BOOK REVIEW: THE TRAGEDY OF THE EURO, BY PHILIPP BAGUS

The world centre of gravity of the Austrian Economics movement has long been the United States, especially since Ludwig von Mises arrived there on August the 3rd, at the age of fifty-eight, in a turbulent 1940.

The 1998 Spanish publication of Money, Bank Credit, and Economic Cycles, by Jesús Huerta de Soto — followed by the English translation in 2006 — then helped to revive European claims of an Austrian equality with the United States, particularly with the trans-Atlantic returns of Hans-Hermann Hoppe and Guido Hülsmann, after long periods of residence in North America.

In particular, a burgeoning growth of the Spanish echelon of the global Austrian movement — initially under the wing of Professor Huerta De Soto — may be starting to prove that a few years in the United States is becoming an option, rather than a requirement, for an Austrian academic to be taken seriously as a heavyweight intellectual force.

Thus we discover the rising talent of Philipp Bagus, and the publication of his landmark book, The Tragedy of the Euro.

This brilliant monograph, written in crisp classical English, flows like a rising tide.

It begins with a description of the rise of the European Union, which was always a dialectic, claims Bagus, with four classical liberal freedoms of movement on one side of a divide; these liberal freedoms covered goods, capital, people, and the provision of services. These four virtues then clashed up against the many vices of socialism, and particularly the desire for new imperial satrapies, especially given the WWII fall of colonial European empires and their replacement by the all-embracing and invisible empire of the American government, particularly after the Suez crisis.

Just before his first chapter, Two Visions for Europe, Bagus removes his gloves and goes straight for the throat, in the best uncompromising style of Von Mises himself; this is perhaps a delight to all of the writers at The Daily Bell, in Switzerland:

“In reaction to the [recent financial] crisis, the political class has tried desperately to save the socialist project of a common fiat currency for Europe.”

Once he has established his outright grip in this manner, Bagus refuses to let go throughout the entire book. Essentially, he claims that the fundamental schism at the heart of the EU project is one of a classical liberal Roman Catholic Church model engaged in a do-or-die struggle with a socialist Roman Empire model. From its Capitoline Hill inception in Rome, in 1957, upon the very site of the Temple of Jupiter Optimus Maximus, the EU project has thus always been doomed to be one of conflict and strife, driven by a perpetually unsatisfactory compromise between these two bitter rival forces of the human condition; liberty and tyranny.

On top of this conflict comes the later antagonism between the Austrian-influenced post-war Germans and their economic miracle, combined with the Saint-Simon socialist French and their desire to rebuild the empire they had lost when the Wehrmacht crushed their Napoleonic republic in 1940 (a military conflict in which Mises himself was swept up as he managed somehow to keep just one bus journey ahead of the Panzers on his terrifying road to New York). Bagus is uncompromising:

“The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification. It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away — in other words, disarmament.”

After this first layer of his intellectual pyramid is built, Bagus delves into The Dynamics of Fiat Money, in his next chapter. In a Michelin-starred culinary mix of monetary history, contemporary politics, and Austrian Economics, Bagus makes a bold prediction:

“Governments started to get heavily involved in banking. Unfortunately, interventions are a slippery slope, as Mises pointed out in his book, Interventionism. Government interventions cause problems from the point of view of the interventionists themselves: begging for additional interventions to solve these additional problems, or the abolition of the initial intervention. If the course of adding new interventions is chosen, additional problems may arise that demand new interventions and so on. The road of interventions was taken in the field of money, finally leading to fiat money and the Euro. The Euro begs for political centralization in Europe. The end result of monetary interventions is a world fiat currency.”

God forbid that should happen, though the world elites may try it on with us for a while before that power-grab collapses too, just as their precursor fiat currencies are collapsing today in the face of their endless money printing to bail themselves out from a gigantic mess of their own greed-fuelled creation.

After explaining this end-game strategy, Bagus details how we got to this point, in one of the clearest expositions of the Austrian Business Cycle Theory that I have yet to read. Indeed, he leads us towards the intriguing idea that the intertwining of central banking and fiat currency, with expansive state war, epitomised by both world wars, is much more than a coincidence:

“After the collapse of Bretton Woods, the world was dealing in fluctuating fiat currencies. Governments could finally control the money supply without any limitations to gold, and deficits could be financed by central banks. The manipulation of the quantity of money has only one aim: the financing of government policies. There is no other reason to manipulate the quantity of money.”

Yes, the diamond-hard spirit of Von Mises is alive and well, and living in the home of Francisco de Vitoria and the other Spanish Scholastics, from which Mises and the other early Austrians, such as Menger, also drew much inspiration.

