from the Keynesian fashionableness. And note too that this was written fully 52 years ago, and Keynes is fashionable all over again.

What Hazlitt discovered was that the book was much worse than he imagined. He found no ideas in the book that were both true and original. He patiently goes through the book to explain what he means, taking Keynes apart piece by piece through 450 pages of thrilling analysis and prose, finishing up with a great concluding chapter that summarizes all the errors in the book.

I’ve not mentioned many of Hazlitt’s other fantastic books, including his two books on monetary economics. On this matter, he was the perfect foil for Keynes. Whereas Keynes believed that the most important single step to destroying the laissez-faire of the old world was to demolish the gold standard, Hazlitt believed that there would never be a lasting regime of freedom restored without addressing the money problem. What Keynes wanted to destroy, Hazlitt wanted to restore and firmly entrench as part of the market order. They both agreed on the centrality of the issue in achieving their dreams and in this they were both right.

But note where each ended up at the end of their lives. Keynes died famous and rich and beloved, heralded by one and all for his brilliance. He was never asked to do anything courageous. He was never asked to make a sacrifice for what he believed. It would never have occurred to him to do so, for the very idea of a moral commitment or an intellectual responsibility was either unknown to him or totally rejected by him.

Hazlitt, in contrast, died at what was arguably a low point in his career. He had climbed to the top, but then was pushed back down again, eventually writing for and working with a small and largely embattled group of defenders of free enterprise.

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We have in these two approaches contrasting images of the role of the public intellectual. Is this role to defend the freedom of the individual and to promote the development of civilization? Or is the goal to enrich oneself, get as close to power as possible, to become as famous and influential as one can be? It all comes down to one’s moral commitments and personal integrity. In the end, this is the core issue, one that is arguably more important than economic theory.

Hazlitt made his choice and left us with great words of wisdom on the duty to support freedom.

We have a duty to speak even more clearly and courageously, to work hard, and to keep fighting this battle while the strength is still in us.... Even those of us who have reached and passed our 70th birthdays cannot afford to rest on our oars and spend the rest of our lives dozing in the Florida sun. The times call for courage. The times call for hard work. But if the demands are high, it is because the stakes are even higher. They are nothing less than the future of liberty, which means the future of civilization.

January 25, 2011

Llewellyn H. Rockwell, Jr. [send him mail], former editorial assistant to Ludwig von Mises and congressional chief of staff to Ron Paul, is founder and chairman of the Mises Institute, executor for the estate of Murray N. Rothbard, and editor of LewRockwell.com. See his books.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

The Best of Lew Rockwell

Austrian Economics Aids the High Dividend Stock Investor Through the Market Minefield.

Investors accept the past record of companies as a basis for judging the future.  The stock analyst must be on the lookout for indicators to the contrary.  Most economists, stock analysts, mutual fund managers, hedge fund managers, and pension chief investment officers are schooled in Keynesian economics.  They can’t see the stock and bond market troubles ahead.  This is why they didn’t forecast the housing bubble and the subsequent stock market crash of late 2008.

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The ability to see what is coming is of inestimable value, but it cannot be expected to be part of the analyst’s innate abilities.  You should expect him to show a moderate degree of foresight which springs from logic and experience intelligently pondered.  Do not expect this from a Keynesian or Chicago school (supply-side) trained analyst.  Those economic theories are full of contradictions and will lead investors astray in the central bank induced boom-bust cycles.

Analysis of the future should be penetrating rather than prophetic.  Austrian economics is penetrating; Keynesian and Chicago school economics are prophetic.

There are many high dividend stocks that speculators overlook due to irregular or a downward earnings trend.  A penetrating analyst can pick out a company that will remain in business and can be counted on to earn about as much as before in good times (boom) and bad (bust).  A company in a prominent position in its industry with a strong balance sheet and selling at a deep discount can be bought with a very small chance of ultimate loss.  And it might very likely double during the next central bank engineered boom.

