Reader Mail #55

This post on The Picket Line had a huge error. The author is helping poor people file tax returns, so they can get the Earned Income Tax Credit.

Up to a certain income, the credit is phased in. Then, there's a plateau; the credit neither increases nor decreases. Then, there's a phase-out range.

If you have no children (married or unmarried), the Earned Income Tax Credit has a phase-in rate of 7%, a plateau, and then a phase-out rate. If you take into account Social Security and Medicare taxes (15% of salary), you would be better off having off-the-books income than having taxable income and getting the Earned Income Tax Credit.

If you have no children, you are still a net taxpayer.

With 1 child, the phase-in rate is 34% (married or unmarried). With 2+ children, the phase-in rate is 40% (married or unmarried). In this case, the filer is a net beneficiary of the earned income tax credit.

If you're in the plateau range or phase-out range, then you have to check the calculation. Off-the-books income may be preferable to taxable income for these people.

If you also take into account state taxes, then the equation favors off-the-books income even more.

If you compare the volunteer effort spent, compared to helping people start free market businesses, it's probably a waste of time.

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I liked this post on Liberty is my Homie. It refers to "testilying"; I hadn't heard that term before. When policemen testify, their lies are well coordinated and scripted. This carefully rehearsed false testimony is called testilying.

The problem is sovereign immunity. The State is dependent on policemen to enforce its laws. Therefore, policemen must be shielded from negative consequences of their misconduct.

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This post on Silver is Money is entirely missing the point. He is complaining that someone is manipulating the silver price downward.

Suppose I knew that someone was keeping the silver price artificially low. What should I do? I would buy all the silver I could! Eventually, the market manipulation will stop and I will profit.

I never understand why people complain that the gold and silver price are artificially manipulated downward. If you believe that to be true, buy gold and silver! If you are unleveraged, you will be able to hold onto your position and you will profit eventually.

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I'm on the first page of Google search results for "Federal Reserve Caused Depression". That's neat.

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This post by Kevin Carson is amusing. A mainstream pro-State troll is criticizing Kevin Carson's writing. Kevin Caron is attempting to defend himself. It's very much like reading:

2+2=3

No, 2+2=4.

2+3=98

No, 2+3=5.

2+2=5

No, 2+2=4. I covered that already.

Overall, I didn't follow the details much. Kevin Carson is usually mostly right.

If the "Libertarian Alliance blog" is full of pro-State trolls and fools, then why is Kevin Carson wasting his time hanging out with them?

Kevin Carson once said he gets around 200 visitors/day. I'm averaging 100+ visitors/day, which means I'm about half as popular as Kevin Carson! I imagined Kevin Carson as being a spectacularly successful blogger, when I first started out. Lately, I find Kevin Caron's arguments to be correct, but very difficult to read. Now, I understand free market agorist thinking well enough to be able to fill in the details for myself, most of the time.

I wonder when more popular bloggers are going to start launching ad hominem attacks on me? Where's the strawman attacks of my writing? It's much easier to attack Kevin Carson than to attack me.

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This post on Check Your Premises was awful. I received the same E-Mail (in Reader Mail #53).

Rioting/protesting at the RNC is a waste of time. That isn't proper agorism or market anarchism. Starting a free market (counter-economic) business is a more efficient use of your time.

The RNC is the wrong place to go to raise awareness for agorism. You could raise awareness *ANYWHERE*. What's special about the RNC?

If you're going to the RNC to riot, protest, or raise awareness, there's an implicit hidden assumption "It matters what the RNC does." By protesting the RNC, you're actually saying "The RNC is important"! Any sort of activism at the RNC is pro-State trolling.

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I figured out how Blogger treats RSS feeds now.

Previously, if I edited and republished a post, Blogger would put the post in my RSS feed *TWICE*; the original and the corrected version.

Now, Blogger puts only one version in my RSS feed. However, if I edit the post, Blogger substitutes the new version for the old one in my RSS feed.

I'm 99%+ sure Blogger's behavior changed recently. I like the new behavior. Previously, I was unable to edit previously published posts, without sending duplicate content to my RSS feed. Now, I'm going to edit my older posts and add links to newer versions.

This matters for posts near the top of my "Best of FSK" list. I'm making updated versions of those posts. I should add links to the new version. The old version still is the "ranking version" in Google and has many incoming links. People who visit the old version of the page should get to see the updated version.

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I briefly experimented with posting on the mises.org forum. I rapidly concluded "Many of these people are fools; why am I wasting my time here." On the other hand, it's been directing some traffic to my blog. I'll continue my experiment.

If you have a serious economics or free market agorism question, let me know.

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Recently, "The Economist" had a huge section devoted to the banking crisis. Naturally, there was no mention of the Compound Interest Paradox. If you write about economics without understanding the Compound Interest Paradox, you're probably pro-State trolling.

"The Economist" is a tabloid as much as "The National Enquirer". The target audience is different. "The Economist" cloaks itself in a better disguise of legitimacy. "The National Enquirer" provides distraction to the average clueless person. "The Economist" provides distraction to someone who considers themselves knowledgeable about banking/finance/capitalism/theft.

Keynesian economists use very sophisticated mathematical models to justify what they're doing. However, if your axioms are wrong, then no amount of calculation will give you a useful conclusion. "They're using stochastic calculus! Therefore, their conclusions are correct!" That's a variation of the "argument from authority fallacy". Almost no mainstream economist has the ability to say "Are my axioms correct?" or even recognizing hidden axioms. For example, most Keynesian economists assume "The CPI is an accurate measure of inflation." and "The Fed Funds Rate is the fair market-determined interest rate." If that's your starting point, your conclusions are guaranteed to be useless, no matter how much fancy calculation you do.

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I liked this post by Bill Rempel, in reference to this article on lewrockwell.com.

A promising cancer treatment is being suppressed by the FDA. The chemical is naturally occurring. The pharmaceutical corporations won't be able to make extortionate patent-related profits from it. Therefore, this treatment is banned. Profits are more important than actually curing diseases. The current business model for the pharmaceutical industry is "patented drug, which the patient must take for the rest of their life". Other treatments are not considered, or outright outlawed.

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In this thread on mises.org, the other poster showed some intelligence.