But one impregnable bastion still stood between the nascent world government elites and their rotten self-serving dream of unlimited money printing and a world Soviet financial gulag — which in my opinion is a hopeless dream anyway, as it will quickly go the way of the Soviet Empire — and that was the post-war Wirtschaftswunder Germany of Konrad Adenauer and Ludwig Erhard, and the semi-granite rock upon which this economic miracle was built, the German Bundesbank.

Yes, although the Bundesbank did inflate its currency, like all other central banks, its intimate knowledge of the consequences of Weimar caused it to inflate a lot less than the rest, with perhaps its only rival to fiat currency hardness being the Swiss National Bank. Bagus explains how the destruction of this bastion was approached, in his third chapter, The Road to the Euro:

“Not surprisingly, governments and central banks wanted to escape the ‘tyranny’ of the Bundesbank. The system finally failed. The declaration of surrender was made when the [European Monetary System] corridor was amplified to ±15 percent in 1993. The Bundesbank had won; it had forced the others to declare the bankruptcy. It had followed its hard money philosophy and not succumbed to the pressure of other governments. Anyone who inflated more than the Bundesbank was showing its citizens a weak currency. The Deutschmark, in turn, was respected throughout the world and very popular among Germans. It brought relative monetary stability not only to Germany, but to the rest of Europe as well. The Deutschmark, of course, only looked stable in comparison to the rest. It itself was highly inflationary and lost nine tenths of its purchasing power from its birth in 1949 to the end of the EMS.”

Of course, this begs a simple question about all of the various intellectual pygmies who call themselves ‘servants of the people’ within the various European governments. If they truly wished to serve their peoples — rather than serve themselves as masters — then instead of being jealous about German financial success and the relative prosperity of the German people, they should simply have copied German policies rather than deriding the Bundesbank for being too effective at making ordinary people wealthier and happier, at the cost of preventing politicians from engaging in their endless dreams of aggrandising themselves, at the cost of everyone else, via unlimited money printing.

In fact, Bagus makes this point clear in his final paragraph in his second chapter:

“If Europeans had just wanted monetary stability and a single currency in Europe, Europe could just have introduced the Deutschmark in all other countries. But nationalism would not allow for this. With a single currency, there were no embarrassing exchange rate movements that would reveal a central bank’s inflating faster than its neighbors. For the first time there was a centralized money producer in Europe that could help to finance government debts, and open new dimensions for government interventions, and redistribution of wealth.”

However, the ‘problem’ remained of how to get the German people to give up their ‘evil’ independent Bundesbank and its relatively honest-money policies? Obviously, German politicians would go along with the plan. Exploitative elites in different countries have always felt more at home with other exploitative elites, rather than with the exploited hoi polloi who pay the taxes to make their lives comfortable, who share merely a language and a physical geography with ruling elites, rather than the same attitude towards life; the politicians and civil servants of our current EU may require translators — if they lack fluency in the lingua franca of English — but they get on much better with each other at their cloistered conferences than they do with their respective peasant rabbles beyond the gates.

This is the trick Bagus believed the elites settled upon:

“The implicit blaming of Germany for World War II and making gains as a result was a tactic that the political class had often used. Now the implicit argument was that because of World War II and because of Auschwitz in particular, Germany had to give up the Deutschmark as a step toward political union. Here were paternalism and a culture of guilt at their best.”

Indeed, you may have noticed yourself that for several years it almost became a Rite of Passage for world elite members to make the required pilgrimage to Auschwitz, to really nail the point home, with Gordon Brown, of course, being several years too late.

More, however, was needed than the promised removal of a continual drip-feed of collective guilt (as if people born decades after WWII should ever really consider themselves blameworthy for what other people did before they themselves were alive). The endless drone about Auschwitz was the stick; but what about a carrot to sweeten the bitter pill of the Euro?

This was constructed in the form of the ‘Stability and Growth Pact’, in which other non-German members of the Euro would be forced to jump rigorous financial hurdles and to pass continuing acid tests, to prevent the Mediterranean La Dolce Vita lifestyle — fuelled by the printing presses of the peseta, the lira, and the drachma — from diluting the iron-hard rules of the soon-to-be ex-Bundesbank.

It was all a despicable sham, of course, and nobody believed any of it, especially the lying politicians of Germany, even when it was being put together. But as they say with the eternal hope of marriage; proceed in haste and repent at leisure. The German people were thus hoodwinked into giving up their precious Bundesbank, which had served them so well since 1948:

“The Stability and Growth Pact was not as harsh as Theo Waigel had suggested. When the SGP was finally signed in 1997 it had lost most of its disciplinary power. The result prompted Anatole Kalteksky to comment in The Times that the outcome of the Treaty of Maastricht represented the third capitulation of Germany to France within the century, citing as well the Treaty of Versailles and Potsdam Agreement.”

