The End of QE2

QE2, i.e., quantitative easing two, the program by the Federal Reserve Board of buying longer-term government bonds to “support the economy” ($600B this time) is slated to come to an end June 30, 2011, today. One might ask what this round of low interest rates and easy money has done? I am sure that the governmental types will proclaim to the land that they have averted major disasters and saved civilization by their actions. Sure. Others will say that the results are a significant additional amount of inflation. Perhaps. One can definitely say that the level of reserves that the banks who are members of the Federal Reserve System (nearly all banks) have risen to new, even scarier heights. Before September 2008, the total reserves of these member banks were in the $50B range. Soon after that fateful September, the reserves rose to over $1T! Now the reserves are about $1.6T. What is good is that the “money” (which the Fed merely created out of the air) is sitting in the reserves and not roaming around the economy. Other than inflating the reserve figure, I don’t see anything beneficial that the QE2 creation of an additional $600B has done. The economy is not doing well. And much of the damage of the run up to the 2008 meltdown has not been undone, either.

Maybe what has happened is that the economy has floated along on the Fed cushion for the first half of this year. It is growing slightly, say less than 2%. At this point in most “recoveries” the economy has achieved much higher growth. The current economy has not gotten back to even, yet. Some prices have fallen, e.g., real estate. Residential real estate prices have probably not fallen enough and the sector is still in poor health, with foreclosures still happening at a high level. Employment as a percentage of the working population is still low. It is even lower when the actual productivity of the many of the new “jobs” is taken into account (i.e. government “jobs” that produce nothing). Moreover, for various reasons, some having to do with money creation around the world and some having to do with enforced shortages in the face of growing demand, the prices of some basic commodities are high, meaning a lower standard of living for all.

So QE2 comes to an end. Many suggest that the economy, left to its own resources does not have the strength to continue to grow, or, if at all, at a very low level. Employment, which is only doing better because of some statistical manipulation by the Labor Department, will suffer. Our standard of living will continue to fall.

The counter trend to the government’s activities is that there are millions of people in our country running businesses and working to be more productive and profitable. In spite of all the government does, some very basic elements in our economy are growing. So much of what I see from Objectivists assumes that the government is all-powerful and ignores what the non-government sector is capable of doing. Remember, the practical attack on capitalism has been going on for over 100 years (as opposed to the philosophical attack that has been going on much longer). The attack is still only partly successful because the ingenuity of the American capitalist works around and through the laws, regulations, and direct interference put in place by our politicians. The failures, when they occur, can be big, e.g., the Gulf oil spill. But on the whole, American businesses have coped pretty will with the interference. There is a limit to how much they can overcome, and we may be getting close to that limit (re. Atlas Shrugged), but American capitalists and their workers are trying, still. Whatever QE2 and its aftermath, the real economy will influence the results. This is a major reason why the consequences of government actions are so hard to predict. It is also why people do not take the predictions of doom seriously. Long-term doom just doesn’t seem to happen (as opposed to short-term doom like the sub-prime/financial meltdown). Things don’t seem to change much on the surface. We seem to still have capitalism. To the extent that capitalism has been undermined, we are in for a rough time, unless change for the good happens. (We are experiencing long-term deterioration, but we are experiencing it like a lobster in a tub of heating water, and we aren’t noticing our losses.)

To the extent that QE2 has been propping up the economy, that support will disappear. To the extent that participants in the economy thought that QE2 was providing some real support for the economy, the loss of that support will make them weary and less confident. To the extent that QE2 has been fueling the rise in the stock market and commodity prices around the world, that fuel will disappear and perhaps those prices will drop. To the extent that QE2 has been keeping longer-term interest rates low, they will now begin to rise. To the extent that QE2 has been glossing over problems in the economy those problems will reassert themselves and they will have to be addressed by the markets in a more rational manner.

The end of QE2 will be a good thing if the government and the Fed do not start tinkering again. There is another program that the Fed has ongoing, that is not changing. It has a lot of bonds and mortgage-backed securities, say about $1T. Those securities are maturing and being paid off as time goes on. The Fed has been taking that money, and buying Treasuries, about $250B a year (according to news reports). This isn’t really a good thing, since the original funds to purchase these “toxic” securities was made-up money. It would be better if the money was retired, and the member bank reserves reduced (that is actually where the money went in the first place). But at least it isn’t new made-up money.