Ok I have been research for ten hours and I doubt I will ever understand the Federal Reserve so I am hoping someone can help me. From what I can tell this is what I think I understand. I would really like it if someone could correct me(note the figures of 1000 and 1050 are simply arbitrary).

Say for example the government needs a thousand dollars. The government will give a security bond to the Federal Reserve. The Federal Reserve will charge interest on the bond(lets say the price is simply 1050 for demonstration purposes). The Federal Reserve creates 1000 dollars and gives it to the government. The Fed now has 50 dollars that the government owes it and 1000 dollars for the bond. The Fed can now create approximately 1050 dollars. The Fed gives the bond out to banks who buy the bonds at 1000 dollars and sell it back to the Reserve for 1050. The Fed is creating money twice in this scenario(one time to give to the government and the other time to give to the bank). Am I right on this or severely wrong? If I'm wrong can someone please explain?

I wrote about this on my blog. See The Monetizing the Debt Scam and The National Debt - Who is the Creditor?.

Ok so using your example. The Federal Reserve buys a bond that the government sold that will eventually mature to 1B. The Federal reserve creates 999M which is the face value of the Treasury Bond. If the bank does not increase profit, why would they buy a bond only to sell it back to the Fed? Furthermore, how does the bond get it to the bank? Does the Fed sell it to them or the government directly?

The Federal government does not sell bonds directly to the Federal Reserve. The Federal government only sells bonds to banks and the general public. However, the Federal Reserve may then buy the bond immediately after the government sells it.

For all practical purposes, the Federal government is selling about 10% of its debt directly to the Federal Reserve, although it's through the middleman of a bank. Reserve ratios are 10x. For each $1 the Federal Reserve creates, another $9 may be created by the financial industry.

What does the bank get out of this arrangement? Suppose the bank starts with $10M in cash. Suppose that, when investing in Treasury debt, leverage ratios of 100x are allowed. Leverage ratios are not the same as reserve ratios. A 100x leverage ratio means that for each $10M in net worth, the bank can buy $1B total in Treasury Bonds, borrowing the remainder from the Federal Reserve.

Suppose the Fed Funds Rate is 2% and the Treasury Bond yields 2.2%. The bank puts up $10M of its own money. The bank gets $990M from the Federal Reserve, borrowing at the Fed Funds Rate directly from the Federal Reserve or borrowing from other banks. The bank buys the $1B bond from the government, earning a profit of 0.2% times 100x leverage for a total profit of 20%.

The bank made a guaranteed riskless profit.

I can't do this trade myself, because I can't borrow at the Fed Funds Rate. Banks are guaranteed a certain profit, built into the rules of the monetary system.

Also, the above calculation assumes the Fed Funds Rate never changes. Replace "current rate" with "average future rate" if you expect the Fed Funds Rate to change. Also, $999M is the market value of the Treasury Bond and $1B is the face value. I use round numbers to simplify things.

Yes, but I thought you said that the Federal Reserve will buy back the bond before it matures. So if the bank has 10M and they borrow 990M. The bond eventually has to mature at a rate of 2.2% for them to make a profit. The bank has borrowed at 2%. If the banks sell the bonds before they can mature at 2.2% how are they making a profit?

Also can the bank use the the bond as a reserve?

It seems like you want a complicated example.

The Federal Reserve only buys back about 10% of Treasury debt before maturity. The rest is owned by banks and individuals.

Bank reserves are always cash (physical Federal Reserve Notes or electronic credits). Bank reserves and assets are different. The Treasury debt does count as part of the banks' assets. Treasury Debt is a "Level 1 asset", because there's a liquid market where they can be bought and sold. The Federal Reserve will always print new money and buy Treasury debt if the prices get too low (interest rates get too high).

Reserve ratio = (cash on hand) / (total debts + cash on hand). Reserve Ratio >= 0.1 at all times.

Leverage ratio = (total assets) / (total assets + total debt). Leverage Ratio >= 0.01 at all times. The legal leverage ratio varies by asset class; in this example, I'm using Treasury debt and assuming the legal leverage ratio is 0.01.

Assume banks are allowed to use reserve ratios of 10x. Assume banks are allowed to use leverage ratios of 100x when investing in Treasury debt. Banks will always have the maximum reserve ratio and leverage ratio that the law allows; otherwise, they're not maximizing their profits!

Suppose Bank A has:
$1B in Treasury Debt (yielding 2.2%)
$1.10B in debt (at the Fed Funds Rate of 2%)
$130M cash on hand

The bank has a leverage ratio of (approximately) 0.01. The bank has a reserve ratio of 0.1. The bank has a net worth of $30M. The bank is making a guaranteed riskless profit, because it's borrowing at 2% and investing in debt yielding 2.2%.

Suppose Bank B has the same balance sheet as A:
$1B in Treasury Debt (yielding 2.2%)
$1.10B in debt (at the Fed Funds Rate of 2%)
$130M cash on hand

The Federal government decides to auction another $1B on Treasury debt. Bank A buys. Now, Bank A has a balance sheet of:
$2B in Treasuy Debt (yielding 2.2%)
$1.10B in debt (at the Fed Funds Rate of 2%)
-$870M cash on hand.

Bank A needs to come up with another $1B so in can pay the Federal government and not be violating its reserve requirement rules. What does Bank A do? It borrows from Bank B.

However, Bank B doesn't have enough money to lend Bank A. Oh no! The Fed Funds rate is rising! It's time for the Federal Reserve to "monetize the debt". The Federal Reserve buys $100M in Treasury Debt from Bank B.

Now, Bank B's balance sheet is:
$900M in Treasury Debt
$1.10B in debt
$230M cash on hand.

Bank B lends $100M to bank A.

Now, Bank B's balance sheet is:
$900M in Treasury Debt (yielding 2.2%)
$1.10 in debt (at the Fed Funds Rate of 2%)
$100M loan to Bank A (at the Fed Funds Rate of 2%) (an asset)
$130M cash on hand.

Bank A now has $100M, which it gives to the Federal government.
The Federal government immediately deposits this cash in its account at Bank B.

Bank B now can loan another $90M to Bank A. Bank A pays this $90M to the Federal government. The government deposits this money in its account at Bank B.