As Mark Twain said, history usually fails to repeat itself, but it does often rhyme.

Moving into his fourth chapter, Why High Inflation Countries Wanted the Euro, Bagus gets much more technical and produces lots of charts and graphs to detail and highlight his developing thesis. He does, however, continue in the same refreshing Misesian vein within the text:

“Governments of Latin countries, and especially France, regarded the Euro as an efficient means of getting rid of the hated Deutschmark. Before the introduction of the Euro, the Deutschmark was a standard that laid bare the monetary mismanagement of irresponsible governments.”

In the fifth Chapter — Why Germany Gave Up the Deutschmark — Bagus drills deeper into the cunning plan to part the German people from their wealth and their independence, via the machinations of their rapacious and power-hungry politicians, eager to seek further baubles from the EU bureaucracy and a luxurious financial independence from their rotten capricious voters.

The Bundesbank thus had to be destroyed, to allow the dreams of Keynesians within governments everywhere, to flourish and prosper:

“Mitterand, France’s president from 1981–1995, had hated Germany in his youth and despised capitalism. The French patriot was a staunch defender of the socialist vision of Europe and geared his policies toward defending France against the economic superiority of its Eastern neighbor. Germany’s superiority was based on its currency. Mitterrand’s intention was to use Germany’s monetary power for the interest of the French government.”

So, a relationship built on love and trust then. It was surely bound to last.

Of course, the plan would never have worked without the duplicity of German politicians:

“The Euro allowed German politicians to rid themselves of stubborn Bundesbankers, promising the end of the bank’s ‘tyranny.’ More inflation would mean more power for the ruling class. German politicians would be able to hide behind the ECB and flee the responsibility of high debts and expenditures.”

As you might say in a high quality jazz club after listening to a particularly dense and interwoven melody; “Nice”.

Bagus finishes his fifth chapter with a summation of what the Euro has really been about all along:

“In sum, the introduction of the Euro was not about a European ideal of liberty and peace. On the contrary, the Euro was not necessary for liberty and peace. In fact, the Euro produced conflict. Its introduction was all about power and money. The Euro brought the most important economic power tool, the monetary unit, under the control of technocrats.”

Bagus is particularly scathing about the political gnomes and bureaucratic dwarves of the various exploitative tax-eating classes, who are currently trying to rescue their own miserable political careers by wrecking the economic futures of their exploited tax-paying classes. For instance, he has a lot to say about that quisling betrayer of the German people, Angela Dorothea Merkel:

“Merkel herself stated that: ‘If the Euro fails, the idea of European integration fails.’ Her argument is a non sequitur. Naturally, one can have open borders, free trade and an integrated Europe without a common central bank. Here Merkel showed herself to be a defender of the socialist version of Europe.”

The rest of the book then contains a brilliant and detailed analysis of the relationship between the Federal Reserve and the European Central Bank, and the political interconnections between the two, as well as an up-to-date breakdown of how the Euro crisis has developed over the last three years. Bagus also explains how the ECB is stoking up the fires of future European conflict in its bid to help the EU create a strait-jacket Force majeure political union.

At the end of his tenth chapter, The Ride Towards Collapse, Bagus neatly summarises the current situation after an interesting discussion of the concept of ‘qualitative easing’, the evil twin of ‘quantitative easing’:

“The European Union has become a transfer union. Interest rates that most governments have to pay on their debts remain at a high level. Sovereign debt levels are still on the rise. The future will tell us if the situation was sustainable.”

In the next chapter, The Future of the Euro, Bagus clearly and succinctly answers the following set of questions:

“Have we already reached the point of no return? Can the sovereign debt crisis be contained and the financial system stabilized? Can the Euro be saved? In order to answer these questions we must take a look at the sovereign debt crisis, whose advent was largely the result of government interventions in response to the financial crisis.”

No stone is left unturned, as they say, though Bagus does it in as few words as possible.

In summation, most living Austrian authors fall into one of three broad camps; the Misesian traditionalists, the Hayekian cerebralists, or the Rothbardian essentialists. I can only say that if forced to pick one of the three, I believe the spirit of Von Mises still lives on within the pen of Bagus. For example, was this written by Mises or Bagus? (The clue is in the last sentence):

“As Austrian business-cycle theory explains, the credit expansion of the fractional-reserve-banking system caused an unsustainable boom. At artificially low interest rates, additional investment projects were undertaken even though there was no corresponding increase in real savings. The investments were simply paid by new paper credit. Many of these investments projects constituted malinvestments that had to be liquidated sooner or later. In the present cycle, these malinvestments occurred mainly in the overextended automotive, housing, and financial sectors.”