There is a lot of talk about the reappearance of Fed “support”, say QE3 at some point within the next year if the economy begins to founder. Right now the pressure in the much of the world is for interest rates to rise. For instance, the Bank of International Settlements issued a statement that criticized developed countries for keeping interest rates so low. Other countries have raised their rates recently. Raising rates now is inconsistent with any of the Fed’s QE’s. To engage in another round of quantitative easing the Fed may have to fight a worldwide trend. Such a trend of rising interest rates would put further pressure on U.S. Treasuries since money would tend to seek higher rates of return, and Treasuries would have to have higher rates to compete for funds. This is especially true with the recent public statements from S&P and the IMF regarding the Treasuries deteriorating soundness. The U.S. government may be ignoring the negative evaluations of U.S. government debt, but the rest of the world isn’t. (On the other hand, with the problems in the Eurozone, Treasuries are viewed as very safe by comparison and there could be no significant upward interest rate pressure on them. When things are going bad, it isn’t going to be very clear what will suffer and what won’t. That kind of uncertainty is the nature of government-induced instability.)

Once interest rates begin to rise, we shall see how badly the Fed is prepared for the real world. It is suggested that to avoid significant consumer price rises the Fed will have to aggressively soak up all the liquidity that they have put into the system since 2008. That is so even if that liquidity resides only in “member’s reserves”. “Sopping up the liquidity” means doing just the exact opposite from what the Fed has been doing the last three years. It means doing just the opposite from what Ben Bernanke has built his professional life around and what he has been hailed a hero for doing. Does anyone think that the Fed is really ready to reverse course in any significant way? If there is any reason to give credence to the hyperinflationists it is the prospect of interest rates rising and the Fed allowing the policies of the last few years to run their course. It is definitely the reality that if the Fed keeps things as it is now we could see hyperinflation. Our immediate future may depend upon how the Fed reacts to rising interest rates. To that extent our future rests in the hands of a few deluded, self-proclaimed geniuses.

I am not going to forecast what will happen over the next couple years. (I have been expecting interest rates to rise for over ten years.) We just need to keep a very careful eye on events here and abroad, especially in Greece and the Eurozone. We could also see problems in China.

Let me tie my most recent Inflation Update to the end of QE2. In the inflation update I am talking about the money supply and its effect on prices. The end of QE2 will reduce the upward pressure on the money supply some. Keep in mind that QE2 was aimed at longer-term Treasuries, thinking that lower longer-term rates would spur major borrowing. The Fed is still aiming to keep short-term interest rates low, and will continue buying Treasuries where necessary to keep those interest rates in the target area of zero to 0.25%. This upward pressure on the money supply will continue.

Let us suppose that QE2 did act as Bernanke anticipated. Businesses were attracted by the lower interest rates and did invest. Then, with the end of QE2 and interest rates increase because there is less money available to loan, then we should see less borrowing, less investing, less hiring, lower growth, and perhaps less money for the equity market. And still there will be pressure on the money supply, high commodity prices, and probable upward pressure on consumer prices (from various sources).

So, the bottom line is that the next few months offer even greater uncertainty than we have been living with since the residential real estate mortgage crisis began. I think that the only thing we can be certain of is that our governmental leaders, who have nearly unlimited sway over the money taps and financial/legal gimmicks that they can produce, are going to generally make wrong decisions.

I have final note about interest rates. I have seen reports that foreign central banks, big buyers of Treasuries in the past were absent in the last Treasury auction (and the Fed stepped in and made up the difference – indirectly). As the Fed will stop buying at the end of June, if the foreign central banks do not return, the Treasury is going to have to raise rates to attract buyers, from somewhere. I don’t want to suppose at all what levels the rates are going to have to be to sell the bonds that they need to. Actually, hitting the debt limit may be helpful to the Fed’s program because the Treasury will be limited in the quantity of bonds it can offer for the next few months. The interest rate tale will begin after the debt ceiling is lifted.

It is difficult to see what the foreign central banks are doing. There just aren’t many places for them to put the excess cash they are accumulating. Probably Japan is expecting to spend a lot on its reconstruction (meaning that their money supply will expand and the Yen vs. other currencies will get stronger as the central bank buys yen). But there really isn’t another source of even decent, high grade (which is a relative term), large volume bonds besides the US government. China has told the EU that it will continue to “support” them in the face of their expanding credit crisis. I haven’t seen an exact definition of “support”. It may mean that they won’t sell out of European bonds. It may mean that the Chinese will continue buying as they had before. I doubt that it means China will increase their buying. Europe is certainly not a candidate to replace the US as a place to park hundreds of billions of dollars a year. Remember that China has a large trade surplus with the Eurozone that rivals its dollar surplus and it is already buying lots of bonds from Europe. Is China just keeping cash? We shall see.