Summing up the infinite series, Bank B creates another $900M in new money via fractional reserve banking. In practice, there's a little "wiggle room" in the bank balance sheets, so the whole process occurs in only one step.

At the end, Bank B's balance sheet is:
$900M in Treasury Debt (yielding 2.2%)
$1.10 in debt (at the Fed Funds Rate of 2%)
$1B loan to Bank A (at the Fed Funds Rate of 2%) (asset)
$1B in Federal Government's account (yielding 0%) (debt)
$230M cash on hand

Bank A's balance sheet is:
$2B in Treasury Debt (yielding 2.2%)
$1.10B in debt (at the Fed Funds Rate of 2%)
$1B in debt to Bank B (at the Fed Funds Rate of 2%)
$130M cash on hand.

Does this help?

I was wondering: why would bank B ever lend to Bank A? B can lend Bank A money at 2% but get a far better return of 2.2% by buying treasury bonds.

The government only periodically sells Treasury bonds. The Federal Reserve purchases just enough Treasury debt to keep the Fed Funds Rate at its target level.

In the example I gave, Bank B was lending to Bank A at the Fed Funds Rate of 2%, while borrowing from the government (depositor) at 0%. The only 4 parties in my example were Bank A, Bank B, the government, and the Federal Reserve. Bank B's only options were to leave the cash in its vault (earning 0%) or to lend it to Bank A (earning the Fed Funds Rate of 2%).

Suppose Bank B didn't want to lend to Bank A at the Fed Funds Rate. Then, the Fed Funds Rate would start increasing from 2% to 2.1% or more. Then, the Federal Reserve would purchase more Treasury debt, suppose from Bank C, increasing the supply of bank reserves. If the Federal Reserve creates the right amount of reserves, the Fed Funds Rate is equal to the target. The Federal Reserve has (literally) an infinite budget, so it can create just the right amount of reserves to attain the Fed Funds Rate target. When the Federal Reserve buys Treasury debt, it is printing brand new money to fund its purchase.

Ok. So Bank B starts out with $1B in Treasury Debt (yielding 2.2%) $1.10B in debt (at the Fed Funds Rate of 2%) $130M cash on hand

After the first stage it ends up with $900M in Treasury Debt (yielding 2.2%) $1.10 in debt (at the Fed Funds Rate of 2%) $100M loan to Bank A (at the Fed Funds Rate of 2%) (an asset) $130M cash on hand.

I still don't understand why Bank B would voluntarily engage in this transaction. It goes from earning 2.2% on $1B and 2% on $1.1B to earning 2.2% on $900M and just 2% on $1.2B (1.1B+100M). It is earning less.

Am I missing something here? Is Bank B being arm twisted into this exchange? Or is the Fed giving some sort of financial incentive not captured in your example? For instance, maybe the Fed overpays for the $100M that it monetizes, thus baiting Bank B into the transaction.

I still oversimplified. I assumed that the 1 year Treasury Bond yield was 2.2% and the overnight Fed Funds Rate is 2%.

The Federal Reserve typically buys Treasury debt that is nearly matured. Assume that a 1 year Treasury Bond yields 2.2%, a 6 month Bond yields 2.1% and a 1 week Bond yields 2.0025%.

In my example, all the bonds in the bank's inventory were 1 year bonds. Change the example to have a range of maturities and the transaction makes sense.

Alternatively, the Federal Reserve makes a repurchase agreement. 2%/12 is 0.17%. The Federal Reserve agrees to buy the Treasury debt from the bank for $100M and sell them back a month later for $100M*1.0017=$100.17M. A month from now or a week from now, the Federal Reserve will make another repurchase agreement to further increase the money supply.

Also notice that, with the repurchase agreement, the Compound Interest Paradox still operates. The Federal Reserve created $100M in new money when it initiated the repurchase agreement, but $100.17M must be repaid when the repurchase agreement unwinds. There's a permanent money supply shortfall of $0.17M. In practice, the Federal Reserve keeps "monetizing the debt", making more purchases or repurchase agreements to keep up the money supply. The Federal Reserve must continually print new money to keep the money supply from crashing in hyperdeflation.

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According to Google Analytics, I'm off to a good start for June. After 3 months of negligible growth, my reader statistics are increasing again.

The overall trend for my blog is that I plateau for awhile, then have a growth spurt, plateau, then growth spurt, etc. Other people promoting my blog seems to be more beneficial than me directly promoting it myself. "Organic growth" is still working for me.

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I've decided to start being active on mises.org. It's been awhile since I wasted time posting in online forums. There's been some noteworthy threads.

I'll see (via Google Analytics) if posting in the mises forum is an effective use of my time.

This thread was interesting.

Subject: Scientology and Drugging

I know they are against some pharamaceuticals (and maybe that is somewhat irrational), but does anyone else find it disburbing how unthinking the media have become in criticizing their skepticism? There has to be something to it. I know the whole field is somewhat subjective and not fully understood.

There are two separate issues:

Is the massive use of anti-psychotic and anti-depressant drugs a good idea? Is the "chemical imbalance" theory of mental illness a bunch of nonsense?

Are Scientologists a bunch of fruitcakes, even though they're 100% right about the evils of the psychiatry drugging industry?

How many pharmaceutical corporations take out ads on mainstream media sources? How many ads are taken out by Scientology or critics of the pharmaceutical industry? Hint: A "news" show isn't critical of its advertisers!

I was the victim of anti-psychotic drugs, imposed on me against my will. I'm 99.9%+ convinced that those drugs are purely harmful with no benefit at all. While I was drugged up, I was unable to concentrate or do anything. Since I've stopped taking them, I've recovered my thinking ability.

It's very traumatic to realize that 90%+ of everything you've been taught is a total lie! It's very traumatic, and the process of realizing this causes you to show the symptoms of a "mental illness". (The Mathematics and Computer Science I've learned is not a lie. Most politics/economics/history is a bunch of lies or omissions/exaggerations.)

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I like this post on to herd or not to herd.

Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it. -- Mark Twain

This is a really tough question. Do you believe the current corrupt system evolved by accident? Or, is there a Supreme Leader of Humanity somewhere, secretly pulling the strings?

All the public figures you see are slave-puppets. Mainstream journalists, politicians, CEOs, and economists are all fools. Behind the scenes, someone may be secretly pulling the strings.

