September 2014


Can you explain what actually is the reason/purpose of interest in our modern day monetary system?”

Money is endogenous in the modern monetary system. That means it can be created by any user within the system and can be created from what is really nothing more than an agreement between parties. The primary form of money in our system is bank deposits and they are created by banks when banks make loans. Private banks essentially control the primary payment system that we all use and so they create the primary form of money and maintain the system in which it is used. If you want to participate in the US economy to purchase goods and services then you need a bank account.

Banks make money by charging you a fee to use their system and to use the money they create within this system. Because the system is privately controlled there is an element of risk management in everything that a bank does. That is, if a bank doesn’t properly manage its risks it can end up like Washington Mutual or Northern Rock. Because banks are private profit maximizing entities they have to balance how they generate a profit and how much risk they take in the process of doing this.

The privately controlled element of this system creates competition which makes banks operate more efficiently and makes them accountable for how they operate their businesses. But since this payment system is so central to the health of the economy the payment system has a unique relationship within the economy. And as we’ve all discovered over the last 5 years when the payment system doesn’t work properly the whole economy stops working properly. And so you get this inherent and tricky mix between government intervention in the banking system and the way banks try to operate within their “free market” to compete. It’s all a bit messy because the banks are profit maximizing and risk taking entities who can, at times, threaten the health of the entire economy through their ability (or inability) to manage their risks in the pursuit of profit.

When a bank lends you money they are essentially allowing you to use their payment system for a fee. And they will assess this fee based on the duration in which you want to use that money and the risks you pose to using that system. So, a borrower with bad credit could be rejected from being allowed to use the payment system that banks operate. Or the banks could just choose to charge that person a very high fee (interest rate) to use the system. So, in its simplest form interest is just the fee that banks charge users of the payment system.

Of course, there are lots of instruments which convey a similar temporal relationship like stocks or corporate debt. These instruments convey a similar type of relationship where one party is again creating a financial instrument to obtain money and thereby paying someone a fee to use that money. So, for instance, a corporate bond is an agreement by a corporation to obtain bank deposits for a certain period of time at a certain interest rate. In the process of creating this instrument with lower moneyness than the bank deposit they will pay the lender a fee for the specific period. They are, in essence, convincing the bank deposit user to forgo using their bank deposits in exchange for a fee. So you can see how this process of financial asset creation can be thought of within the spectrum of moneyness with different entities creating different forms of money within that system….

I hope that helps answer the question.

So Cullen is essentially saying that ‘interest’ is the charge that banks make for you to access/use their systems.


The fundamental problem is that economic theory today has seemingly forgotten what capital actually is. The abstraction of money is so prevalent, not that economists seem to understand money either, that capital and its function has been lost.

Take the mind experiment of Crusoe on the island alone. He has a bright idea to build a boat and a net to catch more fish. He has the idea, now, how to build the boat and net. Both will require time to build/make and both will require materials, which again require time to be gathered.

The time required to gather and manufacture his products, require him to forego time spent gathering food. He decides to gather extra food each day for 3 months and save it. Then when he is manufacturing his product, he can allocate time from gathering food to manufacturing his products, living off of his saved capital, viz. stored/saved food.

The saved food is present value consumption. It is valuable. More valuable than future value consumption. The future haul of food will however be far more using a boat and net than current production of food. The difference or discounted value is the return to capital. Whether this capital be the saved capital goods of stored food, or the capital goods manufactured, capital is critical to actioning an idea.

If however there was a second castaway, and instead of Crusoe ‘saving’ food [capital] he could borrow the food [loan]. The difference or interest rate, will be the future haul of food, which will however be far more using a boat and net than current production of food. The difference or discounted value is the return to capital and is the interest rate charged for the loan [food].

Another way of looking at it is if I want to manufacture a boat and I can borrow money [food] to do so: will the return exceed the cost of interest? If it does, I build the boat. If not, I don’t.


I manufacture wigits. I can borrow at an interest rate of 5%. My selling profit is 18%. My net profit is 13%. It is worth borrowing the capital.

