August 2011

Bearish on gold? Here is a possibility of going long and benefiting from higher margins should commodity costs fall. I’m thinking on it.

Did I ‘change boats’? Well, I didn’t specify they had to be alive, but the telling fact remains that they are all dead! In any case I would challenge you to produce evidence that Friedman and Smith would support your understanding of inflation.

From Friedman & Schwartz pg 626 & 700
From Adam Smith pg 382 & 387


The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place…pg 382

Whatever coin therefore was wanted to support this excessive circulation both of Scotch and English paper money, whatever vacuities this excessive circulation occasioned in the necessary coin of the kingdom, the Bank of England was obliged to supply them. The Scotch banks, no doubt, paid all of them very dearly for their own imprudence and inattention…pg 387


Easy money was the near-uniform prescription. Inflation was the near-uniform result. pg 700

Correct, it is a tautology. As already demonstrated, the concepts are illegitimate. Thus the tautology says nothing. Essentially it is nonsense.

Would 2+2=4 be a tautology if the concept of number were illegitimate? Does 2+2=4 say nothing? Is 2+2=4 nonsense?

Since the concept of numbers are not illegitimate, the question is irrelevant. This contrasts with Fisher’s tautology, which bases itself upon concepts, Velocity and the aggregate price level, which are both illegitimate concepts.

The financial markets seem to have very little to teach about economic realities – which is hardly surprising if they are as random as you claim.

That wasn’t my argument at all. My argument was that the financial markets teaches the individual to cleave to, and search for the truth. The reason is glaringly obvious I would have thought; that faith in fallacy tends to prove highly unprofitable. This of course really only applies to those that trade on a macro/micro economic basis. Daytraders of course are savages, many don’t even know the company behind the ticker

As for my ‘investment’, it’s probably rather less than you seem to think.

Of course that is entirely possible, and I’m quite willing to accept your assessment on that. However it seems then rather odd that you would write a book based on anything other than your values [in economic theory], unless it were a say a history of economics, which from your blog does not seem to be the case.

As to teaching; so you would teach a curriculum that you personally did not value? If you did, surely that would create some ethical issues?

If you want to challenge standard economic thinking – and it certainly needs challenging – you have to understand concepts as they are currently used and measured, whether you think they are legitimate or not. There is no point in dismembering Fisher, just because you’ve read something garbled on Wikipedia. Thousands of papers on these concepts have been written since. And most of them will be perfectly logically consistent – they wouldn’t have been published otherwise. Intellectual rigour is plentiful.

Fisher was flawed right out of the box. When it’s wrong, it’s wrong. Nothing can be done to save it.

So you underestimate economists if you think their thinking is as self-serving as you suppose. Their errors are almost entirely in their unthinking initial assumptions (their axioms!) – which for the most part are much closer to the sort of assumptions you make about the outcome of ‘free markets’ than are mine.

I remain unconvinced.

Embrace neoclassical economics – it really is your friend! (But not mine.)

I think I’ll likely pass on that. This is part of the problem.

Diarmid Weir Says:

August 30, 2011 at 1:08 pm e

The comment referred to the argument. I don’t even know if the argument belongs to you.

So let us move on then.

Did you look up the non-government barriers to entry? Sunk costs, access to capital, access to natural resources, customer loyalty, network effects, economies of scale…?

No I didn’t. I was simply waiting for your preferred list.

Sunk costs become the original firms losses. They however can potentially, as previously indicated provide the starting point for new entrants to purchase heavily discounted capital, which lowers their fixed costs. The advantage in lower fixed costs of course means that the strategy of selling at a loss to force the new entrant out of business is no longer possible.

Access to capital, assuming that the capital costs [interest on a loan] are lower than the profit margin, will not be a problem. Add to that the tax deductibility of interest and depreciation, and this is less of a problem still.

Access to natural resources. Since in the original article you claimed that the firm lowered the selling price to a price that created losses, thereby forcing out the competitor, that the original competitor had access to raw materials. I can assume that any new entrant will also have access to raw materials. Therefore this is not an issue.

