Bitcoins revisited....

I posted on the topic of bitcoins a while back and know all my criticisms and skepticisms regarding them as a money or a currency.

This posting is targeted specifically against the position that bitcoins have value for various reasons.

Let me argue against those reasons here:

1. Bitcoins have value because...the technology use to build them and the infrastructure cost money and resources.

This uses the Labor theory of value for which the very same libertarians argue against when discussing general economics with statists.  The fallacy here is that labor and resources falls in the "necessary but insufficient" category.  It's a common arguing technique that if you can demonstrate necessity for A to make B valid that somehow A alone can prove B.  Labor and resources can be wasted and so the argument is insufficient to prove anything.

2. Bitcoins have value because...other people want them.

This is an admission that bitcoins are a con game.  Con game meaning "confidence game."  Confidence being the key word, what happens when confidence goes away?  There is nothing there.  Unlike other asset classes that were pumped up by confidence like stocks and real estate, there is no non-zero price bitcoins can evaluate to when confidence goes away.  When the stock market crashed in early 2000, the speculators all left and stock prices dropped back to levels that more accurately reflected the valuation of the company.  Same thing with real estate.  There is a base market value of wood, bricks, siding, glass and land.  There's no base value for bitcoins except for zero.

3. Bitcoins have value because...the network effects allow bitcoins to be exchanged.

This is basically a hybrid of the prior two points.  Consider the telephone.  Imagine for a moment nobody knew what a telephone did at the time it was invented.  Now imagine as the inventor, you are trying to get people to adopt the telephone.  What would you say to a potential customer?  Would you say, the value of a telephone is the network of people who will use the telephone?  Of course not.  The value of a telephone is the ability to transmit your voice across very long distances.  Yes, other people would need a telephone to receive the transmission.  But the value is in efficiencies in communication versus sending a letter or shouting.  The fact it generates a network is purely secondary as more people find value in its efficiency.  The point is - the selling point of the telephone is the efficiency of communication over existing technologies, not that other people will have telephones.  You certainly don't say that when you're trying to sell the first few telephones!

4.  Bitcoins have value because...it's anonymous, untraceable, low overhead and other bitcoin properties.

This is probably the only partially valid argument.  Anything can be valued for its properties but again, that is required but insufficient.  Anything can have properties like a broken piece of glass.  But that broken piece of glass is of very little value because I can't do anything with it.  Sure, if a burglar ties me up and I find that broken piece of glass, then it has tremendous value.  However, it's the properties that allow something to have utility that brings that something value.  So while bitcoins have properties, it has yet to be demonstrated that those properties bring about any utility because of my earlier points.  Sure, can someone say they really value a broken piece of glass?  I suppose so.  That's why I can sort of concede this only on the grounds you can't prove a negative.


I certainly understand the appeal for bitcoins but they're not going to be the future of money.  The defenders are very smart people who want it to work but like their Keynesian counterparts, they use a lot of technical terms and fallacious analogies to tape together a flawed argument while ignoring the cracks.

Economies need money to flow.  It certainly isn't flowing since people are hoarding them.  What that means is bitcoins are experiencing extreme deflation right now.  Exactly how can the money be adopted by the market if the few are hoarding them?  The masses are simply not going to enter into the bitcoin money system to allow a huge wealth transfer to the early adopters.  Ain't gonna happen.

The myth of respect...

I really dislike words that act as vessels.  They simply take the meaning of whoever wants to fill it up with their own personal bullshit.  'Respect' is one of those words.

A black person living in da 'hood has a completely different meaning for the word than say some old Asian grandmother living in Japan.  The former could mean it to be looking at him/her the wrong way while the latter uses it as a means to prevent talk-back from their grandchildren.  But there is one consistent usage of the word's connotation: A double standard.

I'm not certain if there is any valid way to define the word because the word, like 'Love', takes on so many different meanings depending on its usage.  But like I said earlier, it is usually used to enforce some kind of double-standard, especially with regards to older people.

This idea of 'respect for elders' isn't just a first-generation immigrant concept that brings with it the traditions of the 'old-world.'  Many white people also feel the same way but I'm speaking purely anecdotally here.  But the idea here is if you talk back to your elders, it's disrespectful.  If you don't serve them food before yourself, it's disrespectful.  If you don't listen to them, it's disrespectful.  I call bullshit on all of it.

Simply living longer than your relatives does not give you a pass on being reasonable.  Nor does it give you carte-blanche to do whatever you want and think they must accept it.  The only reason why it's accepted at all is because society has enforced it.  Again, society has it backwards by enforcing an effect that assumes the cause already exists.  Let me explain.

If...a parent loves their child and raises them correctly, a child will naturally love the parent back and take care of them when the parent gets too old and lacks their independence.  What society assumes is the parents' love. So when a parent raises a child through force, usage of double standards and intimidation and as a result a child does not turn out the way society expects it should based on the assumption that the parent was a loving and understanding, they must find a way to force the child to take care of the unloving parent by using the word 'respect' and the rules that surround it.  It forces the child to be the kind of child the parents couldn't raise.  But whose fault is that?  It certainly cannot be the child's.  The child was forced into the relationship with the parents.  They couldn't choose to be born or select the parents it deserved to have.

The truth is old people, especially those who had children, do not deserve respect or any kind of special reverence simply as a function of time.  Until they can understand concepts of truth and consistency and the laws of nature, as it applies to everyday life (not necessarily as a physicist), with the motivation to achieve higher levels of understanding, old people are basically no different than young people.  Sure, they've lived longer and noticed longer-trending patterns but without understanding their causes, are incapable of passing down any real insight to any subsequent generations.

It still follows the same pattern:  What people do not understand, they make up in force.

Why men and women can't be friends

This is something I've thought about throughout my life ever since I watched the movie, 'When Harry Met Sally.'  It was a question that has resonated in my life and had contemplated many times.  I've also debated this with my wife as well as many friends of mine.  I figure I'll blog about something a little more lighthearted and fun.

So basically my opinion on the matter is men and women cannot really be friends.  We can make up reasons on why we can but these are just lies we tell ourselves as men.  Women on the other hand truly do believe that men and women can be friends.  It's funny how uniformly this opinion is.  Almost all women think men and women can be friends and some men think the same while other men (who I think are honest) admit they really can't be friends.  To paraphrase Chris Rock, men become friends with women by accident.

The idea is men will want to have sex with women they find attractive at some level.  We can safely assume any categorically "hot" women (like Victoria Secret models) will have many male "friends" in their minds.  The question to examine is if a man can be friends with a woman he finds unattractive.  Billy Crystal's answer to that is that men will still want to have sex with them too.  However, my assertion is if a man cannot find a woman attractive at any level (personality or otherwise) they would not find themselves being friends with that person.  Whatever that woman could provide in terms of value, the man can get the same from another man.

So my assertion is if a man is "friends" with a woman, he has to find them attractive at some level for whatever reason.  Now a man who is friends with another man also finds value in the friendship but because they are the same gender and are both heterosexual, find value in pure character alone.  When the genders are different where sexual attraction becomes possible, the value is then tainted.  For example, if a man enjoys good conversation with another male friend, he can appreciate the friendship at face value.  Now consider a heterosexual man enjoying a good conversation with a female friend.  Maybe the conversation was very good at face value or maybe the conversation was partially enhanced because he's attracted to her at some level, conscious or not.  It becomes a possibility he cannot ignore.

One of the other reasons why women can't seem to understand why men and women can't be friends is men and women are built completely different in terms of attraction.  Men can be instantly attracted to a woman.  Women are built differently on choosing a mate.  Looks alone can't do it.  They are hard wired to pick mates who can assist them in raising a child.  This means they must look beneath the surface and find qualities that will make them want to mate with them.   Things like having a sense of humor, confidence, ambition and of course good looks.

Now, if we frame the question differently to women so that they find themselves in the same position as a man would be in (e.g. at first sight) like the following question:

"Suppose you met a man who could make you laugh, feel comfortable, was good looking and had a really good job and would make a good husband, would you be okay being friends with him?"

I'm sure they'd have a hard time just being friends with such a person.

If that's true, then it should send a clear message to any guy who's in the "friend-zone" to move on.  You don't have the qualities she's looking for.

The main problem is timing.  Both men and women can feel physical attraction immediately.  However, women need more time to weed out those they cannot sleep with.  For men, it's almost instantaneous.  And there lies the problem.  While a man is waiting to figure out a way to sleep with a woman, the woman is putting the man through her tests.  As time keeps passing, a man either becomes more attractive or less attractive.  Of course, if you're not dating the girl by then, you already know which camp you belong to.

The best way to get a girl to decide to date you or not is to refuse to be friends with her and force her to give you a chance or free you up to pursue other interests.

Perception fail!

I recently started a new job about 6 weeks ago.  I'm definitely much happier being in the role that I'm in as well as being completely out of the government sector.  One of the more interesting perks was that one of my co-workers is into philosophy - or so he said.

Last week we went into it for about 3 hours one afternoon.  I know...it was a rather waste of company time but apparently the other co-workers knew I was getting the indoctrination by this guy.  He has a history of giving unsolicited philosophy classes to his coworkers.  The three-hour "debate" involved me, this guy and another person who had has gone through with this guy's spiel.  He was rather impressed on my challenges.

