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Galileo Blogs

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  1. What I think is just incredibly rich is that those who advocate central banking and this type of monetary policy always claim more stability and point to the little booms and busts in the late 1800's as examples of why the gold standard didn't work. All the while ignoring the laundry lists of bust since. Free market banking has hardly created any of the instability that centralized banking has!

    Absolutely true. As an example, no recession in the entire history of the United States probably including the colonial era was as severe as the Great Depression. Nor was there ever an episode of inflation as drawn out and destructive as the 1970s inflation. Both of these events arose because of central banking.

    Prior to 1913, even the imperfectly established gold standard that did exist protected the economy from dislocations as severe as these.

  2. Also consider that the forced investment causes more irrational investments since the pressure to maintain its value requires fairly immediate action. The higher the inflation, the more short term we are required to act. Taken to the extreme of 100%/day runaway inflation, every dollar earned must be exchanged for product immediately. Planning more then a day ahead becomes futile. I do not view more investment as necessarily a good thing. Rational action and long term planning are more likely to yield positive results then "irrational exuberance."

    Yes, this is entirely true.

    Moreover, even if the inflation is more subtle, it still leads to uneconomic spending by businesses. Because new inflation initially lowers real interest rates, it causes businesses to over-invest. This is the "boom" period of the boom and bust cycle caused by inflation. When these investments are later revealed as uneconomic, they are liquidated during the "bust" phase of the cycle.

    Some examples: the inflationary boom in real estate investment by savings & loans banks in the 1980s. This resulted in widespread bankruptcies of the S&L's and the federal government's stepping in as liquidator of billions of dollars of uneconomic shopping malls, etc., that the economy didn't need.

    More recently, the boom in real estate prices until last year is the result of inflation. Now the economy is in the process of liquidating this over-investment in housing.

    Part of the 1920s stock market boom was the result of inflation during that decade, which was the first full decade the economy was subject to Federal Reserve control of the money supply. That inflation was the principal (but not only) reason the stock market crashed in 1929 and the country suffered a Great Depression.

  3. That seems to be based on a possibly incorrect view of inflation. Price is determined not only by inflation but also technological advance, demand,etc. So to base the interest rate on the prices of products in the CPI is to essentially steal the effect of lower prices due to market efficiencies before they even register. Deflation of prices should be a natural occurence in a free state. A static price(long term) is mainly due to inflation. Using price to determine inflation is a reversal of cause and effect as far as I can tell.

    Yes, I agree. I did not say that CPI properly or completely accounted for the harm of inflation. However, a bond that uses it to adjust the interest paid out will at least partially compensate the holder for the harm of inflation.

    As for prices, you are right that prices decline when there is stable (non-fiat) money. That occurred throughout the 1800s, interrupted only by episodes of inflation surrounding the War of 1812 and the Civil War. The secular decline in prices ended with the establishment of the Federal Reserve Bank in 1913 and the advent of fiat money. Interestingly, the 1920s had stable prices which many contemporary economists lauded. However, those stable prices were actually a sign of the monetary inflation that was occurring, since prices should have been declining.

    So if we look at a more real measure of inflation(quantity of money) then that chart shows an increase in the monetary supply of what appears to be 5% a year. 1.34% doesn't touch that.

    1.34% is a real interest rate. The nominal rate consists of CPI plus 1.34%. So, if CPI grew by 3%, for example, the nominal interest rate on a TIPS bond is 4.34%.

    It doesn’t destroy wealth, it transfers is because the first person to spend it receives undue benefit since the effect of the extra capital has not yet registered on the economy. They buy more actual wealth then the money is actually worth. They eventually adjust to it but not until after the wealth is transfered. It's effects trickle down from the center.

    Inflation does directly destroy the value of cash (i.e., non-interest bearing) instruments. In other areas, it transfers wealth, but those transfers cause uneconomic behavior that results in wealth destruction. For example, during an inflationary boom, there is too much (i.e., uneconomic) investment in certain industries which then must be liquidated during the subsequent recession. Wealth is destroyed.

    Wealth is also destroyed because the uncertainty caused by inflation reduces planning horizons. Businesses and individuals find it more difficult to plan long-range. Because more valuable long-range projects are avoided, less wealth is created.