Customer loyalty. That prior to the higher cost producer being put out of business, we can again assume some % of market share at price X. The new entrant, with lower fixed costs, can sell at a lower price. The lower price may take some market share from the marginal purchasers of the “brand”. This will be based of course on the lower price and the dynamics of demand elasticity.

Network effects. This argument has no relevance to your original argument and therefore becomes something of a straw man. However let me accept the argument of network effects. In that case, no other competitor chooses to enter the field as they feel that the available market is too small, or even non-existent. So now we have a monopoly in the definition of a sole firm. We have both agreed that this definition is not an accurate definition. That the true definition revolves around the question or definition of a monopoly price. This argument has already been addressed and rebutted comprehensively here.

Economies of scale, provide the means to achieve the end of a lower selling price while maintaining, or increasing profitability. If the consumer receives lower prices as a result of these economies of scale, that is a positive. Again, this argument bears no relation to your original article, which is just plain wrong. There is always a limit to the size of a firm, which consist of the law of diminishing returns, and second, the requirement of a market of prices by which to calculate, should the firm grow so large as to become the market, without which it will create losses.

Are these irrelevant because they don’t exist or because some 16th century sage didn’t mention them?

I see that you are a subscriber to the fallacy of new knowledge is superior to old knowledge. That new knowledge always offers an advance in quality over the old. In the social sciences, this is [i] incorrect and [ii] rather dangerous to those that hold this belief.

The recent volatility has created an interesting spread twixt Implied and Historical, with historical higher than the implied. There are various Option strategies designed to trade this spread.

EK missed my GTC Sell order @ $3.48 by a few cents today. Looks as if the order may be triggered this week at some point.

Diarmid Weir Says:

August 29, 2011 at 11:40 am e

Simply that the causative agent for inflation is an expansion of the money and credit supply.

So what? Is ‘an expansion of the money and credit supply’ a necessary or sufficient cause of inflation?

The expansion of money and credit are the necessary cause of an inflation.

If only necessary, what other factors are involved?

As we are talking about money, as an exchangable commodity, it will require other commodities that it is exchanged against to be present. The volume of these other commodities, when referring to inflation, are not important as long as they exist to be exchanged against money.

If only sufficient, can other factors cause inflation?


Is the inflation caused by ‘an expansion of the money and credit supply’ on its own something we should be concerned about or does it need other features to make it damaging?

Yes we should be concerned. Very concerned. Money facilitates and underpins the entire edifice of indirect exchange, and of incorporating time into transactions. It requires no other features other than an economic system that bases exchanges on indirect exchange using money as the intermediary commodity.

Do you know? Do you care?

Yes to both questions.

There is, as demonstrated, no such thing as the price level

There certainly is! Go to—consumer-price-indices—july-2011.html#tab–CPI–Percentage-change-over-12-months

Again, if you take a quote out of context you can distort the original intent. I demonstrated the illegitimacy of the aggregate price level as defined by Fisher. Mathematically it cannot exist, fact. That economists and/or politicians have created one regardless is true. That however does not alter the accuracy nor veracity of my original statement.

Now, whether this is a useful measure or whether there might be some better measure of the ‘price level’, you are quite at liberty to question. But unless you engage with the substantial literature on the topic you cannot expect to be taken seriously.

When you can demonstrate mathematically, or in argument, that the aggregate price level is not illegitimate, then I shall be perfectly happy to recant my position. As to the argument of the substantial literature on the topic, that is simply abusing the use of expertise.

Velocity. More nonsense.

So money doesn’t change hands? Or changes hands within an infinitesimal time interval? These are the only two conditions under which the concept of velocity would be ‘nonsense’.

I have in my wallet a cash balance of $200. I am peckish, and it is a junk food day, so I decide to treat myself to a KFC. The chicken costs me $10. So what is the velocity of this single transaction? Velocity is not an individually defined variable. Fisher can only derive V only as being equal to E/M.

Thus the purchase of my KFC = 1/20 under Fisher’s equation. Therefore Fisher sets up M and V as independent determinants of E. This allows Fisher to then state that if M doubles, and V and T remain constant, the price level P, will also double. Now as V is defined as = E/M we now have M*[E/M] = PT or simply E = PT which was the original equation.