As was pointed out in an analysis I read (an email), the funds that the Treasury can attract to replace the foreign central bank buyers would be from the US private sector, who would want higher yields. But, if the money goes to the Treasury, it won’t go into equities or other investments, and thus, for sure, the stock market’s fun days will turn into sad ones. Also, the prospects for job creation, productive jobs, will diminish further (if that is possible). Unkle Ben is expecting a rebound in the last part of the year. HA!

So what would Bernanke do then, when interest rates start going up and the true lack of recovery is obvious? What does he advocate for every instance? What has he done? Make-up more money! Watch for QE17!!

More Reasons Why Oil Prices are Going Up

For all of you “oil price equals inflation” enthusiasts, watch what happens with Japan’s nuclear power industry. Reports are that after April of 2012 Japan will have no working reactors. They will have all shut down permanently for various, mostly irrational, reasons. To still provide power, Japan will have to import fossil fuel, oil, to the tune of about $30 B a year. Think that won’t have some impact on international oil prices?

Coal fired power plants in the U.S. are expected to be shut down over the next few years because of environmental regulations. Where that power will come from is not clear as far as I can see, at least publicly, but oil may play some role (I would like to hear form someone with accurate information).

Those people in the U.S. who are losing their coal-fired power plants will see a double attack on their standard of living. Not only will their electric bills go up by an estimated 40% to 60%, but their bill for fuel for their car will stay high or also go higher. Who will they blame?

In other words, for various reasons, mostly having to do with government regulations, we are going to see a necessarily higher demand for oil over the next few years. If the large developing nations, especially China (I have written about China’s potential difficulties, so its oil demand is not a sure thing.), continue to demand more oil, and the nations of the world continue to restrict the oil industry’s attempts to find, develop, and produce from oil exploration (government owned “oil companies” are not competent to fill this need), we will see oil prices stay high, very high. As of this writing, oil prices are about $90 a barrel for light crude. (The price is lower than it was because a few countries, including the US, released oil from reserves. This is a short-term bandaide and will only mask the problem until they stop releasing oil or can’t release any more. No one is moving to free the oil companies.) If China continues its present demand level, we can expect to see oil prices rise. If China has economic problems (as I think it will) then oil prices will merely stay near their present levels as all of these regulations and irrationalities play out.

Are you watching the events in Greece?

What you are seeing in Greece you will see repeated often in the next few years. Other Eurozone countries who did not control their borrowing will also experience the same problems as Greece, Portugal, and Ireland. These were mainly Socialist governments that bought elections by promising what could not be delivered. Spain could be next, and Italy, then soon in France. The bigger countries will each have a larger impact on the world economy. Other Eurozone countries will be weakened significantly by the attempts to prop up the failing countries and then in the dissolution of the Eurozone. They will also be weakened by the decline of international trade, as countries cannot afford to buy internationally. We could see tariffs spring up again, as in the mid-1920s. If these countries default, you will see large bankruptcies in other countries and economic dislocations, that will be a recession and, perhaps, depression. Although US banks have made few loans directly to Greek banks or the government, they have insured many of the European loans. A default will touch us, hard. And we aren’t out of our own recession.

Notice that the endless rounds of intense discussion and bargaining, with actions that, if rationally based, would result in significant improvement in the situation, only that a few months later the same events occur again. And notice, no one is really surprised. In the blogs you find people just calling these intense efforts, “kicking the can down the road”. That is, everyone seems to know that these actions will not produce any legitimate results and that the future only holds more of the same, until bankruptcy or default occurs. These events, with the seriousness, intensity, pretend efficacy, and intellectual bankruptcy, are right out of Atlas Shrugged, complete with consistent failure.

In the next few years, as Europe spirals downward, we will see a similar failure occur in Japan, and ultimately in the U.S. The big difference for us will be that there won’t be anyone to pretend to bail us out. The IMF and other rich countries will have used up all of their resources by then (but then, most of the IMF resources came from us).

I always knew that these countries would suffer major economic disasters. I knew that they could not keep their welfare systems functioning in the long term. I was wrong, however, in the mechanism. I thought that the problem would be the aging of the population. The Ponzi scheme of taxing to pay current welfare state benefits would hit population problems (an application of Maltus that he didn’t foresee!). Okay. So I was wrong. It is the debt! Debt. We have seen several debt crises over the last decades. What is coming will make the earlier problems appear as minor ripples. Obama has really brought it all to a head for us. Our chance.