When the interest rate is low, more projects of production will be profitable, the marginal project. When it’s high, less.

To explain interest as the bank charge…nonsense.


We build wealth by increasing our own production. That is, we become more valuable to others within society when we do things that they find valuable. This is why society rewards great innovators and people who tend to work hard.

Betting on commodities like gold is often a bearish bet against human productivity and innovation. When you buy a block of gold you are essentially buying an insurance asset whose value will increase if the value of dollars collapses or falls. In other words, you are betting directly against the ability of US workers to produce and maintain the value of the dollar.

Betting on gold is largely a bet on faith. That is, you are betting on the idea that someone else will believe gold is more valuable in the future. Although gold is valuable to some degree as a commodity there is also a substantial portion of the population who wants to own gold because it is viewed as money or protection against paper money. I’ve referred to this in the past as a “faith put”, a premium in the price that inflates its value due to sheer faith.

I don’t mean to rant against gold. I just think that there are some fundamental reasons to keep gold in the proper perspective when we consider its value as a portion of our asset holdings. In my view, it’s not the type of asset you want to build a portfolio around due to the aforementioned thoughts….

I’m running out of time on my last assignment of the year, otherwise I would refute the argument…essentially that gold limits/reduces productivity.

The argument is so weak, surely it does not need rebutting?


Soon after Maryanne Wolf published “Proust and the Squid,” a history of the science and the development of the reading brain from antiquity to the twenty-first century, she began to receive letters from readers. Hundreds of them. While the backgrounds of the writers varied, a theme began to emerge: the more reading moved online, the less students seemed to understand. There were the architects who wrote to her about students who relied so heavily on ready digital information that they were unprepared to address basic problems onsite. There were the neurosurgeons who worried about the “cut-and-paste chart mentality” that their students exhibited, missing crucial details because they failed to delve deeply enough into any one case. And there were, of course, the English teachers who lamented that no one wanted to read Henry James anymore. As the letters continued to pour in, Wolf experienced a growing realization: in the seven years it had taken her to research and write her account, reading had changed profoundly—and the ramifications could be felt far beyond English departments and libraries. She called the rude awakening her “Rip van Winkle moment,” and decided that it was important enough to warrant another book. What was going on with these students and professionals? Was the digital format to blame for their superficial approaches, or was something else at work?

Certainly, as we turn to online reading, the physiology of the reading process itself shifts; we don’t read the same way online as we do on paper. Anne Mangen, a professor at the National Centre for Reading Education and Research at the University of Stavanger, in Norway, points out that reading is always an interaction between a person and a technology, be it a computer or an e-reader or even a bound book. Reading “involves factors not usually acknowledged,” she told me. “The ergonomics, the haptics of the device itself. The tangibility of paper versus the intangibility of something digital.” The contrast of pixels, the layout of the words, the concept of scrolling versus turning a page, the physicality of a book versus the ephemerality of a screen, the ability to hyperlink and move from source to source within seconds online—all these variables translate into a different reading experience.

The screen, for one, seems to encourage more skimming behavior: when we scroll, we tend to read more quickly (and less deeply) than when we move sequentially from page to page. Online, the tendency is compounded as a way of coping with an overload of information. There are so many possible sources, so many pages, so many alternatives to any article or book or document that we read more quickly to compensate. When Ziming Liu, a professor at San Jose State University whose research centers on digital reading and the use of e-books, conducted a review of studies that compared print and digital reading experiences, supplementing their conclusions with his own research, he found that several things had changed. On screen, people tended to browse and scan, to look for keywords, and to read in a less linear, more selective fashion. On the page, they tended to concentrate more on following the text. Skimming, Liu concluded, had become the new reading: the more we read online, the more likely we were to move quickly, without stopping to ponder any one thought.

