Stock Market Crash

For those of us with shares, January has not been a whole heap of fun. The Australian Stock market has fallen 24% from its high of 6851 reached in October to close yesterday at 5189. With full employment, a budget surplus, a rampant housing market, strong wage growth and a highly profitable corporate sector, this may seem odd. The reason is, of course, that the ASX has just slavishly followed the US markets down and down.

Last night, Fed Chairman, Ben Bernanke, cut rates by 0.75% between Fed meetings – a rare event indeed. Not since the midst of the deep recession in 1990 have rates been cut this much. The Fed meets again next week and talk is of further rate cuts, possibly by another 0.5%.

Now the market awaits the details of the ‘fiscal stimulus package‘ that Treasury Secretary, Hank Paulson, is negotiating with Congress. Original numbers of $150bn (about 1.4% of GDP) in tax rebates are now being talked higher. Each of the Presidential hopefuls has a different idea on how to spend their voters’ money. Obama’s looks the best – a $250 rebate to all taxpayers.

Before he became Fed Chairman, Bernanke’s chosen method was to fill helicopters with $100 bills and drop them on cities. This will likely prove a far more effective stimulus than the end result.

Is this the end of the bear market? Of course not. Bear markets end quietly without fanfare when no-one is looking, when no-one in their right minds would advocate buying stocks and when the last seller has sold up. There will be violent rallies (probably today) but use these as chances to sell up.

My advice – avoid anything complicated (Allco), too reliant on debt funding (infrastructure and property), retailers, those with poor cash flow (most resources companies) and anything you don’t understand (Babcock and Macquarie). The Big 4 banks are trading at 10x 2008 earnings as is BHP and Qantas. But don’t buy yet. Wait until people think you’re crazy.

102 thoughts on “Stock Market Crash

  1. I think the problem with the fiscal stimulus package is that the only way it can be payed for is via spending cuts or borrowing the money from China, Saudia Arabia, or whoever is stupid enough to lend them the money at this time. I know where I’m going to bet the money is going to come from. Given that, I don’t think they are spending voter’s money at all — they are spending the next generation’s money.

  2. The US doesn’t have a forecast recession, they have forecast lower growth.

    Nothing can end the decline in America other than tighter fiscal policy and cutting spending.

  3. If my recollection is correct the Ben Bernanke comment about dropping cash from helicopters was limited entirely to a discussion about deflation that was topical about five years ago in the US context. Gold had plummeted to US$250 per ounce on the back of Bill Clintons “strong dollar” policy and Japan was still struggling with deflation and had trapped itself in that state by the zero point boundary problem with interest rate policy. The US dollar deflation was in my view real and sustained and exported versions of dollar deflation contributed to:-

    1. the 1997 asian financial meltdown. The asian nations that were fixed to the US dollar suffered most of the pain but recovered quickly after devaluing their currencies (ie reflating).

    2. the currency crisis in Argentina. They were fixed to the US dollar but escaped the deflation induced credit crunch by floating.

    3. the US tech wreck. Although lots of factors were at play.

    4. Actual falling consumer prices in China that was at the time fixed to the US dollar.

    Of course had the US dollar remained stable rather than having strengthened through most of the 1990s most of these problems could arguably have been avoided.

    The concern about deflation was first floated by supply-side followers of the gold price. In particular Jude Wanniski. However in time it entered the mainstream media and Bernanke was responding to that concern.

    http://www.wanniski.com/defmonster.asp

    Bernanke in that context was in essence (quite correctly) pointing out that the zero point boundary that exists when using interest rates as a monetary policy target need not be a problem in fighting deflation if you instead shift to quantitative easing. A policy that ultimately allowed the Japanese to ease out of their own deflation wowes.

    At the time Greenspan managed to shift the bias of the US dollar back towards inflation by cutting interest rates close to zero. Unlike Japan the zero point boundary problem was never techically encountered.

    Ben Bernankes full speech about deflation with the relevant reference is here:-

    http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

    In short the barb about Bernanke and helicopters seems somewhat unfair.

    However the overnight cut in interest rates is consistent with Bernankes other statements about economic contractions. He has argued that the great depression was caused by a failure of the fed to slash interest rates. As such his action over night is consistent with past rhetoric.

    The Austrian economists peg a lot of problems on malinvestment brought on by monetary instability. I think that they over generalise. However in terms of the current problems I think they are basically correct.

  4. I sold most of my shares 18 months ago to pay for a property and haven’t been keen to buy back while the market was breaking records every week.

    It looks like the opportunity has arrived. This correction was overdue although as always the market has overshot. But it’s not necessary to buy at the exact bottom as long as it’s reasonably close. Assuming the fundamentals remain sound, the trend will be up.

    There’s money to be made here. I love capitalism.

  5. Terje,

    One of the best summaries on the issue, other than reading the 1000 page Human Action, is “The Capitalist Alternative: An Introduction to Neo-Austrian Economics. By ALEXANDER H. SHAND. Foreword by G. L. S. SHACKLE”

    The uneducated mob at Mises.org do overgeneralise, but the mechanisc of misallocation explain economic downturn and falling wages and employment very well.

  6. Lucky bastard, David.

    To be honest, I’m a student so I don’t invest and don’t know much about investment. But I heard rumours of a potentially struggling economy as early as the election last year. I don’t know why this stock market crash comes as a surprise?

    I thought a lot of people would have known to have pulled their money out last year and be looking to reinvest this year..

  7. It depends on your strategy Shem. BHP went up 9% today. Maybe yesterday was an overreaction. A Mac Bank guru yesterday said it probably was an overreaction and to hold on if you already hadn’t got out.

    However, the “recession” fears are doom and gloom. 1.8% forcast growth in the US is far from fantastic, but it isn’t recessionary. What is depressing is that inflation will eat up any wages growth.

    It might be a good strategy to buy and sell between different asset classes, but becoming a survivalist just isn’t necessary. A slowdown in growth.

    What’s worse is the US policy response – Keynesian tax rebates (whilst military spending remains uncapped) and loose monetary policy. Larger, long term tax cuts (matched with real spending cuts) and austere monetary policy would avoid most future downturn. The current policy might just make the US worse in the medium term.

  8. hold on if you already hadn’t got out

    Absolutely correct. Following the crowd is no way to make money. I’ve ridden out two previous downturns, although 1987 took quite a while to recover from.

    Shem – open an account with an on-line broker and learn to trade. You only need $500 to get started. If your judgement is sound you’ll make a healthy profit. If it isn’t, you can always go with a managed fund. Either way it’s practical capitalism.

  9. David – even after a 24% fall, Aus shares are still higher than they were 18 months ago! Still, you’re probably up 10% on your property.

    Terje – nitpicking. A slump in demand whether caused by a fall in house prices or goods prices still warrants the helicopter analogy.

  10. You all consider yourself to be intelligent people.

    Have you considered that the ‘global credit crunch’ is, in reality, a correction in the cost of credit. Have you also considered the fact that cheap credit has, primarily, caused the 500% asset inflation we have observed over the last 40 years.

    Massive amounts of credit are undoubtedly invested in the Australian stockmarket; as stocks are assets, and assets are subject to asset inflation.

    So what happens when hedge funds, and organizations, who have purchased large quantities of shares across the market, with borrowed money, have to front up with additional collateral to back their waining loans? More importantly: what happens if they can’t front up, or decide that their profit margin has shrunk significantly enough to make it no longer worth their while?

    If all the borrowed capital in the stockmarket, or any other asset market, was withdrawn over the space of a few months the result would be disasterous.