Either way, it's immoral to support a corrupt economic and political system. It's irrelevant whether there's a SLH or not. If there is no SLH, we should do everything we can to correct the problem; we will be unopposed, so success should come easily. If there is a SLH, then how do you know he doesn't *WANT* the current economic and political system to collapse? If there is a SLH, he could easily reform the corrupt system, if he wanted to.

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This post on Blogger Buzz was interesting. There's a bug in their CSS code which means that post line spacing comes out wrong after a blockquote. I'd noticed that bug, but didn't bother hunting around for a fix. (CSS is a web design scripting language.)

If you edited your template, as I did to allow for Google Analytics, you don't get the fix. You have to manually edit your HTML template to get the fix.

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This comment on mises.org shows why that forum has hopeless people on it.

I disagree with this part of your argument. This line of reasoning was never used by Mises.

Why are we exclusively bound to discuss "What Mises wrote about"? He's dead, so we can't ask him to clarify. Are we allowed to think for ourselves?

You should evaluate the Compound Interest Paradox or "Debt Virus" on its own merits. Even if Mises never wrote about it, that doesn't affect whether it's true or false.

Mises didn't write about the Compound Interest Paradox. Therefore, the Compound Interest Paradox is not a problem?

Mises is dead, so we can't ask him about the Compound Interest Paradox. That's the brilliant part about the "argument from authority" fallacy.

A pro-State troll ("Anonymous Coward" - a registered user) responded:

I think you misunderstand. Rothbard is acceptable too.

That's entirely the point. If the "freedom movement" restricts itself to "argument from authority fallacy" instead of original thinking, then it's guaranteed to make no progress.

I'll experiment posting there some. I'll see how much traffic it drives to my blog, and how many people have a clue. I'll probably enthusiastically post for awhile, and then get frustrated with the pro-State trolls and leave.

It's been awhile since I posted comments in a forum. I prefer to stick to blogging, where the pro-State trolls, fools, and paid disinformation agents can't shout me down.

This thread on mises.org degenerated into a flamewar. I didn't post in that thread, but it's been sending a lot of traffic to my blog. Liberty Student was quoting me, and some pro-State trolls/fools/paid disinformation agents started a flamewar with him.

Liberty Student made an interesting fallacy. The poster Niccolo said "I am an agorist. I want to riot and protest at the RNC." Liberty Student said "Niccolo is a fool and is an agorist. Therefore, all agorists (including FSK?) are stupid." Is it time for me to choose another label, "up-libertarian" instead of "agorist"? I'll use the adjective "vulgar agorist" in the same sense as "vulgar libertarian" or "vulgar anarchist".

That's the reason I don't like posting in other people's forums. On the other hand, if there are some sensible people reading the thread, it may pay to fight the trolls in order to reach the sensible people.

Mises.org has been driving a lot of traffic to my blog, so I'll invest some time posting there. When I first started blogging, I was very active on the Ron Paul Forum, but the forum became dominated by pro-State trolls and I gave up.

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I liked this post on Check Your Premises. The Libertarian Party is a waste of time. It was started by people with good intentions. The movement was hijacked by pro-State trolls.

The only resistance strategy with a non-zero chance of success is agorism.

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I liked this post on the Picket Line. India's government is having trouble with tax resistance. They have declared that publicly advocating for tax resistance is a serious crime. I wonder if things will escalate to that level in the USA?

When I read about Somalia and 3rd world countries, I wonder where an agorist revolution will start? Will it start in a 3rd world country and spread to big countries? Or, will it start in the USA and spread elsewhere? I always thought it would start in the USA, but I'm not sure.

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Francois Tremblay has left a new comment on your post "Reader Mail #54":

PS I did mention private military contractors.

The word "contractor" did not appear in that post. I reread it carefully, and you sort of mention it. I would have placed more emphasis on the role of private military contractors in the Iraq war. A *LOT* of money disappeared into the pockets of private military contractors.

My favorite story is that the US military shipped planes full of $100 bills to Iraq. That money was used to pay private military contractors. A lot of that money simply disappeared.

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eagledove9 has left a new comment on your post "The Compound Interest Paradox Revisited - Overview...":

Your explanations aren't "too complicated." They're not complicated enough. I didn't understand a word you were saying until you used a quantum physics analogy and talked about dollars and anti-dollars. Then it all made sense. I'm serious!

If you read the "simpler explanation", Robert left a comment "OMFG! Quantum mechanics!"

I can't please everyone! I try to mix up the degree of difficulty. Sometimes, I try for very simple explanations. Sometimes, I give very detailed calculations.

Now that I can republish older articles without them getting republished to the RSS feed, I'm going to edit my high-ranking older articles with links to the newer version.

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CorkyAgain has left a new comment on your post "The Voting Scam":

Another form of counter-economics is frugality -- opting out of the consumerist lifestyle and thus the need to sell yourself out as a wage slave.

Reducing your consumption *ONLY* works if you have a safe place to store your savings! If I say "I'll work harder now and retire early or work less later", that doesn't work if your savings are stolen by inflation.

Also, one of my principles is "Don't sacrifice my lifestyle to fight the State!" I need some income to keep up my standard of living. I like my computer, Internet connection, and nice place to live.

Ideally, you should have a mixture of on-the-books reportable income and free market off-the-books income. That is tricky, because most on-the-books jobs that pay a decent salary demand 50+ hour weeks.

It's important to evaluate your *MARGINAL* tax rate and not your average tax rate. I read a blog where a guy got a really great job. He worked 2x as many hours that year, but only made 20% more after taxes.

Reducing our need for wages is a way to reduce the income taxes we pay. Consuming less means paying less in sales taxes.

If you find free market trading partners, you'll pay zero sales taxes.

Frugality also means not buying on credit. This means not exacerbating the compound interest paradox.

The Compound Interest Paradox enslaves you even if you personally have no debt. Everyone around you is a debt slave. If you're competing with slaves for jobs, that makes you a slave.

If you use Federal Reserve Points as money, you're letting your purchasing power be stolen by inflation. The Compound Interest Paradox is the excuse for continuous money supply inflation; without money supply inflation, the financial system *WOULD* collapse.

The only way to be truly free is to work off-the-books and use sound money.