This type of reasoning does not lay emphasis on accurately predicting the industry’s future trends, but rather on reaching general conclusions that the company will continue to do business pretty much as before.

This is how private business purchases and investments are made.  This is also a conservative approach that allows for a liberal margin of safety in case of error or disappointment.  It runs considerably less risk of confusion between “confidence in the future” and mere speculative enthusiasm exhibited by most investors.

There were immense buying opportunities for high dividend stocks with earning power and strong balance sheets during late 2008 and the first quarter of 2009.  Don’t worry.  You haven’t missed your opportunity to scoop up great high dividend stocks at bargain prices.

There will be new buying opportunities in the next few years due to the insanity of nation, state, and local government deficit spending along with unprecedented counterfeiting by the central bankers worldwide.  All governments and central bankers are following the delusions of John Maynard Keynes.  Some are more delusional than others (e.g. the Federal Reserve and the US government).  Keynesian actions are characterized by massive money printing, to fund government deficit spending, on any so-called shovel ready projects, to build out the crumbling infrastructure, and to put people back to work digging holes while others fill them in, along with artificially lower interest rates that discourage savings.

Subscribe to www.myhighdividendstocks.com/feed to journey along with me as I discover high dividend stocks with earning power and strong balance sheets.

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Are You Confused About the Prospects of Hyperinflation, Massive Inflation, and/or Deflation?

Yesterday’s blog post “How the Stock Market and the Economy Really Work” http://bit.ly/edAgNT shined light on the little reported fact that the stock market indices and the economic GDP numbers go up with the increase in the money supply.  Today’s post covers what is going on right now with the US money supply.

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The past and future actions of the Federal Reserve will affect every investor and saver.  Pay attention to the central bankers actions and plan your high dividend stock investments accordingly.

Rockwell interviews Jorg Guido Hülsmann.

Quantitative easing is designed to bail out the federal debt, but it may presage Weimar.Dr. Hulsmann discusses the evils of central banking and fractional reserves, the blessings of deflation, and how Austrian economists are making vast progress.

Enjoy this excellent audio interview.  http://bit.ly/gcroyR

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How the Stock Market and Economy Really Work

This essay could save you tens of thousands of dollars.  It is a MUST READ article.  You will learn how the stock market and the economy really work.  Spend a little time reading it to save yourself thousands of dollars by watching some very key economic numbers. 

Please click on the Google Ads if you like the content of this blog and you want more of it.  I'm evaluating the profitability of this blog with the responses to those ads.  If you don't see the Google Ads, then please visit my main site at www.myhighdividendstocks.com and give them a click.  Thanks you for your support.

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How the Stock Market and Economy Really Work

Mises Daily: Wednesday, September 01, 2010 by Kel Kelly

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"A growing economy consists of prices falling, not rising."

The stock market does not work the way most people think. A commonly held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.

A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.

This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.

In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.

Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.

The Fundamental Source of All Rising Prices

For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)

When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. George Reisman offers us the critical formula for the derivation of economy-wide prices:[1]

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In this formula, price (P) is determined by demand (D) divided by supply (S). The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.

In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; prices are rising due to more money entering the marketplace.

The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits. As Fritz Machlup states:

It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or dishoarding).[2]

To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without more money — specifically bank credit — flowing into it.

There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.

The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,

If it were not for the elasticity of bank credit … a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortization allowances is fairly inelastic.… Only if the credit organization of the banks (by means of inflationary credit) or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.[3] (Emphasis added.)

The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.[4]

Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.

The Link between the Economy and the Stock Market

The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.

Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.

In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.

Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.

The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.

Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.

Forced Investing

As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts.

"An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."

The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.

To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.

The Fundamentals are Not the Fundamentals

If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.

For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.

Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).

Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).

"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."

Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.

In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).

Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.

It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.

A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.

In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.

(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)[9]

Asset Inflation versus Consumer Price Inflation

Newly printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve has done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.

There are two main reasons for this channeling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.[10] As financial economist Peter Warburton states,

a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.[11]

And, as bond-fund guru Bill Gross said,

what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidized yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.[12]

This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.