One of the main challenges with people who like to dabble into philosophy is their inability to stay focused on one argument.  They go on tangents indefinitely.  One of the things this person claimed that the future is completely predictable.  So I asked him how that is.  Ultimately his argument hinged on the fact that he was a determinist.  He didn't quite explain how being a determinist makes the future completely predictable.  I explained, for example, that weather systems are deterministic systems and at the same time unpredictable.  This is due to the fact that there are always unknown agents at play which create unpredictability.  This is basic chaos theory.  It was difficult to understand how someone who claims they spend a lot of time studying philosophy take a very simplistic view on determinism.  I did concede that only with perfect knowledge can one argue that determinism leads to predictability.

The argument then segued to the topic of God since we were discussing the topic of perfect knowledge.  I said that I didn't believe in a God.  Of course we then, almost immediately, debated on the truth value of the existence of God.  I then said there is no truth value to the existence of God.  In other words, we cannot apply a value of either True nor False.  He then said he didn't understand the concept of having no truth value.  I said it was equivalent to a NULL value - its value cannot be determined.  He started arguing that everything is either true or false.  I then proceeded to explain to him that if I had a dream about rabbits, there was no way for him to know either way if the dream happened or didn't happen.  But he kept insisting that I would know and therefore I would know the value.  But he had completely missed the point about falsifiability.  Something that is true cannot be true exclusively for one person.

This again, segued into another topic of objectivity and subjectivity.  We debated on what the color green was.  I stated that green is simply a label to a specific frequency of light wave.  Then he said that another person could have a different frequency that is slightly different to which they label green.  I said that is irrelevant because the labels are different.  If they called my 'green' color assignment 'blue-green' for themselves, it's nothing different than some French person saying 'vert.'  He then tried to explain that differences in cones and rods is the reason why people have different color experiences.

The mention of rods and cones is probably the most frustrating part of the debate.  The reason being that he cheated very badly in his argument.  If we are trying to establish a framework on how to objectively view reality, you cannot use results of a framework you are trying to refute.  Specifically, one cannot argue on what "green" is while at the same time accept that "cones and rods" are already objectively established.   If your argument is "We can't objectively put labels on things" then you have given up the right to use "things with labels" to support your argument.

It's unfortunate this guy, who is in his mid-sixties, have spent a lot of time in this area and cannot establish a coherent argument.  The depth of his knowledge was impressive as he went on tangents about the universe, basic math and geometry.  However, trying to tie it all up filled with contradictions that he's unable to see was disheartening.

The government shutdown

I noticed something this morning on facebook.

A lot of postings regarding the impending government shutdown.  What was particularly interesting was what was being posted and how to spot the die-hard statists.  These people are the ones who expressed their frustration on the "failure" of Congress.  Mark my words here: Those who are frustrated with the government's inability to compromise and "get things done" today are the ones who will be the first to abandon the democratic model in favor of a "more centralized" form of government where there's less gridlock.  In other words, a more totalitarian form of government.  This is exactly where the Hitlers, Mussolinis and the Maos come from.  They just don't fall out of the sky.

When a representative style of government begins to fail, from its own inherent flaws, people will want a more "effective" form of government.  Instead of thinking perhaps their assumptions might have been wrong to begin with, they simply double-down on the flawed system.  This is the drug-addict refusing to believe the source of their troubles is the drug itself but rather not having enough of the drug.

Statism is the new religion.  It is dogma and its failures could only be explained by the lack of total adoption by others.  The interesting thing though is if it's success is solely based on 100% adoption rate, simply kicking out those who oppose this ideology would solve their problem.  All they have to do is say, "Okay, all you anarchists out there, we don't need your tax money and we'll show you how great this society can be without you."  Once the precedent has been established, everyone would be heading out the exit doors.  Thus the contradiction that taxation isn't theft is revealed; the social contract exposed for what it is - a myth.  Maybe not everyone would head for the exit doors.  Perhaps there will be those who wish to stay and try this social experiment.  However, this would then simply become an example of a stateless society because the remaining participants in this experiment wouldn't be coerced to pay for "government services" since they all willingly stay.  Taxation, in this system, is really donation-based funding.

Another angle for attacking the concept that taxation isn't theft is a moral argument.  If taxation isn't theft then it should follow that anyone who pays taxes is good person.  If the tax money goes to help the poor, feed hungry children, put out fires, provide protection services for others AND taxation is not theft and simply a donation, or better yet, a social contract where by not fleeing the tax system shows your devotion to enter into this contract,  you are doing great humanitarian services for others.

Ahhh but no statist would look at that as morally good since it's indirect through a tax system.  These people aren't happy to just stop there.  Suddenly, the goal post has moved because if you pay taxes, you are just doing the bare minimum and it can't be considered good if you just do the bare minimum.  Suddenly the voluntary aspect of the social contract is completely ignored.

Anyway, take down names on facebook.  In about 5-10 years these will be the same ones who will support the idea of a dictatorship.

Why demand doesn't drive an economy

It feels like ages since I last posted....

I started a new job and have been really busy ramping up to the new environment and trying to get a handle on all the inventory of servers this new place has with minimal documentation.

Anyway, I had a thought the other day on why so many economists (mostly Keynesians) have such a backward view of the economy.  Mainly they think that demand drives an economy.

I'm going to debunk that idea and it will center around the fact that people, even economists, cannot strictly adhere to definitions.  Like the way many people argue, they hold two different meanings of the same word and then, at the right time, switch the meanings mid-argument to supposedly win the argument.

So what drives an economy?

Let's examine what goes on in our economy that still runs pretty freely.  For example, I just left my previous employer for a new employer.  The new employer needed someone to perform some tasks that required a certain set of skills.  I possess a certain set of skills and after interviewing to see how good of a fit I would be, we entered into an agreement or contract where I would offer my labor in exchange for money.  Now keep in mind, I accepted money not because I could eat the dollar bills but rather because I have confidence I can then turn around and use that money to buy the things I want....food, shelter, an Amazon Prime membership...etc.

So money is the oil in the economy that allows people to exchange thing more easily than barter.  Sure my employer could pay me with skim milk, protein powder, heat and electricity and other tangible goods.  But then my employer wouldn't be able to do exchange the goods and services they are good at because they'd be too busy milking cows, creating protein powder and managing a generator to keep me happy.  In fact, without money, people wouldn't be productive enough to help anyone but themselves.

Even with barter, an economy can exist but is rather limited due to the constraints of reality.  What reality is that?  That people are different and have different values and preferences.  This is why barter cannot overcome what is called a 'double coincidence of wants.'  Try going on craigslist to find some free stuff.  Even when it's free...think of how many things people want to unload that you don't want.

So it's important to realize that an economy doesn't exist until people learn to exchange with one another.  That's an important concept when one tries to establish what defines an economy.  When people exchange, each party in the transaction benefits.  Values are met and preferences are satisfied, or at least to the point where both parties are voluntarily compromising towards.  When the exchange happens, this is where economic supply meets economic demand (think of the classical supply and demand curves).

It should now be obvious that economic demand doesn't drive the economy because something of value must first be created.  In order for an exchange to occur, both parties must possess something that the other wants.  Without this condition, an exchange doesn't occur and you don't have an economy.

Where mainstream economists get it wrong is they forget this whole concept that I just explained and look at people like Steve Jobs and say, 'The only reason why he makes more and more iPhones is because he wants money or his economic demands.'

This is where they are switching definitions.  They are confusing human motivation as economic demand.  As I said earlier, each person is different with their values and preferences.  These values and preferences is what motivates each of us to seek out and fulfill.  So while it is true that our desires motivate us to work harder and harder it doesn't necessarily translate into creating something of value or anything worth exchanging with someone else.  Even though our motivations lies at the heart of human action, it is the output of that action and whether it satisfies someone else's preferences or values that drives an economy.

There are thousands of soon-to-be entrepreneurs trying to figure out what the market wants because they want nice sports cars, a fancy house and other things that have already been produced.

Consumption is the fun part of the economy.  It's production that's the hard part.  You simply cannot consume something before it is produced.  Any five-year-old can understand that watching Survivor.

On truth and subjectivity

One of my pet-peeves regarding the way people think today is this whole subjectivity bullshit I hear.  It's an abandonment of absolutism and adoption of any principles of any kind.  At the first sign of trouble, it's anything goes.

What I'd like to start off with is how reality works and where people get the idea of subjectivity.

The way reality works is in absolute and universal terms.  The law of gravity applies to everyone.  The color red is always the same frequency on a spectrometer.  I can go on and on but you get it.  The problem is people misunderstand reality and human experience.  Human experience is at the individual level and takes into account the natural variance in our species.  In more specific terms, if we say that all humans are 98% genetically identical and it is in the remaining 2% in which we vary from each other, then we can say that it is in that remaining 2% where the natural variance occurs among humans.  I am also asserting that in that 2% is where our experiences also vary.

Some people are able to smoke a pack a day and never get lung cancer.  Some people can eat foods high in saturated fat and are resistant to developing high cholesterol.  How does this happen?  Who knows.  But it's important to note that while the smoker's experience is different than someone who also smoked a pack a day but developed cancer, that doesn't provide any evidence that somehow reality is subjective.  What is overlooked there is genetic variance between the person who doesn't develop lung cancer and the person who does develop it.  Reality is still working objectively and universally.  What we don't know yet is what is it about the genetic makeup of the non-cancerous smoker that creates a set of laws for reality to play out so no cancer develops.