  4. I haven't found this to be the case, though. I don't know of any interest-bearing account - that isn't paying heavily on the assumption of additional risk - which has come even remotely close to matching the inflation rate found on that chart.

    If you know of one, please do let me know so I can move my money.

    Move your money into a TIPS Treasury bond. TIPS stands for Treasury Inflation Protected Securities. The principal on a TIPS bond appreciates by the rate of inflation. In other words, the real value of your money stays constant (based on the consumer price index). Therefore, the interest rate you receive is a real interest rate, above the rate of inflation. Currently, the real interest rate on a 10-year TIPS is 1.34%. That means that if you held the TIPS for 10-years, you would receive a 1.34% annual real rate of return on your investment; you have been protected from inflation. The federal government began offering TIPS bonds in 1997.

    As for regular bonds, I will scare up some data on their yields versus inflation... tomorrow. My hypothesis is that in most years, the nominal yield was above the inflation rate, which means bondholders earned a positive real return.

  5. Predatory pricing is good, in the same manner that "greed" is good. In the business world, as long as force or fraud is not used, all prices are the result of voluntary interactions of market participants and are justified. Each side to the transaction determines that what he pays is in his self-interest. In this sense, SoftwareNerd's statement really captures the essence of the benefit of low prices: "Save money. Live better."

    In defiance of that slogan, the predatory pricing argument is a smear against successful competition, and an attempt to justify a third party (the government) stepping in the middle of mutually-agreed upon, mutually-beneficial transactions.

    The argument also is cast in terms of hypotheticals, allowing all sorts of claims. In reality, no business could operate for long if it regularly incurred losses to drive out more efficient competitors. In fact, if his competitors are more efficient, they would be able to get unlimited financing to fight their battle with the less efficient monopolist and thereby gain the monopolists' coveted position, because once they gained it, they would make even more money with their lower cost structure.

    The real predatory pricing argument is being made by less competent competitors in an attempt to throttle their more successful competition. Just look at the history of antitrust for examples.

    The term "predatory pricing" is a package deal. In that sense it is similar to "greed." For instance, greed attempts to unite a positive and a negative concept. The positive concept is "self-interest," and the negative concept is "willingness to harm others in order to achieve one's goals." By packaging the two concepts together, the legitimate meaning of self-interest is destroyed.

    In the same manner, "predatory pricing" attempts to tie together a good term, "low prices," with some sort of nefarious, undefined implication of "predatory" behavior. By tying these two terms together, the virtue of low prices is smeared.

    In sum, to state this in personal terms, no owner of a (relatively) poorly run mom and pop store in collusion with his local congressman has the right to tell me that I can't shop at Wal-Mart, or that Wal-Mart cannot open a store in my neighborhood! That is what the argument against predatory pricing boils down to.

  6. Like Walmart, people used to use the large airlines as examples of organizations that could use "predatory pricing" to keep smaller guys out. Turns out that the smaller guys like Southwest and Ryan put the larger airlines to shame.

    Better example: WalMart was not the first large retailer. Roll back the clock to when Walmart had just a few stores. K-Mart was huge, and would have loved to keep out competition. Yet, they could not stop WalMart. WalMart manages to push more small retailers out of business than KMart did for one simple reason: WalMart is able to be far more cost-efficient that K-Mart ever was. I say: "Save money. Live better."

    It's a good point. Every large company began as a small company. And yet those small companies beat their larger competition to become large companies themselves. The reality of market competition belies the claim that fat, lazy and incompetent entrenched "monopolists" can suppress their nimble competition. Of course, I am leaving out true monopolists from this statement, i.e., companies that have managed to gain the coercive power of the state to forcefully keep out competition. E.g.: the postal service or the local utility monopoly.

  7. I don't understand what you mean here. Are you saying that the 1-4% that someone gets from having money in the bank would somehow make a dent in the >50% loss in the chart?

    Yes, that is exactly what I am saying, because...

    Part of that 1-4% represents genuine interest, i.e. compensation from the bank for your lending them your money.

    the other part of that 1-4% is an inflation premium that the bank pays you to compensate you for the inflation-caused erosion of your money's value.

    So really we're talking less than 1-4% "nominal value gain" from not having one's money "duffel bagged."