For those who are focusing solely on health care, what do you suppose it is like in Greece, or will be over the next few years, or will be when Greece defaults on its debt and has no money in the government till, or leaves the Eurozone and has to depend upon its own resources and inflates its currency? That will be our fate in a few years. Which will happen first, ObamaCare or our own depression? Even if you save us from ObamaCare, you will lose to the depression.

I did look at the Greek protesters as complete idiots, protesting the end of their gravy train paid for by others. But I have reconsidered. One commentator I read explained the reaction of the protesters by saying that the prospects offered by the government were very bad, and that default wasn’t significantly different, by comparison. They are protesting the dead-end view of the Greek economy. Unemployment was skyrocketing, production down, and government debt – what all the fuss is about – was way up. In fact, every account I have read of what is expected in the future for Greece, including those who are very critical of the Greek protesters, say that without the government spending, the economy will continue to spiral downward. No one that I have read expects the Greek economy (or the Irish or the Portuguese) to improve. Every commenter, even “conservative” ones, regard the government as a prime mover. Its reduced presence means continuously lower production and growth, they say. Now this is patent nonsense. Yet, it is also the case that these economies will die, not because the government is the prime mover, but because these countries have removed the prime mover from the economy by law and ideology. That is, the individual is forbidden to seek his own way and make his own decisions. Self-interest is not allowed to flourish. Laws restrict initiative, hiring, firing, and generally doing things – producing. By law and ideology, they have forced the atlas to shrug.

We can see the same thing happening today in our country. Businessmen continually say that in the current climate of uncertainty and forthcoming, vague regulations, they are not willing to hire or make plans. The decision makers are frozen. Major corporations are sitting on hoards of cash, but don’t know what to do. They are stopped in place by Obama and his willingness to arbitrarily assert control over men. Greece is an advanced example of our same system.

I am an admirer of Greece, Ancient Greece. One cannot forget, however, that the present inhabitants of Greece bear little resemblance physically and intellectually to the ancients. The ancient Greeks were heroic both physically and intellectually. The present Greeks are not. The ancient Greeks laid the foundation for Western Civilization, and all that it could be. The present Greeks have no knowledge or desire to know what the ancients learned. The ancient Greeks made possible the United States of America. Unfortunately, Greece is our future, but not like Greece was our past. Unless, of course, the descendants of the ancients stand forth and don’t let their world go.

Inflation Update: Mid 2011

The U.S. Bureau of Labor Statistics just released its monthly announcement of the CPI (Consumer Price Index). The index showed some modest growth in consumer prices, .03% over the previous month. These numbers did not meet expectations, but the differences are small. Then there is the “core” and the broader index. The core is supposedly more important because it represents consumer goods that are less susceptible to short-term market swings, and thus are more dependable as indictors of the direction of prices. Maybe. It is obvious that there is a lot of manipulation of the data that the Statistics Department uses for the CPI. If that manipulation is for political reasons, as many suspect, or not, the consequence is that the index tends to be far removed from what residents experience on a daily basis.

More importantly, so what? What both the average economist today and most hyperinflationists tend to think is that if prices are going up there is inflation. What it means for that average person, on the other hand, depends upon whether his own income is rising at least as rapidly as the price increases. If a person’s income is not increasing as rapidly, it means making some difficult choices and seeing a constant drop in living standards. It a person’s income is increasing as fast, it means that one isn’t any better off. It is only an illusion.

But inflation is not increasing consumer prices. Inflation is the expansion of the money supply by a government. The expansion of the money supply is a form of taxation, making our incomes and savings worth less, It also makes government debt easier to pay off and defrauds the lender. That is one of the reasons it is popular with governments.

Looking at the data available from the Fed, it appears that our two-year hiatus from the threat of increases in the money supply is coming to an end. First, business loans, after a dive, have begun increasing. We will have to keep a careful watch on this, but the seeds of destruction are beginning to take root. If the interest rates were something near a market level, an increase in business loans would be a good sign. With interest rates as low as they are, the new loans could be anything from meaningless to bad news. Again, we have to watch.

The money supply indicator that I watch, MZM, has also begun to climb upward again. This isn’t surprising since the Fed has been trying to get it going upward for a couple years now and it was bound to happen sooner or later.