Once we start framing reality and experience in this fashion, we can now see how different people start filtering on what is true and false using only personal experience.  So with the non-cancerous smoker, it becomes too easy to conclude that the statement, 'Smoking causes lung cancer' is false because they are obviously an exception and discard this 'absolute' and 'universal' statement and therefore reject that framework as well.  But as explained before, the statement isn't absolute.  Perhaps it could be established that there is a 98% chance of developing lung cancer if you are a chronic smoker.  There is an unaccounted 2% that represents other variables that are not known at this point that represent the population that break the correlation.

This is how reality works.  There is no perfect knowledge.  We can only perform studies, control variables and try to establish approximate relationships.  Some relationships are stronger than others.  There are probabilities and then as humans, we assess the risk and accept or assume them.  Would we really want it any other way?  Life would be boring if we knew all the risks.

So in the context of different levels of chance, we can then frame reality as a set of 'IF...THEN...ELSE' statements.  Pardon my computer alliteration here.  But it's true.  You can say 'IF you smoke on a regular basis, THEN you will develop lung cancer.'  It's given that it's not a 100% certainty because who knows....you could be the few who have the genetic makeup that prevents lung cancer but that is up to the individual to make that assessment, assumption of the risk and the resulting action based on that information.

So you can start framing reality as a series of 'IF...THEN...ELSE' statements based on the scientific method, you can then start establishing 'right' and 'wrong' actions.  However, it is critical to point out that 'right' and 'wrong' are conditional.  Let me explain this with an example:

If you don't want to develop lung cancer, then it is wrong to smoke cigarettes on a regular basis.

Note that the 'rightness' or 'wrongness' of cigarette smoking isn't absolute.  It's conditional on whether you assume the risk that lung cancer is in your future or not.  This is another aspect of reality that many relativists confuse.  They conflate 'rightness' and 'wrongness' in the context of cause and effect with morality.  We are using 'rightness' and 'wrongness' as it applies to actions being congruent with a desired outcome.  It is 'wrong' to not exercise and eat right if your desired effect is to lose weight and be physically fit.  Physical fitness and being a certain weight isn't a moral issue.  It is a value.

Wanting things for oneself are values.  Being educated, having wealth and being healthy are all  human values that have established methodologies.  There are processes that have a high correlation with those outcomes but do not come without their exceptions as well.  You can also be a genius Bill Gates, drop out of college and start a company and be a billionaire philanthropist.  Could that be you?  Maybe...but what are your chances?  But I'm digressing.

The achievement of values is what drives each of us at the individual level to act.  But that should not be confused with morality.  Values are the motivator.  But the reinforcing factor that keeps us motivated is the fact that the actor experiences the effect of their actions.  And herein lies the concept of morality.

When an actor experiences the effects of their actions, that is what I've always defined as 'property rights.'  It is a self-evident truth.  If a person is thirsty, and values the removal of thirst, then drinking water achieves that value.  Once the person engages in the action of drinking water, that person experiences the achievement of that value (the removal of thirst).  The person has 'rights' to those effects.  It should also be obvious that such relationships of those effects being owned is universal and not relative.

The concept of property rights is something I've discussed extensively in earlier posts.  It is also naturally accepted that if an individual produces something that achieves some personal value, like growing food from the ground, property rights extends to those crops.  A farmer's crops are the effects of the farmer's actions of growing the crops.

Property rights are 'naturally accepted' because if we assume that the effects of one's actions does not belong to them, we are then saying it is acceptable to steal.  If we establish this as a universal rule then society cannot come into being because no one would bother saving.  The division of labor would completely disappear and everyone would live moment-to-moment eating hand to mouth.  Anyone who would start planning for the future and 'hoard' food, risks having that supply raided since property rights are not respected.

Once property rights are respected universally, everyone benefits.  Therefore, respecting property rights is an absolute good.  We rise out of living hand-to-mouth and build a society and an economy.  Everyone benefits.  Individuals can still choose to live hand-to-mouth in this context.  But the idea is no one's situation get any worse by respecting property rights.

Morality is not about values in and of themselves.  It is about why satisfying those values is important.

The business cycle applied to politics...

Had to post again...I felt compelled to after having another discussion about a stateless society and hearing the same nonsense in response.

What I'm referring to is the typical debate tactics:
Me: We should have a stateless society; meaning a society without a government.  People should be free as long as they respect property rights (don't hurt anyone and don't steal).
My debater: Then we'd have chaos and everyone would killing each other.

This is the typical response.  Chaos.

There's two things wrong with this response.

1. In response to the rule that 'killing and stealing is morally wrong', they immediately break those rules to invalidate the rules.  It would be analogous to respond to a statement like 'People shouldn't smoke because it causes cancer' with 'That statement cannot be adopted because if it was true, people would start smoking." This is a purely emotional response with absolutely no intellectual merit whatsoever.

2. The second thing that is wrong with this response is the fact that people draw upon some sort of experience or story in the news where governments have collapsed and the aftermath of chaos is somehow associated with the 'absence of government.'  This is how most people frame the term 'anarchy.'  There's a problem with how this word is framed and ultimately defined.

Many libertarians from the Goldwater-Republicans to the minarchists tend to build this kind of defense to the idea of anarchy.  I find that very interesting because many of these people understand the Austrian Business Cycle Theory.  They know the bust is not the result of the failures of capitalism but the failures of socialism.  It is the result of distorting the free market in the first place.

Similarly, the chaos the inevitably ensues after a government is toppled or collapses is not the result of anarchy.  It is the result of the preceding government existing - usually some sort of totalitarianism.  The size of government has grown so big and so many people have grown dependent on it that once it is taken away suddenly, there is an acute reaction.

The effects are very similar to a drug addict who has grown a tolerance and keeps upping the dosage.  Is it not untrue to point out that taking drugs is not the right thing to do if you want to be healthy?  If the drug addict suddenly stops taking drugs and experiences extreme withdrawal symptoms, does that invalidate the maxim of not taking drugs?  If he says, 'See??? See what happens when you stop taking drugs?'  Is this a valid argument?  Is the cessation of drugs responsible for the withdrawal symptoms or the drugs themselves responsible?

Just like the economic busts are not the result of capitalism, the resulting chaos is not the result of anarchy.

Money as debt myth...

I know it's been a while since I last blogged.  I've been busy with trying to meet some deadlines for work and dealing with management who don't know how to do their jobs.  But I digress.

Recently, I've seen another one of those videos posted by someone who says we're all slaves to the economic system because we have a debt-based money system.  Even these 'Zeitgeisters' make a similar conclusion.  Unfortunately, these arguments start off with correct premises but they fall prey to these economic fallacies by applying way too simplistic logic that isn't true.

So let's start off with where they are correct:

1.  Money starts off as a commodity to facilitate indirect exchange over barter, which is direct exchange.

2.  Gold and silver emerge as the best commodities to facilitate indirect exchange and become the premiere 'money.

3.  People turned to goldsmiths to keep their gold safe in their vaults and in exchange, would hand out paper receipts in order to return the gold back to its rightful owner.  (Anyone with a computer science background - I like to draw the analogy that paper receipts are like pointers and the actual gold is the physical memory location on a computer).

4.  The goldsmiths, as the first known bankers, realized people started to use and accept the paper receipts as money and that people seldom used the receipts for redemption for gold.

5.  The goldsmiths took the practice of simply storing gold for receipts a step further by printing up more receipts for gold than they could redeem.  It is important to note at this point that two conditions must be met for this to take place.  One - the people whose gold is being held by the goldsmith implicitly trust the goldsmith to keep their gold safe.  Two - the goldsmith has faith that the people have faith in him because if he felt a "run on his bank" could happen at anytime - he can't get away with printing more receipts.

6.  The goldsmith gets wealthy because there is confidence in the gold receipts.  The goldsmith can now loan out the paper and collect interest on which society now has to pay down.


So the above basically describes the 'Fractional-Reserve' monetary system.  The expansion of the money supply (the gold receipts) exceeds the bank's ability to redeem the receipts for the base (the actual gold).  The paper money is now loaned out with interest and society has to pay down the principle plus the interest.

This is where the 'Money as Debt' people get it wrong.  They say that since paper money is created out of thin air and then lent out, where does the money to pay the interest come from?  That too must be created out of thin air.  So they conclude that creates a never ending cycle of more debt and more interest to which we are forever slaves to.  This is an economic fallacy.

Let me explain how it's a fallacy-

Today, money IS created out of thin air, which is the very definition of inflation.

When the new money is then lent out with interest, the debt is wiped out by paying off the principal plus the interest.  You need money to pay off that interest.

What is not correct is that there isn't enough money to pay off that interest.  What these 'Zeitgeisters' and other 'Money as Debt' advocates are doing is aggregating all the interest for all loans and assuming they mature at the same time.  What they're forgetting is bullet point 4 and 5 above, but in reverse.  If the banks required redemption on all their loans plus interest at the same time, that is, in effect, putting a run on the paper money that is out in circulation.  The money to pay the interest wouldn't exist and if at that point, the banks decided to print more money and pay themselves, it would be game over.  All confidence would be lost since they'd be screwing themselves by paying themselves with depreciated paper money, but also screwing the rest of society with depreciated paper money.