One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."

That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.[13]

A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).

Figure 1: The Size of the Stock Market Relative to GDP

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Source: Thechartstore.com

The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.

Can Government Spending Revive the Stock Market and the Economy?

The answer is yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.

Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses, could in turn create new net real wealth — real goods and services — is preposterous.

What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Broken economies suffer from a misallocation of resources consequent upon prior government interventions and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.

Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.

$25 $20

"What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing."

As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.

Summary

The most important economic and financial indicator in today's inflationary world is money supply. Trying to anticipate stock-market and GDP movements by analyzing traditional economic and financial indicators can lead to incorrect forecasts. To rely on these "fundamentals" is to largely ignore the specific economic forces that most significantly affect those same fundamentals — most notably the changes in the money supply. Therefore, following monetary indicators would be the best insight into future stock prices and GDP growth.

Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe and in the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail. See Kel Kelly's article archives.

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Notes

[1] See G. Reisman, Capitalism: A Treatise on Economics (1996), p.897, for a fuller demonstration. Most of the insights in this paper are derived from the high-level principles laid out by Reisman. For additional related insights on this topic, see Reisman, "The Stock Market, Profits, and Credit Expansion," "The Anatomy of Deflation," and "Monetary Reform."

[2] F. Machlup, The Stock Market, Credit, and Capital Formation (1940), p. 90.

[3] Ibid., pp. 92, 78.

[4] For a holistic view in simple mathematical terms of how the price of all items in an economy may or may not rise, depending on the quantity of money, see K. Kelly, The Case for Legalizing Capitalism (2010), pp 132–133.

[5] Price increases are supposedly adjusted for, but "deflators" don't fully deflate. Proof of this is the very fact that even though rising prices have allegedly been accounted for by a price deflator, prices still rise (real GDP still increases). Without an increase in the quantity of money, such a rise would be mathematically impossible.

[6] To gain an understanding of earning interest (dividends in this case) while prices fall, see Thorsten Polleit's "Free Money Against 'Inflation Bias'."

[7] Most funds are borrowed from banks for the purpose of business investment; only a small amount is borrowed for the purpose of consumption. Even borrowing for long-term consumer consumption, such as for housing or automobiles, is a minority of total borrowing from banks.

[8] The other main reason for this, if the country is poor, is the fact that there is a lack of capital: the more capital, the lower the rate of profit will be, and vice versa (though it can never go to zero).

[9]Any reader who is interested in exploring and poking holes in this theory with me should feel free to contact me to discuss.

[10]This recycling is what Mises's friend, the French economist Jacques Reuff, called "a childish game in which, after each round, winners return their marbles to the losers" (as cited by Richard Duncan, The Dollar Crisis (2003), p. 23).

[11] P. Warburton, Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (2005), p. 35.

[12] William H. Gross, "100 Bottles of Beer on the Wall."

[13] It's not actually American dollars (both paper bills and bank accounts) that make their way around the world, as most dollars must remain in the United States. But for most dollars received by foreign exporters, foreign central banks create additional local currency in order to maintain exchange rates. This new foreign currency — along with more whose creation stems from "coordinated" monetary policies between countries — pushes up asset prices in foreign countries in unison with domestic asset prices.

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You can read the original here: http://mises.org/daily/4654       

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Article - What is a Stock Worth (2005)

Here is an excellent article from 2005 that combines Austrian economics with stock valuation.

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What Is a Stock ‘Worth'?

by Sean Corrigan
by Sean Corrigan

The answer seems obvious: whatever someone is willing to pay for it, of course. But, it's not as simple as that.

For example, whenever we are obliged to determine the net asset value of our fund for the purpose of reporting to our shareholders, we take the last price bid for each security on the last day of the month; we multiply this by the size of our holding; we repeat the process for each security in turn; we add up the results and — lo! — we have an aggregate total.