    Yes, that is often, although not always, the case. If inflation has been steady and relatively predictable, then you are likely to get nearly fully compensated from the bank in the form of higher interest for the erosion of your money's purchasing power due to inflation. However, if inflation spikes, then you would suffer a real loss. Conversely, if inflation unexpectedly declines, you would gain at the bank's expense.

    The bottom line is that inflation does destroy wealth in the manner I described, but not to the extent of the total inflation that has occurred over the years. The reason inflation does not destroy all this value is because every participant in the economy does his best to adjust his behavior to account for the inflation. Banks charge more in interest to borrowers and pay more interest to depositors to account for inflation, the storekeeper marks up his products to account for the inflation in his cost of goods sold, etc. Still, economic actors cannot fully adjust for inflation in their actions. That is why inflation does destroy wealth.

    If you're referring to other forms of investment, such as stocks, really those are not an option for anyone who isn't a professional investor. They all involve a degree of risk, so much of the gain there is from the assumption of risk, and not from the "nominal value gain" of the inflation.

    All investments involve risk, but you are right that inflation only increases the risks and makes investing more difficult for everyone. Having said that, most people are already invested in one of the best inflation hedges, their homes.

  8. I don't disagree with this discussion, but what do you have to say about local or regional price fixing. A large corporation must grow from a small company, that is, it must start out with a limited scope in terms of size, business area and location. To take a simple example, let's assume that some pro-union do-gooder wants to fight back against WalMart, so he opens a Mom&Pop in his home town to compete. Let's also assume he's discovered some business principles and made some strategic alliances that allow him to compete successfully with Walmart on price and quality. He opens up and is flooded with customers happy to see better prices etc. Things go along just fine, then one day, no customers come in.

    He looks across the street and sees a big sign on the front of Walmart: "50% Off Everything!!!"

    He waits it out. Weeks go by, and the sale continues. He consults his wholesalers and they agree to temporary price breaks to keep him afloat, and he drops his prices by 50%. Customers flood back in. A few days later, no customers. He looks across the street, knowing what to expect, and sure enough: "75% Off Everything!!!" He waits it out. His distributors can't take any more price cuts. He drops his price to match Walmart, and six weeks later goes out of business. The next day the Walmart sale is over.

    Walmart is able to do this without suffering a loss because it can recoup its profits at its 20,000 other stores.

    On the broader scale, a Walmart could charge high prices as long as a large competitor doesn't emerge. If a large competitor emerges, Walmart lowers its profits to subsistence to make competition not sufficiently profitable to justify a reallocation of capital resources. If the competitor is regional or local, this advantage is even easier to realize.

    The problem I see with the anti-monopoly argument is that it's based on steady-state conditions. A company can't operate at a loss for a long time or over it's entire range of business. But it can target unprofitability strategically over a short period or a small area, in order to keep competitors out. Once the coast is clear, it can raise prices again and return to high profits.

    (BTW, I use Walmart only for emotive purposes. I don't shop there, but I admire their anti-union stand, and I would shop there if there was one closer to me.)

    Perhaps Wal-Mart could do these things, but you are incorrect when you say they do it "without suffering a loss." If the prices are below their costs of operation, they do suffer a loss, and that loss must be paid for. In fact, each time they do what you describe, they accumulate another loss. Each of these losses must be paid for. How do they do that? They do it by consuming some of their capital. Either they take on debt, or they have to pay smaller dividends to their shareholders. If they take on debt, interest must be paid on that debt. That is an expense, which raises their cost of doing business. If they reduce their dividends, Wal-Mart finds it harder to raise equity capital and therefore expands more slowly.

    As you can see, there is no way a business like Wal-Mart can afford to take losses on its operations. In actual fact, stripping away the hypothetical nature of your scenario, Wal-Mart has achieved its scale, not because it takes losses to drive out its competitors, but because it has achieved a lower cost of operation. Wal-Mart's operational costs are lower because it can buy in massive quantities at low cost, distribute efficiently using economies of scale, and gain great advertising synergies because of its large size. As a result, it profitably sells for less than its competitors. As proof, just pick up one of Wal-Mart's annual reports and study its growth in net income.

    If a mom-and-pop store tries to compete head-to-head with the low-cost efficient stores Wal-Mart has developed, it will find it cannot compete.