The point is - the lynchpin that allows fractional-reserve banking to work is the fact that not everyone is redeeming paper money for real money at the same time.  This allows the expansion of paper money through the loaning of paper money to work.  Conversely, not everyone is borrowing money from the banks at the same time, even if there was no fractional reserve banking.

What these people don't realize is their logic would have to apply to a 100% reserve banking system as well.  In a fixed money supply system, how would there be enough money to not only pay back the principal as well as the interest?  Their fallacy also extends into not understanding what money really is and the concept of deflation.  I will use an example.

Suppose I'm on an island with you and we find twenty one-dollar bills.  We decide that we'll use that as our money supply for us to facilitate trade.  I decide I'm going to lie on the beach all day and relax while you are busy fishing for food.  I decide to pay you $2 a fish so I can eat and you agree.  I start spending my money this way everyday to the point where you have all twenty dollars.  So now I have no money and you have all the money.

Now suppose I wanted to borrow $10 from you.  You agree to it but decide to loan me the money at 20% interest.  So that means I have to pay you back $12.  How can this happen?  It's quite simple actually.  Since I have $10, I can pay off the principle with the paper money.  Then I have to go to fishing.  Once I catch a fish, I can then sell the fish to you at the going rate of $2 a fish.  Once you buy it from me, I have the $2 I owe for the interest.  I then give back the $2 to extinguish my entire loan.  As the banker, you extracted $2 of wealth out of this micro-economy in the form of fish.

The point is, many people confuse money for wealth.  Money is exchanged for wealth.  It doesn't matter if money is based on a gold standard or a fiat money, as long as it remains fixed.   That is what matters.  The productivity of the free market will create more wealth relative to the money and prices will generally fall.  The problem is, banks, protected by the government, will keep expanding the money supply and thereby siphoning off society's productivity into their pockets.

Hopefully I explained why it's not a mathematical certainty that the money system has to collapse because principal + interest > principal.  The reason why monetary systems collapse is because governments run the money supply and power corrupts - even the best of us.  As I've explained before, the concept of government is built upon a logical contradiction.  And for that reason, it is of logical certainty that these political and monetary systems on which it is all built upon must eventually unwind.

Why Atheism is not a belief system

It's amazing how easily people's minds reset.  No matter the evidence and sound logic and that they sheepishly have to agree with you, dogma, like old habits, are hard to break.  This is what psychologists refer to as 'cognitive dissonance.'  It's the idea that a once held belief is challenged by an argument or position that cannot be refuted and the resulting conflict that arises out of it.  My experience with people who find themselves in this situation tend to throw out the new information and hold onto their original beliefs.  This very thing happened to me the other day with a friend regarding why Atheism isn't a religion....

Now I've blogged about religion before in earlier blogs.  But this will be a little bit more in-depth regarding the matter.

Each of us is born to think critically.  Children are always asking 'Why' questions because they're trying to establish a way of determine what is true and what is false.  Now, an un-indoctrinated child would stop asking 'Why' questions until they come to an understanding.  Let me illustrate with an example:

Little Billy: Where's grandmom?
Grandpa: She's in the hospital...
LB: Why is she in the hospital?
G: She broke her leg.
LB: Why did she break her leg?
G: She went outside and slipped on a piece of ice.
LB: Oh..

Now at this point in the conversation, Little Billy has an understanding that ice is slippery.  Why does he have this understanding?  Where does this come from?  Experience.  Sensory perception.  Reality.

Another line of questioning could be: Why do you go to the hospital when you break your leg?

Obviously, if this question is being posed, Little Billy's never been to the hospital or at least been in one where he remembered.  But the point is, 'Why' questions can be asked ad infinitum without having a framework in which things can be allowed to be true or false.  No one can really be told what is true or false.  That knowledge can only be ascertained through experience, logic and reasoning.

The job of science is to explain or describe phenomenon.  They can use mathematical equations and physics to express what is happening, to explain relationships between objects and then try to make approximate predictions in the future.  It's not the job of science to explain the 'Why' but rather the 'How.'  To many it sounds like a distinction without a difference but it's very analogous to explaining human behavior.  If someone asked you 'Why do you workout?' vs 'How do you workout?' you'll come up with very different answers, no?  The 'Why' question is about motivation.  The 'How question is about processes.

Possible answer to the 'Why' question could be: "I don't wanna get fat so I work out."  Again, one could ask more 'Why' questions until you reach the final answer 'That's just the way it is.'  You reach a point where everyone has an understanding because each person is also built the same way.  Everyone has values and preferences to which they cannot explain on why they hold those values and preferences - but they do.  People like chocolate over vanilla, blondes over brunettes, plastic vs. paper...etc.  You cannot explain why you have such preferences.  You just do.  It's just part of reality.  Just like Gravity.  No one can explain why gravity exists.  It's not science's job to answer such questions.  How gravity works is something science can explain.

So children naturally ask 'Why' questions because they want to get to the point where they understand something as true and then all the 'Why' questions in between make sense to them.  What they're doing is establishing a logical chain to which the original premise is a true statement.  The only way to evaluate the premise as true or false is through reality.

On the topic of theism, we are now stepping outside the realm of reality because there isn't a shred of evidence that Zeus ever existed or a Buddha or a God.  Just ask enough 'Why' questions and you'll either go in circles or you simply have to 'believe.'  I have no problem with that.  But to claim that not believing in a god is a belief is a misunderstanding of the word 'belief.'

Belief is an idea that something is real but fails the reality test.  In order to hold onto the belief, the believer must reverse the order in which they establish what they believe to be true.  They start off with an assertion such as 'God exists' and then seek evidence for which there is none.  To then accuse an atheist that they too hold a belief is an attempt to hold them to the same reversal of order as they are.  But that isn't the case.

The atheist concludes that there is no God.  The theist begins with 'There is a God.'  And here lies the crux of why atheism isn't a belief.  They too are like the theists in that they begin with a hypothesis that God exists.  The atheist treats that statement as possibly true or possibly false.  The theist, on the other hand, doesn't consider the possibility that the statement can be false.  The atheist begins testing the hypothesis, which is analogous to the child asking the 'Why' questions.  It's an attempt to gain an understanding.

If you always start with the position, 'Everything is possibly false' and then try to apply that to religion, you will have a very difficult task ahead of you.  In order to hold on to a religious belief is to temporarily suspend that position and say to yourself, 'Everything is possibly false except for X, Y and Z.'  In fact, that is exactly what they do.  Ever have a debate with a Christian?  It's astounding in some cases.  Some employ excellent critical thinking skills in attacking other religions and even science.  It only makes you wonder why they can't apply the same techniques on their own religion.

Racism will never die...

The recent George Zimmerman trial tends to bring back to the forefront of society's hot topic regarding racism in the US.  The colloquial meaning of racism is often a euphemism for discrimination.  Racism involves the power to subjugate one race under another.  Under this meaning, racism has been long gone because since a majority of Americans are categorized as white and if need be, simply enforce their numerical advantage over all other races.  While one can make the argument today that all the minorities could band together and perhaps negate the 'white' power, that wasn't always the case.  Especially a hundred years ago where the majority was clearly white.  The fact that such a progression could have been allowed is proof of one of two possibilities: Either democracy failed to maintain the white advantage or...enough white people weren't racist to allow equality for minorities.  But I digress because we're not talking about the power to subjugate.  We're really talking about discrimination.

There's nothing wrong with discrimination.  In fact, it's essential to discriminate in order to survive.  We have to have a means to discern differences.  It can mean the difference between life and death.  You need to know which mushrooms are edible and which are poisonous.  Discrimination also allows what people and children do naturally....establish pattern recognition.  Again, many liberals think they can draw a line in the sand somewhere regarding discrimination.  Somehow it's okay to determine there's a difference between kale greens and collard greens and mustard greens but somehow bad to determine differences between Asian people vs Black people vs Latin people.

Now most people would not disagree with much with what I just said since these things are pretty self-evident and that isn't where their point of contention would lie.  Where it would lie would be in how certain races are being treated.  That they should be treated 'equally'.  But even people who make such arguments will draw another line.  They won't apply those rules to themselves.  I look at their circle of friends and people they date and there are obvious patterns.  Take a look at your facebook friends and the pictures they post with their friends.  Be honest and see how equally distributed their friends' races are.  Skewed?  I'd bet good money that they are.

So the next line of defense, after they concede they can't show evidence of 'equal outcome' within their personal lives, is giving an 'equal chance.'  The 'Equal Chance' line of argument essentially means each encounter with a new person, there are no preconceived biases.  That also goes out the window because that is to deny you have a memory.  No matter how equal you want to be, walking down a dark alley alone as a black person in a hoodie approaches you, you are going to be prepared for the worst scenario.  Even though you may not outwardly act on it, it's impossible to claim non-bias.  It is simply a survival-mechanism to prepare yourself.  Anyone who claims otherwise is simply lying and not interested in seeking truth.

What is left from the argument is to have a the 'Benefit of the doubt' approach.  You don't act on your bias but you acknowledge it.  At that point, the argument is no longer a position in opposition of the one I've put forth but one in agreement.