The online world, too, tends to exhaust our resources more quickly than the page. We become tired from the constant need to filter out hyperlinks and possible distractions. And our eyes themselves may grow fatigued from the constantly shifting screens, layouts, colors, and contrasts, an effect that holds for e-readers as well as computers. Mary Dyson, a psychologist at the University of Reading who studies how we perceive and interact with typography and design online and in print,
has found that the layout of a text can have a significant effect on the reading experience. We read more quickly when lines are longer, but only to a point. When lines are too long, it becomes taxing to move your eyes from the end of one to the start of the next. We read more efficiently when text is arranged in a single column rather than multiple columns or sections. The font, color, and size of text can all act in tandem to make our reading experience easier or more difficult. And while these variables surely exist on paper just as they do on-screen, the range of formats and layouts online is far greater than it is in print. Online, you can find yourself transitioning to entirely new layouts from moment to moment, and, each time you do so, your eyes and your reading approach need to adjust. Each adjustment, in turn, takes mental and physical energy.

The shift from print to digital reading may lead to more than changes in speed and physical processing. It may come at a cost to understanding, analyzing, and evaluating a text. Much of Mangen’s research focusses on how the format of reading material may affect not just eye movement or reading strategy but broader processing abilities. One of her main hypotheses is that the physical presence of a book—its heft, its feel, the weight and order of its pages—may have more than a purely emotional or nostalgic significance. People prefer physical books, not out of old-fashioned attachment but because the nature of the object itself has deeper repercussions for reading and comprehension. “Anecdotally, I’ve heard some say it’s like they haven’t read anything properly if they’ve read it on a Kindle. The reading has left more of an ephemeral experience,” she told me. Her hunch is that the physicality of a printed page may matter for those reading experiences when you need a firmer grounding in the material. The text you read on a Kindle or computer simply doesn’t have the same tangibility.

In new research that she and her colleagues will present for the first time at the upcoming conference of the International Society for the Empirical Study of Literature and Media, in Torino, Italy, Mangen is finding that that may indeed be the case. She, along with her frequent collaborator Jean-Luc Velay, Pascal Robinet, and Gerard Olivier, had students read a short story—Elizabeth George’s “Lusting for Jenny, Inverted” (their version, a French translation, was called “Jenny, Mon Amour”)—in one of two formats: a pocket paperback or a Kindle e-book. When Mangen tested the readers’ comprehension, she found that the medium mattered a lot. When readers were asked to place a series of events from the story in chronological order—a simple plot-reconstruction task, not requiring any deep analysis or critical thinking—those who had read the story in print fared significantly better, making fewer mistakes and recreating an over-all more accurate version of the story. The words looked identical—Kindle e-ink is designed to mimic the printed page—but their physical materiality mattered for basic comprehension.

Wolf’s concerns go far beyond simple comprehension. She fears that as we turn to digital formats, we may see a negative effect on the process that she calls deep reading. Deep reading isn’t how we approach looking for news or information, or trying to get the gist of something. It’s the “sophisticated comprehension processes,” as Wolf calls it, that those young architects and doctors were missing. “Reading is a bridge to thought,” she says. “And it’s that process that I think is the real endangered aspect of reading. In the young, what happens to the formation of the complete reading circuitry? Will it be short-circuited and have less time to develop the deep-reading processes? And in already developed readers like you and me, will those processes atrophy?”

Of course, as Wolf is quick to point out, there’s still no longitudinal data about digital reading. As she put it, “We’re in a place of apprehension rather than comprehension.” And it’s quite possible that the apprehension is misplaced: perhaps digital reading isn’t worse so much as different than print reading. Julie Coiro, who studies digital reading comprehension in elementary- and middle-school students at the University of Rhode Island, has found that good reading in print doesn’t necessarily translate to good reading on-screen. The students do not only differ in their abilities and preferences; they also need different sorts of training to excel at each medium. The online world, she argues, may require students to exercise much greater self-control than a physical book. “In reading on paper, you may have to monitor yourself once, to actually pick up the book,” she says. “On the Internet, that monitoring and self-regulation cycle happens again and again. And if you’re the kind of person who’s naturally good at self-monitoring, you don’t have a problem. But if you’re a reader who hasn’t been trained to pay attention, each time you click a link, you’re constructing your own text. And when you’re asked comprehension questions, it’s like you picked up the wrong book.”