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Thomas Blair has left a new comment on your post "Falling Cranes and Sovereign Immunity":

If you consider the $990M punitive damage award excessive, consider this analogy. Suppose I steal $1000 from you, but I only have a 1% chance of getting caught. 99 times out of 100, I make a profit of $1000 for a total of $99000. 1 time out of 100, I get caught. If my damages are only $1000 when I get caught, paying restitution to the victim, then stealing 100 times yielded a net profit of $9900. Without punitive damages, stealing is profitable when there's a low risk of getting caught.

The number $9900 ought to be $99,000. Just a small typo.

Frequently, even egregious misconduct goes unpunished.

For a cornucopia of recent examples involving just the police forces, look no further than the Agitator blog, which I see you read.

The market cost of insurance is thus $100k plus the insurance corporation's expenses; let's assume a 50% profit margin for the insurer. Insurance can be purchased for 2% of the cost of an accident.

Perhaps I misunderstand you, but shouldn't the insurance be available at 1.5% of the cost on 50% profit or 2% of the cost on 100%?

Compensatory damages only include direct compensation for injury or property damage. If you're unable to enter your apartment for a week due to a construction accident, then the cost is 1 week of rent. The inconvenience is not included as a cost.

Do you mean to say this is the way things are now, or this is how they should be? I'd argue that the inconvenience is surely compensable. In this case, the construction accident has imposed not only the cost of one week's lost rent (that I've already paid to my landlord), but also the cost of having to secure replacement lodgings for the week. If the purpose of compensatory damages is to make the person whole after imposing a cost, then my need to secure shelter for that week is a cost imposed upon me through no fault of my own. Additional restitution might be due if my inability to access my dwelling due to the accident cost me in other ways, like not having access to my business records or computer, for example.

If a drunk driver is stopped by police, and the police catch 10% of drunk drivers, then the penalty should be the cost of an accident (paid to the police); this is better (for the drunk driver) than an actual accident, because nobody was injured.

Again, I presume this is taking place in an agorist society. By what authority do police officers (or private security officers, depending on your nomenclature preferences) have to pull over any motorist suspected of driving drunk, and by what authority can they extract a payment equal to the cost of a (non-existent) accident as a fee for pulling a drunken motorist over?

Please excuse my comments if I've mistaken descriptions of what 'is' for what 'ought to be'.

I answered this in Some Free Market Justice Calculations.

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Inquisitor has left a new comment on your post "The Compound Interest Paradox - a Simpler Explanat...":

Robert, I'm not sure who you are talking about - name names. I post quite frequently at the LVMI blogsite and I have yet to see anyone defend the Fed who is a contributor to the site or a regular poster. I'm wondering if we're even talking about the same LVMi...

Robert didn't answer. I noticed some problematic posters on the mises.org forum. It's hard to tell if they're fools or paid disinformation agents. I treat them the same.

On a (relatively) popular freedom-oriented forum, it's *GUARANTEED* that paid disinformation agents have a strong presence.

I noticed some users with suspicious posting patterns. Users "Niccolo", and "Anonymous Coward" on mises.org are pro-State trolls/fools/paid disinformation agents. It's almost impossible to tell if they're merely fools or paid disinformation agents. ("Anonymous Coward" is a registered user, and not an Anonymous Coward in the sense of Slashdot. On Slashdot, "Anonymous Coward" is the name given to an anonymous poster.)

"Anonymous Coward" is using a typical paid disinformation agent tactic; he's "forum-stalking" me. In any thread in which I post, he posts another comment to disrupt discussion. In discussion forums, paid disinformation aggressively bury insightful comments by posting a lot of irrelevant nonsense.

Spreading disinformation is very easy, if it's your full-time job. It's very easy to make a handful of online identities, and then post 10+ comments to drown out any insightful comments. That's the reason I like a blog, where I have full editorial control. It's almost impossible to tell if such behavior is a bunch of people overwhelmed by their pro-State brainwashing, or if it's a coordinated disinformation attack.

I've been experimenting with posting on mises.org, to see if it drives traffic to my blog. I'm not starting threads; I'm only responding to questions from someone that seem intelligent. Even though I *KNOW* I'm never going to convince the pro-State trolls, I might draw lurkers to my blog when they see my comments.

I'm getting pretty good at recognizing paid disinformation agents. Their tactics are very transparent to me now. Of course, it's very difficult to tell the difference between a fool and a paid disinformation agent. Paid disinformation agents tend to be very persistent, past the point other people would have given up.

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Anonymous has left a new comment on your post "The Compound Interest Paradox Revisited - The Fede...":

Good evening FSK, I hope you are doing well. I will be standing up a blog of my own soon on the motivation of prior inclination and by no small degree upon your suggestion.

You're better off posting in your own blog and just providing a link here, if you're going to be writing a lot. Also, you're not formatting your paragraphs. I'm adding formatting for you.

The three main options for blogging are:

1. Blogger (free)
2. Wordpress (free)
3. self-hosted, with either Wordpress or a custom engine
   

Hosting costs around $50/month. I'm not profiting from my blog (yet?), so I choose free hosting paid by Google.

I find blogging superior to posting on discussion forums or other people's blogs. I like having full editorial control. On other people's forums, it's too easy for the pro-State trolls to disrupt the discussion, either accidentally or on purpose.

In the meantime, I would again like to give you due praise for the opportunity of hope that you place in the hearts of those who would apply honest and objective understanding to the knowledge you possess and share on your blog. What a big mass of indecision, insecurity, and doubt we human beings are. I say that first after my acknoledgement not as an attempt to be deliberately verbose in some exercise of vanity or obstruction, but rather in an attempt to make it clear that while indeed there are axioms of truth, 'X' policy bringing about 'Y' result as you have so aptly identified, that human beings have an imperfect and all too often prevailing dominance of psychological forces at work in the interaction with, and action taken there from, axioms of truth which may be laid before them. How I wish at this point in your reading these words you could truly see how humbly I am engaging with you. How I wish I had the Rosetta Stone of succinctness and intention in my possession, so that I could say everything and anything to you or anyone else without the burden of misunderstanding or the misuse of time. More than just an honest declaration, by saying that I return to the point I would make which is that truth, regardless of its intended delivery, is bound by the inherent imperfections of humanity as it pertains to its reception.