What happens next is the definition changes from 'discerning differences and pattern recognition with a certain expectation of outcome' to 'acting on that bias without giving the benefit of the doubt.'  A counter to this is to go back to the previous retort of accusing the liberal of not dating a certain race or not having enough Mexican friends.  They will ultimately say they do give everyone an equal chance but they just don't prefer certain types of girls to date or guys to date.  What they've done now is taken the person in question and evaluated them against their own personal values (tidiness, how they dress, blonde or brunette, has broad shoulders, language barrier, etc.) and established a level of compatibility in relation to social interaction.  There is absolutely nothing wrong with this.

The problem is liberals draw another line in the sand saying personal social interactions are okay to do this 'compatibility test' but if you're an employer you're not allowed to do this when screening for employees.  Why not?  Is this not also a social interaction?  If I want to barter my apples with someone who has oranges, isn't that a social interaction?  I would argue such transactions are social because they involve another person.  Isn't friendship simply two individuals who voluntarily help each other at random intervals?  I seriously doubt a friendship exists where one person only gives and the other always receives.  No one wants to be friends with anyone who doesn't 'give back.'  So what is that?  It's a acknowledgement of someone voluntarily giving and in return an expectation of the other to also voluntarily give.  All relationship interactions are, in one form or another, an exchange.

There's no line in the sand.  It's really all the same.  You or I picking a new friend vs. an employer picking an employee.  We are all testing for compatibility.  There should be no double-standard.

Since it's in our nature to discriminate and the fact that minority leaders like Jesse Jackson will always frame any situation where it's between a white person and a black person as a racial issue, the topic of racism will never die.  You can't even criticize a black president without being called a racist, even when you have criticized a white president.  THAT is bias - always jumping to the conclusion everything is racially motivated.  But the reason why that is the case is the black leaders want to maintain their position of power and leadership.  A problem always need to exist for these people to have a job.  The last thing people like Jackson want is racism to die.

Recent market activity

I am by no means a financial guru.  I understand economics, some investing theory and philosophy.  So what I'm good at is understanding things by first breaking them down into their component parts and gaining insight.  Often times you have to discard existing frameworks of thinking and start over again.

Well, last week our friend The Beard (aka Ben Bernanke) held a news conference on his take on the economy and his expectations of "letting off the gas" on "QE" (quantitative easing).  The resulting reaction by the markets was an acute downtrend on all three major indices as well as bond prices collapsing.  A lot of people in the precious metals market were confused why the price of gold, and silver, also dropped very significantly.  After all, if people are moving out of stocks and bonds, why aren't commodity prices rising?  After all the money has to go somewhere right?  Not necessarily.

What happened most likely spooked the market speculators in all markets (stocks, bonds and precious metals) and they all poured into cash and want to wait it out.  Keep in mind now, the Federal Reserve hasn't done anything.  The chairman was just speaking and that's all it took for the speculators to be spooked and sell their positions.  They wanted to be the first ones out before the mass exodus.

That's sort of what I wanted to illustrate here.  A lot of confusing signals occurred after The Beard had spoken.  All the normal activity evaporated and a lot of trends were bucked.  I like to envision the market as a glass of both oil and water.  In its natural state, the oil sits on top of the water, the way it should.  However, what the Fed Chairman did was equivalent to shaking up the glass and now there's oil and water all mixed in together.  If your scope is limited to just inside the glass, things are in a confused state and the oil mixed together with the water doesn't make sense.  But as time progresses, things go back to their natural state and the oil begins to rise above the water.

The question is, what state are we going to be returning to?  There's no real baseline for a so-called "natural" state since the the market is heavily manipulated by the Fed.  But what options do the Federal Reserve Board have?  I would say little to none.  Ever since the '08 crash, the Federal Reserve started QE1, QE2 and QE-Infinity.  They are buying $85 billion of MBS each month.  It's obvious the market can't even tolerate the mentioning of scaling down.  Remember, Bernanke didn't talk about selling their bonds.  They will continue buying bonds but at a slower rate.  This means their balance sheet isn't shrinking.  It's expanding.  They've added more than $3 trillion to their balance sheet since '08 and it will have no choice but to keep it up and perhaps even increase their MBS purchases.

As of now, the bond prices haven't recovered yet.  The 30-year bond yield rose 16 basis points since Bernanke spoke.  Mortgage rates on a 30-year fixed is now above 4%.  The bond speculators were definitely spooked by the news conference and the only way to entice them back in is for the Fed to reverse policy and continue buying but perhaps to buy even more bonds.  Once you think you've escaped from the bottom falling out, it's going to take a lot more assurance to jump back into the game.

But Bernanke can only play that game for so long without destroying the value of the dollar.  You can't manipulate market for IOUs for dollars and destroy the value of those dollars at the same time.  At least not in the long run.  Eventually he's left with only two choices: Destroy the dollar or let interest rates rise.  The only thing delaying making that choice is the perception by the market, mainly our export partners, that the US will not default on its bonds.

But between now and then, I would expect Bernanke to reverse course on his news conference and say the economy is 'weaker than expected' and will continue their $85B a month purchases of MBSs.  That should settle the markets for a while and entice the speculators back in.

"Come on in....the water's warm!"

Problems with health care - their root causes...

I was at a BBQ at a friends house not too long ago.  A bunch of friends got together and at some point the topic of health care had arisen.   It was interesting not really participating and just listening to each person put in their two cents.  Each person focused on one particular thing, starting their sentences with, "Well, you know what the problem is..."  Some pointed to corrupt politicians and others pointed to the high cost of service and others also pointed to the insurance companies.

I knew I couldn't really get involved because they were focusing simply symptoms of the problem.  Examining root causes requires re-evaluating things you hold true and I knew no one in a party setting was ready to do that.  I felt very much like the Oracle talking to Neo.  When you're ready, you will ask the right questions.  No one wants to answer the questions why politicians become corrupt or why prices are high or why insurance companies play such a huge role.

When people say, "The problem is..X, Y and Z" they are really saying that are problems X, Y and Z are things that have no solutions they can figure out.  Usually the next thing that comes out of their mouth is "We need a law to fix X, Y and Z."  It's a bit egotistical when you think about it.  The person who has this line of thinking must believe that if they can't find a solution, no one can.

But I'm going to lay out the root causes for the problems in our health care system.

1. The Great Depression ushered in two concepts that affected the health care industry.  The first was when the federal government issued wage controls on employers during WWII.  Since employers could no longer compete by offering more attractive wages, they offered more benefits which included health benefits.  The second was hospitals, with their fixed costs, lacked the flexibility to lower prices during this time-period and turned to insurance plans to guarantee a steady cash flow.

2. In 1929, Baylor University Hospital was the first to offer a group of 1500 school teachers a pre-paid monthly fee in exchange for health care services should they need it.

3. The Baylor University Hospital model started to catch on with non-profit hospitals and they started to group together to offer multiple plans to make them more attractive to subscribers.  This was a crucial turning point in history because the word 'insurance' no longer meant a hedge against unforeseen risk for consumers as it would in any other area.  It really meant a safety net for hospitals from going out of business.

4. Blue Cross and Blue Shield - In 1932, BCBS modeled their business off the multiple-hospital version of the original Baylor University Hospital plan.  The inherent flaws in this model, if left alone, would have fixed themselves over time but that never happened.  The AMA (American Medical Association) and the AHA (American Hospital Association) lobbied Congress for BCBS to be exempt from the normal insurance regulations at the time in addition to the tax exemption status as a non-profit business.  This essentially granted BCBS near-monopoly status in the market since they had this special privilege.  For nearly 50 years, BCBS's share of the market place never dipped below 40%.

5. Introduction of 'Cost-Plus' - In 1965, the Blues introduced a reimbursement procedure called 'Cost-Plus' which allowed physicians to be reimbursed according to "reasonable and customary" charges, and hospitals were reimbursed on a percentage of their costs which included equity and working capital.  This allowed all health care providers to basically charge whatever they wanted.  Combine that with the consumers not caring since the costs were carried by a third-party, the healthy supply and demand curves were hijacked from doing their jobs by keeping prices in check.  As a result, prices soared.

6. The IRS - The IRS ruled that providing health insurance to their employees, employers could deduct the amount from their taxable business income.  Employees were also allowed to exclude the value of the benefits when calculating their taxable income.

7. The Unions - the unions started to leverage health benefits in their collective bargaining agreements.  Not only did more union members had coverage, they also negotiated the percentage the employer must pay.  In 1945, only 10% was paid by the employers.  By 1950, that number rose to 37%.  In one particular case in 1959, United Steelworkers Union ended their 166-day strike until the steel companies paid the entire premium for health insurance.  By 1961, the big 3 autos (GM, Ford and Chrysler) also followed suit.

8. First-Dollar Coverage - First dollar coverage refers to paying for expenses related to routine care.  This was the result of both employers and employees maximizing their tax exemptions.  The concept turned the idea of insurance completely upside down.  Insurance was to cover the rare but extremely expensive medical event and everything else would be out-of-pocket.

9. Medicare and Medicaid - By the time the 60s hit, there was a push to expand health care to those who were unemployed, poor or old.  Thus, Medicare was born and who did they model after?  You got it, the BCBS model.  Since they were so "successful."  All this did was amplify the flaws and inflate prices to never-seen-before levels.