    In fact, the only way mom-and-pop stores really can compete is if they have achieved some operational advantage that Wal-Mart doesn't have. This could be grand or it could be simple. A grand advantage might be the invention of a superior way of warehousing and distributing merchandise based on some new technology. A simple advantage could be a superior store location, better customer service, or a product mix that is more specifically tailored to the local market.

    The fact is, many small mom-and-pop stores do compete with Home Depot and Wal-Mart by offering the simple advantages I describe.

    However, the larger point is that Wal-Mart's gain is the gain of everyone who chooses to do business with Wal-Mart. No one's rights are violated by Wal-Mart's success. If Wal-Mart can figure out how to sell me something for less than the store down the street, I say thank you and buy that product from him.

    If a competitor to Wal-Mart cannot match Wal-Mart's prices or service, by what right does that competitor demand that Wal-Mart's customers must be forced to patronize him? To demand that Wal-Mart be punished through antitrust or that taxpayers subsidize the less successful store is a violation of everyone's rights.

    In capitalism, everyone is free to compete, but no one is entitled to success at others' expense. The essential principle here is a person's right to life and property. That is violated if shackles are put on Wal-Mart to indulge some right-to-exist demanded by the less successful store.

    The economic point is that by respecting property rights, businesses under capitalism constantly create an ever-widening plethora of new and lower-cost products that we all enjoy. Those products, such as cheaper foods and electricity, new entertainment devices such as iPods, etc., raise our standard of living. To violate property rights by subsidizing the less successful is to sacrifice all that. To shackle Wal-Mart and other highly successful large companies like them is both immoral and impractical. It violates the rights of Wal-Mart's owners, employees, and its customers. Unsurprisingly, it also reduces our standard of living.

  9. What's really interesting and heinous about this particular recession is that your third effect can destroy the hedge of the first. In this case if the malinvestment is in real property, such our subprime mortgage issue, and it depressed the property market, then the property itself doesnt act as a hedge against inflation. Most people's inflation hedge is their house. That gets you nothing in today's market.

    So says the guy trying to sell his right now... :)

    Good luck with your house sale, Kendall.

    Unfortunately, you are right. Inflation creates all kinds of "winners" and "losers" whose only reason for winning or losing is the lucky fortune or misfortune of their timing. If you happened to buy property in the early 1990s and sold in 2006, you made a windfall. That windfall is the flip-side of someone who may have bought in 2006 and now has to sell. I know people in both categories, including someone who bought a condo at the absolute peak in 2006 in what has become one of the worst-hit housing markets in the country, Miami. She and her husband are probably underwater on their property, such that they would have to cut a check to the bank just to move somewhere else. They have negative equity in their property.

    Interestingly, the people I know in these examples who gained or lost did so just by buying homes to live in. Their financial gain or loss was the equivalent of random good or bad luck for them. Such whimsical financial gains and losses that are not reflective of productive effort show inflation's injustice and also how inflation destroys the ability to plan long-range.

    Translate these effects to a businessman who builds factories. Such random financial gains and losses undercut his ability to plan such investments, with the result that there are fewer of them. With fewer long-term investments, there is less wealth-creation and our standard of living suffers.

  10. Nice depressing graph. So since 1913 it appears that the federal reserve/government has stolen approximately 98% of the peoples wealth through inflation. If you started making money in the mid 90's then they've taken 47% so far. With theft rates like that I'm surprised that they need to tax at all on top of it.

    Inflation is heinous, but your statement really isn't correct. It would be true if you had a duffel bag of cash from 1913 or the mid-1990s. In that case, you would have had that much of the buying power of that duffel stolen from you.

    However, if your wealth consists of deposits in a bank or real property or stocks or bonds, then it also gained in nominal value along with the inflation. Having said that, you still lose out from inflation, even if not to the degree those percentages imply. First, you always hold some cash and that loses value. Second, the rise in nominal values often fails to fully compensate for the effect of inflation. This is true for stocks, for example in the inflationary 1970s when nominal stock prices were flat with the result that real stock prices collapsed.

    Third, inflation causes malinvestment, thereby slowing economic growth and the rise in our standard of living. In that sense, inflation destroys wealth. But, the net effect is nowhere near as drastic as those percentages indicate... except for holdings of non-interest bearing cash, a la the duffel bag.