Though this methodology is standard throughout the industry, by virtue of its simplicity and transparency, we really ought not to forget that the price of the last traded fraction of the company's stock is not logically applicable to the value of the whole. Here is the reason behind this assertion.

“Dad, we are thirsty!”

Imagine you are walking a baking hot stretch of beach, trailing your two restive and annoyingly insistent kids, each of them moaning that they are thirsty.

Just ahead is the only kiosk visible for a mile or more in either direction so, gritting your, teeth you drag your little darlings over the last few hundred yards of scorching sand and there you happily part with $5 to get them a couple of small bottles of soda.

Now, those two particular bottles, in that particular time and place, clearly seemed well worth $2.50 apiece in your hour of need. But, by the same token, you'd have been increasingly less keen pay such a premium for a third, a fourth, or a fifth bottle of what you'd soon have come to regard not so much as a welcome liquid pacifier, but as a fairly meager container of overpriced, sugary acid.

Similarly, you'd also be a trifle reluctant to fork over that same $2.50 a pop when you're cruising — thankfully child-free — along the beverages aisle of your local, air-conditioned supermarket — your shopping cart sandwiched between two long, closely-stacked ranks of competing wares.

Again, at the neighborhood cash and carry, you may well be offered this same soda by the crateful. But, since you'll have more urgent things to acquire with your last few bucks of housekeeping money than to buy three weeks' advance supply of soda, it will have to be pretty steeply discounted to tempt you into making such a large purchase upfront.

Taking this to an extreme, you'd be positively dismissive — even if you had the required wherewithal — if Coke itself tried to get you to take a whole year's production from them at an equivalent price to the one being asked by that damnable seaside “gouger” (actually a man who is not so much a rip-off artist as an astute entrepreneur with a keen sense of what the local market will bear).

So, we should quickly be able to deduce from this that it doesn't makes sense to calculate the whole of Coke's annual sales by taking the product of the waterfront kiosk's circumstantially specific $2.50-a-bottle and the company's 475 million bottles of worldwide shipments.

But, if this is the case, we should realize it makes no more sense either to fall into the analogous trap of valuing all of Coke's shares, en bloc, by taking the $42 where the last 4,000 lot changed hands and multiplying it by the whole 2.4 billion shares the company has in issue, to arrive at a market cap of $100.8 billion.

The crucial point to grasp is that any individual trade reflects the monetary overlap in preferences of the most insistent buyer and the most willing seller at the point of exchange.

It should be obvious that each individual will be influenced in where he ranks on that scale of mutual eagerness by plain circumstance. This is exactly in the manner that our two very insistent minors combined with the presence of only one nearby seller to make for a highly skewed deal at the seaside!

Further, it is self-evident that as we begin to satisfy our appetite for what the other fellow has to offer, this quickly changes the relative attractiveness of the trade as we gain more of what we want — soda — and are therefore left with less of what we have to give up — money (and therefore the chance to buy, say, a candy bar for Mom, or a beer for Dad instead).

Theoretically, the converse would apply to our vendor, who would gradually raise the price of each successive soda sold, were it not that he has no other, more pressing needs to satisfy with the money he earns and that he suffers severe constraints of time in shifting his stock-in-trade.

Arguments along these lines were among those which revolutionized economic understanding in the 19th century under the guidance of the so-called “marginal utility” school, which included such Austrian luminaries Wieser, Menger, and Böhm-Bawerk.

Churn and burn

But, as well as this somewhat theoretical objection, there is a more practical aspect to the tyranny of the regular pricing mechanism to which we are subject.

This is that most of these marginal buyers — the I-want-it-now, $2.50-a-bottle guys who effectively set the price for our snapshot of net asset value — are buying now, only to sell a moment later and they are doing this largely with borrowed money, into the bargain.

To give some idea of the incredible rate of churn between specialists, brokers, and clients, consider that NYSE dollar volume has averaged $55 billion a day in 2005, while overall securities trading in the US topped $1 quadrillion (a one followed by fifteen zeroes!) in 2004.