I have no idea what you're writing about here.

I grew up on the west bank of New Orleans, spending my afternoons at Woodland Park and watching the ferry and transport boats land at the docks. Having a family and friendship background in this form of transportation, I know that there is a certain degree of inertial force that must be calculated in the speed and trajectory of a boat's landing at a port. In short, regardless of the cargo on board, how it may best be received is a principal concern if it is ever to be made use of. So, on one side there is the truth, and on the other there is the dynamic logistics of delivery of it which, while an ever-changing grey area, still is a factor in that truth ever manifesting itself into meaningful action.

I still have no idea what you're writing about.

Since coming to your blog, I have learned so much and also given you a lot of thought. I have referenced you in conversations with friends and family and we are all better for it.

It's good if you share links to my blog. That's a good way for me to gain readers. If I educate 100 people, and they in turn educate another 100 people each, then exponential growth is working in my favor. Via Google search, Google Analytics, and Technorati, I notice when other people are discussing my blog. Overall, the volume of "other people linking to my blog" is increasing. Perhaps, I benefit more from *OTHER* people promoting my blog than my efforts to promote it myself. (For example, posting on the Ron Paul Forum or mises.org is a form of promoting my blog. I usually only post if I see an interesting question and write a response that I can also put in one of these "Reader Mail" posts.)

My experience promoting my blog's ideas in person has been mostly unsuccessful. Most people can't break their pro-State brainwashing. They can't accept the possibility that a lot of the things they "know" are wrong. Whenever I say "Taxation is theft!", I can literally see the other person's brain shutting down.

I believe you truly want to help other human beings have a better and freer life and my heart is in the same place. Though it may be unintentional at times in the things I might say think or do, I AM NOT A PRO-STATE TROLL.

I judge each comment individually. Sometimes, people get confused or I am unclear. I usually mean "That specific comment is pro-State trolling" rather than "Everything you write is pro-State trolling."

For example, Francois Tremblay (and others) wrote an article quoting Soviet Onion saying "We should riot and protest the Republican National Convention (RNC)." When you suggest a riot or protest at the RNC, you are pro-State trolling. Such a protest contains a hidden assumption that it matters what the RNC is doing. Even though Francois Tremblay was pro-State trolling in that instance, that does not mean that I'm not reading his blog anymore. He posts enough interesting content that I read his blog, even though he occasionally writes something *REALLY* stupid.

The pro-State troll argument is "we should riot/protest the RNC to raise awareness of agorism". If your goal is to raise awareness of counter-economics and agorism, you could do that *ANYWHERE*. There's nothing special about the RNC. The best way to raise awareness of agorism is to actually start a free market business.

I am trying to do the best I can to help other people. Quite frankly, most of my software engineering jobs have been a complete and utter waste of time. Now that I understand the financial industry, I understand its parasitic role on the rest of the economy. When I write software that makes the financial industry more efficient, I'm not really accomplishing anything. The financial industry gets to leech the productivity of the rest of society at a predetermined rate of approximately 10% per year. All I accomplish writing financial software is that I move the loot from one group of people to another group of people, taking a small slice for myself.

Blogging is the only thing I can easily do that really doesn't seem like a waste of time. I'm looking to develop more serious/profitable free market businesses.

When I make the transition from theoretical agorism to practical agorism, I might find myself the victim of State violence. If necessary, I will try to defend myself sui juris, perhaps also hiring a lawyer to assist (depending on how much income my free market business raises).

I'm sure you receive a lot of vitriol and bitterness from others on your blog, and perhaps that has conditioned a set of absoluteness in your responses as a means of saving time if nothing else. Truth is at this point I cannot know. In closing let me say first that the praise I offered you was not some insincere preface for subsequent criticism or even advice, only heartfelt and well-meaning observations made in conjunction with everything else I have said which may better serve the beliefs, hopes, and ideas I know in my heart that we both share. Thank you.

I've received a surprising amount of hate mail. The worst comes from people employed as economists/quants/bankers. However, I've also received enough positive feedback to make me feel that I'm not wasting my time. Positive feedback comes in the form of reader comments, or people discussing my blog elsewhere.

There's a very interesting pattern regarding people discussing my blog on discussion forums. There's usually one sensible person and a bunch of pro-State trolls shouting him down.

My policy regarding pro-State trolling is to judge each comment individually.

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Thomas Blair has left a new comment on your post "Some Free Market Justice Calculations":

Profit margin = (expenses) / (revenue).

This isn't how profit margins are calculated either.

Profit margin is given by:
PM = (profit) / (revenue)
PM = (revenue - expenses) / (revenue)
PM = 1 - (expenses)/(revenue)

I presume you intended to indicate the third formula. This example is a bit silly, as we don't have a value for the insurer's expenses. I think we both get it.

Yes, I made another typo/error. You do know the insurer's expenses. They're the expected/average/actual payouts. If the insurer writes 1 policy with a 1% chance of a claim, that's not really insurance. If the insurer writes 10000 policies with a 1% chance of a claim, then the actual claims will be *VERY CLOSE* to 100, if the claims are independent events. This is the "Central Limit Theorem". That's the way insurance works. The insurer may even purchase reinsurance, if they're concerned about the possibility of more than 120 claims.

If you are driving while drunk, then the other drivers on the road have a valid tort claim against you. Your reckless driving increases their chance of injury.

Here's where we begin to differ. The mere increase in the probability of injury is not sufficient cause for recovering damages. If I am playing catch with my son and threw a ball and hit a passing pedestrian, he would have a valid tort claim against me for injuring him. If I, however, throw the ball and just missed him, he has no valid claim. He has been caused no loss and sustained no injury.

Negligence and accident are different.

Let's use another example (that actually occurred). You park near a little league ball field. A foul ball lands on your car and breaks a window. The league is responsible for compensatory damages but not punitive damages. If a foul ball lands without injuring someone, then no damages are awarded.

The important point is that the ball striking the car was an *ACCIDENT*, not negligence. For an accident, damages are awarded only if injury occurs. Negligence is *ALWAYS* treated as if it caused injury.

Consider another example. Someone takes a bat and intentionally smashes the windshield of your car. In this case, compensatory and punitive damages are appropriate.