    Of course, any destruction of our wealth through inflation is wrongful theft, and the magnitude of destruction is still quite large, even if not as large as those percentages imply. One visible aspect of the harm of inflation is the recessions it engenders. By tricking businesses to invest in uneconomic projects, inflations lead to recessions, and all the harm they bring, including unemployment, falling asset values, etc.

    We are now entering a recession brought on by the monetary inflation of the past decade.

  11. I agree with Stonebuddha and Maarten. That this is considered a matter for governmental involvement is a sign of the Puritanism and Christian fundamentalism that has some strength in this country. Interestingly, these fundamentalists blather endlessly about how much they are allegedly "pro-family." Well, the proper pro-family approach in this case is for the government to declare that there is no basis for prosecution, and let this situation be resolved by the parents.

  12. What that tells me is banks would be willing to offer option 1, but for a price--maybe enough of a price that there would be not enough of a market for it to justify the hassle.

    I suspect that would be the case. If people are paid interest on their gold deposits and if banks are operated under laissez faire principles such that failures are exceedingly rare events, few people would choose "option 1" where they have to effectively pay interest to the banks rather than receive interest in exchange for depositing their gold at the banks.

    The broader point is simply that banking would be far better in a laissez-faire society than it is today. There would be no inflation and far fewer, if any, instances of banks systematically making dubious loans, such as with today's sub-prime mortgages. Given the history of banking in this country and around the world, and an understanding of the economics of banking, I am thoroughly convinced that the case has been made that in a laissez-faire society banking would be highly efficacious and far more efficacious than it is in today's centrally banked and regulated world.

    Would it be gold-based? Most likely yes. Would it be a fractional reserve system? In my opinion, yes, but it really doesn't matter, as long as it is the result of free market forces.

    On the issue of government involvement, I do not see any special role for government in the realm of banking. Government would not even define "gram." It would merely acknowledge the definition that has been generally accepted such that if anyone stated that a different measure was a gram, he would be committing fraud. All standards ultimately arise from market interactions while the government merely acknowledges established practice as it goes about its job of enforcing contracts.

    I am also not worried at all about whether gold coins or currency would have a standardized form and appearance. They would. I know this because industry already has standardized the sizes of credit cards, compact disks, shoe sizes, etc. It is in the interest of business executives to create standards because standards facilitate commerce. Such principle would also apply to banking.

  13. This is fine as long as the firm offers option 1 and option 2. I may not want my property to be loaned out, because I may want it at any given time in the near future. Likewise, I may want it loaned out because I have no practical use for it within the foreseeable future. Therefore I would like someone to pay me for the use of it. But only with my advance permission would this be acceptable, otherwise it would be fraudulent, i.e. the bank transferring temporary rights to my property to another individual without my consent.

    If fractional reserve banking was practical, it is unlikely you would readily be offered option 1. Yet any bank would guarantee you immediate convertibility into gold. They would do it while maintaining fractional reserves. How can they make that guarantee? The same way an insurance company can guarantee to pay your claim even while maintaining reserves for only a small fraction of potential claims. In both cases, the firm takes advantage of the statistical likelihood that not all claims will be demanded at once.

  14. Adrock, the two firms you identify historically have been one and the same. For example, the great banking houses of Middle Age and Renaissance Italy were begun by goldsmiths who would also store gold for their customers. Then they began lending out gold and then claims for that gold, while accepting gold deposits. Thus, they became banks.

    But the key difference between this option and the first is that these bonds are not receipts, they are IOU's, and they are spendable only if the individual I trade with wants to accept them. This would be extremely unlikely because when an individual or firm sells a product it typically wants to be paid immediately, and therefore it will not want to accept IOU's as payment for its goods.

    Au contraire, such bonds (bills) were widely accepted by Americans and effectively became money. They were bearer instruments, sometimes paying interest (payable upon presentation to the issuing bank). In other cases, they paid no interest but were convertible on demand into gold.