Now then, money is I agree exchanged in any money based transaction, but I have to ask, so what? Individuals who have a money balance will make decisions concerning that money balance: [i] hold/hoard [ii] spend/transact [iii] save/invest are the only three possibilities. Even if we could define V, which we can’t, what exactly do you hope to learn?

…the price level is an illegitimate construction. That it in no way = total money spent.

Indeed it doesn’t. ‘Total money spent’ equals the total no. of monetary transactions x the average price of the goods and services exchanged in those transactions.

There you go, using the aggregate price level concept. That concept, mathematically and conceptually, is illegitimate. You again state that Total money spent = total money spent, which is a tautology. You admit as much yourself just a bit lower.

And that is exactly what doesn’t happen. Newly created money flows to the goods and services demanded by the creators of the new money…

So you accept that it could happen? Is that correct? The second sentence is strictly true in the case of central bank money, but not in the case of commercial bank money. In the latter case, the newly created money flows to borrowers. They demand goods and services with it but they have to negotiate a price, for which the starting point will no doubt be the pre-existing prices of those goods and services.

There are actually two prices. The price or interest attached to borrowing the money and the prices of the array of goods and services that they will demand with that loan. I agree that in the latter case, the starting point will likely be the pre-existing price. And your point is what exactly?

Why do you think financial markets were rising on the back of QE1/2?

Whoops! Sounds a bit inductive!

In correct. Inflation is an a priori theory derived from the theory of money. That the empirical evidence confirmed the theory is to be expected, or predicted.

Until you can prove the equation of exchange, any reference to it is simply incorrect and nonsense.

To be honest, as set up, the equation of exchange/quantity equation is a tautology, and so proof is irrelevant. If you properly understood the concepts with which it is constructed, instead of making them up as you go along, you would realise that.

Correct, it is a tautology. As already demonstrated, the concepts are illegitimate. Thus the tautology says nothing. Essentially it is nonsense.

With that, I think this correspondence has come to a natural end.

I’m now going to float my theory on why this correspondence has come to a natural end and that is this: you as a professional economist, an author of an economic text to be, are heavily invested intellectually and possibly emotionally, in the economic ideology that you subscribe to, whether that be a single, or aggregate ideology. Clearly, your ideology is sadly lacking in intellectual rigor, as demonstrated in the past discussions.

I on the other hand, a financial market chappie, have no particular drum to bang, unless it pays me money. I am very open to the truth, as financial markets have a nasty habit of taking your money if you subscribe to faulty ideas.

This has been the criticism that has been leveled at the ivory tower academics for quite sometime, that their theories are elegant, sound plausible, but unfortunately are just so wrong as to be almost criminal.

I have to add though that I have thoroughly enjoyed the exchange. I have definitely learned some important lessons with regard to precision in the use of language, and since I enjoy leaning new stuff, it has been a major positive for me. Also having to defend and argue various points has clarified my thinking in these areas, another huge positive.

From the portfolio, VGR is looking to break out of a triple-top pattern, moving to new 52wk highs. Low P/E high dividend stock, makes rational sense in the current environment.

Diarmid Weir Says:

August 29, 2011 at 10:06 am e

…then I am a consumer, until I produce my product.

You are just misusing terms to suit you. In economic usage, consumption implies that a good has been used up to provide ‘utility’ and once used up is no longer available for use in whole or in part. The inputs of firms are not ‘consumed’ in this sense. If you want to be pedantic the terms ‘final consumption’ or ‘exhaustive consumption’ can be used to make this clear.

So a shipbuilder who consumes [uses up] raw steel to provide the utility of a ship, to whom he will exchange against money, with a shipper of commodities, is not a consumer? The producer of raw steel did not supply the demand for raw steel to a consumer of raw steel? What then if, our hypothetical shipbuilder has misjudged the demand for ships, and he cannot exchange his newly completed ship for money, and the ship lies unused? What then of the raw steel, has it been consumed? After all the raw steel is no longer available in its original raw form and the utility falls to zero.