I want to point out a couple things about that chart that are important. I want you to avoid the knee-jerk response that many will have that the sky will fall immediately. This is a thirty-year chart, ranging from $1T to $11T. The dollar increments are evenly spaced per $1T steps. The slope of the recent increases is closely in line with the slope on the chart from 1995 to the present. (Admittedly, it is a little difficult to tell how steep short-term changes are on this small chart. The actual data is available, but it is too soon for us to tell the actual trend. For the sake of this discussion, let’s go with the appearance.) An increase of, say, $100M dollars in the money supply in 1985 moves the slope up at the same rate as an increase of $100M today. But the base from which it increases is considerably higher today. A new $100M today has much less impact than it did in 1985. Today, such an increase wouldn’t be noticed. The rate of increase we see beginning in 1995 and running nearly continuously through today, with two brief recessionary periods, has resulted in modest amounts consumer price increases, relatively speaking (you will find that I have damned even small levels of continuous consumer price inflation elsewhere in my blog, but here we are making comparisons to hyperinflation). For the rise in the money supply to have the impact it did even ten years ago, it is going to have to be an increase of a larger amount and a steeper rate of climb on the chart. For it to cause hyperinflation, the increase in the money supply, as shown on the MZM chart, will have to be nearly straight up.

The Fed wants to see a rate of price inflation (what it mistakenly calls inflation) running around 2%. This is already a betrayal of the American population. Any inflation is a disaster for all savers and those on fixed incomes. For many years, the Fed policy was to be willing to accept inflation of between 1 and 2%. Now it wants 2%. In a couple years it will be 3 or 4%. Such is their level of intellectual honesty and responsibility. Anyway…

So the Fed wants 2% of price inflation. The money supply is moving up, business loans are moving up, the Federal deficit is moving up, and, although commodity prices have backed off a little, they are still very high. Employment is not improving. What makes the Fed think that when price increases hit a two percent annual rate they are going to do anything but continue to increase faster and faster. We don’t have to postulate hyperinflation (20% or more annually) to suggest that increasing prices aren’t going to become a prominent news item. The Fed is going to have to react and the only thing it can do is to raise interest rates and take money out of the system. It is going to have to work hard and fast on the money removal program because of the amazing overhang of Fed member reserves that are just sitting there. If (I mean, when) prices begin to increase faster than the Fed wants, its curative actions will take some time to have any impact, even by its standards of the last twenty years, because of the $1,4T in excess member reserves just sitting there. The Fed is going to show itself as unprepared, intellectually ignorant, and ineffective. It will not be pretty. They do have one amazing, strong, successful capability: they blame everyone besides themselves. Ultimately, as has happened every time things have not gone well in the last century, it will be capitalism that will be blamed.

As I have often suggested, continue to watch your own situation. Be prepared for higher prices (these increases will not occur evenly, but in certain segments of your budget), and try to not be exposed to rising interest rates, i.e., don’t own bonds, have long-term fixed debt obligations if you can.

I don’t see this disruption from the Fed’s difficulty with interest rates as necessarily a step toward an economic depression. Government figures may show a recession (in the real sense, we haven’t left recession, not with our high unemployment).

My list for depression triggers is the Federal debt (higher interest rates could bring that issue to a boil), the default of one or more of the Eurozone countries (that situation could make the residential real estate mortgage meltdown of 2008 look modest), or the disruptions and craziness of the implosion of the China real estate market (who knows what kind of rioting, mayhem, crackdowns, and blaming of capitalism that could happen in that country).

Since the end of 2008 and that meltdown, the U.S. economy has kind of been drifting, not recovering, not being obviously self-destructive. That period couldn’t last for long. Since the powers-that-be weren’t willing to let the economy heal, our only real choice for the future will be difficulties. The possibilities range from painful to the worst depression in history. To some extent what will happen is in our hands. Let’s see if we can turn things back toward reason, freedom, and prosperity.

Uncle Ben Spoke, and a couple Economics Lessons

Uncle Ben had a press conference a couple weeks ago – a first for a Fed Chairman.  (Uncle Ben Bernanke, Chairman of the Federal Reserve Board.)

And didn’t really say anything. Transparent! Transparent = Nothing! Fits.

So, Ben said that inflation expectations are low and that core inflation is low and the Fed isn’t responsible for anything that might be bad and everything that the Fed is responsible for is good and coming along, perhaps slowly, but coming along. Notice that when he discusses his policies he refers to the models and intellectual justifications, not to the results and consequences, not to the facts of reality.

Bernanke’s history at the Fed has shown that he does not believe that any of the problems that the economy has experienced are the result of the Fed’s policies. The Fed does the right thing and somehow, some other source of economic action causes things to go wrong. The Fed, Bernanke, is always right. He knows that he is right. He doesn’t know why things go bad.