    Don’t even bother with the indices if you don’t know where the money driving them is coming from.

  11. Regarding #9. I don’t think it is nitpicking.

    A general economic contraction (eg slump in supply) is inflationary and requires a tightening in the supply of money. A deflation requires the helicopter response. Deflation and contraction are very different although deflation can in the right circumstances cause contraction.

    A crash in stock prices is neither an economic contraction nor a deflation. It merely indicates a prediction about where the economy is headed. Sometimes that prediction is accurate and sometimes it isn’t.

  12. Bob, I’d say you are a La Rouche disciple.

    La Rouche constantly predicts the sky is about to fall due to “financial meltdown”. He also thinks the solution is more government intervention.

    I’ve just looked out the window and the sky is still up there. By the time the Government catches up with what’s happening, the market will have sorted it out.

    Become a capitalist Bob. You’ll be more relaxed.

  13. Bob,

    The FNMA and GNMA issue 70% of US sub prime loans, and do so under the fiscal backing of US Congress. Unlike other sub prime issuers, like Aussie, Wizard, and RAMS (or even private American issuers) in Australia, they have no incentive to do proper checks of financials.

    It is another case of financial moral hazard leading to malinvestment and wasting scarce capital, driving up the price of credit.

  14. FNMA is not government guaranteed.

    One thought that comes to mind is that in the US market place morgages are routinely issued with 30 year fixed interest terms. Whilst in Australia few banks will fix terms for more than 7 years and few customers take out this option in any case. This means that when interest rates rise in Australia the effect felt by most households is quite immediate. Whilst many US households may be quite insulated from any such feedback.

  15. Yes, they are.

    While Fannie Mae and Freddie Mac do not have explicit guarantees, and deny implicit guarnatees, they have a line of credit to the US treasury. What other companies have a revolving line of credit to the national treasury? They don’t have an official status as a Government sponsored entity, but in reality they do.

    Ginnie Mae is explicitly and a fully backed Government entity.

  16. Terje

    Not explicitly guaranteed, sure, but if it hit trouble, i would bet strongly on a complete government bailout with a guarantee for senior creditors.

    The recent demise of the British mortgage lender, Northern Rock, is an interesting study on what governments do when a financial institution gets itself in trouble. (in short NT financed its long-term pool of mortgages in the short-term Asset-Backed market). The British taxpayer is currently on the hook for $125bn via the government’s bailout. That’s the equivalent of a 40% increase in income taxes. And NR is far less central to the British economy than FNMA or Freddie Mac is to the US economy.

    Fortunately, i am no longer a British taxpayer 🙂

  17. DavidLeyonhjelm,

    I am a capitalist, and a libertarian.

    You may call me an alarmist, but then I may call you an ignoramus. Lets try stick to the facts shall we?

    Since the 70s we have had around 50 – 100% consumer (goods/services) inflation, depending on which specific area you look at. But asset prices have been inflated almost 500%.

    The two lines cannot continue to diverge indefinitely. With corporate, government and personal debt spiraling out of control, throughout most of the first world, and a world correction in the price of credit, is it not apparent that something has to give?

    The price of gold says it all. Uncertainty ahead! Subprime woes are just the tip of the iceberg.

  18. There will always be uncertainty as all assets are not sold simeltaneously and everyone has different opinions and levels of understanding on the same basic information.

    In Australia for example, regulation, taxes and inflation have all compounded greatly since the early 1980s to inflate land prices through the roof.

    If we went to free market money, gold or even 0% inflation targeting, we would need to remove many transaction and value based taxes on land development and sale, and regulations on land use and subdivision before land supply expanded to reduce the price.

    50-100% inflation isn’t unusual with 2-4% inflation all of the time for 35+ years and occasional 5%+ inflation.

    Debt isn’t spiralling out of control. It was. The credit crunch took care of that. Growing US budget deficits are very worrying however.

  19. I think part of the problem with people’s concerns of rising debt is that they misunderstand the usefulness of money lending.
    It’s probably a continuance of the middle age belief that money lending was evil. Even the ancient Greeks did not see the value in money lending.

    These days socialists seem to view rising debt as proof of ‘greed’ and proof that humans can’t be trusted.
    But I see money lending as a sign that things are being built, new businesses are being created and therefore valuable products are been made to improve our lives. Money lenders aren’t stupid enough to throw their money away.

    With my limited economic knowledge, I think the von Mises school ‘boom/bust cycle’ theory explains the current situation well and that at the same time, there is no need to fear a major recession/depression.

  20. Mark,

    If you truly believe the credit crunch is over then you probably deserve to lose all your money.

    Our whole system of economics is built around attempting to maintain artificially low interest rates; fractional reserve banking.

    To begin with we have a single currency in each country, that is issued and owned by a government central bank. To a large extent the central bank also determines retail interest rates.

    If the economic process were left to its own devices, in the free market, a number of things would be different.

    First, there would almost certainly be more than one currency. Second, there would be many more banks. And third, credit would be far more expensive (its real free market value) as banks would not be protected by the government.

    In Australia, the RBA will issue emergency loans to any bank which goes under. In the free market, you have no unlimited supply of government issued credit to rely on in extreme times, thus the risk of lending is higher, thus credit is more expensive, and thus asset inflation is kept at reasonable levels.

    However, what happens when you have artificially cheap credit issued around the world for 40 years? Asset inflation happens. Every asset market in the world has huge amounts of cheap credit invested in it. And as uncertainty increases in the market, the banks will reassess their risk in giving new loans, as well as reassessing their current position in maintaining existing loans.

    With the imminent failure of Ron Paul’s presidential race, due to election fraud, we usher in the decline of the US dollar as the world reserve currency.

    With wars, (re)emerging super powers (china, russia), the fall of the US empire (and with it the world reserve currency), a global correction in the cost of credit and spiking gold and oil prices, how many more warning signs do you need?

  21. The US represents more than 25% of global GDP. Even with inflation the dollar will still be the reserve currency of the world for a long time to come. The euro represents an economic zone with similar output however it has a shorter history. It is however rivaling the dollar for status as the dominate reserve currency.

    In the 1800s when gold was the unit of account interest rates were also low. And they were expected to stay low as evidenced by the uptake of private bonds with 50 year maturities. The fact that interest rates are low today is not indicative of a system ready to collapse. This would be a considerable overstatement of the problem.

    And the problem today is not fractional reserve banking (which is consistent with free markets) but with fiat currency and central banking (neither of which is consistent with free markets).

  22. Terje,

    In a natural economic climate the banks would self-regulate their reserves based on withdrawals and savings. They would also leave themselves a larger safety net, because, in the event of a run on the bank, there would be no government to bail them out. (And other banks would probably be unwilling.)

    So, while fractional reserve banking is consistent with the free market, the manifestations of it we see today (under the protective wing of central banks) are still largely to blame for the asset bubbles.

    And, as I said earlier, I do no believe the US will retain its position as the world reserve currency for much longer. For over a decade the US administration have been heavily abusing the US dollar’s role, spending money they don’t have.

    There is going to be considerable strife when the US t-bond market sours. What happens when the Chinese finally figure that the US has no intention of paying, or cannot hope pay? All that spending, which has been masked by the influx of capital back into the system, from buyers on the bond market, will come unstuck.

    This administration, and the next administration, will most likely remain unwilling to pull out of the middle east thus leaving no way out.

    If the US dollar hyper-inflates you can be almost certain it will lose its status as the world reserve currency. And, worse, if the euro is not yet ready to replace it, as the new world reserve currency, we may be left in a rather tricky spot.

  23. You may call me an alarmist, but then I may call you an ignoramus. Lets try stick to the facts shall we?

    No, you may not call me an ignoramus because that would make you a rude prat. As to whether you are alarmist, I merely repeat these ‘facts’ asserted by you.

    With corporate, government and personal debt spiraling out of control, throughout most of the first world, and a world correction in the price of credit, is it not apparent that something has to give?

    Subprime woes are just the tip of the iceberg.

    I do no believe the US will retain its position as the world reserve currency for much longer.

    With the imminent failure of Ron Paul’s presidential race, due to election fraud, we usher in the decline of the US dollar as the world reserve currency.

    Unless you are nubile teenager, you must have lived through previous economic downturns when the sky didn’t fall.

    Markets are self-correcting, notwithstanding a certain amount of distortion. Just because central banks act as lender of last resort and this artificially reduces the cost of credit, there is not case for claiming the market cannot adjust. Indeed, there is no evidence to support that view.

    The other four people in Australia who believe in the gold standard and an end to fiat currency wouldn’t even agree with you.

    But I still suspect your preference is the Homeowners and Bank Protection Bill isn’t it? http://www.cecaust.com.au/hbpa/

  24. It is the artificial manipulation of the cash supply rate, not any fractionality of the banking system that makes credit cheap.

    The credit crunch is over. The rates have changed and bad loans have been capitalised as losses and banks seek to rebalance their capital ratios. People have been laid off and the impact has been felt globally.

    In a free market, banks will issue their own money as they see fit and as customers accept it, and issue credit as they see fit.

    Moral hazard, pump priming and inflation as a policy tool will go. Risk won’t go, but risk management will be a product available to all.

  25. DavidLeyonhjelm,

    Believe what you will. Believe, as you may, that the good times will last forever. Believe that asset inflation of 100% per decade is sustainable. Believe that the US economy can spend itself into infinite debt and remain the world reserve currency.

    Incidentally, I now have two reasons not to vote for LDP.
    a) a flat tax of 30%, and
    b) the possibility that you would be in charge of the economy.

  26. Bob, you’d rather vote for the Greens and increase taxes or Labor and Liberal and only reduce taxes enough to account for bracket creep? Name one party that is lower taxing than the LDP?

    Why not join the party instead? We pay a lot more attention to financial members at this stage, as financial members are required to garner mainstream attention.

  27. Shem Bennett,

    I’d rather start my own purist libertarian party instead.

    Unfortunately the climate isn’t right just yet. Maybe in five years public attitude will be shifting fast enough to make the effort worthwhile.

    30% flat tax is a joke: Compulsory taxation is aggression. Aggression by the state is exactly what libertarianism is supposed to prevent. Any political party that advocates compulsory taxation cannot truthfully label themselves libertarian. You might get away with ‘libertarian leaning’.

    And while you all may snicker and sneer about the prospect of returning to a form of gold standard, you fail to realize it is a powerful economic stabilizer, and the only hard currency which has survived throughout virtually every civilization in the history of man kind. By contrast no fiat currency (that I know of) has ever survived longer than about 300 years.

  28. Well, Bob, you’ve certainly got all the winning ideas! I definitely agree that in five years the Australian public will be ready to vote for you, en masse. If only the LDP had more like you they’d probably be in parliament as we speak. Oh well, what can you do……….

  29. 30% flat tax is a joke: Compulsory taxation is aggression. Aggression by the state is exactly what libertarianism is supposed to prevent. Any political party that advocates compulsory taxation cannot truthfully label themselves libertarian. You might get away with ‘libertarian leaning’.

    Actually, I think the party you are looking for would be an “anarchist” or “anarcho-capitalist” party. Libertarianism, at least in the Friedman sense of the word, never seeks to abolish the state, merely to limit its role.

    I guess we’re “libertarian leaning” in that we seek to move towards a more libertarian society. A lot of party members would share your view of no compulsory taxation as an ideal endpoint. But where you believe in revolution we believe in reformation. We’ll see which approach achieves more libertarian outcomes in the end, I guess.

    In the meantime who will you be voting for? The “socialist leaning” Socialist Alliance (would call them pure socialists myself…)? The “conservative leaning” Coalition (would call them conservative myself)? Labor? The Greens?

    Oh and incidentally I’d prefer revolution to reformation myself, I just don’t view revolution as a viable option, so reformation is all we are left with…

  30. As you all point out, fiat currency isn’t going anywhere anytime soon, and market downturns certainly won’t bring about its end.

    My problem is a banks ability to claim it holds your money as a demand deposit while simultaneously lending it out. And of course under this closed system where there are generally only 4/5 major ‘competing’ banks, their credit can easily end up as demand deposits yet again, ready for lending out. With this, I don’t believe it is legitimate for a bank to make a profit for a service giving little genuine effort or capital on their part.

    It should also be a crime (to me anyway) for a deposit bank to lend out money while offering a guaranty it can not keep. It should not be considered a failed business but a crime against each and every depositor. After all, this is the prime reason why we have central banks.

    Term deposits are a more genuine approach to loan banking.

  31. Rob,

    Allowing the bank to lend out your deposited money is simply a freely entered into agreement between you and your bank. The bank makes money from interest payments, passes some of this interest on to you and gives you a banking service in exchange. If you are not interested in trading with the bank, then don’t. Nothing is preventing you from storing your money in a vault somewhere or starting a service whereby you simply charge for banking services. I’d be interested in what fees you’d have to charge to give your customers the full range of banking services they enjoy today:

    – Austomatic Teller MAchines
    – Electronic Funds Transfer at Point Of Sale
    – Chequing Accounts
    – Direct Debits
    – Credit Cards
    – Mortages
    – Short Term Loans
    – Share Trading
    – Foreign Currency Exchange

    I’d guess that the cost of all of these services would have to be profitable for you, rather than some being loss leaders to attract customers and their deposits, which are essentially at-call loans to the bank.

  32. Bob

    Any political party that advocates compulsory taxation cannot truthfully label themselves libertarian

    Utter nonsense. Libertarians do not believe in the abolishment of the State, merely a reduction in its size and scope.

    You’re talking about Anarchy, which is the stomping ground of loons, goons and bored middle class students with too much time on their hands.

  33. Shem Bennett,

    IMHO, anyone attempting to implement libertarianism incrementally is doomed to failure. Name one instance where a state has been successfully reduced in size, permanently, due to a push by libertarians.

    The state always expands, just as the capitalist always invests. Its just the nature of the entity. Trying to reverse its expansion will always fail. And in the off chance you did succeed, whats to stop it returning to its original bloated size?

    Consider that you have some 30% of employed people working in the public sector. (I don’t have the actual figures with me.) You need at least 10% public support to start a real movement. And yet you are going to come up against 1 in 4 members of the Australian population, who are essentially aggrandized welfare recipients…

    You are correct in asserting that I am more or less an anarcho-capitalist. The only ‘state’ I would put up with would be a minarchist state, which is unable to create and enact new legislation, consists only of voluntarily elected diplomats, and does not make an income from compulsory taxation or seizure of property.

    Such a limited state entity would be of benefit, whilst trying to co-exist in a world full of other states. And, in the event chaos were to break out, the nation would have a rallying point, even though the minimum state body could do nothing about it.

  34. So let me get this straight Bob. You want no State but you want to force everyone to use commodity-based currency?

  35. Oh and more pertinently you call yourself an anarchist but you want to ban maturity transformation by banks? Your position here is even more inconsistent than that of the most vocal advocate of banning fractional reserve on Oz blogs. What business is it of yours if I want to deposit my money to earn interest and don’t need it to be on call? Mind your own business.

  36. Bob,

    Have you read the terms of your bank account. It is usually a booklet of 10-15 pages outlining the terms and conditions under which you lend your money to the bank. It forms the basis of your contract with the bank. I have read such booklets from several banks and nowhere have I ever seen a bank suggest that they store your money or don’t lend it out. In fact the terms and conditions from my own bank make it plain that there is a chance that in some rare instances they can’t provide a cash withdrawal on demand. Your claim that banks are misrepresenting reality in this regard seems like ignorance at best and outright deception at worst. And a survey of the average person in the street asking what the bank does with their money will quickly tell you that the vast majority of people know that it gets lent out even if some of them are vague on the details.

    In post #23 you all but accept that fractional reserve banking is not the problem. The problem is with fiat currency and bad monetary policy. Throwing babies out with bath water makes absolutely no sense. Outlawing fractional reserve banking would do vastly more damage than retaining fiat currency.

    And banks are certainly far from being the only entities that generate the profits off the back of other peoples capital. Vast numbers of businesses in a multitude of industries all do exactly the same thing. And it is all largely enabled by the banking sector that provide a very useful matching, aggregation and management service bringing together those with capital to spare and those with applications that capital can be applied to. Of course if you don’t like this service you are free to put your capital elsewhere.

    Regards,
    Terje.

  37. In the words of Ron Paul, we need to define “what the role of government ought to be.”

    I feel this needs to be clearly stated in any libertarian party’s policy. It is certainly fair enough for us to progress slowly towards the ideal of liberty for I can’t imagine us being taken seriously otherwise. I don’t however feel you can cloud libertarianism, in that with policy released we should be setting out where we want to be and how we are going to get there.

    I imagine the ultimate goal is small government, where the pathway to this is smaller government.

  38. I don’t think Rob and Bob are the same person with a typing disability. But then …

    For the eleven millionth time, this is the ALS blog. Some bloggers here (like me) are in the LDP, some are not. But it is not the LDP’s blog.

    For those interested in Australia’s only libertarian political party, go to its website http://www.ldp.org.au.

  39. Rob and Bob are both generally short for Robert and they both look similar so I had not actually noticed that they are separate people. Having now taken a quick glance at the admin view of the respective comments they don’t appear to be sock puppets because they originate from different IP addresses.

    So sorry to Rob and Bob for thinking you were both the one and the same person. I’ll try and make a clearer distinction in future.

  40. Fair enough Terje (I’m no relation to Bob), I enjoy reading your comments. Your knowledge on this is far more developed than mine. Perhaps I shouldn’t talk in absolutes.

    I will say from my understanding (correct me again if I’m wrong) – its more if a bank lends out money, the actual stock should go to the borrower (if a $1000 cheque is written in favour of the borrower, the bank should remove/eliminate the same amount from their reserves given to them by the depositor).

    I agree that outlawing fractional reserve banking would do damage, but I feel it will remove the ability to gain something for nothing – this is ultimately inflationary and beneficial to those who use the new money first.

  41. The purpose of the ALS blog is to comment on topical issues and to provide a forum to discuss classical liberal or libertarian ideas. It is not aligned to any one political party, though the LDP is currently the party that most closely reflects the views of the writers.

    The contributors to the ALS range from the socialist war-mongering utilitarians to the gold standard-obsessed, Ron Paul devotees to the passivist minarchist idealists. 🙂

  42. Rob,

    I think it is worth understanding the debt creation process in some details. Let me attempt to do paint a bit of a picture.

    Lets say that you go to the bank and want to borrow $20000 dollars. The bank decides that your a nice guy and worth the risk. This is what generally happens:-

    1. You open a bank account and deposit the $1 minimum in cash.
    2. You sign a contract saying that you owe the bank $20000. This is now the banks asset and your liablity.
    3. The bank makes an entry in your bank account saying that they owe you $20000. This is your asset and their liability.
    4. At this point no money has been created and all liabilities and debts are effectively neutralised.
    5. You present to the bank a withdrawal slip for $20000 so you can go and buy that heaps cool car from the guy next door.
    6. The bank dips into it’s cash drawer and finds the $20000 cash for you.
    7. An alarm goes off in the banks computer saying that the bank overall and the branch in particular now has less cash reserves sitting around in the cash drawer.
    8. Unless someone else happens to make a cash deposit to fill up their cash drawer they now need to make up the potential shortfall in cash by attracting more deposits (via extra marketing or a change in interest rates or just in the normal course of business).
    9. If the bank fails to maintain ample cash in it’s drawer then it may have to borrow cash from another bank. It will do this in the overnight cash market.
    10. The interest rate in the overnight cash market is determined by supply and demand.

    Much of this so far is the same for any non-bank business. Cash flow is the name of the game. Receivables and payables are important assets and liabilities but it is the immediate demand and supply of cash that decides if the business is solvent or not.

    11. The interest rate in the overnight cash market is heavily influenced by the biggest player which is the central bank. Unlike other players they have the power to lend unlimited quantities of cash because they can legally print more of the stuff. In practice they only lend (or borrow) as much as is necessary to achieve their interest rate target.

    I hope that casts a little light on the topic.

    In the case where somebody writes a cheque there is no impact on the banks reserves. If the cheque is presented back at the same bank then no reserves are used at all. In this instance the circulation of cheques becomes a cash substitute and will in effect reduce the demand for currency (and ultimately put downward pressure on the currencies value). If the cheque is presented at a rival bank then the rival bank will come and make a cash claim against the first bank and there will be a drain on the reserves of the first bank.

    Regards,
    Terje.

  43. Thanks for the run down. So in a system where a central bank doesn’t exist, the funds would be borrowed from a genuine supply thus not causing inflation?

    Quoting John Stuart Mill – He who knows only his own side of the case, knows little of that.

  44. For all of you incapable of noticing the difference between an ‘R’ and a ‘B’, no I am not Rob.

    There is nothing inconsistent about my economic view. As I said earlier, fractional reserve banking is only to blame in its current manifestation, not in its fundamental concept.

    And, outlawing central banking would not force you to use a commodity currency. You are still perfectly free to ask your bank to give you paper to represent your real wealth, if you are so inclined.

    In my view the LDP is not worth voting for because;
    a) you are not real libertarians
    b) the majority (or the loudest) of you seem to be ‘in it for the money’ rather than out of moral / philosophical concern for the wellbeing of our society.

    Lib/Lab may be essentially socialists by incrementalism, but at least the people in these parties have a moral compass. Furthermore, the larger the nanny-state gets the closer we come to libertarian revolution. So, frankly, bring it on.

  45. a) Bullshit.

    b) Oh dear God I wish that wasn’t bullshit.

    c) Soon I’ll be accused of dating Miranda Kerr. My response to that allegation is the same as to the former.

    It is ironic that you mimic Marx to support minarchy or anarchy.

    “Outlawing central banking” is a very broad term. I hope you mean ending Govenrment control of monetary policy and supply. Larger banks perform central banking duties in a free markets as clearinghouses.

    I guess it mightn’t be appropriate at all to bring up my tax proposal for the LDP now: but here it goes.

    We should move to a single tax of 20% GST and no other taxes, reduced incrementally as economic growth allows. This will intially see a smaller, but similar level of taxation raised. Split it equally amongst the tiers of Government and let funding determine responsibilities, end duplication of services and incrementally privatise assets by mutualisation and gifting of corporatised shares or cash proceeds from the sale of real assets. Offset the rate of tax against funds levied in a “tax me more fund”.

    A final target of 10% GST as the only tax seems reasonable.

  46. #43. If there was no central bank then inflation would still be possible. And it is possible to have a central bank and low inflation. You could even have a gold standard and still have a central bank although their monetary policy would clearly be different.

  47. Mark,

    If you want to get idealistic I would suggest that the federal government should have no direct powers of taxation and instead should be allocated a fixed percentage of state tax revenue. That would provide an incentive for the states to keep their operations lean because that would mean less revenue flowing out of the state. The EU has this federal structure and I think it is extremely promising.

    Regards,
    Terje.

  48. What do you mean it isn’t a plan? An aspiration is to “cut tax”. My proposal is conditional and flexible.

    Actually it is a hell of a plan I think we should aspire to.

  49. Terje, Mark, what are your thoughts on decentralisation in regards to taxation (a return of primary taxation to the states)?

    Would it create competition to produce better tax systems, or decrease efficiency?

  50. Rob,

    I think centralisation of taxation is a mistake. I think decentralisation and competitive federalism is the way to go. Decentralisation and competition keeps taxes low. Whilst the regulatory excesses of the EU are a concern the structural ways in which their central authority is kept fiscally weak bodes well for this modern attempt at federalism.

    The problem I see with Marks “plan” is that it seems to entail greater centralisation. I think this is the wrong structure.

    Regarsds,
    Terje.

  51. Mark,

    Your plan would never work. By the time the third year of your government came to pass you would be displaced by one of the prominent socialist-leaning parties and any and all tax cuts and reforms would be undone.

    The liberals tried to lean a little to the right, with respect to industrial relations, and look what happened.

    Freedom can only be won by revolution. There is no instance (that I know of) in history where it has been won incrementally.

    As for GST, any tax is too much tax. Disband the public service, auction the public assets, and return the taxes to the people. Hell, rewrite the consitution. We are no longer a British colony, we need a real constitution, and a real free society.

    Just because we all disagree with Karl Marx, and the socialist ideology, does not mean we should be ignorant of its teachings. The Marxists understand the need for a revolution – if one wants to change the fundamental structure of governance in society.

    Finally:

    I am rather sick of you pseudo-libertarians in the LDP twisting my words and implying that I am a socialist. You act like snickering children. And you haven’t got a clue about how the real world works. Grow up.

    If you ever want a shot at running this country I suggest you find someone with leadership, responsibility and intelligence. Based on what I’ve seen that would mean looking outside of your own party.

  52. The problem I see with Marks “plan” is that it seems to entail greater centralisation. I think this is the wrong structure.

    Centralisation is not necessarily required for Mark’s plan. A central system for collecting the tax would probably be best, although even that is not obligatory. But not for spending it. If there was a fixed formula for distributing the funds to the States, for example, there may be less centralisation.

    I think it has merit. It would need to be properly costed to get to first base as a policy, but I’m sure Mark and the other clever economists can do that.

  53. I am rather sick of you pseudo-libertarians in the LDP twisting my words and implying that I am a socialist. You act like snickering children. And you haven’t got a clue about how the real world works. Grow up.

    And you are highly qualified to offer that opinion because …..

  54. Bob, whilst I would never bandy the word ‘Socialist’ about in mixed company or in the presence of kidlings, on some sights that call themselves ‘Anarchist’, they come across as socialist. They also favour small units of government, called communes. They also use the word ‘Libertarian’. Like you, I favour a modified Anarcho-Capitalist system. I keep changing the words and titles, but my current favourite is ‘PanSecessionism’. If you own the land, you should be able to rule the land. ‘Let Owners Rule!’

  55. David – It is centralised collection and centralised rate setting that I think is the key problem. If Mark can get around those issues then I’ll be more sympathetic. I find the GST less offensive than income tax so if he proposes to fund the federal government with a GST instead of income tax then thats an improvement. However leave the states to raise their own revenue rather than chain them to the federal purse. I don’t mind if the chain runs the opposite direction.

  56. nicholas gray,

    I share your dilemma. If there exists an ideology that sits in between minarchism and anarcho-capitalism, then that is what I believe in. I am ever tempted to become completely anarcho-capitalist, but I cannot picture a government-free nation being able to exist effectively within the international community.

    As for the idea of ‘PanSecessionism’… I largely agree, with some limitations. The civil rights of any guest must be upheld by the land owner; unless the guest aggresses against the land owner, in which case the land owner has the right to defend himself and his property.

  57. Bob, I consider that you both ‘own’ and ‘are’ the body that calls itslef Bob. ‘Let owners rule’ themselves, as well as material goods. Local Councils could own the roads and other properties called Public, and could charge for the use of the facilities. Let’s turn Counties into public companies, open to all who live next to a public road! I also have put forward a concept of time-share government, where all members must first do some community service (such as volunteer fire duty) to get the right to vote on public issues. That approach allows all members to be part of the local militia, which could train with neighbouring militias, etc. That would solve the existence angle, and if we’re all an equal part of the government, with equal votes, then we’d all have a vested interest in keeping it small.

  58. Terje,

    A 20% GST and no other taxes.

    But now, the detail: each tier of Government gets one third of the share. States and shires get their share of the 1/3 split on a per capita basis.

    Centralised collection is probably better. But it does not mean centralisation – only for collection and the setting of the total tax take. States and shires would have more, and roles would be decided by finances. This would reverse centralisation by fiscal strings as at present the Commonwealth distributes funds by grant, and has undue influence on State policy.

    I like what you propose Terje (ground up), but it isn’t constitutionally possible. States can’t levy a GST and transferring income tax (less preffered tax) powers back to States would be very difficult once they are referred.

    The rate can be eaten away at a set rate or by a tax/GDP rule (which would both require a short term debt funding cap for it to work). I say let the GST eventually go to 10%, and offset it vs the “tax me more fund”.

    Welfare: Basic income. A negative income tax is just like a basic income and income tax. I am replacing the income and all other taxes with a sole and pure VAT with no exemptions.

    State Owned Assets: Mutualise to interest groups, corporatise gift shares of Government business enterprises (GBEs) and give cash trasnfers for the sale of real assets and unincorporable assets and wound down GBE firms.

    Bob, Ayn rand was pretty close to that. So am I. You should look up the Texas Constiution Ratification Fund. I like that idea.

    I hope that explained something.

  59. I accept that a negative income tax of the type that the LDP proposed at the last election is equivalent to a flat income tax with a basic income. And I agree that modifying that to use GST instead of the flat income tax would be a better approach. So if you were to merely propose to:-

    1. Replace all income tax with a GST.
    2. Replace all welfare with a universal basic income.

    Then I’d be right behind you.

    The bit I object to is the attempt to abolish all state and local taxes by funding those tiers of government from the central GST.

    In my view it would be better to complete steps 1 and 2 above and to then cease passing out federal funding to the states. They could pick up the slack with land taxes, commodity taxes or any number of alternatives or they could cut spending. In democratic accountability terms and to foster competitive federalism it is best to have the states raise the revenue that they spend.

    Can you tell me what part of the constitution bars the states from having a GST?

  60. nicholas gray,

    Robert Heinlein explored the concept of a public company replacing a government in the novel ‘Podkayne of Mars’, which you may or may not have read.

    In the novel, the planet Venus is owned by a public gaming company. Anything that does not directly or indirectly cost the company money is legal.

    Certainly, it is an interesting notion. Unfortunately, I fear that it would evolve into an active, and coercive, government body in the long run. Incidentally, that possibility was also explored in another of Heinlein’s novels: ‘The cat who walks through walls’, in which a space habitat, which owned by a public company, becomes a fascist dictatorship.

    I like the idea of many smaller companies owning what we now consider to be public infrastructure. Imagine that each suburb formed a land owners association which, in turn, owned a small private company, which owned and maintained the necessary infrastructure of the suburb. The profits made would likely be plowed back into upgrading infrastructure. Thus, the more a road or water main is used, the better it gets.

    Re: existence angle:
    I still think, at the end of the day, the entire nation, if it wishes to remain a single nation, needs a ceremonial and diplomatic head of state; be it a single person, or a group of people. I honestly don’t know entirely how that would work out, as I would not be willing to give them any sort of real power. Perhaps they would receive voluntary contributions to perform their diplomatic services and be re-elected every five years.

  61. s 90.

    “They could pick up the slack with land taxes, commodity taxes or any number of alternatives or they could cut spending.”

    Top down reform isn’t popular, but it gets the job done. Competitive Federalism might lead to lower tax outcomes, but why not just go the low tax route to begin with?

  62. Mark,

    To whom do you seek to market your lower tax system? Who is your target audience?

    Are you marketing it toward libertarians, or are you marketing it toward the ‘progressive left’?

    True libertarians will disagree with your flat tax as it is a compulsory tax. And progressive leftists (center-socialists) will think the tax rate is too low (indirectly), as they prefer handouts and poorly provided public services to liberty and the free market.

    So where do you plan on getting your votes from? Left and right are both statist, and increasingly socialist. Neither will vote for you, libertarians probably won’t vote for you, so where will you find your votes?

  63. Bob,

    If Libertarians won’t vote for the tax policy which involves the lowest tax rate being offered by any party then who will they vote for and why?

    Regards,
    Terje.

  64. I’m sure its been discussed before, but I haven’t been able to get a legal opinion/meaning to section 115 of the constitution. What were the writers of the constitution inentions regarding this particular section?

  65. Terje,

    In a non-compulsory system libertarians most likely would not vote. In our system they likely vote practically rather than ideologically. Either that or submit an informal vote.

    Incidentally, I specifically do not consider a 30% flat tax to be any lower than the current level of taxation. And, as with all new tax systems, by voting LDP in to power, we risk retaining the old tax system in addition to the new tax system. At which point the question really becomes ‘Do I trust the LDP enough to vote for them?’ to which my reply would be ‘no, I do not.’

    Party may only remain consistent with the true libertarian philosophy if it repeal taxes, with the aspiration to eliminate compulsory taxation altogether. Creating new taxes to replace old taxes is NOT libertarian. It is closer to center-reformist.

  66. I think the LDP and ALS should be focused on getting the message out there about cutting income tax.

    Inflation, tax rebates and budget surpluses are all been discussed in the media right now. While Australia may not be ready for libertarian principles, I think they’re ready to listen to the the benefits and principles of income tax cuts.

  67. The idiot public is more interested in purchasing houses they can’t afford and stopping the evils of non-existent man-made global warming.

    Everyone I speak to (who isn’t a libertarian) about politics makes liberal concessions with respect to compulsory taxation. A common one is: “But we get a lot of services.” Another is: “But poor people have to eat too.”

    The vast majority are either so brainwashed that they believe the government actually helps society at large, or so afraid of what they consider to be lawlessness that they won’t hear a bad word about the state.

    And don’t forget the 20 – 30% of jobs which exist within the public sector; The tax consumers. You have a huge resistance to any sort of reduction in taxation right there.

  68. Bob, there’s more than just progressive lefties and libertarians in the world.

    I personally believe the LDP needs to target people that support low taxes and civil rights. People that oppose middle-class welfare. People that support streamlining and efficiency in the public sector. Libertarian reform IS possible if we can gain enough support.

    We’d like the support of libertarians and anarcho-capitalists, too. But the latter group is often offended by our political compromises. A lot of members of the LDP are anarcho-capitalists themselves, however. Just because our policies compromise what you view as libertarianism that doesn’t mean our personal values do.

    Mark:
    Welfare: Basic income. A negative income tax is just like a basic income and income tax. I am replacing the income and all other taxes with a sole and pure VAT with no exemptions.

    How do you plan on providing a NIT based on a GST? Make everyone keep every receipt they get? Have a national ID card that you need to use with each purchase?

    I guess Terje’s system of having a universal income would be okay (though it wouldn’t be a NIT in that case) but think of the churn! Less than now, sure, but the majority of the population would be paying GST only to get it all back as a guaranteed income.

  69. Shem Bennett,

    The people of whom you speak exist only in America. Nowhere else in the world does such a class of voters exist.

    The left-right paradigm is a false dichotomy. Really there are only two schools of thought, and therefore two types of voters; those who want more state influence, and those who want less state influence.

    The reasons for wanting state influence are irrelevant. Either you want it, or you don’t.

    For those of you who have read The Libertarian Manifesto, you may be familiar with Murry Rothbard’s assessment of the two prominent classes of any grand-scale political movement.

    The incrementalists and the separatists.
    Incrementalists try to move slowly toward their goals, through small policy changes, across long periods of time.

    Separatists simply break away from the mainstream and attempt to live by their ideology in their own communities.

    In the case of libertarianism neither approach will work. The incrementalist compromises his own ideology and therefore the final goal. In addition, he effectively tries to hold back the tide, continually battling against tax increases and inevitable state expansion. Whereas the separatist cannot live peacefully within a statist society, as they will never be left alone by the government.

    As he concluded: Freedom can only be won by revolution.

  70. Bob,

    You seem to advocate revolution and overthrow of the state. Just exactly how do you propose to do this and how do you reconcile such actions philosophically with a principle of non-violence except for self defence?

    We all agree that the status quo of big central government is flawed, but we’re stuck living amongst people who can’t see the same problems that we see. The state is a comforting blanket to most, not the suffocating pillow we claim. Organisations like the ALS and LDP can only start to open people’s eyes to the faults of the state. If we’re successful, we won’t need to violently overthrow the state because the people who are the state will begin to think like us and it will dissolve away with time. We’re not living under some totalitarian regime, we live in a social democracy where life is good but could be better if we returned to a classically liberal model for state. Revolution is nonsensical, this is not a universe for V is for Vendetta or Firefly or Atlas Shrugged.

  71. I agree with Brendan. All this talk of revolution is comical and is the stuff of Year 10 students who should be out getting laid, experimenting with pot and learning how to break Bob Hawke’s Yard of Ale record.

    It is possible to shrink the State without revolution. Margaret Thatcher achieved it in the desolate 1980s Britain as did Reagan. And the call for less government is now getting louder in England following ten years of huge expenditure on schools and hospitals with nothing to show.

    Bob – politics is cyclical. During the good times, people vote for group hug/caring/sharing issues such as global warming. During the tough times, they demand the govt get smaller and spend less of their money. The tide is turning in the UK – but not yet in Australia. Patience, dear boy, patience.

  72. Brendan,
    The state is a criminal organization. Self-defense, the return of private property to its rightful owners, and compensation for previous wrongs are all justified. If it were an organized crime racket you would have no objection to it being shut down forcefully. But because we label it ‘the government’ you suddenly raise objections…

    The level of overall government coercion is subjective. When the majority of the population think the same way (that is: the way the government wishes you to think) then people seem to believe the state is not absolutist. It is only when people attempt to diverge from the mainstream, and find they cannot, that it is suddenly (and shockingly) realized how pervasive the state is.

    In this country it is illegal for parents not to obtain a birth certificate for their newborn children. It is illegal to home-school your children without the consent of the government. It is illegal to own firearms without a permit. It is illegal to work without giving the government 30% of your income. It is illegal to buy and sell various substances on the free market. It is illegal to buy and sell ANY substances, goods, or services on the free market without paying GST. It is illegal to own and operate a motor vehicle on public roads, which you are forced to pay for, without a license, valid registration, and third party insurance. The list goes on, but no one seems to notice, because very few people are attempting to diverge… so far.

    Mick,
    The mistake the founding fathers of the US made was letting a state exist at all. It is the very nature of the state to expand and seek more power, more wealth, and more influence.

    Thus we must never make the same mistake. Whatever benefits a real government, one that is capable of passing legislation, may bring, they are sharply outweighed by the above stated tendency… the nature of the beast. To answer your question: We don’t grant the government the power to pass legislation, engage in compulsory taxation, or declare war. In essence no real government at all, just a figure head and diplomatic body.

    pommygranate,
    Your claim that it is possible to shrink the state is void. Both those attempts ultimately failed. Any progress made by incrementalism is inevitably overturned by state expansion.

    Finally, to answer the general mood on the topic of revolution:

    Revolution is not unrealistic, it is also not something one person can begin. The climate must be right, the issues must be clear, and the desperation must be extreme.

    A revolution is a meeting half way. We no doubt have the leadership, now we must wait for the right climate.

    Incidentally, any perceived implication that a revolution need be violent is no doubt due the connotations of the word. Most people associate the concept of revolution with the French revolution.

    However, given that the state has a monopoly on the use of legal force against disarmed citizens, it remains a fair bet that at least some blood will be shed as a result of any revolution.

  73. Bob,

    No doubt that you are correct in your definition of revolution. Until the violence of the French and American revolutions, the concept of revolution as simply a transition from one identifiable era to another, and also had a cyclical nature.

    If this is the sort of revolution you advocate, then it will be a passive one, and it will be done through the ballot box.

    No libertarian craves the power of the state, the philosophy is the antithesis of wielding the state to achieve your own agenda. Thus, the most secure way to secure liberty is to convince others to want it as much you do.

    The demise of the state as an entity may be possible and even foreseeable, but only when every single individual on the planet embraces liberty to the same extent as we. The existence of other states forces us to embrace the concept if only to protect ourselves collectively.

    Nothing about libertarianism foresakes collective action absolutely, all that it requires is that it is done voluntarily.

  74. David

    very good 🙂

    I’m still intrigued by how i am ‘in it for the money’. Show me how, Bob! Show me the money!

  75. Ah… you LDP backpatters.

    Why doesn’t David try argue some issues instead of constantly attacking my character? So far, according to him, I am a socialist, a nubile teenager, and an old, bitter, and insane man.

    Frankly, David, you have the mind and attitude of a child. And, because of this, you are a liability to the LDP.

  76. Shem:

    30/30 can be described in one way as a 30% income tax for those earning above 30k and a -30% tax for those earning less than 30k. Another explanation is that 30/30 is like a flat 30% income tax and a basic income of 9k.

    I would merely replace the income tax with a consumption tax.

    “So where do you plan on getting your votes from? Left and right are both statist, and increasingly socialist. Neither will vote for you, libertarians probably won’t vote for you, so where will you find your votes?”

    Don’t be facetious Bob. It is a plan to wither the role of the State. It begins with rationalisation and ends with a night watchman State without the result or perceived result of making anyone worse off.

  77. “Don’t be facetious Bob. It is a plan to wither the role of the State. It begins with rationalisation and ends with a night watchman State without the result or perceived result of making anyone worse off.”

    I understand the concept of incrementalism, but my question is still valid: Where do you intend to get your votes from? In order to do anything you must first be elected. A plan is useless without the ability to execute it.

  78. I would merely replace the income tax with a consumption tax.

    But then you have people paying tax and receiving welfare… One of the pros of 30-30 is that tax and welfare are mutually exclusive, hence reducing churn.

    I mean, by lowering and combining taxes churn is still going to be drastically reduced, but it’d be nice to cut out “money recycling” altogether.

  79. “I understand the concept of incrementalism, but my question is still valid: Where do you intend to get your votes from? In order to do anything you must first be elected. A plan is useless without the ability to execute it.”

    Jesus Christ, you believe you can get votes by trotting out Graeme Bird’s anti banking tirades?

    But more to the point, it can appeal to everyone from hardcore libertarians to social democrats who believe the free market works better but have second best and winner and loser type concerns…

    Shem: the point is there is no real difference, except that consumption taxes are more efficient.

    The churn itself is not as important as how incentives change.

  80. Mark:

    I am a hardcore libertarian / anarcho-capitalist and your plan does not appeal to me.

    I doubt your plan would appeal to feminists, who make up a large percentage of the socialist voting population; Simply because its too simple and it doesn’t focus on giving women enough ‘free’ money.

    I doubt your plan would appeal to modern day conservatives, as they obviously like the way things are.

    Male leftists (do they even exists? – oh yeah stupid Michael Moore) they are unlikely to vote for you:

    All socialists support the socialization of industry. They believe it is the most moral. (Despite the fact this has been disproven in theory and in practice time and time again.) They don’t like the free market, they always association it with images of children in coal mines.

    At the moment you are getting very few votes, you would not get my vote (and indeed didn’t last time I voted, even though I saw your box on the senate ballot), and you have not focused on targeting any new groups of voters. Your current tactic is failing and yet you persist in claiming it will work.

    I don’t mean to be rude about it, but I want the LDP to see that their current attitude and direction is going to take them absolutely nowhere.

  81. Okay. So we shouldn’t try to appeal to as many people as possible and incrementally change the role of Government from paternal welfare state to a “nightwatchman” state?

    What should we do?

  82. ‘What should we do?’

    A good question!

    Let us look first at what you should NOT do.

    You should not attempt to ‘appeal’ to the widest range of voters. This is a common misconception about modern politics. The act of ‘appealing’ to the widest range only works when you have something to bribe your voters with.

    If they are socialists you bribe them with increased socailisation and ‘free’ money. If they are conservatives you bribe them with tax cuts and promises you will keep a budget surplus.

    If they are old people you bribe them with increased healthcare, and if they are young people you bribe them with whatever they will happily accept. (In the most recent case: change itself).

    You get the point. Your campaign fails because you offer no bribes. Of course, bribery won’t work for libertarians, because people are too caught up in their own false beliefs to listen to any element of truth about the morality and practicality of the free market and nonaggression principle.

    So, what are the other ways to gain votes, other than by buying them?

    The Marxists use the technique of ideological purity in a cult-like manner to gain votes. So this is one way. This is probably the best way to describe the constitutionalist movement in the US right now, the head of which is Ron Paul.

    You could try the above technique; shifting to an ideologically pure stance and, with luck, you might start a grass roots movement.

    Another way is the way Hitler used to rise to power; propaganda (except this time your propaganda is moral because it would be true). This technique involves finding target voter groups and specifically marketing libertarianism to them. That means finding farmers and actually convincing them outright that their current beliefs about subsidies are wrong, and doing the same with other special interests groups, and so on. I admit this is not an easy approach to take, but valid nonetheless.

    In your shoes I would do both of the above. Purity of ideology, grass roots, and propaganda. I would also wait. As state power grows and people lose their fundamental freedoms, the reinstatement of those freedoms becomes a form of bribe. So the longer you wait the better chance you have.

    Practical steps:
    – Your website needs a forum and an overhaul.
    – You need to get some smart people who are educated in Austrian economics up there predicting the Australian economy’s woes. A front page news section.
    – You need a pure ideology that everyone in your party follows and that everyone in your party can argue and prove.
    – You need local grass roots advertising, starting in areas the most affected by big government. High crime areas, gun owners, people living in poverty. Every vote is equal, find those who are disgruntled and turn them into a grassroots army.
    – You need donators; target people with money.
    – You need advertising which is exciting, flashy and new. No more boring addresses to the audience on the tail end of an ABC program.

    – And you need to start all this NOW. You won’t win if your campaign lasts just 10 weeks. You want to effect fundamental change in society and that takes a lot of energy, money, effort and dedication (which is one of the reasons your ideology must be pure!) to do that.

    I hope these insights help the LDP to succeed.

    Me, personally, I am just waiting for the state to implode. You are welcome to try hold back the tide; and maybe, just maybe, you will succeed. But the state will implode eventually of its own accord (as history has proven), and, at least at this stage, the implosion is still such a long way off (decades) that it isn’t worth my time to fight just yet.

  83. Hate to spoil your fun, but there are several reasons for people choosing a libertarian philosophy: morals, utilitarianism, pragmatism, tradition, individualism or life experience. Even simply choosing what is closest to personal ideas and feelings about right and wrong.

    So I think being “idologically pure” will alienate people. Firstly, it is impossible, secondly, it is abrasive. We can always try to persuade them, rather than abuse or shaghai people into somethign they don’t understand. Make them learn our behaviour, not smash them with sensationalism.

    You are wrong to generalise about other groups. Socialists aren’t all Trotskyists or people with a rather nasty streak of bias against business and economic growth. They are virtually all normal people who have fallen into the pitfalls of pre marginalist economic thought. “Wages will always go down” “Business inevitably end in monopoly” yes the Marxists repeat these claims but most people just need gentle persuasion and examples as to why socialism doesn’t work and that they are better off without it.

    You have a strange position. We can’t bribe people but we need to bribe people (so how did you and I become libertarians – I thought through issues and became more economically literate). We need to indoctrinate people? The last thing I want is robots and zealots scaring away the support of the general public.

    Yes we do need more money etc. We know that. Thanks. You can donate. Better still you can join and help us get registered at the State level for elections.

    The State won’t implode. It has been around since one caveman beat another oiver the head and told everyone it was for their own good.

    It needs one hell of a leash.

  84. Bob, RE Revolutions.
    A study of history shows that many revolutions have a mass component to them, which then translates into a socialistic democracy. Even the American rebellion, called a revolution, created a new tier of Government, called the Federal government. When you talk about revolution to create a libertarian society, I fear that the need for numbers for victory will guarantee a socialist outcome. Therefore, I believe that the gradualist approach has the best chance of working.

  85. I don’t see the LDP as being about promoting a pure libertarian platform. It should be about promoting meaningful public policy reforms that moves Australia towards libertarianism. Policy proposals should stand on their merit not on their purity.

    If somebody wants to start an Australian party commited to libertarian purity more along the lines of the party called Libertarianz in New Zealand then I wish them the best of luck. In the interum I’d suggest they vote for the LDP.

  86. Bob

    You raise a fair point in that it is becoming harder and harder to advocate policies that will shrink the state when an increasing number of people are dependent upon it. In the UK, more than 50% of voters are dependent on the State in some form or other.

    It is also near impossible in boom times such as these to make a serious push for greater economic freedom. That is only possible during downturns or rising tax bills.

    However, i have noticed a growing concern about the nanny state from people who normally only read the Sports sections. Appealing to personal liberty makes sense right now and will gather votes.

    Adopting a principled approach to policy is also something the LDP practices. Check out the policies page on the website. This will also attract voters. But it will take time and money. If you have any ideas re sources of funds, please let us know.

    I received my copy of the annual statement of the CIS last week. In 2007, they raised $1.4mm in donations. There’s money out there for classical liberal policies. It’s a matter of finding it!

  87. Pommy, even Mark Latham had a newspaper column deploring the nanny state! But can we turn this into votes for the L & D party?

  88. Mark,

    You have a poor understanding of people’s motives, various political phenomenons (such as marxism), and of the nature of the state. You fail to derive any sort of lesson from history or objectively review your beliefs to ensure consistency and compatibility. To be truly libertarian is to be anarcho-capitalistic; Any institutionalized use of aggression against anyone is obviously not consistent with libertarian knowledge (economics, human behaviour, universally preferred behaviour – non aggression principle) and therefore both immoral and syllogistically irrational.

    You must be ideologically pure. Your policies must conform to your ideology. And you must believe and accept your ideology as fact.

    You must be able to prove to people that the free market, and your policies, are the most moral and the most practical of any choice they could ever make; Prove the evil of the state.

  89. Bob, this just terrifies people. We’ve all debated classical liberalism and we all believe it to be logical and morally correct. This doesn’t win votes, it just makes you out to be a weirdo.

    You must be ideologically pure. Your policies must conform to your ideology. And you must believe and accept your ideology as fact.

    ………I am the angle of death. The time of reckoning is upon us!!!

  90. I think people vote as much if not more for the values that parties espouse as for the policies or ideology. Personally I think the LDP should say it wants to save the poor, heal the sick and make jobs for the unemployed. Of course the means it advocates and hopefully the means it uses would be to hack away at regulations, taxes and price controls and to shrink government. If the LDP said it wanted to save the poor, heal the sick and make jobs for the unemployed it need not mean it thinks the government should save the poor, heal the sick and make jobs for the unemployed. It is reasonable (probably more reasonable) for this to mean the government should back away.

    Most people who vote left don’t vote left due to a commitment to the ideology of the left. They vote left because the language of left-wing politians is concerned with those in our society that are seen to be doing it tough. Most people that vote left-wing do so because they care not because they think deeply about politics.

    If the LDP or others who favour smaller government were to retreat from the political stage and wait for revolution they would do liberty a massive disservice. The Bobs of this world can sit on their hands and wait for their revolution but why piss on those that try to hold the line in the interum?

  91. Terje

    I couldn’t agree more.

    ‘The LDP is passionate about enriching the lives of all people, not just the privileged and the wealthy. Its policies will enable those on the lowest rung of the ladder to come off the soul-destroying narcotic of welfare and help them find dignity and employment.’

    That’s the language the LDP should use.

    Not, ‘we’re anti-right, anti-left’

  92. That’s the language the LDP should use.

    Not, ‘we’re anti-right, anti-left’

    That’s like saying a tradesman should use a hammer, but not a screwdriver.

    They serve different purposes.

  93. I’m biased in this. I really like the original catch phrase which was “smaller government, stronger society”. I think the argument for “anti-right, anti-left” had some merit but I was never sold on it.

  94. This is not the forum for a micro-analysis of the LDP, but i do agree with Terje’s sentiments that a classical liberal party should ensure it speaks ‘modern’, upbeat English and banishes all political jargon (such as ‘left’ and ‘right’) from its messages.

    We do care passionately about the plight of the less privileged, we do want people to receive better medical care and their children a better education. Let’s say so!

    ‘smaller government, stronger society’ like it 🙂

    more freedom, more responsibility’

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