Here's another example. You take your car to the dealer for repairs, and when you pick it up it has a dent. You question the dealer and they deny responsibility. In that case, compensatory and punitive damages are awarded if you can prove the dealer caused the damage. If the dealer admits their error, then they only are obligated to fix the car.

Negligence/fraud and accident are *DIFFERENT*. Negligence includes "should have known better". Someone driving a car *KNOWS* they should not be drunk.

As another example, suppose you're a professional baseball pitcher. During a game, you hit a batter in the head and he is injured. In that case, the rules of the baseball league determine the damages. A professional baseball batter knows that he is risking being hit by a baseball. However, if the rules of the league were obviously unfair, then the rules could be appealed to a another court. Instead, suppose you are on the street and throw a baseball at someone. You just barely miss. The victim *DOES* have a claim that you unnecessarily exposed him to risk of injury. Suppose a professional baseball pitcher throws the ball at a batter's head and just barely misses. Again, in this case, the rules of the league determine the appropriate damages; this is considered part of the game, and the players voluntarily consented to the rules.

Such is the case with impaired driving. The only time a tort is committed is when a loss occurs. Driving impaired causes no loss. Crashing into a person or property while driving, whether impaired or not, is a tortious action and damages may be sought by the victim.

No, negligence is always punishable as if it caused injury. For example, suppose the insurance inspector for a construction site determines conditions are unsafe. He is fully justified ordering the construction to halt and fine the builder, even if no injury occurred. The builder agreed to follow safe construction practices as part of his insurance contract.

If *OBVIOUS* negligence is not treated as if it caused injury, then it's impossible to stop someone from negligent behavior until they actually injure someone.

Suppose a restaurant is serving contaminated food. There were no complaints of illness, but a food inspector notices. The restaurant should be shut down and fined as if they caused food poisoning. A restaurant agrees to food inspections when they purchase insurance; customers probably won't eat in an uninsured restaurant. The reputation of the food safety inspector would be as important as the reputation of the restaurant.

Police are performing a *LEGITIMATE* service when they stop a drunk driver. They're protecting everyone else on the road from injury.

Here's another example. Pro-State trolls say people should be barred from owning guns because they might be used to injure someone or commit a gun. That's false reasoning, because someone who owns a gun is responsible for what they do. Even if some people are stupid and use guns irresponsibly, that does not mean everyone else should be barred from owning a gun.

Suppose you are being robbed and fire a gun to protect yourself. You had a valid reason to fire a gun. Suppose you fire a gun in a residential neighborhood, but you weren't being robbed. The other people have a valid tort claim against you; your reckless shooting exposed them to risk of being shot. (This doesn't include people who take proper safety precautions, such as someone building a shooting practice gallery in their basement, although you also would be obligated to not make noise pollution.)

Suppose I hire police association A to protect me. If I am driving on a road, and police association A arrests a drunk driver on that road, then police association A is meeting its obligation to protect me.

Agreed, but where does the police association gain the authority to detain the impaired driver? The driver has caused no harm to anyone.

The driver has injured 1% of a person by driving drunk. Causing a 1% chance of accident due to negligence should be treated the same as if he caused an accident.

Alternatively, in a *FREE* market, everything is owned by someone. Whoever owns the road would require, as explicit or implicit contract, that drivers do not drive drunk and are insured. Otherwise, the owner of the road would be liable in the event of an accident. The right to drive on roads in an area would be handled via a registration sticker in your car, exactly as is done now. There would be reciprocal "roaming" agreements, so you wouldn't have to purchase driving rights wherever you travel.

If I am the victim in a drunk driving accident, then I have a valid claim against my police protection/insurance agency for failing to protect me.

Sure, but the more important thing is that you have a valid tort claim against the tortfeasor.

Yes, but I *ALSO* have a claim against my police/insurance provider, if the criminal is unable to pay or escapes prosecution.

For example, suppose I am a pedestrian and am struck by a car. The driver gets away. My police/insurance contract specifies that I receive the same payment whether the criminal is caught or not. Catching the criminal and making him pay is the police/insurance's responsibility, not mine.

10% of the time, the drunk driver would get caught by the police. They would owe the police $1M in damages.

Damages for what? An non-existant accident causing non-existent losses? Damages, by definition, cannot exist without a loss and no loss has occurred.

No, any negligent behavior that has a *CHANCE* of injury causes damages. You may argue that $1M is excessive. However, arguing that the person committing negligent behavior owes nothing is wrong. Perhaps insurance contracts would specify lower penalties for first-time drunk driving offenders?

If you do something that *MIGHT* injure someone, *WHEN YOU SHOULD HAVE KNOWN BETTER*, that's almost as bad as actually injuring someone.

As another example, suppose a drug manufacturer sells a drug that causes diabetes in 5% of the people who take it. That is a substantial rate; a responsible drug manufacturer should have noticed that. *EVERYONE* who took the drug has a valid claim, and not just those who develop diabetes.

Suppose you're part of a drug research study and during the study it's discovered that the drug causes diabetes. In that case, only compensatory damages are appropriate, and only for people who actually develop diabetes. This is injury due to accident, not negligence.

Suppose the police decide to set up a roadblock to catch drunk drivers.

Again, by what authority? Am I free to do this, provided I give everyone I stop a fiver? Suppose I'm rich as hell and I want to have a little fun. I declare myself to be ThomasBlair Security Force and obtain a client. I set up roadblocks with the intention of finding people unsafely operating a motor vehicle (tail lights out, high/low tire pressure, cracked belts and hoses, shoddy maintenance) and detain a few thousand drivers for the two days it takes me to physically examine every car. I assign fines based on the probability that a certain maintenance issues is likely to cause harm or damage to my client. Provided I pay them $30/hr, or whatever they're worth, who's to stop me? By your reasoning, I've committed no tort, because I declare that I'm looking for unsafe motorists.

Actually yes, anyone who wants to can start a police protection agency. That's exactly how free market competition works.

You're missing a big point. You don't have the ability to force other people to pay your salary via taxes.

Also in a free market, it's less likely for someone to become "ridiculously rich" if they have the sort of personality that abuses other people. If you start acting like a jerk, then eventually you'll start losing employees/customers.