For equities themselves, however, data from the National Securities Clearing Corporation shows that, on any given day, typically as little as 2—3% of that sizeable notional sum actually goes to cash settlement — with the balance being netted out between all those frenzied intraday buyers and sellers, winners and losers.

Thus, in a market dominated by players with the most restricted of short term horizons — who battle it out literally tic-by-tic for the scraps to be made between the brackets effectively set by the less frequent entry of punters taking a longer view — we can see that considerations of the actual fundamental value of any given enterprise are the furthest from the minds of the majority of those likely to set our reference price.

What is a stock worth to these guys? Hopefully, a couple of tenths more than when they bought it two minutes ago.

Moreover, even the longer-term players who impart the underlying momentum to the market — those who, as it were, provide the ocean current, rather than the tide which is superimposed upon it — may well be executing trades based on a whole host of disparate factors: technical analysis, “relative value,” “sector rotation,” “index arbitrage,” “asset allocation,” derivative or convertible arbitrage, and “black box” trading. The list of such blind, mechanistic, model-based approaches seems endless.

As a particular case in point, on average, more than half — and anything up to three-quarters — of NYSE volume is now accounted for solely by program trading (Goldman, Sachs alone accounted in this way for 1.2 out of the total 8.8 billion of recorded volume in the week of June 24th).

Yet another facet of this commoditization and temporal foreshortening of the market is the rise of the exchange-traded funds, or ETFs — quasi-mutual funds which “trade just like stocks.” As the latest hot thing to hit the Street, last year the assets incorporated in these entities soared by nearly one half, reaching $222 billion as everyone sought to cash in on the speculative fever of the times.

Are these savings vehicles or tools of speculation? Are they a means to “grow the world economy by furthering the development of low-cost, efficient capital” (as the DTCC motto laughably proclaims) or merely another fancy way for respectable folks to do a little gambling with their nest-eggs?

You tell us. But again, note that most of the people involved in trading this way — and so in setting a price on all the relevant securities — would be hard pushed to name the CEOs of the constituent companies, or their main line of business, or a single key product, much less tell you anything about their balance sheets or income statements.

It should be apparent that the motivations of the overwhelming majority of “price-setters” are thus wholly different to the ones which drive us as we try to discharge our duty to our shareholders.

In our work, what we are firstly seeking to avoid are costly mistakes of over-enthusiasm — of buying when the market is clearly overpricing a business. We try not to buy soda for $2.50, no matter how much the kids might whine at having to drink water instead.

Conversely, we always try to recognize and take advantage of those times when the market underprices claims on valuable, well-managed, wealth-creating assets. 50 cents a litre? Yes, please. Do you deliver?

By now it should be apparent that on both these counts — both the theoretical and the practical — that to focus too much on price, especially in the short term, is to commit what logicians call a “category error”: instantaneous market price and long-term value are decidedly not the same animal!

Discounting the future

But if a stock is not always “worth” the price, what factors should we consider in valuing a company?

Here, many fall back on something called the “dividend discount” model, which effectively assumes a near infinite flow of dividend payments and discounts them back to a price payable today, using some readily observable long-term interest rate — usually, if highly inappropriately, in our view — the US Treasury 10-year note yield.

This simplistic calculation, however, poses a number of problems, namely:

  • the dividend payments are inherently uncertain (unlike those contractually set by a fixed income instrument) and will certainly be variable;
  • the company may choose to return shareholders' funds through buybacks instead of dividends (whether or not financed by borrowing);
  • it may chose not to return them at all;
  • from the other side of the equation, the T-Note yield is itself intimately subject to market whim and is therefore by no means an objective yardstick;
  • being technically “riskless” (a rather empty guarantee related to the surety with which a government can always print enough local currency — however worthless — to redeem the bond) it is not really suitable for gauging a “risky” asset like a common stock, in the first place.
  • For our part, to the extent we pay any attention at all to this concept, we sometimes compare the market's earnings yield to that applicable to 30-year BAA-rated corporate bonds — which, unlike US Treasuries, therefore theoretically discount for real yields, implied inflationary erosion, and corporate credit risk. This leaves us with a broad measure of expected real, long-term earnings growth. This, in turn, can be loosely benchmarked against observed or expected rates of change in gross domestic product with which, intuitively, it should be correlated over the long run.

    We should caution, however, that the only purpose for doing this is to judge how “cheap” stocks — as a group — may or may not be, relative to bonds, and not whether they — much less any individual components of the index they comprise — hold any absolute appeal whatsoever.

    Through the looking glass

    But what of the vexed issue of why anyone other than one of our market-timer friends would ever wish to buy a non-dividend bearing stock? What we can say here is as follows.

    A non-dividend paying, non-liquidated, still-independent stock derives its worth from a gauge of the company's ability (a) to generate real income (over some uncertain, but broadly-estimated time horizon) and (b) to maintain and hopefully to extend that income generation capability in the course of its operations (i.e. to preserve and accumulate 'wealth').

    Essentially, this 'worth' reflects the fractional ownership of the firm's productive assets, its claims on resources; its inventories of finished goods; its stock of work-in-progress; and any other titles to property it holds, as well as to more ephemeral entities such as brand and reputation.

    Above all this, though, the stock has value as a vehicle through which to devote one's savings to a participation in that epitome of wealth generation — entrepreneurial activity, especially that of a kind in which one either is technically, or perhaps, financially unable to engage, alone and unaided.

    Granted, ownership of the stock must eventually release some of the income or the capital to its proprietors whether through dividends, buy-backs, spin-offs, liquidation, transfer sale, or take-over or there would be little purpose in owning it, beyond vanity.

    However, so long as one regards the potential for such deferred remuneration as reasonable and as long as one possesses the suitably low degree of time preference to wait, one need not demand such a disbursement in the here and now before considering the stock worthy of purchase today (particularly if one holds a realistically dark view of the process of the chronic monetary depreciation endemic to our modern system).

    To illustrate this, we ask you, would you have wanted Microsoft to have paid a dividend in the early, and rapid expansion days (at the possible cost of slowing its advance to profitable, global dominance)? Would you consider a share in the title to an undeveloped (and so, financially 'inert') gold-bearing ore as “worthless”?

    Moreover, for so long as the firm is deemed to be growing its shareholder equity better than any alternative is likely to do for a given degree of uncertainty which is a purely subjective matter, no dividends rationally should be paid; for to do so would actually be to squander and possibly to prejudice entirely the ultimately realizable worth of the company.

    Vive la différence

    To recap our earlier theme, it is critically important to try to maintain the distinction between this process of consciously and painstakingly estimating the true going-concern worth of a viable business enterprise and the one derived by a glib (and wholly non-marginalist!) extrapolation from the prices posted, second-by-second in the stock market, at which a handful of its shares are passing from largely instantaneous sellers to equally short-term buyers, the majority of whom are engaged in a frantic game of musical chairs, often after having borrowed the money for the entrance fee.

    As the example of Mr. Buffett, among others, underlines, significant returns can be had, often at relatively low risk, if one realizes that the two sums can diverge significantly — and can stay divergent for a considerable period of time.

    Indeed, the knack of recognizing this kind of disparity is what makes a great investor simply another form of entrepreneur (if a vicarious one) that is to say, a man who is constantly seeking to exploit the arbitrage between what he feels is the unduly depressed price of resources being made available to him and the total real income he will ultimately derive from their use.

    So, what is a stock worth? The answer — different things to different people — is not as trivial as it sounds, for in that very difference lies a world of opportunity for those of us who know the only way to protect our clients' existing wealth — and then to nurture it — is by redeploying it at the most propitious moment so that it can share in and help foster the creation of wealth anew by others.

    July 14, 2005

    Sean Corrigan [send him mail] is an executive of Sage Capital Zürich AG and strategist for the Edelweiss Fund.

    Copyright © 2005 Capital Zürich AG

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