10. In 1992, the Resource Based Relative Value Scale (RBRVS) was in effect which is basically the government's idea of determining prices, instead of using supply and demand.  Basically this scale would try to measure how much resources it would take to perform a medical procedure and determine prices that way.  This alternative to the pricing mechanism simply ignores supply and demand and simply indoctrinates the Marxian concept of the labor theory of value.

As you can see, the history of how health care is muddled with government intervention in the form of protectionism, tax exemptions and countless more indirect involvement like protection of unions and wage controls.  This is hardly the result of the free-market.  It's a classic case of government failure and then blaming the failures on the free-market.

All these examples I cited is still secondary to the real root of the problem - government.  Until we address the violent nature of government, the root cause will always be invisible and we will be swimming - lost in the sea of symptoms.

We're running outta oil...so what?

There is a series of videos out on youtube when you search: The most important video you will ever see.

It's about Peak Oil theory and the power of compounding.  Being a math major, the math isn't in debate.  In fact, it's used all the time to calculate doubling-time in investment theory.  I'm not even going to debate that Peak Oil is real.  It seems sound enough since all resources are finite.  However, what I am going to talk about is the bigger picture and beyond Peak Oil.

First of all, we will never consume all the oil on the planet.  It won't happen.  How can I make this claim?  Well imagine being stuck in a barn filled with peanuts.  As you start getting hungry, you start to discover you can crack open the peanuts and start consuming them.  As you eat them, you start discarding the shells in the barn since you're stuck inside it.  Initially, finding unopened peanuts is easy.  You can pretty much go anywhere you want and find an unopened peanut.  However, at some point, you start running into opened shells in search for peanuts.  Eventually, there will be so many opened shells and not enough peanuts that finding peanuts become a fruitless exercise, even though you know there are unopened peanuts somewhere in the barn.

The Peak Oil theory basically describes a method in which to estimate how much oil you have left based on how much you've consumed...i.e.where you are in the peanut consumption process.  So while we are indeed running out of oil, there will be a point where finding the remaining oil becomes way too expensive.  Combine this process along with the population growth and demand for energy increases.  This has only one effect on prices - they will rise.

Prices in the free market are simply signals to find alternatives.  Soon, oil will become more expensive than alternatives that are expensive today.  Alternatives like solar, wind and geo-thermal.  Nothing brings out the entrepreneur in each of us than extremely high, unmet demand.

Back when telephones were invented and the network effects were kicking in, the only way to build the infrastructure was to run copper lines.  Believe it or not, people started thinking we were going to run out of copper because every household in the country, and ultimately in the world, would want a telephone.  Add to that the dependency companies had on this marvelous invention to dramatically increase sales, a shortage would threaten the very economic livelihood of millions.

But it turns out the world didn't end.  Today, we have alternatives to copper telephone wiring.  We've replaced it with fiber optics and wireless technologies.  Not only did we did we satisfy millions of more users today than back then, but the quality is much greater.

Most of us under 40 will likely see this change in energy in our lifetimes.  As consumption continues at its 7% annualized growth rate, we will consume as much oil in the next 10 years as we have so far in our entire history.  Yes, prices will rise but that will just spur innovations in every direction until another viable solution is found.  Yes, some people will lose their jobs and will have to find new ones.  Just like the old-fashioned telephone switchers and operators got replaced by computer controlled switches, an oil rigger today will have to find another job as well as the CEO of Exxon-Mobile.

Transitions aren't always easy but are necessary.  I'll close with a favorite blurb from one of my favorite songs, Tom Sawyer:

"He knows changes aren't permanent.  But change is."

Violence by proxy...

We definitely live in a world where things aren't as they seem.  People like to think they live rather peaceful and rational lives but it's quite the opposite.  It's very violent, chaotic and we're basically out of control.  It only appears that we're not because we've learned to twist reality through the manipulation of language to buy us some time before we feel the effects of our actions but like the Merovingian said in Reloaded, 'You cannot escape the nature of the universe.'

The reason why many think their world is generally peaceful and, for the most part, in order is because they're so far removed from the actual violence that is taking place to create that peace and order.  Sure, there are instances of 'random acts of violence' you hear on the news but that's just to maintain the illusion that anomalies are a fact of life.  But rest assured, it is just another reason to maintain the illusion.

People generally are good and moral in their own little world.  They're not going to walk over to their neighbor and point a gun and start threatening them.  They don't eat food off their friend's plate in a restaurant.  When it comes to their immediate actions, they understand right and wrong and understand property rights.  Even the religious folk, you often hear, "I wouldn't force my beliefs onto another."  There's a general respect for a person's mind, body and property in the immediate realm.

It's outside this realm that things get interesting.  People tend to equate "doing good" by doing it directly and have difficulty seeing it indirectly.  At the same time, people see "doing bad" indirectly as easily as they do as if done directly.  Let me illustrate with some examples:

Doing good directly: Going to a soup kitchen for the afternoon and volunteering to feed the poor.
Doing good indirectly: Donating money to the Red Cross.

Doing bad directly: Approaching a stranger at knife-point and stealing their money.
Doing bad indirectly: Hiring a contract killer to kill your business partner.

As you can see, if you act through a third-party to do good, for some reason it's less noble in the eyes of society.  Is this fact?  No, but it's the impression I get.  However, if I ask you if I'm more or less culpable of murder if I hire someone to do it for me rather than doing it myself, I'd bet some good money that you'd say there is little to no difference.

This is why Fathers Day and dads get less love than moms and Mothers Day.  You can immediately see the kissing of the boo-boo and understand the goodness and love from mothers.  Fathers, usually the breadwinners, go out and work and provide for their families.  There's lots of goodness there but it's indirect and therefore unseen.

I'm starting to digress here but my focus is on the indirect violence.  If somehow I could teleport some dark-skinned person from the Middle East and put them in front of you and then handed you a gun and claimed they have information that would put your fellow citizens at risk and you had to kill them, would you pull the trigger?  I'd think you'd have a very difficult decision on your hands.

But this is what we do but it's done indirectly.  Through the political system, the military and the "chain of command" we are doing exactly that.  It's only because we are so far removed from the actual pulling of the trigger that the moral rippling effect make very little waves personally.  Make no mistake, because through the voting process, as I have explained in an earlier post, we lose our individual preferences for war or peace.  The group, embodied as the country's government through democratic representation, has decided to go to war in Iraq, Afghanistan and all the other countries we've gotten ourselves into.

All the laws for texting, drinking and driving, insider-trading etc. as well as all the countless regulations is simply another way of inflicting violence upon each other through local police.  We pay men and women in blue costumes to threaten the use of force if we do not comply.  How many of us sit there and talk about how important drinking and driving laws are and then go to a bar, have a few, and then get behind the wheel?  I have yet to meet a person who say they are in favor of drinking and driving laws who hasn't drank and then got behind a wheel.  Of course the law is to prevent "other people" from doing it.  If one of your friends had one too many and was about to get behind the wheel, how far would you go to stop him?  Sure you'd try to take away his keys or try to plead with him to crash with someone but what if he insisted on driving himself home?  Would you resort to pulling out some kind of weapon and start threatening him?  Would you bind his feet and arms and then kidnap him to your basement?  Sound extreme?  Well, this is what the police do almost on a daily basis on your behalf.  They are simply instruments of policy that you voted for so if you think it's extreme for you to personally do it, the extremity isn't diminished to any degree simply because there are proxies in between you and the drunk driver, or texter, or the tax payer, for that matter.

See, we all hire contract killers, against each other for every law that we pass by vote.  The contract killers don't really kill but they walk around with guns and will use them to subdue those who resist them.  Under the light of consensual proxies, our world is plenty violent.  Guns are being pointed in all directions.  It only appears peaceful because we're not the ones who are carrying the guns.  The enforcement of these laws aren't without repercussions.  All these wars inflicted upon other countries do not leave orphans who think their dead parents were bad people and side with the US.  This is what Ron Paul refers as 'blowback'.  Same thing goes with some inner city kid who can't get a decent education because of a state-run monopoly on education protected by a teachers-union who then tries to gain some unskilled employment but can't because of the minimum-wage laws.  What options are there?  Most of them are illegal but those become the only real choices to get out.  Either that or simply ride the gravy train called the welfare program.  Women go into prostitution and men go into dealing drugs or something else illegal.  It's only a matter of time some kind of altercation happens in this black-market and "random acts of violence" happens.  But make no mistake, this violence isn't random at all.  It is a natural consequence of the existing indirect violence we have placed ourselves into.

Of course, those who have been put in charge will make it seem like it's completely random and can't be predicted and so it further strengthens their argument to pass more and more laws.  This is why it's only natural for governments to grow at the expense of individual liberties.

The core of our problems is the collective belief that something false is true.  And that falsehood is the following:  You can protect property rights by violating property rights.

You cannot protect something by first destroying it.  It's a logical contradiction.  The reason I say this falsehood is because the concept of government is built on this falsehood.  Governments are established to protect people from murder and theft.  But how do governments get the funds to do so?  It must first tax the people.  But taxes aren't voluntary but imposed.  If one argues that people donate money for collective protection then we're no longer talking about a government but a free-market solution to the problem of theft and murder.  But take a look around.  Governments are the opposite of the free-market.  Taxes aren't voluntary.  There is no social contract.