You can argue semantic detail to the n’th position, it will not however save the error of your analysis, which simply remains incorrect.

And herein lies the error and the fallacy. Let me suppose…

All you suggest is that barring long-term barriers to entry, predatory pricing cannot continue indefinitely.


Were this all there was to it, you still don’t ‘prove’ that monopoly cannot exist, only that it cannot be a permanent feature in all industries.

Which is categorically not my position is it? My position is that monopoly cannot exist outside of government grant of privilege and the coercive force required to maintain that privilege.

My argument here is that profits arising from non-monopoly behaviour can be used to permit monopoly-creating behaviour (of which predatory pricing is only one form), which in turn creates more profits.

Your argument signally fails to provide the truth to your assertion.

The persistence of these monopolies depend on barriers to entry and the scale of monopoly profits. With high barriers to entry and high monopoly profits this could be quite a long time.

The existence, never mind persistence, of any monopoly depends on a barrier to entry. This cannot happen on a free market. It can only happen with government granted privilege. I repeat Lord Coke’s admonition;

A monopoly is an institution or allowance by the King, by his grant, commission, or otherwise…to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.

Original article here.

This article is full of errors, which I will address in due course.

NEW YORK – We live in a time of high anxiety. Despite the world’s unprecedented total wealth, there is vast insecurity, unrest, and dissatisfaction. In the United States, a large majority of Americans believe that the country is “on the wrong track.” Pessimism has soared. The same is true in many other places.

Well I can’t really comment on that. No evidence is presented. Pessimism is being measured how? How about the results of this poll?

In this poll, government seems to be the source of the angst.

Against this backdrop, the time has come to reconsider the basic sources of happiness in our economic life. The relentless pursuit of higher income is leading to unprecedented inequality and anxiety, rather than to greater happiness and life satisfaction. Economic progress is important and can greatly improve the quality of life, but only if it is pursued in line with other goals.

Certainly there is growing inequality.

Well that was not suggested by the above poll. Rather than earning/wealth inequality, government was the source. In fact the American dream is predicated on the notion that anyone can succeed in America, the land of opportunity.

In this respect, the Himalayan Kingdom of Bhutan has been leading the way. Forty years ago, Bhutan’s fourth king, young and newly installed, made a remarkable choice: Bhutan should pursue “gross national happiness” rather than gross national product. Since then, the country has been experimenting with an alternative, holistic approach to development that emphasizes not only economic growth, but also culture, mental health, compassion, and community.

GNP and GDP are simply total products sold against total money spent [prices]. Increase the prices through expanding the money supply – instant growth in GDP. But what does it actually say about the question being asked, viz. happiness?

Dozens of experts recently gathered in Bhutan’s capital, Thimphu, to take stock of the country’s record. I was co-host with Bhutan’s prime minister, Jigme Thinley, a leader in sustainable development and a great champion of the concept of “GNH.” We assembled in the wake of a declaration in July by the United Nations General Assembly calling on countries to examine how national policies can promote happiness in their societies.

So increased government intervention. Another technocrat.

All who gathered in Thimphu agreed on the importance of pursuing happiness rather than pursuing national income. The question we examined is how to achieve happiness in a world that is characterized by rapid urbanization, mass media, global capitalism, and environmental degradation. How can our economic life be re-ordered to recreate a sense of community, trust, and environmental sustainability?

What was the argument for happiness? How was it defined? How will it be measured?

Here are some of the initial conclusions. First, we should not denigrate the value of economic progress. When people are hungry, deprived of basic needs such as clean water, health care, and education, and without meaningful employment, they suffer. Economic development that alleviates poverty is a vital step in boosting happiness.

How then is the most efficient way of producing these goods and services?

Second, relentless pursuit of GNP to the exclusion of other goals is also no path to happiness. In the US, GNP has risen sharply in the past 40 years, but happiness has not. Instead, single-minded pursuit of GNP has led to great inequalities of wealth and power, fueled the growth of a vast underclass, trapped millions of children in poverty, and caused serious environmental degradation.