Or is the directional style of Bagus a combination of all three broad camps, plus something new? Are we going to have to invent a new term, such as ‘Bagusian’, to create an evolving fourth camp? If we get three books of this quality, in sequence, then I feel we may be forced to deploy such a term.

To wrap up, in his conclusion, Bagus outlines all of the various possible futures he believes the Euro may possess in various different random universes. Its outcome is in the lap of the Gods, he thinks, as to which one of these universes the Euro will finally enter, though he outlines one or two of the more likely predictions and why he thinks these will be favourite with the bookmakers.

I will let you download, buy, or in some way imbibe this required-reading book, to find out what the details of these predictions are. However, I think we all know the general conclusion; all fiat monies ultimately end up as worthless. The interesting part of the story is how they get there.

And if you want to know the illuminating and interesting history (and future) of the Euro, and how it interconnects with the planned world fiat money — which you can call ‘the Bancor’ or ‘the SDR’, though I prefer ‘the Soviet’ — then you must read this book.

Street Smarts, by Jim Rogers

In China, eight is the lucky number. The Mandarin symbol for eight is a pictogram representing a side of meat being sliced in two, in infinite progression. This forms the symbolism of multiplication and increase, in the same mythological way that the biblical story of Noah represents multiplication and increase, two by two by two, giving us this same powerful, capitalistic, and mystical number of eight.

For where chapters one to seven of Jim Rogers’s new book, Street Smarts, are a wonderful how-to-get-rich and rags-to-riches story of his life so far – including a description of his wedding in Henley-on-Thames, a town where I also got married – he really pulls out the economic meat cleaver in Chapter Eight. He begins to lay it, at first, into Alan Greenspan, and then rolls up his sleeves before setting to work with Ben Bernanke, Timothy Geithner, and Uncle Tom Cobley and all, with a fiendish delight which had your author calling for more Pinot Noir to appreciate the greater subtleties of the author’s carefully-crafted words.

Chapter Eight is thus a joyous chapter to read as this maestro of real-world global investment lifts the withered fools-gold slab of Keynesianism and exposes the insectoid Krugmanite creatures below to a well-deserved blow-torch of common sense, slaking them in a coruscating fire of simple concise words, well chosen, and written in the flowing liquid style of a master wordsmith craftsman.

For Jim Rogers is far more than than meets the eye on financial news interviews. Wherever he’s been, in whichever geological strata of life he has found himself, he has risen inexorably, like a molten volcanic stream of gold, improbably filled with diamonds, to the very surface of that strata. And that includes the rare earth mineral layer of superlative writers and teachers.

Fortunately, even by the close of his pivotal Chapter Eight, Rogers is far from finished. For the wonderful and refreshing pummeling continues apace in Chapter Nine, which ends with the Frank Borman quote, “Capitalism without bankruptcy is like Christianity without hell,” a hearty tagline I’m sure the illustrious Joseph Schumpeter would have appreciated.

And so the unwinding story of Jim Rogers and the entertaining dance of his thoughts continues onward towards distant future prospects, until the unwanted end of the book in which I was left pleading with the author for more. Alas, for the world’s hard-core band of dedicated Misesians, the horse-frightening words of ’Rothbard’ and ’Mises’ fail to show up in any part of the book. However, you can still feel their willing paired ghosts standing in the shadows throughout the entire manuscript, urging Rogers forwards in his clinical evisceration of America’s supine political class, which has sleepwalked Paine’s and Jefferson’s America into the socialised, regimented, and bureaucratised United States of George Walker Bush and Barack Hussein Obama.

One especially feels this Misesian support with Rothbard’s bow-tied ghost, willing on the bow-tied Rogers to land yet another skewering blow into the heart of the Washingtonian beast, which is strong-arming the United States into the same destructive chasm as the draconian Athenian empire, whose hated and once-almighty Delian league was eventually wiped from the ancient classical map by the lowly and simplistic Sparta (metaphorically, read China).

Bring the troops home, let bankrupt companies fail, shrink the state, bring back liberty. These are the heartfelt messages of Rogers. Truth, wealth, and freedom thus abound in the pages of this wonderful book.

And these are messages Austrians everywhere can believe in and subscribe to, as we march on the eternal road towards knowledge, harmony, and peace.

And if you’d like some excellent investment tips too, then this really is the book for you.

Buy, sell, hold?

Buy.

Henry Hazlitt: Economics in One Lesson

In the classic novel King Solomon’s Mines, the witch Gagool leads a group of Englishmen, including the legendary Allan Quatermain, into an ancient treasure room deep inside a mountain carved within solid rock and chock full of gold, diamonds, and other splendid jewels.

To feel like Quatermain yourself, to discover an almost endless stream of flawless intellectual gems, and to experience writing of the highest classical quality, there’s little need to find a time-and-space machine to travel back to nineteenth century Africa. All you need do is get hold of a copy of Henry Hazlitt’s Economics in One Lesson, still the main hidden doorway into the secret treasure room of Austrian economics.

