Why central planning fails

 by Bill Bonner 

The Dow is still rising. It rose another 125 points yesterday… hitting a new record high.
Gold is dawdling.
We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Bernanke — all seem to have a simpleton’s view of how the world works. They believe they can manipulate the future and make it better. Not just for themselves, but for everyone. Where did such a silly idea come from?
Aristotelian logic came to dominate Western thought after the Renaissance. It was essentially a forerunner of positivism — which is supposedly based on objective conditions and scientific reasoning. “Give me the facts,” says the positivist, confidently. “Let me apply my rational brain to them. I will come up with a solution!”
This is fine, if you are building the Eiffel Tower or organizing the next church supper. But positivism falls apart when it is applied to schemes that go beyond the reach of the “herald’s cry.”
That’s what Aristotle said. He thought only a small community could work at all. Because only in a small community would all the people share more or less the same information and interests. In a large community, you can’t know things in the same direct, personal way. So it’s hard for people to work together in the same way.
In a large community, you have no idea who made your sausage or what they put in it. You have to rely on “facts” that are no longer verifiable by direct observation or personal acquaintance.
Instead, the central planners’ facts usually are nothing more than statistical mush, wishful thinking or theoretical claptrap — like Weapons of Mass Destruction, the unemployment rate and the Übermensch.
Large-scale planning fails because the facts upon which it is built are unreliable, frequently completely bogus.
And it fails because people don’t really want it.

Hidden Agenda

In a small community the planners and the people they are planning for are close enough to share the same goals. In a large community the planners are a small minority.

The Market and the Distribution of Wealth

by Ludwig M. Lachmann

Everywhere today in the free world we find the opponents of the market economy at a loss for plausible arguments. Of late the "case for central planning" has shed much of its erstwhile luster. We have had too much experience of it. The facts of the last 40 years are too eloquent.
Who can now doubt that, as Professor Mises pointed out 30 years ago, every intervention by a political authority entails a further intervention to prevent the inevitable economic repercussions of the first step from taking place? Who will deny that a command economy requires an atmosphere of inflation to operate at all, and who today does not know the baneful effects of "controlled inflation?" Even though some economists have now invented the eulogistic term "secular inflation" in order to describe the permanent inflation we all know so well, it is unlikely that anyone is deceived. It did not really require the recent German example to demonstrate to us that a market economy will create order out of "administratively controlled" chaos even in the most unfavorable circumstances.

Is gold in a bubble?

By Detlev Schlichter

To answer this question is not straightforward. As the gold-sceptics keep reminding us, gold pays no coupon and no dividend, it does not offer a running yield, so traditional measures of ‘fair value’ do not apply. But gold is money, and just as the paper ticket in your wallet does not pay interest, neither does gold. Gold is a monetary asset that has functioned as a medium of exchange and a store of value for thousands of years, around the world and in almost all societies and cultures. Many modern economists believe that gold has now been successfully replaced with state paper money, such as paper dollars, paper euros, paper yen, and so forth. Holding gold is therefore redundant. The present crisis is a stark reminder that this faith in fiat money is misplaced.

Gold is still a superior monetary asset. It is not under the control of any political institution. It cannot be printed to artificially lower interest rates and to ‘stimulate’ the economy, to create fake booms in financial assets and in real estate, to fund credit growth with printed money rather than true savings, to subsidize the banking sector and then bail it out when the banks overreached, to allow the government to run never-ending budget deficits, to make unfunded promises to voters and fund wars. Gold is hard, inelastic, apolitical and truly international money. It does not bow to anybody. Paper money is a political tool.

What gives money value, and is fractional-reserve banking fraud?

By Detlev Schlichter

I thought I should address a couple of points that I consider to be misconceptions and that frequently come up in discussions with the audience or other speakers when I present my views on the fundamental problems with fiat money. I am not always in a position to correct these misconceptions right then. They are often woven into questions on other points and I have to leave them uncommented so as not to disrupt the flow of the debate. My book is, I believe, quite clear on these points, so I could simply refer people to Paper Money Collapse. But, for whatever reason, it is still the case that many in my audience make inferences from similar arguments to my own, and I fear that some of the differences between these positions might get overlooked. These differences are not unimportant, and I think it is worthwhile to highlight and clarify them.
The first point is related to the question what gives money its value? The second point is the question of whether fractional-reserve banking is fraudulent, and should be banned on the basis of property rights.
Let’s first restate the central premise of Paper Money Collapse. The main message is that today’s mainstream views on money are flawed. The most important difference between commodity money, such as a proper gold standard, and ‘paper money’,

Jim Rogers 'Don't Sell your Gold and Silver Coins'

Regime Uncertainty and the Fallacy of Aggregate Demand

In a recent New York Times column, economist Paul Krugman once again took to chastising a claim he has infamously dubbed  the “confidence fairy.”  According to the Nobel laureate, the “confidence fairy” is the erroneous belief that ambiguity over future government regulation and taxation plays a significant role in how investors choose to put capital to work.  To Krugman, the anemic economic recovery in the United States shouldn’t be blamed on this “uncertainty” but rather a “lack of demand for the things workers produce.”  Being the most prominent mouthpiece for Keynesian economic policy in modern times, the Princeton professor represents the school’s circular thinking very well.  Keynes and his followers saw most economic slumps as being the result of insufficient spending.  A slowdown in spending means the animal spirits aren’t so aggressive in their lust for immediate consumables.