Maybe the decline of deep reading isn’t due to reading skill atrophy but to the need to develop a very different sort of skill, that of teaching yourself to focus your attention. (Interestingly, Cairo found that gamers were often better online readers: they were more comfortable in the medium and better able to stay on task.) In a study comparing digital and print comprehension of a short nonfiction text, Rakefet Ackerman and Morris Goldsmith found that students fared equally well on a post-reading multiple-choice test when they were given a fixed amount of time to read, but that their digital performance plummeted when they had to regulate their time themselves. The digital deficit, they suggest, isn’t a result of the medium as such but rather of a failure of self-knowledge and self-control: we don’t realize that digital comprehension may take just as much time as reading a book.

Last year, Patricia Greenfield, a psychologist at the University of California, Los Angeles, and her colleagues found that multitasking while reading on a computer or a tablet slowed readers down, but their comprehension remained unaffected. What did suffer was the quality of a subsequent report that they wrote to synthesize their reading: if they read the original texts on paper or a computer with no Internet access, their end product was superior to that of their Internet-enabled counterparts. If the online readers took notes on paper, however, the negative effects of Internet access were significantly reduced. It wasn’t the screen that disrupted the fuller synthesis of deep reading; it was the allure of multitasking on the Internet and a failure to properly mitigate its impact.

Indeed, some data suggest that, in certain environments and on certain types of tasks, we can read equally well in any format. As far back as 1988, the University College of Swansea psychologists David Oborne and Doreen Holton compared text comprehension for reading on different screens and paper formats (dark characters on a light background, or light characters on a dark background), and found no differences in speed and comprehension between the four conditions. Their subjects, of course, didn’t have the Internet to distract them. In 2011, Annette Taylor, a psychologist at the University of San Diego, similarly found that students performed equally well on a twenty-question multiple-choice comprehension test whether they had read a chapter on-screen or on paper. Given a second test one week later, the two groups’ performances were still indistinguishable. And it’s not just reading. Last year, Sigal Eden and Yoram Eshet-Alkalai found no difference in accuracy between students who edited a six-hundred-word paper on the screen and those who worked on paper. Those who edited on-screen did so faster, but their performance didn’t suffer.

We need to be aware of the effects of deeper digital immersion, Wolf says, but we should be equally cautious when we draw causal arrows or place blame without adequate longitudinal research. “I’m both the Cassandra and the advocate of digital reading,” she says. Maybe her letter writers’ students weren’t victims of digitization so much as victims of insufficient training—and insufficient care—in the tools of managing a shifting landscape of reading and thinking. Deep-reading skills, Wolf points out, may not be emphasized in schools that conform to the Common Core, for instance, and need to meet certain test-taking reading targets that emphasize gist at the expense of depth. “Physical, tangible books give children a lot of time,” she says. “And the digital milieu speeds everything up. So we need to do things much more slowly and gradually than we are.” Not only should digital reading be introduced more slowly into the curriculum; it also should be integrated with the more immersive reading skills that deeper comprehension requires.

Wolf is optimistic that we can learn to navigate online reading just as deeply as we once did print—if we go about it with the necessary thoughtfulness. In a new study, the introduction of an interactive annotation component helped improve comprehension and reading strategy use in a group of fifth graders. It turns out that they could read deeply. They just had to be taught how. Wolf is now working on digital apps to train students in the tools of deep reading, to use the digital world to teach the sorts of skills we tend to associate with quiet contemplation and physical volumes. “The same plasticity that allows us to form a reading circuit to begin with, and short-circuit the development of deep reading if we allow it, also allows us to learn how to duplicate deep reading in a new environment,” she says. “We cannot go backwards. As children move more toward an immersion in digital media, we have to figure out ways to read deeply there.”

Wolf has decided that, despite all of her training in deep reading, she, too, needs some outside help. To finish her book, she has ensconced herself in a small village in France with shaky mobile reception and shakier Internet. Faced with the endless distraction of the digital world, she has chosen to tune out just a bit of it. She’s not going backward; she’s merely adapting.


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.