It is a particularly useful first book for anyone who has spent the last few years in a foggy miasma of Keynesian or Monetarist economics, which together form the state-sponsored mainstream of most economics schools, mainly because they award the state a sacred role in controlling all of the major levers of economic power.

But something has gone very badly wrong with the mainstream economics schools, who seem incapable of understanding just what happened in 2008, and whose only policy solutions seem to consist of doing more of the same, to solve the seemingly unknowable problems of economic collapse.

Fortunately, the Austrian School does have a clear idea of what happened in 2008, and does have a consistent framework of ideas of how to get back to a functioning and steadily expanding economy, based upon reality and truth, rather than fictitious state smoke and lying political mirrors.

But to reach that framework, it may first be necessary to clean out any economic shibboleths that may have infected your mind, pumped in through the mainstream education system, media system, and government system, which is the main ‘ground clearance’ task of Economics in One Lesson.

My own first impression of reading this book, was one of having infective giants ripped out of my mind. But done in a precise way, rather than a violent way, in the manner of a wizardly eye surgeon, rather than in the manner of a devilish chainsaw merchant.

This is because Hazlitt is arguably the finest technical writer in the Austrian School, with perhaps only Rothbard as a serious contending rival, with Hazlitt as Johann Sebastian Bach and Rothbard as Wolfgang Amadeus Mozart.

If you’ve ever read the famous book on writing by Strunk and White, you’ll know that its motto is “omit needless words”. Throughout his own work, it is as if Hazlitt has swallowed a copy of Strunk and White, because he follows their motto religiously, without even a single comma being superfluous.

Economics in One Lesson is unusual, however, in that it is not explicitly about Austrian economics. Instead, Hazlitt draws inspiration from Frédéric Bastiat, the nineteenth century French classical liberal, who via his inspirational essay, What is Seen and What is Unseen, explained the lesson of opportunity costs, or, to put that in simpler terms, explained why having your windows broken may be good for your local glazier, in the short term, but worse for the general economy, in the long term.

With politicians and their paid apologists in the Keynesian/Monetarist economic industrial complex only capable of seeing in the short term, almost always in their own immoral narrow-minded selfish interest, we are always pointed at the benefits of the single group which benefits from any whimsical political policy.

What we’re never allowed to think about are the personal effects of having your windows broken and the things you now cannot purchase because you are spending all of your available money on paying your local glazier to repair your broken window, to get you back to square one.

After having your window broken, you now cannot visit your tailor to buy a new suit with that money you had to spend on the glazier, so you are out one suit and your local tailor is that much worse off without your planned trip to his emporium, which vaporised along with your broken window.

The glazier may cheer, of course, when your window is smashed, and vote for the politician that cheered the breaking of your window too, but all that has happened is that earned wealth has disappeared just to get society back to where it was before the window was smashed.

If the window remains unsmashed, society is up one suit, plus you are happier and your tailor is happier, though admittedly your glazier may be less happy. But who earned the money in the first place, anyway? You or the glazier? Did you earn it to make yourself happy or to make your glazier happy?

However, the politicians and the policy framework analysts never look at you and your tailor, says Hazlitt, they only examine the glazier’s situation. Therefore politicians keep getting away with their crazy policies of stealing from Peter, to pay Paul, and keeping a healthy slice of the proceeds for their own nefarious uses, all to the overall detriment of society.

It has got so bad that Keynesians, such as Paul Krugman, can even suggest that destructive war is good for an economy, as if Hiroshima and Nagasaki were beneficial for the Japanese economy.

(If you found yourself unconsciously nodding along to that last sentence, then you really do need to read Hazlitt’s book, as the virus of state worship has deeply infected your brain.)

Hazlitt makes us answer the question that if war is that good for us, why don’t we just burn down all of our own houses now and shred all of our own clothes, to save on the cost of munitions, to really get rich? That would really ‘stimulate’ the housing and clothing industries. However, to ask the question, is to begin to understand the answer that Hazlitt is driving at. To wit, that we must always look beyond the immediate beneficiaries of any economic policy before we sign ourselves up to their consequences. And as we saw in England in 2011, with the city centre riots, where various towns were ripped up by hoodlums, even the crassest of politicians had to think twice before saying that these events had ‘boosted’ local economies.

As you progress through Hazlitt’s book, these kinds of ‘in extremis’ questions start enabling us to see through the fog of statist fallacies surrounding and supporting the warfare/welfare state beloved of the Keynesian/Monetarist nexus, virtually all of whose members suck at the teat of the state, in one form or another, for example via grants from the Federal Reserve, tenured posts at universities subsidised by government-administered student loans, or by luxuriating in lucrative positions inside state-subsidised banks.