Some Additional Reflections on the Economic Crisis and the Theory of the Cycle

by Jesus Huerta de Soto

The four years that have passed since the world financial crisis and subsequent economic recession hit have provided Austrian economists with a golden opportunity to popularize their theory of the economic cycle and their dynamic analysis of social conditions. In my own case, I could never have imagined at the beginning of 1998, when the first edition of my book Money, Bank Credit, and Economic Cycles appeared, that 12 years later, due undoubtedly to a financial crisis and economic recession unparalleled in the world since the Great Depression of 1929, a crisis and recession which no other economic paradigm managed to predict and adequately explain, my book would be translated into 14 languages and published (so far) in nine countries and several editions (two in the United States and four in Spain). Moreover, in recent years I have been invited to and have participated in many meetings, seminars, and lectures devoted to presenting my book and discussing its content and main assertions. On these occasions, some matters have come up repeatedly, and though most are duly covered in my book, perhaps a brief review of them is called for at this time. Among these matters, we will touch on the following:

Why Is There a Euro Crisis?

by Philipp Bagus

Today's banks are not free-market institutions. They live in a symbiosis with governments that they are financing. The banks' survival depends on privileges and government interventions. Such an intervention explains the unusual stock gains. On Wednesday night, an EU summit had limited the losses that European banks will take for financing the irresponsible Greek government to 50 percent. Moreover, the summit showed that the European political elite is willing to keep the game going and continue to bail out the government of Greece and other peripheral countries. Everyone who receives money from the Greek government benefits from the bailout: Greek public employees, pensioners, unemployed, subsidized sectors, Greek banks — but also French and German banks.

Our Whole Economy Is a Ponzi Scheme !

The Boston Consulting Group (BCG), one of the world’s most prestigious consulting firms, is making waves by stating something that only a few marginal analysts, generally from the Austrian school, are saying : all developed economies have become giant Ponzi schemes (read the essay). The fraud consists in paying interests to the investors with funds provided by newcomers, which can only lead to bankruptcy, as shown by the Madoff affair, last example to date.


In the same way, developed countries have borrowed tomorrow’s riches to finance today’s consumption. According to the Bank for International Settlements (BIS), the total debt of governments, households and companies in the OCDE countries has grown from 160% of GDP in 1980 to 321% in 2010. And most of this debt has been used for financing consumption (bureaucrats’ salaries, household spending) rather than for infrastructure or investment. Most countries being in deficit, a part of their debt goes to... servicing older debt, which is the definition of a Ponzi scheme. On top of that, those countries are guaranteeing « entitlements » (retirement, health care) that are far from being funded.

It’s a mad mad mad mad world

By Detlev Schlichter 

Shinzo Abe, Japan’s new prime minister, has some exciting new ideas about how to make Japan’s economy grow. How about the government borrows a lot of money and spends it on building bridges and roads all over the country?

If that doesn’t sound so new, it is because it isn’t. It is what Japan has been doing for 20 years, and it is the main reason why Japan is now the most heavily indebted nation on the planet – and still not growing a lot. Its debt-to-GDP ratio stands at an eye-watering, world-record 230 percent, which already guarantees that the country’s pensioners-to-be (and Japan has a lot of those) will never be repaid with anything of true value for the government bonds they kept patiently accumulating in their pension funds, and that they optimistically keep calling ‘assets’.

But never mind. The Keynesians agree that this policy was a roaring success, and that this is why the country needs more of it, as, strangely, Japan has still not regained self-sufficient growth after 2 decades of such a policy. Hmmm. Well, in any case, surely the next set of roads and bridges are going to make all the difference. I suggest that this should be called the ‘Krugman-doctrine’, after the outstanding Keynesian thinker, Paul Krugman: even if a few trillion of new government debt and a few trillion of newly-printed paper-money have not revitalized your economy, the next trillion in government deficit-spending and the next trillion in new central-bank money will finally get the economy going. “Just keep the foot on the gas pedal until the economy grows, damn it!”

The Trends to Watch in 2013

Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends.
In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.

Trend #1: Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention