Jeff Deist: Ladies and Gentleman, welcome to Mises Weekends. I’m your host, Jeff Deist, and I’m very happy to be joined by Andy Duncan. Andy, how are you this evening in the UK?

Andy Duncan: Well, it’s very nice to be with you again, Jeff.

JD: Andy, I’d like to get your impressions about UKIP. In the Western media, it seems to be portrayed a populist, nationalist, anti-immigration movement, but I’d like your thoughts.

AD: Well, the thing about UKIP, is it’s mostly a wing really of the Conservative Party. If you take the British Conservative Party from the 1970s, there was some very, what the media would call rightwing people in there, like Sir Keith Joseph and Margaret Thatcher and people like that. There’s also a big body of people behind them and they wanted to be independent with England. They wanted England to be like a free market, like a Singapore of the world, only a big Singapore, but the Conservative Party itself, the larger party, was much more kind of statist, socialist with a small “s,” so there is always this rump inside the Conservative Party and about 5-10 years ago, they just had enough, these people, and they just created the UK Independence Party because they didn’t believe the Conservative Party anymore, which has always been playing the rhetoric of we will leave Europe one day and they didn’t believe it anymore, so they decided to go it alone.

So, that’s how I see UKIP. It’s attracted a few people since then, as all political parties do once they grow power, they suck in intellectuals of various kinds, but the core to UKIP is a very what you might call, what the media in this country would call a rightwing Tory element. It’s very funny that today, a Conservative MP, Douglas Carswell, has actually defected from the Conservative Party and has joined UKIP. There might be about a dozen others in the Conservative Party in Parliament, who might defect as well. He’s standing against a Parliament in a few weeks’ time or a couple of months. If he wins, I suspect a lot of Conservative MPs will ditch the Conservative Party who were pro-EU and will get out and will join UKIP and that will hopefully wreck the Conservative Party.

JD: Andy, so just to clarify, there are no elected UKIP members in Parliament, i.e., in House of Commons.

AD: Well, Douglas Carswell is technically a UKIP MP now, but he has said that he will resign his seat immediately, on this declaration today and he will stand for reelection in what we call a local by-election, probably in a couple of months’ time. He has a very, very big majority at the moment, of something like 28% and he’s very, very popular in his constituency, so the chances are that he will win and that he will be the first UKIP member of Parliament. Nigel Farage is going to stand at the next election, you’ve probably heard of in the United States and he will probably win the seat that he chooses which I think is somewhere in Westminster and I’m hoping that, I don’t really follow politics that much, but when I do follow politics, I just follow the secessionary part of politics and I’m hoping that maybe 10, 15, 20 UKIP MPs will be elected at the next election and of course, being a Hoppean, I don’t vote.

JD: Well what seems odd about this system in UK is that UKIP sends many members to the European Parliament in Brussels, but it’s scarcely represented in Parliament.

AD: Well, the constituency elections are what we call here first-pass-the-post, so a town, say, like Redding, which I live near — I live in Henley on Thames — say, Reading will be divided into say, five constituencies and in each constituency there will be about 100,000 voters. Those 100,000 voters in each constituency will vote for one MP, so if say, everybody voted for one person, if everybody voted, if 51,000 people vote for one person, they become the MP, whereas with the European elections, it’s a big area and there’s party lists. So, Nigel Farage, I think, is an MEP for the Southeast of England, so they take, 15-20 million people and there’s usually very low turnouts in these elections and then depending on your votes across this huge area, I mean nobody knows who their MEP is. Nigel Farage might even be my MEP and I have no idea, very few people do. There’s a party list system that comes in play, so then they just go down the lists until you’ve used up your votes across this 15-20 million kind of area.

JD: Andy, Scotland has a proportionately high representation in Parliament, is that correct?

AD: Yeah, well actually that’s not the case in Scotland. Now this is an interesting thing. In Scotland, they have a lot smaller population, so as per MP, so out of about 600 MPs or so, about 40 of them are Scottish. Now if you were just to go on the population size, I’m not exactly sure of the exact numbers, but they would only get about 15 MPs. They have 40, whereas they should have 15. What this has done, is this has created this huge kind of political battering ram, the Scottish political vote in the House of Commons. If Scotland becomes independent, most of those MPs in the past have been Socialist MPs and so the Socialist Party in England, called the Labour Party, is going to lose a huge amount of power because they’re going to lose all the Scottish MPs and I think they only need about 30,000 people in each constituency in Scotland. And so almost the Labour Party will become unelectable, according to the current democratic setup in the UK and so the Labour Party is very, very keen on keeping the Union and stopping Scotland into going independent because if they let Scotland go independent, they’ll lose these 40 MPs, they’ll lose the balance of power and then the Conservative Party in England will be the dominant power for decades.

JD: Let me ask you this. Apart from the political aspects, is there any libertarian element to the UKIP revolution?

AD: There is a tiny libertarian element in the way that, for instance, the EU is just, on the first of September is going to ban vacuum cleaners of a certain wattage. This is obviously to give the eco intellectuals on the side, which all governments need the intellectual support. What this means is we’re all going to buy cheaper, nastier, less powerful vacuum cleaners and we’re going to spend longer in misery Hoovering our houses, just so that eco intellectuals can be happier with less powerful vacuum cleaners.

The EU has been doing this kind of thing for decades now and people just resent this interference of people they don’t know, people they’ve got no idea where these people got their power from, this kind of feudal setup of the EU and they’re just kind of a very primitive level, just anti- this monolith, altering the morale to making their lives worse all the time. They’ve banned decent light bulbs, for instance, and there’s now a black market in light bulbs. We all have to use these horrible mercury things, which are poisonous and difficult to get rid of and produce this white light that keeps you awake in the evening. I think the root of it, I think people genuinely know, deep down, that bigger government is worse for them and I think this is driving a lot of this secessionism and a lot of these failings and obviously as governments grow larger, more islands of socialism arise within the area that they control and then we get more chaos and we’ve seen with the EU, we’ve seen basically the destruction of Portugal and Spain and Greece and Ireland, by the EU, these islands of socialist chaos spreading in the EU.

JD: Andy, as I mentioned to you, I would love to discuss the upcoming Scottish Independence vote with you although I fear I’m going to get some angry emails. Here I am asking an Englishman about Scottish independence.

AD: Well, my name’s Andy Duncan and the first King of Scotland, according to some, in 734, was King Duncan I and my clan and the Duncan clan were at Bannockburn on the winning side, so I’m not entirely English. I’m kind of culturally half Scottish. So, I do have a little bit to say. The thing about the Scottish vote is, they’ll probably lose.

The Secessionists, unfortunately, will probably lose and the reason for that is because Scotland is being bought and paid for, I think as Robert Burns who said, we’re born and sold for English gold and a quarter of the adults in Scotland work for the British government, so they take a salary from the British government. There’s maybe a million pensioners are all receiving British government pensions and there’s all sorts of even private companies, a lot of their contracts are to the British government. So, Scotland is bought and paid for by the British government and I think people will vote with their wallets without any kind of morality about thinking this money is being stolen from others and then given to me, they won’t think that far. They’ll just think, who’s paying my salary? Who’s going to pay my pension? I’ll vote that way.

The general feeling in Scotland, though, is that people, even in 1707 when Scotland had this active union, it was only the elite that did that. They had this project called the Darien Project, you might have heard of, where when they were an independent country, they tried to form a colony in Panama and they basically took all the money in Scotland, this political elite, invested it in these ships to go to Panama. Everybody died of diseases and they created a legal monopoly for the company there that had a legal monopoly for all trade in the world with Scotland, just like monopolies and elites do. These people all went there and died of dysentery and whatever down there and the few that remained got killed by the Spanish, so the elites in Scotland were going to be poverty stricken, so they basically sold Scotland to the English in 1707 and all the people in Scotland were horrified by this. I mean, there had been Bannockburn, there’d been the Battle of Sterling Bridge, there had been an independent Scotland for 1,000 years and then it was just sold down the river by this elite in Edinburgh for English gold. Lots of the MPs in Scotland at the time of the political power elite, voted for the union. They were paid off by backdoor maneuvers. The treaty was rushed down to England and the armed guard, massive armed guard. It was totally hated, this thing in 1707 and ever since, the people of Scotland have had this general resentment about English interference in their lives and although many of them will vote to stay in the Union. There’s still a general feeling of antipathy towards England, even though many will go into the voting booth on September 18 and vote for the Union to remain.

JD: Andy, we were speaking off-mike earlier about how we as libertarians, tend to see secession and separatist movements as ever and always good things. Can you elaborate for us?

AD: Well, I think if you take an area, let’s say there is 2 million people and there’s a million people in one half and a million people in the other half, they’ll have a very powerful government, but if you split that area into two governments of one million people each, those two governments together are less powerful than the one big government alone and if you break that all the way down to the county, the town and the local area and then eventually the individual, every time you shrink a big government in half, you more than halve its power and so the elite in Westminster, in London, for instance, are terrified of losing Scotland because once we just become England here in England and not the United Kingdom, then all those people swanking around London in big cars and going to fancy foreign ministries and so on, will have less right to swank around like that. They’ll have less right to do these big foreign policy announcements. So, I always believe that the smaller that you can shrink them, the better because every time you do that, you more than shrink the power of the two governments which are left over.

JD: Can you give us your thoughts concerning how well the Scottish banking system and Scottish currency would operate without the backing of the Bank of England?

AD: Well, I mean, this is the great threat from the no campaign, which is “you must stay with the UK and hold aunty’s hand.” Scotland has a tremendous opportunity here, to become a kind of free-market Singapore of the North. I mean, many of our kind of free market Libertarian ideas come from Scotland, David Hume, and Adam Ferguson, and I won’t say Adam Smith because I know Murray Rothbard doesn’t like Adam Smith, but many of those great Libertarian ideas came from Scotland, and so it would be great if they did form this free marketplace and if they were booted out of the pound and then didn’t have a central bank and had to bring in a currency board to follow the pound or a currency board to follow the Euro, what they would lose is this ability to print money out of thin air, which would mean that the government would shrink massively. If they can’t print money out of thin air, they will just shrink and the welfare state will shrink and the state will shrink and they really will have a Singapore of the North and within 10, 15, 20 years, they would have this massively wealthy, dynamic enterprising society.

However, they don’t quite see it like that. The SNP, which is the driving force of Scottish independence, is a mostly socialist organization and how they’re couching it to the Scottish people is this. Yes, you will lose the English taxation for the welfare, but we will keep Scottish oil and you’ll get more welfare from the Scottish oil, none of whose revenues will go to England, than you will just being in the Union and receiving English taxation welfare, so that’s how they couch it is, you’ll have even more welfare than you’ve currently got whereas I would love to see them argue, you’ll be freer, you’ll be more independent, but unfortunately, most people are terrified of being freer and more independent and they just want a bigger nanny state, I think.

JD: Well, you bring up an interesting point. Independence seems to be a left wing phenomenon in Scotland and it seems to be portrayed as a right wing phenomenon in England.

AD: Well, it is a weird thing. I think in the Labour Party, this deep antipathy towards what Ayn Rand might have called the rugged individualist, best summed up in the kind of Anglo-Saxon free market thing. I mean, the Anglo-Saxons, when they were in Germany, fought off the Romans, defeated them in the Forest of Teutoburg and then faced away that bureaucratic threat and then eventually came to England and then were quite free and independent and had very strong freedom traditions. They took a lot of those traditions to the United States and to other parts of the world. So the Anglo-Saxon culture has always been seen I think by socialists as being something to be despised, you know, this treasuring of the individual and of liberty and so on.

So, Scottish independence, strangely, is seen as a way of throwing off the yoke of English right wing kind of thinking and being able to become even more socialist, so it’s the English who were seen or the English mentality of freedom and liberty, may be actually typified by Nigel Farage of UKIP, which is seen as being the problem, so it’s a great socialist thing to throw off the English yoke. Whereas in England, of course, the socialists in England, most of whom, there’s millions of them and lots of them read The Guardian newspaper, they love us to be in the EU because what that does is that’s a big blanket over the kind of English free spirit, so the EU is a way of moderating this Englishness, this kind of Anglo-Saxon thing. So, it kind of works if you see it like that. Scotland wants to get away from England to throw off the English yoke of freedom and English have been kept within the socialist yoke of the EU, to keep it in check.

JD: So perversely, it sounds like the rise of UKIP in England actually bolsters the yes independence vote in Scotland.

AD: Well, it is a weird thing. The UK Independence Party, led by Nigel Farage, as a kind of political statement, is actually against Scottish independence, which sounds a bit weird, doesn’t it? UK Independence Party is against Scottish independence. What Nigel Farage — he’s quite murky in what he says, but I’ve tried to interpret it and what I think he’s saying is this. If Scotland becomes independent, it’s not actually going to become more independent. It’s going to become more dependent on the EU because the first thing it will do, is it will join the EU promptly, maybe even adopt the Euro as the currency and instead of becoming more independent and having a free Singapore of the Northern Hemisphere, it will just become another area inside the Euro zone, so it will actually become less free than it currently is, joined to England.

JD: Andy, I’m sure you understand, as libertarians, it seems ludicrous that the Scots view Westminster as some kind of bastion of free market thought.

AD: Well, I mean, that’s the problem in the UK. I mean, I try to not be involved as much as possible, but we have three political parties here, three political elites and the Conservative Party, the Liberal Democrat Party and the Labour Party and the Conservative Party is supposed to be right wing and the Labour Party is supposed to be left wing and the Liberal Democrats are supposed to be somewhere in the middle, but they can all dance on the head of a pin. I mean, the leaders are indistinguishable. They read out indistinguishable speeches. They all believe in the same policies and when the horrible Gordon Brown, the Scottish Prime Minister was thrown out a few years ago in an election and David Cameron, the Conservative Prime Minister came in, I personally haven’t noticed a single difference in my life, absolutely nothing has changed.

So they just dance on the head of a pin. It’s all rhetoric. I think the British government spends something like 700 billion pounds a year, which is about 200 billion pounds a year more than they take in, in tax and they borrow the rest and the three main political parties argue about spending measures of around 10 billion pounds or 700 billion pounds would probably be about 1.2 trillion dollars. So, they argue, they get really vitriolic about these tiny, tiny, tiny changes in policy from each other, so I find it very weird that we even believe that there’s politics in this country. It’s just a group of people who just play musical chairs every four or five years.

JD: If the yes on independence vote somehow was to prevail in Scotland, do you think that that would inform other separatist movements that are currently percolating in Europe?

AD: Well, unfortunately, because of the bought and paid for nature of the Scottish electorates, don’t stay up late that night burning any candles or anything. It’s not going to be that exciting. The no vote will win and they won’t, I would bet a substantial sum of gold that the no vote will win. However, just like Robert the Bruce, I do believe that they will try, try, and try again and hopefully they will win eventually if they keep trying, but the problem is, is once they have this vote and the independence vote loses, it might be another decade or so before they get to have another go, but the spirit of Robert the Bruce will be there. I’m not historicist like the Marxists, but I do believe, though, that as we get these bigger and bigger governments, we do get these bigger and bigger islands of chaotic socialism within the areas that these governments control and that these islands of chaos eventually lead to people wanting to secede away from the chaos.

So, I actually personally think that we have a greater chance of secession somewhere more like Texas and that would be fabulous if Texas seceded, rather than Scotland. However, I think it is good that at least they’re trying and they’ll probably get 40, 42, 43% of the vote and the bigger the vote—if they got 48, 49, that would be fantastic because that would bring on the next secessionary vote to be a lot sooner, maybe within another 5, 6, 7 years. So, it does inform — there’s problems in the EU, it does inform us that people instinctively know that smaller government is better for them as an individual, but I see the future of secession as being in other parts of the world.

JD: Andy, do you think the urban versus rural mentality still plays a big role in the UK mentality?

AD: I don’t think it’s an urban-rural thing. I think it’s more of what some people in this country are called the chattering classes. These are the intellectuals, the political elites, the metrosexuals, the metropolitan people, and some of them have houses in the country and there’s lots of people in cities who are opposed to these people. They have this shared view, Sean Gabb who you might know, calls them the enemy class. I call them personally The Guardian-istas because the house newspaper is this terrible rag called The Guardian newspaper. It’s more of an intellectual elite versus everybody else, so this intellectual elite reads the Times, the Independent and the Guardian and they constantly bicker and chat about politics. They all are in favor of the EU, they’re all in favor of environmental measures. They’re all socialists with a small “s” even if they’re in the Conservative Party, their political positions are virtually identical in every possible way, bigger government, bigger government involvement, but the mass of people who are just doing daily jobs, you know, being plumbers, being truck drivers, delivering milk or whatever, they just don’t want any of this, but they’re too busy earning money and paying taxes to take much notice.

So, it’s not so much an urban versus rural thing. It’s a political intellectual elite with a small “s” socialist thing versus everybody else. So, in the last Euro election, which UKIP won, I mean UKIP actually won that election, all the newspapers were against UKIP, everyone was deriding them. Everyday, Nigel Farage had some story made up about him saying how he’d done this and he’d done that with this woman and he’d done this with this gambling, all prop fictional, but the people saw the message and they saw what he was saying and what he was saying is you’re better off without this massive superstructure of this elite and the costs associated with keeping them in the manner to which they have become accustomed.

JD: Andy, one last question in closing. Just give me your thoughts on the current state, if any, of the libertarian or Austrian movement in UK.

AD: Well, the problem with the libertarians in the UK I, it’s like cats in a bag. I mean, if you put 30 libertarians in a room, there will be 30 different positions. It’s quite frustrating at times. I mean, I go to the occasional conferences and I mean, people again, there will be vitriolic arguments with each other about the tiniest, tiniest thing, so this is why I always try and push secession because we all believe in secession, we all believe in coming down to the individual and I try to avoid conflict and there’s not many Austrians and if they are Austrian, they tend to be Hayekian Austrians. This is because of the link with Hayek and the London School of Economics and if you take a look at the most Austrian website in the UK, which is probably the Cobden Centre, which was founded by Steve Baker, MP, who is a Conservative MP who is very much a Misesian and it would be interesting if you got him on your program sometime to talk about his views, it’s still a bit Hayekian, this kind of — in the US, you’ve got George Mason University and you’ve got Auburn, I won’t go into the politics of that because I might get slapped by you, but there’s that distinct thing. We have the same thing in the UK.

We’ve got, most people that are Austrians are in London and they’re Hayekians and then there’s a few of us, not many, I probably know them all and I can probably count them all on one hand, that are kind of Misesian Austrians, but we are working on things. I mean, watch this space, a few of us Misesian, Hoppian, Rothbardian Austrians are thinking about doing something and you’ll be the first to know when or if we do that, but it’s very much a mixed bag in the UK. It’s very much a socialist country. Everybody believes in democracy. Most, except for a tiny, tiny handful of people believe in socialism of one form or another, i.e., statism and government intervention and government running the schools and government running the NHS, the National Health Service. I mean, you’re having a taste of that now with Obamacare and you’re seeing what that’s like.

Most people believe in the state in this country and even getting your haircut at a barber, I mean, I can hardly dare say anything because a barber almost threw me out of the shop, his barbershop recently with half a haircut because I dared say something that didn’t believe in the state and the whole of society is ridden with this belief that you are owed welfare and that the state has the right to do this and the state has the right to do that. I mean, just this year, children have now been compulsorily kept in education when 16 to 18, so I mean, I see state schools as basically day prisons and so there’s two more years of day prison being forced upon people and that pleases the teaching unions because they get to have more jobs and more work and more bureaucratic privileges and everyone’s just gone along with it. There hasn’t been a single murmur of complaints that I’ve seen anywhere in any of the press and these kinds of constant abrogations of people’s rights are just going on all the time. So, with the vacuum cleaner ban, of anything that’s too powerful, there’s a few murmurs of complaint, but hardly anybody really challenges the right of government to decide how powerful your vacuum cleaner can be, so libertarian movement in England, very small, not very strong. Everyone’s against each other, everyone holds different positions, but there are a few of us who are trying to work on making something stronger and basing it securely upon Misesian, Austrian economics.

JD: Andy, thank you so much for joining us. Thank you for a fascinating interview. Ladies and gentlemen, have a great weekend.


From the Wall St Journal,

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares.

According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009. At the end of the second quarter, nonfinancial companies in the S&P 500 index held $1.35 trillion of cash, down from a record of $1.41 trillion at the end of last year, according to FactSet.


According to Minsky, events leading up to a crisis start with a “displacement,” some exogenous, outside shock to the macroeconomic system. The nature of this displacement varies from one speculative boom to another. It may be the outbreak or end of a war, a bumper harvest or crop failure, the widespread adoption of an invention with pervasive effects–canals, railroads, the automobile–some political event or surprising financial success, or debt conversion that precipitously lowers interest rates. An unanticipated change of monetary policy might constitute such a displacement and some economists who think markets have it right and governments wrong blame “policy-switching” for some financial instability.

But whatever the source of the displacement, if it is sufficiently large and pervasive, it will alter the economic outlook by changing profit opportunities in at least one important sector of the economy. Displacement brings opportunities for profit in some new or existing lines and closes out others. As a result, business firms and individuals with savings or credit seek to take advantage of the former and retreat from the latter. If the new opportunities dominate those that lose, investment and production pick up. A boom is under way.

In Minsky’s model, the boom is fed by an expansion of bank credit that enlarges the total money supply. Banks typically can expand money, whether by the issue of bank’s notes under earlier institutional arrangements or by lending in the form of addictions to bank deposits. Bank credit is, or at least has been, notoriously unstable, and the Minsky model rests squarely on that fact. This feature of the Minsky model is incorporated in what follows, but we go further. Before banks had evolved, and afterward, additional means of payment to fuel a speculative mania were available in the virtually infinitely expansible nature of personal credit. For a given banking system at a given time, monetary means of payment may be expanded not only within the existing system of banks but also by the formation of new banks, the development of new credit instruments, and the expansion of personal credit outside of banks. Crucial questions of policy turn on how to control all these avenues of monetary expansion. But even if the instability of old and potential new banks were corrected, instability of personal credit would remain to provide means of payment to finance the boom, given a sufficiently throughgoing stimulus.

Let us assume, then, that the urge to speculate is present and transmuted into effective demand for goods or financial assets. After a time, increased demand presses against the capacity to produce goods or the supply of existing financial assets. Prices increase, giving rise to new profit opportunities and attracting still further firms and investors. Positive feedback develops, as new investment leads to increases in income that stimulate further investment and further income increases. At this stage we may well get what Minsky called “euphoria.” Speculation for price increases is added to investment for production and sale. If this process builds up, the result is often, though not inevitably, what Adam Smith and his contemporaries called “overtrading.”

Now, “overtrading” is by no means a clear concept. It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive “gearing.” Pure speculation, of course involves buying for resale rather than use in the case of comodities or for resale rather than income in the case of financial assets. Overestimation of profits comes from euphoria, affects firms engaged in the production and distributive processes, and requires no explanation. Excessive gearing arises from cash requirements that are low relative both to the prevailing price of a good or asset and to possible changes in its price. It means buying on margin, or by installments, under circumstances in which one can sell the asset and transfer with it the obligation to make future payments.

As firms or households see others making profits from speculative purchases and resales, they tend to follow: “Monkey see, monkey do.” In my talks about financial crisis over the last decades, I have polished one line that always gets a nervous laugh:

There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior to what has been described as “manias” or “bubbles.” The word mania emphasizes the irrationality; bubble foreshadows the bursting. In the technical language of some economists, a bubble is any deviation from “fundamentals,” whether up or down, leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values (as prices) are called “noise.” In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.

As we shall see in the next chapter the object of speculation may vary widely from one mania or bubble to the next. It may involve primary products, especially those imported from afar (where the exact conditions of supply and demand are not known in detail), or goods manufactured for export to distant markets, domestic and foreign securities of various kinds, contracts to buy or sell goods or securities, land in the country or city, houses, office buildings, shopping centers, condominiums, foreign exchange. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.

Although Minsky’s model is limited to single country, overtrading has historically tended to spread from one country to another. The conduits are many. Internationally traded commodities and assets that go up in price in one market will rise in others through arbitrage. The foreign-trade multiplier communicates income changes in a given country to others through increased or decreased imports. Capital flows constitute a third link. Money flows of gold, silver (under gold standard or bimetallism), or foreign exchange are a fourth. And there are purely psychological connections, as when investor euphoria or pessimism in one country infects investors in others. The declines in prices on October 24 and 29, 1929, and October 19, 1987, were practically instantaneous in all financial markets (except Japan), far faster than can be accounted for by arbitrage, income changes, capital flows, or money movements.

Observe with respect the money movements that in an ideal world, a gain of specie for one country would be matched by a corresponding loss for another, and the resulting expansion in the first case would be offset by the contraction in the second. In the real world, however, while the boom in the first country may gain speed from the increase in the supply of reserves, or “high-powered money,” it may also rise in the second, despite the loss in monetary reserves, as investors respond to rising prices and profits abroad by joining in the speculative chase. In other words, the potential contraction from the shrinkage on the monetary side may be overwhelmed by the increase in speculative interest and the rise in demand. For the two countries together, in any event, the credit system is stretched tighter.

As the speculative boom continues, interest rates, velocity of circulation, and prices all continue to mount. At some stage, a few insiders decide to take their profits and sell out. At the top of the market there is hesitation, as new recruits to speculation are balanced by insiders who withdraw. Prices begin to level off. There may then ensue an uneasy period of “financial distress.” The term comes from corporate finance, where a firm is said to be in financial distress when it must contemplate the possibility, perhaps only a remote one, that it will not be able to meet its liabilities.

For an economy as a whole, the equivalent is the awareness on the part of a considerable segment of the speculating community that a rush for liquidity–to get out of other assets and into money–may develop, with disastrous consequences for the prices of goods and securities, and leaving some speculative borrowers unable to pay off their loans. As distress persists, speculators realize, gradually or suddenly, that the market cannot go higher. It is time to withdraw. The race out of real or long-term financial assets and into money may turn into a stampede.



Tomorrow, we are in the District Court trying an ACC case. This is our first case in a court, so it will be an interesting experience to say the least.

In addition to preparing for the case, we have had a full load at school and a tricky assignment due in Intellectual Property.



Did I write that big enough? Maybe not. Let’s try again:


He provides his reasoning.

Okay, you get my point. Of course, saying it isn’t enough. There should be some empirical data to back up this assertion. First, a bear market in bonds is nothing like a bear market in stocks. When someone compares the two instruments it means there is a high likelihood that they don’t understand the capital structure very well and haven’t connected all the dots here. A fixed income instrument has several embedded safety components that make it entirely different from stocks:

It’s higher in the liquidation chain.
It pays a “fixed income” over the course of its life.
If held to maturity fixed income pays you back at par.
The duration on a fixed income instrument is generally shorter than that of common stock.

Two words stand out: safe and substitution.

The reasons provided, considering safe first.

What type of bond? Government [sovereign] bonds, Municipal bonds, or Corporate bonds? The argument seems to be Corporate bonds for Corporate dividends.

If that is the case then, if the company goes bankrupt, neither common stock nor the bonds are a safe investment. It is true that secured bonds are higher in the liquidation chain and some value may be salvaged, pennies on the dollar, hardly a ringing endorsement.

That it pays fixed income is a two edged sword. Assume a 10yr bond [longer is worse] in an inflationary environment. That fixed income is eroded. A dividend however is not fixed. It can be raised [or dropped/eliminated] which can offset the inflationary erosion. KO being an example that has worked out well.

If held to maturity there is no chance of capital gain. Stocks however have enormous potential for capital gain.

“Duration” is not related to length to maturity, it is related to volatility, so Cullen needs to do a little homework there. Both are volatile, common stocks as a class I accept are more volatile. Is volatility analogous to safety? No.

Now you can consider whether substitution makes [more/less] sense.


For ten years, the Chinese have maintained a fixed exchange rate of about 8.28 yuan to the dollar. As has been well documented, the US has been a great importer of Chinese goods. We take their merchandise and they take our dollars.

According to James Grant, “the dollars pile up on the balance sheet of the People’s Republic of China at the rate of $10 billion per month.” Such trends are unsustainable. At some point, the Chinese are going to have to stop acquiring dollars at the fixed rate. The yuan, it seems, is too cheap at that rate and the Chinese money supply is booming. People are eagerly swapping their dollars for yuan.

Meanwhile, money and credit are booming in China. As Grant writes, “It is therefore no accident that the Shanghai real estate market is on fire, that Chinese loan growth is burgeoning or that frightened Chinese monetary authorities have been unable to keep the lid on Chinese money-supply growth. By making the yuan too cheap, they have also, necessarily, made it too plentiful.”

The resulting artificial boom in China is no good for the Chinese. A bust follows every such boom. If allowed to float, the yuan would presumably get stronger, and some of the money flows would slow or even reverse. It may be too late for China, whose government seems just as intent on destroying their currency as American officials seem bent on destroying the dollar — whether knowingly or not.

Count the yuan dollar fiasco as just another chapter in the long saga of man’s futile struggle to master paper money. The unattainable dream is to be able to produce as much of it as possible at near zero cost and yet also have it maintain its purchasing power in the real world of things.

Murray Rothbard wrote “Governments don’t know, and don’t want to know, that the only successful fixing of exchange rates occurred, not coincidentally, in the era of the gold standard.” The reason is easy enough to understand. It worked because monetary units, like the dollar, were fixed in terms of their weight in gold. Gold has to be extracted, manufactured within the market, and cannot be created out of thin air.

But government planners don’t like gold. It ties their hands. They can’t spend so freely because they know they have to redeem their monetary issues in gold. It checks their inflating ways.

It’s easy to be depressed when you look around and see the state of monetary affairs. But, as Rothbard noted, and as the short historical vignettes above show, we have one great force in our favor. As Rothbard cheerfully noted, “Free markets, not only [in] the long run but often in the short run, will triumph over government power.” The inability of governments to maintain fixed exchange rates in the face of opposing market forces is only further proof of their impotency.

The difficulty with these time frames is structuring a trade to profit from the economic forces.


Federal Revenues

The economy growing slowly as measured by tax receipts.


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