We must first get past our denial.  We must accept that governments are built upon a contradiction.  That is the first step, in this twelve step program.  That is the choice that we all must make:  Do we want truth or do we want the world exactly as it is?  You can't have both.

Seraph was right...

As a big fan of the Matrix trilogy films, I find a lot of one-liners I have an affinity for.  One, in particular, came to mind when I was at a party not too long ago.  A couple, who I've known for a few years, I'm good friends with disclosed that they never fought.  Keep in mind now, they are married and to have claimed they've never had a fight floored me.  They both said they're laid back and just never fought.  This immediately made me think of what Seraph said in his encounter with Neo in Reloaded, "You don't truly know someone until you fight them."

That quote is very true and it is especially true when it comes to relationships.  It should be obvious to everyone that no two people are exactly alike.  From that one fact alone, we can logically deduce that no two people think alike and therefore will eventually run into a difference of opinion, given enough time and assuming both parties are honest with their opinions.

I like thinking about people, or individuals, as water balloons.  They come in different shapes and experience is the water that fills them up that defines their current state and shape.  The shape and lines demarcate its limits.  When left alone, the water balloon is in its natural form and in the state it wants to be in.  I call this the comfort zone.  But sometimes the water balloon is put under pressure and is pressed up against its limits (e.g. the elasticity of the rubber).  And this is how people also react to pressure.  Some tend to focus and hone in like a laser and others fall apart.  The pressure is too much and they react badly.

The point is, anyone can make easy decisions because we are not confronted with our own limitations.  If you ask Usain Bolt to run 100m in one minute, that's easy.  In fact, that's easy for almost anyone who can walk.  It's easy because we are not pressed up against our limitations.  Perhaps that is how the word 'easy' is defined.  I never really thought about it until now.  However, keep halving the time requirement to 30s, then 15s and suddenly, many of us start dropping off like flies because at the cellular level, we can't produce enough ATP (adenosine triphosphate) to contract the muscles to propel us to travel 100m in 7.5 seconds.  Even the speedy Usain Bolt runs into, perhaps the human limit.  Maybe what defines being human, when it comes to 100m sprinting, is the production of so many ATP units per millisecond that only Usain Bolt, with his genetics, has discovered through intense training.  For a cheetah, it's something much higher and maybe that's what defines the difference between humans and cheetahs, when it comes to this specific task (running 100m).

Whatever defines us as humans can also apply to whatever defines us as individuals.  If the definition of a species can be defined as a set of limitations then defining oneself can also be described as a set of limitations.  Each person has a 'breaking point' for various things like patience, love, hate, cleanliness, organization, disorganization, etc.  Most of us live in the middle somewhere and we call that the 'comfort zone.'  But to understand or know someone is to know their limits.  The only way to do that is to push those limits and see how they react.

Children test limits all the time - almost instinctively.  You set a rule and immediately children are out there testing them.  They want to see what you will do and if you really believe in the rule or not.  They are constantly checking for consistency in the real world and the ones we create for ourselves.  It is only through testing boundaries and limits that we come to gain any kind of knowledge at all.  This applies to everything in the universe and other humans are not exempt from this.

Proper relationship building is precisely this process being repeated over and over again.  It's not that you want to look for a fight but fighting is the natural outcome of two individuals being honest with themselves and then bumping into the boundaries of their partner.  After a while, you gain an understanding of where the boundaries are and realizing you can honestly be in your comfort zone while your partner can also do the same.

The reason why people have to argue in a healthy relationship is because the dating process requires both parties to slowly open up as they get more comfortable with each other.  The beginning of the dating phase requires not being in your comfort zone.  In fact, you have to put yourself into an extreme limit of yourself (e.g. presenting your best face).  In fact, this makes sense to some degree.  It's the most efficient way of weeding out those you are incompatible with.  If you can't stand someone who is presenting their best version of themselves, you will never be able to tolerate that person in their comfort zone.

If you don't fight with your partner regularly, you don't know really know them.  You are either not being honest with yourself or you do fight but want to create the illusion that you have a perfect relationship.  Either way, there are unresolved issues for avoiding the truth.

Interest rates explained

I often get into conversations about how it's a great time to buy homes because of the historic low interest rates.  It's an excellent time to buy under the right conditions though.  Unfortunately, many of my friends don't know what they are because they don't understand the role interest rates play in the economy.  I bought a home recently but I put no money down and view the house as a place to live rather than as an investment.  But before we get any further into the discussion, let's first establish our definitions.

First of all, we'll divide the acquisition of assets or durable goods in the market based on the purpose of their usage.  In other words, are we buying something for consumption or production?  To explain the difference, imagine walking through Costco and looking at all the people shopping.  Most of the people are buying things to take home and use.  Then every once in a while you see that guy who has 20 cartons of milk, stacks of water and other staples.  That guy is buying the stuff at Costco for productive purposes.  The rest of us are buying for consumption.  The productive purpose is to take the low prices at Costco and reselling it in an area where the prices are high enough to generate a spread wide enough to warrant the work necessary.  Consumption is any act that satisfies the needs of the person consuming the product.  So a house can be 'consumed' in the sense that it provides shelter because shelter is the desired use from a house just like a Snickers bar satisfies the desire that is created from hunger.  Production, on the other hand, is any act that creates value in the market.  So that guy at Costco buying 20 gallons of milk is creating value because there is demand for milk that isn't being satisfied.  Just like a house can be productive asset if value is created (e.g. generates a positive return on investment or ROI).

Now that we've differentiated production from consumption, we need to understand the difference between an investment and speculation in any given asset class.  Most people speculate.  They speculate in stocks, bonds, precious metals, real-estate, etc.   Very few are investors.  Here's the difference.  Speculators hold a position in an asset class, either by going long or by going short (I'll describe this in a minute), with the belief that the asset price goes up or down, resulting in a profit.  The term 'going long' is what most people understand as 'buy and hold.'  When people 'go long' they hope for price appreciation.  'Going short' is the opposite of going long.  Going short is when you borrow an asset and then selling it.  The way you make money in this fashion is to hope the price of the shorted asset goes down in price and you buy the asset back at the lower price and return the asset back from who you borrowed it from.  So if you shorted Apple stock (APPL), you would borrow, say 100 shares,  and then sell at $200 a share.  So you immediately get $200,000.  But you also owe 100 shares of APPL.  Then if and when the share price drops to $150 you buy it back.  That cost you $150,000.  So you subtract the $150,000 from your initial $200,000 and you just netted $50,000 and now return the 100 shares of APPL back.  It should be obvious that when shorting, you want the price to go down, not up.  In either case, the only way to make money is to exit out of your position in a way that generated a profit.

Investing is different in that you are chasing a yield or a ROI.  Many will argue that there isn't a big difference between speculation and investing because you can calculate ROI from buying and selling.  True, but what they forget is you can only calculate ROI after you have exited your position.  Investments generate income simply by holding onto an asset.  You can't do that by flipping stocks.  You only get paid at the end of the transaction, not during.  So real-estate investors buy and hold real-estate and hope to get paid rent.  The idea is (Rent - Mortgage - Property Taxes - Maintenance fees - other costs to owning a rental property > 0).  In fact, to calculate your annual ROI, you would take the result of that equation, multiply it by 12 (because rents are monthly) and then divide it by the down payment for the house.  The down payment is your initial investment.  The rent is not only your return but your income for holding on to the property.  In other words, you are getting paid, or rewarded, for holding onto this asset.

Now that we've thoroughly defined consumption, production, speculation and investing, we can finally move on to the meat of this blog....interest rates.

We need to first understand what interest rates really are.  In order to do that, we need to start by understanding money.  So money is, as I have defined before, a commodity that allows indirect exchange (direct exchange being bartering).  Since exchanges come in all different forms, the commodity needs to be flexible enough to handle them all and so commodities that are transportable, divisible and durable were the ones most demanded.

A good way to think about money is each person is like a gear in an engine where each gear wants to interact with other gears and money is like the oil or lubricant to make the whole thing run smoothly.  Once we understand the role of money, in this sense, we can focus on an important truth.  And that is, you cannot spend money and save it at the same time.  You are either in an exchange or you are not.  Austrian economics talks about 'time preference', which is the general preference in society to either save or to spend.  A high time-preference refers to a preference of present-day consumption over future consumption.  A low-time preference refers to a preference of future consumption over present-day consumption.

These time-preferences have huge implications.  In order to consume today, you must spend money in the present to purchase goods and services for consumption purposes.  What that also means is that money being spent cannot be saved.  It also means when people prefer to defer consumption to a later date in the future, more money is being saved in the economy.

So now we come to the point where we can imagine a pool of savings in a society that can expand and shrink based on society's general attitude about the future.  On one extreme, if we new an asteroid would hit the planet and destroy the earth, there would be virtually no savings.  We would have extremely high time-preference.  Another way to look at it is on an individual level.  If someone told you that you would die tomorrow you'd probably go out with a bang.