More fundamentally, no result could cause Bernanke to question his beliefs. He is not reality oriented. He also hasn’t seen anything bad that was coming. In 2004, 2005, 2006, and 2007 he kept saying that everything was just fine. Then, in 2008, he said things weren’t doing so badly. Then, in 2009, he said that his actions had saved us all.

He does have the power, by being the Federal Reserve Board Chairman, to manipulate the economy. And he is intent on doing so. We are at his mercy, at the mercy of his mistaken views, at the mercy of his lack of contact with reality. We, the American people and the world, will continue to suffer.

But here is where I get very upset with the people who are criticizing him, those who post blogs and comments, etc. I include many Objectivists. The only thing they apparently see is inflation. Apparently, if commodity, food, and oil prices weren’t rising, they would have no problem with Bernanke. Well, they would probably howl that Bernanke’s policies would lead to inflation, but it would always be inflation, inflation, inflation. One note Johnnys.

It is certainly the case that the Fed’s only purview is monetary policy, i.e., pumping money. But controlling the money supply has other consequences, and to ignore those consequences is to leave Bernanke and his fellow government manipulators a free area of activity, damaging activity, deadly activity, immoral activity.

For example, one of the actions of the Fed is aimed at keeping interest rates low (the activity they have some direct control over, as opposed to the money supply, which is controlled indirectly) completely distorts a basic, key price in the economy. Interest rates are important in an economy and impact many decisions and other prices. People are just not able to make rational decisions in such an environment. I mean, since rationality consists of observing reality and acting accordingly, without basic, accurate information about the economic situation, rational decision-making is not possible.

I know that some argue that businessmen are smart and know that the interest rates do not reflect reality and adjust their thinking. I am sure that they do. But how much do they adjust? What can they think is the reality of the situation? I mean, without the facts, the businessman is only guessing. It might be a smart, experienced, wise guess. But it is still a guess, not knowledge. As a guess, it could still be way off. It could still be damaging. Further, since it has been literally decades since a market for capital has existed, any guess cannot be based on any actual market experience. A businessman’s wisdom is not an argument that changes the significance or the damage done by the manipulation of interest rates by the Fed.

The impact of the Fed is much wider than real or potential rising prices. People need to stop thinking that inflation is the only or even the major issue in every situation.

By the way, I was looking at copper and corn, two of the “commodities” that people are referring to when they say that “commodity” prices are rising. It may not be significant (you can’t really tell until sometime later), but both have backed off their recent high prices. I don’t know why yet, that is, I don’t know if it is a lowering of demand or if new production has come into the market, but if this trend continues, or if they just don’t keep going up, the contention that the Fed causes every bad economic consequence in the world will be even more questionable. Then the problem of being unscientific, i.e., not looking for causes, will have bigger consequences because it will make all criticism of the Fed look unsupported.

There is another error in the thinking of many about the economy. It is thinking that by knowing at least some of the consequences of the actions of government in the economy that one knows something about economics. Recently I have seen people dismiss comments I have made merely because I didn’t attribute what they viewed as negative economic consequences to a government. It is as if the only economic actor who has any efficacy is the government. Certainly, they conclude, that if anything happens that they don’t like it must be the fault of the government. There are several fallacies involved in such thinking, e.g., affirming the consequence, but the most basic fallacy is just not having taken the effort to learning the subject.

As a reader of Ayn Rand, we have learned that one must use one’s own judgment. This is important for many different, fundamental reasons, including moral ones. There is, however, an important context: a judgment without knowledge is not rational. That is, in order to decide, judge, conclude, make any kind of rational decision, one has to have knowledge of reality. Making a statement, declaring a judgment about an economic subject means you have to know economics, the fundamentals, and not marginally.

The fundamentals of economics involve the actions of individuals, people, acting as producers and consumers. It involves markets, prices, costs, production, and making economic choices. The actions of government overlay the reality of production and consumption. The actions of government affect what people do, the prices resulting from market actions, what people ultimately produce and consume. But the governmental actions are not fundamental to an economy, or its study. The fundamentals are the reason for the existence of markets, prices, and the creation of wealth. People acting for their own benefit are efficacious. Government action only corrupts.

It is often next to impossible to foretell what the results of government action is going to be because of the complexity of an economy, of the large number of actors, of differing interests and motives. In that government action is intended to get people to act differently than they would normally, the results cannot be good. But to identify and understand those results, you have to include the primary market participants. To ignore them is to drop the context. The primary actors are the individuals.