  15. I thought the main concerns with fractional reserve banking are that: (1) banks can inflate by issuing too much currency/debt; and (2) destructive bank runs are more likely to occur. As for the fraud aspect, I just don't see it. If a bank is honest about how it books reserves, there is no fraud. By analogy, would I say an insurance company commits fraud because it offers far more insurance coverage than it has reserves to pay claims? Of course not, because that is the fully disclosed and acknowledged nature of insurance. Fractional reserve banking is no more fraudulent than insurance is.

    As for the twin concerns of fractional reserve banking, I would suggest that the market historically has, and in a future laissez faire world would, solve these problems. Of course, if they are not solvable, so what? In that case, free market competition would ensure that there would be few, if any, fractional reserve banks, with most or all of them being 100% reserve banks instead.

    However, there is a tremendous economic benefit to fractional reserve banking. The principal benefit is that it allows credit to be created more cheaply and flexibly. Fewer gold reserves are needed to create a given amount of credit. Moreover, it allows the amount of credit to be adjusted by the bank in response to market conditions. For example, if a new seed variety is invented that lets grain farmers in the Midwest plant more grain, a fractional reserve banker there could lend more money for seed. He could do so prudently because farmers in his region have gained a greater economic ability to pay back the loan because of the improved productivity of their seeds. By keeping reserves for only a fraction of his loans, and not having to back his loans 100% with gold, he can lend out the additional funds.

    Regarding the second problem mentioned above, banks solve this problem in part by having large scale. During most of U.S. history, branch banking was restricted or banned by the various states. As a result, the U.S. had thousands of small, one or several branch banks located in different regions. If a particular region experienced an economic slowdown, it would drag the local banks down with it. For example, during the U.S. Great Depression, thousands of these small banks went bankrupt, accompanied by frequent runs by depositors trying to get their money out before the banks collapsed. In contrast, Canada, which had only five national banks (Canada had no restrictions on branch banking) reportedly did not have any large-scale bank collapse during the Great Depression. Large numbers of banks spread across a wide region ensured that regional economic problems could not collapse a bank.

    Although they could not develop national banks, American bankers in the days before deposit insurance and the Federal Reserve did develop a solution that was similar to the reinsurance market that protects insurers against large claims. That solution was clearinghouses where banks would agree to aid each other and operate as if they were a large nationwide network. These clearinghouses worked reasonably well until outlawed and made obsolete by the establishment of the Federal Reserve Bank.

    Finally, if fractional reserve banks are not fraudulent and do have an economic advantage, what is the worst case if they fail to have sufficient reserves to pay a depositor withdrawing funds or a banknote holder desiring gold? The worst case is that the bank fails to provide the funds. In that case, the bank may be able to shut temporarily and secure financing that will allow it to resume convertibility, if the bank's charter permits it (similar to how the large U.S. banks are securing emergency investments from foreign investors to shore up their balance sheets following losses in the sub-prime mortgage markets). Or, the banks go bankrupt and liquidate.

    Bankruptcy is a risk faced by anyone purchasing a product or service. Why is banking different that such a risk becomes unacceptable? In the end, the unfettered market and the actions of unfettered entrepreneurs who operate within it will determine which bank best balances the economic advantages of its mode of handling reserves versus the risks of inconvertibility or bankruptcy, whether that bank is a 100% reserve bank or a fractional reserve bank. My opinion is that the advantages of fractional reserve banking would make it likely to dominant a laissez fair world, but in the end the market will determine that.

  16. As long as governments perform their role in enforcing contracts and punishing fraud, all that is necessary for stable private currencies to emerge is for the government to get out of the way. In the three decades prior to the Civil War in the U.S., many private banks issued their own currencies. These currencies were largely successful. The limiting factor was state restrictions on branch banking that resulted in too many banks issuing the currencies. That made it easier for some unscrupulous operators to issue counterfeit currencies or currencies not properly backed by gold reserves. If national banking had been permitted, in all likelihood a small number of currencies would have been issued by financially secure, dominant national banks, much like a handful of large national banks such as Citibank or Chase issue widely-accepted credit cards today.

    A banknote in pre-Civil War America, or in a future laissez faire America, represented a contract between you and the bank. You had the right to present the note to the bank and demand the immediate quantity of gold it represented. Government's only role was to enforce that contract. Such convertibility on demand, backed by the reputation and balance sheet of the large national bank, ensured that its paper would be good as gold in transactions.