Back to the pool of savings in an economy.  We can now measure the supply of savings at any given time and as we can now add a new element to this: demand.  Once an economy gets off its feet, it is savings that allow people to engage in new activities.  To show this, imagine where you lived hand-to-mouth and picked and ate only berries.  Your only activity is really searching for and eating berries.  Now if you were able to save excess berries, you could either enjoy leisure from picking berries or try your hand at hunting game while you existed on your savings.  The point is, you are freed up from picking berries to "invest" in other activities.  In a more complex economy though, the general savings allows some people to borrow it in order to engage in new economic activity such as starting a new business.  And so the demand for savings is the willingness for others to borrow it.  Some people may borrow for the purposes of consumption and others borrow for productive purposes.

Thus the supply and demand for savings creates a price for savings, e.g. interest rates.  However, there isn't just one main interest rate.  There are different amortization periods.  You would charge someone who wanted to borrow $100 for a day a different rate than someone who planned on paying you back in a year.  The longer the term, the higher the interest rate because you forego spending the money for a longer period of time and there is less certainty you'll even be around in a year compared to tomorrow.  This is where the 'yield curve' gets is shape from.

Problems arise in the economy when interest rates are manipulated by a central bank.  Remember that interest rates reflect society's attitude regarding spending today versus spending tomorrow.  By lowering the interest rate artificially, it's sending an artificial signal that the supply of savings is high and/or demand for savings is low.  Thus the low interest rates attracts people to borrow but since it is artificial, there isn't enough real savings so the central bank must print the difference.  But this isn't how it really works.  Interest rates are artificially pushed down by printing money thus spreading the value of the existing savings over a larger number of monetary units.  Then the borrowing begins.  The problem is the investments from the borrowing cannot all yield positively because the people preferred to spend in the past, which was the present when the interest rate was artificially lowered, over today.  They collectively lack enough purchasing power in their money to keep the new investments afloat.

It's the printing of money to purchase government bonds that drive interest rates down.  Government bonds are just IOUs they use to borrow money.  As that might spur people to borrow in the private sector, it also stimulates government spending in the short term.  The IOU must be paid back so ultimately that falls on the shoulders of the taxpayer to do so.  Not only does it create an atmosphere to get people to borrow money, it also precipitates an ensuing bust in the economy.  Let's not forget the obvious - that printing of more money is inflation.

Inflation is a lot like opening up a brand new bottle of OJ, opening it up, take a glass and then filling it back up full with water.  Each subsequent glass becomes less real OJ and more water.  Repeat the process enough times, all you'll end up is funny tasting water.  The rate of inflation refers to how fast money is being depreciated simply by holding onto it.  Since we live in a world where interest rates are manipulated, we must discount the rate of inflation to get real interest rates.

For a 30-year mortgage, borrowers can get anywhere in the mid-to-high 3 percent range today.  Considering the real rate of inflation is well above that (I don't trust the CPI), many people will be benefitting from buying a home at a fixed rate, in the form of depreciated future dollars to pay their mortgage in 30 years.  Of course, the banks get screwed because they have to hold on to the paper for 30 years earning no real interest.  But they have an ace up their sleeve.  A government bailout paid for by 'you-know-who.'

But it's also not such a great deal for anyone who plans to put down the 20% a lot of banks are now requiring because of the tightening of lending standards.  Not only are they putting their present-day dollars into a depreciating asset that requires constant maintenance, they will also be losing money, as with the rest of us as taxpayers, in the form of bailing out the banks in the future for the artificially low interest rates for today.  Sure, the nominal value of their homes may increase but their purchasing power will have declined.  What good is living in a million dollar home if the average car costs $50,000 and a tank of gas costs $200?

It's much better to find something that will return something above the rate of inflation for your 20% down payment than to put it in as equity into a home.  Even though home prices, in the past year, have appreciated to almost 11%.  After discounting for inflation, you're only looking at a few percentage points of real gain.  You can try your hand in flipping homes but what happens if your timing is off and you're left holding the bag?  Will it be worth those few percentage points?

It's perfectly fine to buy a home and put your 20% down if you what you want is a place to live but don't fool yourself in thinking it's an investment.

The IP debate

It seems today that either Apple, Google or Samsung is suing each other for patent infringements.  Some design or how a corners of a phone are patentable is beyond me.  I remember when Microsoft got caught with its pants down by not jumping on the Internet bandwagon early enough and allowed Netscape to get head start in the Internet browser market.  Microsoft responded with a complete integration of IE into its OS to which Netscape, Sun Microsystems  and others cried foul and the government got involved.  At the time, I was wide-eyed, young and impressionable and thought Microsoft was being unfair and leveraging their monopoly status to push out competitors.

It turned out integrating IE to the Windows operating system caused more headaches for Microsoft than it was worth.  It exposed too many OS vulnerabilities to the unregulated data traffic of the Internet.  They paid the price by constantly patching the OS.  In the end, they still lost a majority of the browser market share to Firefox and now Chrome.  Performance benchmarks consistently put IE well below the competition and it shows up in marketshare.

The thing is, the free market will always find ways to keep seemingly out-of-control companies in check.  Natural monopolies are difficult to find and when they exist, they only do so by keeping margins too low to attract competition.  What people fear about monopolies is the lack of competition to keep prices and margins in check.  They think once a company achieves monopoly status, it can raise prices to whatever they want.  In the short-term that may be true.  But let's consider what would happen if I suddenly told you I was making a fortune making banana-nut-bread muffins using a secret ingredient.  People just loved them and I was charging $10 a slice for something that only cost me 50 cents to manufacture.  Now wouldn't you be interested in learning how?  People who aren't rich always want to know how rich people got to be rich.  And this is my point: High profit margins always attracts competition because people want the same margins - low inputs and high outputs.  Certainly it would be worth paying the $10 to obtain a slice and then taking it to some chemist to figure out exactly what the chemical composition of my proprietary 'secret ingredient.'  In fact, you'd spend enough money to the point where the returns on future business would yield a positive return.

But let's not stop there, let's say you figure out my specific recipe and now there are two players in the market for the same banana-nut-bread muffin.  At this point, there is no reason for you, the second entrant in the market, to lower your price as long as you can reach at least 50% of the market share.  This is the other problem people have with the free market.  They think collusion will occur and that government must step in.  But in reality, collusion is more difficult to maintain in a free market than it is for a monopoly.  Collusion, in concept, is no different that a monopoly except that you have not one, but two 'competitors' setting prices the way they want.  Colluding companies still face the same problem the monopoly did because the high margins keep attracting more competition into your market except the collusion, or now cartel, must equally share the same market.  As each new competitor enters the market and is included into the cartel, it diminishes the profitability of the existing members thus putting pressure on them to lower prices to gain market share.  The other alternative is to continually raise prices so that it cancels out the effect of dividing the market into smaller and smaller pieces due to increasing the cartel membership.  Either way, it becomes increasingly more difficult to maintain the cartel.  Either the members break rank and slash prices or the rising price of the commodity create market demand for an alternative.  U.S. Steel was a natural monopoly but had competition because it knew if steel became too expensive, people would simply turn to other metals like aluminum.

What does this have to do with IP, copyrights and patents?  Well, these are all tools to maintain a monopoly status artificially.  It hurts the free market in that the person looking for such government protection is trying to maintain a high profit margin and to set their own prices.  Supporters of IP will make the argument that lots of research and resources go into patentable ideas.  That is true.  However, what these people are ignoring is the risk factor involved.  Most ideas are no good.  If you don't believe me, go watch 'Shark Tank' and see how many stupid ideas are presented.  Now the argument is usually made that since the inventor is the first to market with an unproven idea, it should be rewarded with the IP.  The fact is, they will always be rewarded for being first regardless of IP protection.

Back when musicians like Mozart and Beethoven were around, there were no recording devices.  But that didn't stop some knock-off artist to attend a concert performed by the original artist, write up the score and then perform their own concert playing the same music.  All that did was allow the original composer to charge more to hear an 'authentic' version of the concert.

It makes no difference whether it's a book, prescription drug or a song.  There is no a-forehead knowledge of its profitability in the free-market.  The first-to-market is taking the risk.  Only after it's wide acceptance and profitability will copiers enter the market and drive the price down at which the whole market benefits.  But the copiers will forever be the copiers and only capture the residual profitability as the market saturates.  The real entrepreneurs will still be rewarded for their risk-taking.

From a philosophical standpoint, IP, is a non-tangible thing.  It is simply an idea.  I always say, 'IP really stands for Idea Profiteering.' IP is not the result of any discernable action.  It is the result of thinking or imagination.  It's until you physically engineer the idea into reality that you actually own anything.  So the concept of property rights cannot apply to 'intellectual property' because it fails to fit the definition of: You own the effects of your actions.  You are not acting and there are no effects.

It's all about definitions.  I've heard the argument a million times that thinking is acting but I believe that's a fail and here's why.  If I'm standing in front of you and doing jumping jacks, you can see that I'm doing jumping jacks but more importantly you also know that I'm not doing sit ups.  When someone is thinking of an idea, they can just sit there motionless.  There is no way one can tell when someone is thinking about a topic and when they are not.

There is also no effect from thinking about an idea.  The effect of thinking is having thoughts and while that is obvious, it is also a irrelevant to the matter.  Everything, at this point, only exist in the mind and while you may own your brain and the contents in it, both real and abstract, if someone else physically does work to make your idea into a reality, then the effects of their actions belong to them, not you.  One cannot simply think things into existence.  One must act.