At this point, I would say that you should now just download Hazlitt’s book for free from Mises.org, and start reading, but if you need more persuasion, and if you’ve ever been puzzled by any of the following economic questions, then you’ll now know what to do to satisfy your curiosity.

I’ll use the first couple of examples of Hazlitt’s wave of incisive question-and-answer sessions, to show how he demolishes all of his target economic shibboleths.

For instance, doesn’t government spending on something like a bridge provide extra employment? Yes, but only at the expense of other jobs lost (or never created) elsewhere, where that money taken in taxation to pay for the bridge is now never spent. We see the bridge, or the Olympic stadium, or the dam, and we are impressed. We never see all the work that would have otherwise been created. And if the bridge is a ‘bridge to nowhere’, then it becomes nothing other than a white elephant. Bridges are only ever built voluntarily with private money if they fulfil a genuine need. Government bridges are often built merely to win the next election.

My own perversely favourite boondoggle bridge is the Humber Bridge here in the UK, built by the horrific Labourite socialist government of the 1970s. Not only is this a typically governmental bridge to ‘nowhere’, it is also a bridge from nowhere to nowhere, and for sixteen years, the longest single-span bridge in the world.

Although not the most gigantic waste of money indulged in by British governments, which is a prize either earned by Gordon Brown and his bailing out of the British banking system in 2008 or by his selling of half of the British government’s gold reserves at the bottom of the market in 1999-2002, the Humber Bridge is still perhaps the finest physical embodiment in Britain of the uselessness of allowing politicians to make and take financial decisions.

But surely it’s okay for governments to take taxes to generate employment in this way? Notwithstanding the points raised above, another problem with taxes is that they discourage production and thus reduce private employment. If government takes 40% corporate taxes on profits, then the motivation to generate profits in the first place is reduced. As taxes increase, then the total amount of wealth generated in a particular society is reduced (though government income may unfortunately rise, to waste on bureaucrats and other parasites).

And this leads us to a secondary beauty of Hazlitt. Not only does he shatter the socialist economic nostrums of his own time, he enables you to take apart the socialist economic nostrums of our time.

For instance, his explanation above of ratcheting government destruction of the motivation to create initial wealth takes us straight towards the infamous Laffer curve. What this curve implies is that if the general taxation rate is 0%, then the government will receive no income, no matter how much private wealth is generated. But if the government taxes us at 100%, then it also receives no income, because nobody gets out of bed in the morning, because all wealth-generating motivation has been obviously destroyed, outside the portals of a dystopian science fiction novel peopled by drugged or cloned human ants.

There is therefore some percentage of taxation, says Laffer, where the government extracts the maximum amount of revenue. (For the sake of argument, and so we can save a hundred thousand words in this book review, let’s make this rate 50%.) This actually makes sense, as far as it goes, and we can all agree that increasing taxation rates gradually diminish the will to generate initial wealth. However, Laffer only looks at things in terms of how the government benefits (the glazier). Just as Hazlitt taught us, decades ago, Laffer fails to look beyond the initial situation, as is usual with all similar government worshippers. His curve, and all of its apologists, fail to take into account the total level of societal wealth production (you and the tailor), with most such economists being incapable of thinking beyond the needs of the state.

For instance, let’s assume that government spending is equally as productive and efficient as private spending (which is a very big ‘if’) and introduce a subsequent simple rule to examine Laffer’s curve in the way Hazlitt encourages us to think. This rule will take into account Laffer’s idea that increasing tax rates diminish the incentive to generate wealth, so let’s assume that every incremental percentage of tax decreases the motivation to earn private wealth by a single percentage point. (This seems reasonable to me, though you may like to insert your own figures.)

At very low tax rates, such as one or two percent, perhaps extracted by a local mafia running a protection racket, this effect is negligible, but it soon ratchets up, as we head upwards towards the protection racket taxation rates of western democracies.

Even Laffer admits that a 100% taxation rate destroys all wealth production motivation, so let’s extend that basic insight to examine what Laffer has left unseen in his curve above.

At a corporate tax rate of 0%, let’s postulate that $100 million dollars of wealth, in total, is the maximum that might be earned by private companies in a simple model economy, based upon an entirely taxless version of somewhere like Hong Kong, Singapore, or Liechtenstein, with totally voluntary economies. In this wonderful Lafferesque universe, the government will receive none of this entirely private money.

At a 1% tax rate, $99 million is generated by the private sector and the government receives $990,000 dollars. The government worshippers rejoice at this newfound ‘free money’, and so keep increasing the corporate tax rate until they hit their Laffer curve maximum.

Proceeding onwards and missing out a few periods in-between, at a tax rate of 49%, $51 million of total wealth is generated, with the government receiving $24,990,000 dollars.

Going one step further, at a tax rate of 50%, $50 million dollars is now generated by private industry, with the government receiving $25 million dollars. And at a tax rate of 51%, $49 million dollars is generated, with the government receiving $24,990,000 dollars. From here on in, if tax rates continue to increase, the government tax receipts diminish to zero.

However, as far as Laffer is concerned (in this simplified experiment), the government should set the tax rate to 50%, as this maximises its revenue (to $25 million dollars). And this is all that any politicians, with a few Ron Paulian exceptions, are capable of seeing, too.

What Laffer and all the other non-Hazlitt-reading government worshippers fail to see, despite it being plainly in their face, is that the overall wealth in society generated is now half of what it otherwise would have been, even according to their own insights.

Even if we assume that government spending is as efficient as private spending, and even if we assume that the government’s own costs in this taxation transfer operation are nil (two spectacularly generous assumptions), even if the government spends its entire $25 million dollar ‘take’ wisely on lasting job creation, it has denuded society of half the wealth (to spend on job creation) that society otherwise would have possessed.

And this is just one application of what Hazlitt makes possible, if you start to think with his methodology. His method is timeless and his illumination is stunning.

Fortunately, Hazlitt explains his way of thinking much better than any humble book reviewer ever could, and covers many other examples of economic fallacy. If my attempt to explain his thinking above left you feeling a little confused, then I must apologise. Read the real thing and it will become much clearer.

Hazlitt’s book covers all of the following major economic insights, all informed by an Austrian framework and by Bastiat’s idea that we should always look beyond the obvious if we want to find the truth:

• The Broken Window
• The Blessings of Destruction
• Public Works Mean Taxes
• Taxes Discourage Production
• Credit Diverts Production
• The Curse of Machinery
• Spread-the-Work Schemes
• Disbanding Troops and Bureaucrats
• The Fetish of Full Employment
• Who’s “Protected” by Tariffs?
• The Drive for Exports
• “Parity” Prices
• Saving the X Industry
• How the Price System Works
• “Stabilizing” Commodities
• Government Price-Fixing
• Minimum Wage Laws
• Do Unions Really Raise Wages?
• “Enough to Buy Back the Product”
• The Function of Profits
• The Mirage of Inflation
• The Assault on Saving

If any of these conundrums have ever puzzled you, then simply download the book and start reading.

SmartMetals: The Most Seductive Metal – Matthew Hart Interview

Smart Metals Radio host Andy Duncan talks to Author Matthew Hart about his new book – “Gold – The Race for the World’s Most Seductive Metal,” diamonds, and the mysterious Chinese gold mining industry.

SoundMoney: Peter Schiff responds to ‘The Daily Show’

In this episode, Andy Duncan talks to Peter Schiff about his recent appearance on ‘The Daily Show’, the economics of the mandated minimum wage, and gold in China.

SmartMetals: The Asian appetite for gold – Jayant Bhandari Interview

On today’s show Andrew Duncan and Jayant Bhandari discuss the junior gold mining sector, gold prices, and the strategic investment differences between India and China.

SoundMoneyShow.Com: CODE RED, protect your savings – John Mauldin Interview

Andrew Duncan speaks with Mauldin Economics founder, John Mauldin about his recent book; Code Red, central banking practices, and how investors should position themselves in the face of a potential coming monetary crisis.

Bitcoin executive arrested for money laundering

Here are some principle definitions of a perfect money, based mainly upon those provided by Aristotle:

• It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.
• It must be portable. Money should hold a high amount of ‘worth’ relative to its weight and size.
• It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics.
• It must be fungible. One unit of money should be freely exchangeable with another identical unit of money.
• It must have intrinsic value. There are lots of arguments about this one, of course, but let’s just say – without needing to write a book on it – that it should have a general market value and a general attractiveness to many people based upon its own properties independent of its use as a money, and prior to its use as a money.

For more precise Austrian School definitions of money, and for those who are interested, there are two indispensable books which go into much greater depth on what defines a perfect money:

• On the Origins of Money, by Carl Menger
• The Theory of Money and Credit, Ludwig von Mises

However, for the purposes of this piece, let’s stick with the simplified list of five principles, above.