  17. Why is pegging the currency to the dollar a mistake from a free-market point of view? Is it only because the dollar was no longer pegged to gold? I mean, if the dollar had still been pegged to gold, would pegging to the dollar have been a good idea? Or is pegging to any standard a mistake, from a free-market point of view.

    The key question is not whether one currency is pegged to another or allowed to float, but whether government should issue currency at all. At its most fundamental level, currency is property and should only be issued by private entities. The private issuer can determine the policy that maximizes profits, whether it is to float or peg it to another currency, or to define it as a quantity of a commodity, such as gold. The only way he can maximize profits is if he creates a currency that is valuable enough that people want to use it. Such a currency would have to hold its value; it could not be inflated. Thus, a private currency would most likely be denominated in gold.

    If we leave out the possibility of privately issued currency and confine ourselves to the world of fiat currency (which is the world we live in today), the biggest risk of a government-issued fiat currency is inflation. Governments always are tempted to pay for their reckless spending through inflating the money supply. This problem is especially acute in Third World regions such as Latin America. Given the tendency of Latin American countries to inflate, I would argue that the best thing a Latin American government could do is to peg their currency to a far more stable currency, such as the U.S. dollar. The Federal Reserve Bank also inflates and thereby depreciates the value of the U.S. dollar, but it nearly always does so in a far less pernicious manner than do Latin American central banks.

    So, I would applaud Chile's decision to peg their currency to the dollar, and be very nervous of any decision to allow it to float. In our mixed economy world, short of abolishing their national currency and allowing private banks to issue currency, the most prudent action Chile can take to foster economic growth would be to peg their currency to the U.S. dollar or the Euro or a basket of highly stable currencies.

  18. I also read A Noble Treason some 20 years ago and have never forgotten it. I have always been fascinated by the stories of people who protest dictatorship with often mortal consequences. The young Scholl siblings are true heroes.

    A book by another resistance hero I enjoyed even more was the autobiography, To Build a Castle: My Life As a Dissenter, by Vladimir Bukovsky. He lived to write his book and give testimony to the 12 years he spent in the Soviet gulag including psychiatric prisons that housed dissidents.

    The amazing thing about Bukovsky's story is how in simply wanting to pursue his rational life goals, he came into inevitable conflict with the Soviet state, which treated him with the same out-of-proportion horror that the Nazis treated the Scholls. In Bukovsky's case, his conflict began when he started a satiric literary magazine in high school making fun of Western literature. Although his Soviet teachers made fun of "decadent" Western writers such as Faulkner, when Bukovsky roped his friends into mocking these same authors in a skit, the Soviet state came down on him hard. Even though he expressed an opinion that was consistent with the Soviet opinion, the independent manner in which he expressed it could not be tolerated. On that day he was told by the school authorities that he could not go to college. He passionately wanted to be a biologist, which required going to college. This was how one of the greatest modern-day Soviet dissidents was born.

    The other thing that amazes me about his book is the detached way he writes it. He observes his experiences sparsely and elegantly as if he were writing about someone else. As a result, the horrors he describes become that much more horrific. He does not need to exaggerate, only to be objective.

    Unfortunately, the Scholls never survived. It is the world's loss. I am thankful that Bukovsky managed to survive the Soviets and write his books. He is still alive today. In fact, when he finally got out of the Soviet Union, he finally earned his Masters degree in biology. The Soviet state could not stop him. Today, he continues as an activist and is a protest candidate for president in Russia.

  19. In Israel there is a story(a real one) which is constantly told to emphasize how moral the Israeli army is. A group of soldiers are sent to capture/assassinate terrorists in the west bank. Before reaching the village an arab villager spots them. They have two choices.

    A) Kill him

    B ) Let him go - and suffer the consequences if he warns the terrorists

    The soldiers chose B ) but I think A) should have been the way to go as the soldiers are the first priority and any compromise could mean unnecessary injuries/fatalities. I'll provide the rest of the story soon.

    A very similar situation happened with American soldiers in Afghanistan. They also did the altruistically correct thing. The consequences were horrendous. I blogged about "Christian warfare" here, including a link to the original news article.