So let’s look at how that was accomplished.

Third, happiness is achieved through a balanced approach to life by both individuals and societies. As individuals, we are unhappy if we are denied our basic material needs, but we are also unhappy if the pursuit of higher incomes replaces our focus on family, friends, community, compassion, and maintaining internal balance. As a society, it is one thing to organize economic policies to keep living standards on the rise, but quite another to subordinate all of society’s values to the pursuit of profit.

Really? Says who? Do you speak for everyone? Who died and left you in charge? Your assertions have the evidence where?

Yet politics in the US has increasingly allowed corporate profits to dominate all other aspirations: fairness, justice, trust, physical and mental health, and environmental sustainability. Corporate campaign contributions increasingly undermine the democratic process, with the blessing of the US Supreme Court.

I agree. The Supreme Court Justices, appointed by who? Oh yes, government. The Supreme Court, and in point of fact the entire judicial system, which draws their salary from where exactly, oh yes, government, would of course stand-up and be counted through continuously fighting government incursions into freedom. That Corporations purchase political corruption is absolutely wrong, but predictable under the current system.

Fourth, global capitalism presents many direct threats to happiness. It is destroying the natural environment through climate change and other kinds of pollution,

Incorrect. Unenforced property rights create the pollution problem. This is directly attributable to government preventing private ownership and preventing individuals suing corporations that violate property rights via pollution.

while a relentless stream of oil-industry propaganda keeps many people ignorant of this. It is weakening social trust and mental stability, with the prevalence of clinical depression apparently on the rise. The mass media have become outlets for corporate “messaging,” much of it overtly anti-scientific, and Americans suffer from an increasing range of consumer addictions.

Propaganda certainly exists. Government does what exactly, apart from preventing private prosecutions. If government prevents private prosecutions, then they need to enforce the property rights, but, then they would lose their contributions.

Consider how the fast-food industry uses oils, fats, sugar, and other addictive ingredients to create unhealthy dependency on foods that contribute to obesity.

So the fat bastards that stuff their faces are totally at the mercy of the food they choose to eat? They could make no other choices? On the contrary, they have demonstrated their preference to be obese. If they hadn’t, McDonald’s et al would soon provide a new menu, as has been the trend as food choices change.

One-third of all Americans are now obese. The rest of the world will eventually follow unless countries restrict dangerous corporate practices, including advertising unhealthy and addictive foods to young children.

And these children, they get access to the food how? From their daytime jobs?

The problem is not just foods. Mass advertising is contributing to many other consumer addictions that imply large public-health costs, including excessive TV watching, gambling, drug use, cigarette smoking, and alcoholism.

Of course, the individual is totally incompetent to make any choices for themselves. Let’s bring in more government regulation shall we to regulate these bad choices, from which government takes tax revenue. Then we’ll tax the healthy, working people to pay for the medical treatment of the fatties. Caveat emptor, you reap what you sow. If you want to booze, fag and exist on takeaways, go for it, but accept that when the bill comes due, you pay.

Fifth, to promote happiness, we must identify the many factors other than GNP that can raise or lower society’s well-being. Most countries invest to measure GNP, but spend little to identify the sources of poor health (like fast foods and excessive TV watching), declining social trust, and environmental degradation. Once we understand these factors, we can act.

Who can act? Government? And what will government propose? Take away all the booze, fags and takeaways? You’ll be left with a segment of the population, the ex-fatties, who are now far from happy, in fact they are totally pissed-off, and since they are leaner & meaner, probably become a pain in the arse to the rest of us, who also become unhappy.

The mad pursuit of corporate profits is threatening us all. To be sure, we should support economic growth and development, but only in a broader context: one that promotes environmental sustainability and the values of compassion and honesty that are required for social trust. The search for happiness should not be confined to the beautiful mountain kingdom of Bhutan.


Jeffrey D. Sachs is Professor of Economics and Director of the Earth Institute at Columbia University. He is also Special Adviser to United Nations Secretary-General on the Millennium Development Goals.

Good grief.

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