Using that list, let’s take a look at gold. Again, without needing to write a 200,000 word magnum opus on it, I think it gets a perfect score:

• It must be durable – Yes
• It must be portable – Yes, with very large amounts staying inside a vault and only the validated ownership of the bullion changing hands
• It must be divisible – Yes
• It must be fungible – Yes
• It must have intrinsic value – Yes, for jewellery, electronics, gold-plating, and so on

And I know there will be many convoluted arguments by Bitcoin advocates about that last point, but let’s go with this four-out-of-five score for Bitcoin, for the moment:

• It must be durable – Yes (because apparently no more than 21 million can ever be produced)
• It must be portable – Yes (so long as an electrically-powered information network exists)
• It must be divisible – Yes (no doubt, even the Satoshi will soon be broken down even further into a trillion Nakamotos)
• It must be fungible – Yes
• It must have intrinsic value – No, without its use as a money, Bitcoin is just an interesting software and mathematical puzzle, of little value to all except a small hard core of brilliant mathematical software developers, which produces nothing but meaningless jumbles of numbers and letters (let’s just leave it at that for the moment, to prevent endless debate)

So is that the end for Bitcoin? Well, hardly, because in my opinion, this is how fiat paper money – as produced by most of the world’s governments – scores, on my personal test:

• It must be durable – No
• It must be portable – Yes
• It must be divisible – Yes
• It must be fungible – Yes
• It must have intrinsic value – No

Fiat paper money fails on two of the tests, because it can be printed into infinity, therefore lacks any durability, with every historical paper money having completely failed within a century, and current paper monies going down the same virtually inevitable road to complete collapse. Also, unless you want one as a curiosity or you want some to wallpaper your bedroom with, fiat paper monies such as the the Zimbabwe dollar have virtually zero intrinsic value, in and of themselves.

So having established that Bitcoin is better than any fiat paper money, this is my ranking, so far, for the various as-near-as-we-can-get-perfect money candidates:

1. Gold
2. Bitcoin
3. Fiat paper money

So does Bitcoin have to remain permanently in second place, always struggling behind gold?

Well, perhaps in the future – the far distant future, once we’re off the planet – maybe it can become better than gold? What if we add two more properties to a perfect money:

• It must be private for any size of transaction. You must be able to exchange it with the opposite party, without other people necessarily needing to know about the transaction.
• It must be secure. It must be extremely difficult to steal. A perfect money would be impossible to steal.

Hmmm…

Let’s score our three candidates now. Let’s start with gold:

• It must be private for any size of transaction – Yes, at a pinch, though a plane filled with gold would be difficult to hide unless you were the former President of Tunisia flying to an airport controlled by a friendly government, and the gold can always stay in a vault, if necessary, with only the validated ownership changing
• It must be secure – No, all coins, bars, and even vaults can be stolen by governments, many transactions can be taxed, and once gold gets buried in the ground, even in a secure place, it becomes unusable

Bitcoin:

• It must be private for any size of transaction – Yes, at a pinch, with the inevitable Bitcoin II being completely and easily anonymous
• It must be secure – Yes, at a pinch, and we’ll come to that pinch in a moment

And rather laughably, perhaps:

Fiat paper money:

• It must be private for any size of transaction – No, try taking $1 million dollars through any airport and see what happens to you
• It must be secure – No, because it is ‘illegal’ to carry more than 10,000 units of the stuff, and anything above that amount – delivered electronically – is completely traceable by government tax bodies

So now we have gold and Bitcoin scoring equally well, with six out of seven marks for being the perfect money, and fiat paper money way behind with a miserable three out of seven.

But here’s the pinch. Although Bitcoin itself might be secure, governments around the world are beginning to realise that their central banking fraud, and all the power that goes with it, is coming under increasing threat by Bitcoin. The Leviathan is waking. Some of the Bitcoin advocates might even be pleased about this, with an attitude of ‘bring it on’, and ‘see if you can stop us’. But I would caution that attitude, because the governments are still the ones with the guns, and most people are still afraid of those guns.

And although Bitcoin itself might be secure, the people who own the Bitcoins are not. They are physical fleshly beings, and they can be stolen and trapped in cages by the men with the guns, which seems to be the approach the world’s fiat money producers are now beginning to adopt.

The arrest of Charles Shrem for the alleged ‘offence’ of money laundering, is a worrying sign that Leviathan is starting to respond to the challenge of Bitcoin. We shall see how all of this plays out, of course. However, as the Chinese say ‘May you live in interesting times, and come to the attention of important people’. It seems Mr Shrem has just come to the attention of some very self-important people.

SoundMoneyShow.Com: How to spot a looming crash – Terry Coxon Interview

Host Andrew Duncan speaks with Terry Coxon, Senior Economist at Casey Research about how to spot a looming crash, economic trends, and how to take account of political risk.

Link to show home.

SmartMetals: Doug Casey Interview – Gold, economics, and ethics

HAA Radio host Andrew Duncan speaks with Founder and Chairman of Casey Research, Doug Casey. Topics include: A look at Doug’s new book; Right On The Money, where the US economy is headed, how gold can be used for savings as well as speculation, and how ethics is tied into economics.

Link to interview home.