  20. I am afraid of death, for a couple of reasons.

    1. I went to a Christian ( Not Catholic ) school from 6th grade until graduation. I am an Atheist, and I believe there is essentially nothing, not even a " peace " at the end of one's life. But I think for a lot of people who had a lot of hardline Christianity in their early years, its hard to always think of the afterlife as nothingness. Theres a terrible part of me that still contemplates a life in Hell if I continue a " bad " existence. I was, until the summer of 2006, a Christian so these concepts and mental images are still fresh in my mind.

    2. I think if someone is telling you they are not afraid of the absolute unknown there is a bit of a bluff involved. If nothing else, death is " spooky ", just as many things that the human mind cannot comprehend can seem " spooky ". Occasionally on an early walk to school I'll look at the sky and just attempt to imagine its vastness. I get that feeling in my spine of helplessness. I am a spec of dust on a spec of dust in an infinite universe and it can just screw with my mind.

    3. I just love my life. I do not want it to end, not even in my worst hours.

    Egoist, I think this is an instance where your emotions are lagging your conscious convictions. If you only became an atheist in 2006, your life as an atheist is short compared to the length of your life as a Christian. You have had much longer time to integrate Christian beliefs and therefore program your sub-conscious accordingly. Therefore, emotionally you still feel that the putative afterlife is "spooky," that you are a "speck of dust in an infinite universe," and that Hell awaits you if you are bad.

    If I can say "trust me" on this issue, I would say given enough time as an (Objectivist) atheist where you think about and integrate your rational beliefs everyday, your emotions will change. I was raised Catholic and even became an altar boy. I have been an atheist now for nearly 30 years. For me, the emotional pull of religious ideas stayed with me for quite some time. Only gradually did each of my emotional reactions change. On an emotional level, some religious symbolism can still evoke a certain "religious" emotion in me, although these instances are now quite rare. (One of them is religious Christmas carols; I still love them, although now I think it is largely a reaction to the music and their sense of exaltation, not the religious content as such.)

    In sum, my advice is not to worry about your emotions. Instead, focus on and stick to your well-thought conscious convictions, and enjoy life in the here and now on this earth. If you feel any guilt about that, it will gradually diminish until only your ability to experience guilt-free, secular joy remains.

  21. This is the man, Prof. Sidney Fox. He did his work in the 1960s building on the earlier work of Dr. Stanley Miller who synthesized amino acids in a test tube.

    Scroll a little bit down on the page for the discussion of Dr. Fox.

    He created "protenoid microspheres" that "look like primitive cells." He called them "protoalive," not technically life, but nearly so.

    I remember seeing a slide show or video during his presentation, and the damn things moved around just like living things, took in "food" and emitted "waste." Extremely interesting.

  22. Thanks everyone for an excellent discussion exposing the sophistry of the ID "argument."

    I don't have any special training in biology, but I am a real admirer of the achievements of biological science and the theories of evolution and genetics that are at the root of so many amazing achievements today, such as the decoding of the human genome, genetic testing of diseases, individualized drugs based on individual chromosomes, etc.

    Having said that, in the 1980s when I was in college I heard a lecture by a visiting professor from the University of Miami (Florida?) who conducted experiments trying to create life in a test tube. His goal was to simulate the geologic conditions and atmosphere of primordial earth, and then see if he could create life.

    According to him, he failed, but the "creatures" he did create displayed many of the characteristics of life. They looked like small microorganisms. They had self-locomotion. They took in "food" and emitted "waste." I do not know if they reproduced. They also lacked a genetic code. If I recall correctly, it was for the last two reasons that these creatures were not life.

    These creatures were organic. I have also heard of other experiments where very complex organic compounds, which are a necessary building block of life, have been created in different simulations of the primordial "soup."

    If anyone from more knowledge cares to comment on these experiments, I welcome your thoughts.

    From my very limited base of biological knowledge, I took these experiments as providing a great deal of experimental validation for a process by which life could have emerged on the primitive earth.

    As for responding to the ID argument, it is not necessary to prove how life could have emerged. The burden of proof squarely lies on their shoulders to prove that God exists. They cannot do that, so the entire ID "argument" can be dismissed for that reason alone. Of course, exposing and refuting the biological fallacies is still very worthwhile. I am fascinated by these experiments on how life could have emerged, not so much as a weapon to attack ID, but simply because it is so damn interesting!

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