If you're not catching enough criminals, you'll be wasting your money. If you aren't catching criminals at all and being a nuisance, then your victims will complain to *THEIR* police protection agency and you'll be shut down.

Some regulations, such as broken taillights, are overly frivolous at present. If you're catching things that are *GENUINELY UNSAFE*, you're actually providing a net benefit to your customers. For example, you may stop someone for a broken taillight, fix it immediately, and bill them for the repair; your fee must be reasonable, or they'd have a valid extortion claim against you.

In the present, police have an unaccountable monopoly. Their salaries are guaranteed via taxes. In the present, if the police decide to harass people living in an area, they have no choice but to submit to the inconvenience. The victims of monopolistic state police have no choice but to suffer inconvenience, and no choice but to pay the salary of their oppressors via taxes.

Also, there's a difference between stopping them for 5 minutes and detaining them for 2 days. Stopping someone for 5 minutes is a reasonable inconvenience, if it doesn't happen too often. If you hold someone frivolously for 2 days, you're committing a kidnapping crime. You would owe punitive damages in addition to compensatory damages.

I promise I'm not being an ass here. I'm just trying to understand where the police associations acquire the authority to detain anyone they please, even if compensation is awarded. By your calculations below, a police force may make a profit by detaining two hundred thousand motorists looking for that one that's impaired.

Police are providing a net benefit to society as a whole, so their actions are justified.

Suppose society places a cost of $1M on an accident. Suppose the cost is $5 to stop someone and verify if they're drunk. If you stop 100,000 people to catch one drunk driver, you're providing a net benefit of $0.5M to society as a whole. This makes drunk driving very risky. Very few people will actually attempt drunk driving. Therefore, on average, 1 in 200,000 or fewer drivers will be drunk.

You can argue that, since a drunk driver only has a 1% chance of accident, that the fine should be $10k instead of $1M. I'm not sure about that. There has to be "punitive damages" for drunk driving. If you're drunk driving with a 1% chance of accident, and get caught, then $10k is proper "compensatory damages". The police stopped 1% of an accident by detaining you.

If the fine for a caught drunk driver is only $10k, then it only pays for police to set up drunk driving checkpoints when they estimate more than 1 in 2000 are drunk driving. The societal cost of an accident is $1M. Out of every 2000 cars on the road, 1 is driving drunk. He will cause an accident 1% of the time. However, when he gets in an accident, *HE ALSO OWES PUNITIVE DAMAGES*. Therefore, the police should be more aggressive when detaining drunk drivers. The way to encourage police to detain more drunk drivers is to increase the fine for drunk driving.

There won't be roadblocks everywhere, because the risk of being caught would cut down on negligent behavior.

Also remember that the salary of the policemen must be paid, in addition to the compensation to people for wasting their time. I didn't factor that into my first calculation.

If the social cost of an accident is raised to $2M, while it still only costs $5 to question someone, then police *SHOULD* get twice as aggressive in their enforcement.

In exchange for protection against drunk drivers, you agree to occasional inspections to verify that *YOU* are not drunk yourself! Who would offer to sell police protection to someone who didn't consent to the occasional search to verify that they aren't drunk driving? Why would the owner of the road allow someone uninsured to drive on it?

Also remember that searches only cover *NEGLIGENT* behavior. In a free market, you don't have to worry that the policemen who stops you will arrest you for possession of marijuana or possession of a gun.

You may validly argue "$1M is an excessive fine for someone caught drunk driving." I think $1M is appropriate, but you may disagree or offer discounts for first-time offenders. There *HAS* to be a penalty for negligent behavior that gets caught. Otherwise, the odds favor negligent behavior. Also, pre-catching negligent behavior before someone is injured actually *REDUCES* the punitive damages when someone really is injured; they had a high probability of being caught before injuring someone.

I understand you're just making a "devil's advocate" argument.

The key point of my argument is that negligent behavior, when the criminal *SHOULD HAVE KNOWN BETTER* is treated as a crime.

As another example, suppose I decided to start a restaurant inspection business. If I inspect a restaurant and discover nothing wrong, I must compensate them for their time. If I find something wrong, then their insurance provider will pay me for saving them from a huge fine if someone got sick.

For another example, consider a car accident that is really an accident. Suppose a court rules that one person was 80% responsible and the other is 20% responsible. In that case, their insurance protection agencies would be 80% and 20% of the cost, respectively. The insurance vendor may then decide to raise premiums, but no punitive damages are awarded.

As another example, suppose someone goes through a red light. The police should catch and fine them, because they could have caused an accident. In this case, I agree that a $1M fine is way too excessive. If there was a 0.01% chance of accident, I'd fine them $1M*0.0001 plus some small punitive damages. The difference here is that the person who went through the red light was being slightly negligent, rather than blatantly negligent by being drunk.

The key points of my interpretation of free market justice are:

1. Someone who is negligent owes damages to his potential victims. The proper calculation is that the fine should be the cost of accident. You may argue for a lower rate, but negligent behavior should *ALWAYS* be fined. A negligent person owes compensatory damages *PLUS* punitive damages.
   
2. Someone who is negligent and actually injures someone owes compensatory damages *PLUS* punitive damages. Punitive damages are based on the severity of the negligence and the odds of getting caught. Punitive damages should never be insurable.
   
3. Someone who injures someone else due to accident only owes compensatory damages. His insurance should cover the cost. Damages due to accident are only paid when someone is actually injured.
   
4. Your police/insurance vendor is required to pay compensatory and punitive damages, even if the criminal is unable to pay. Collecting from the criminal is the police's responsibility and not the victim's responsibility.
5. Anybody who wants to may start a police business. That's the whole point of free market justice!
6. If you accurately price punitive damages, the fine for caught negligence, and the cost of wasting people's time, then appropriate behavior by police is rewarded. The societal cost of aggressive police behavior and stopping crime is balanced.

Free market justice is a workable system, if you carefully think about it.

There's another advantage of free market justice. I don't need a formal police business to profit from helping someone. For example, suppose I am walking on the street at night and I see someone else being mugged. I intervene to help the victim. Their police protection agency will reimburse me for protecting their customer. I could send them a bill if they refuse to pay. In the present, if I see someone else be the victim of a crime, I have *ZERO* incentive for helping them. I'm risking personal injury, but for no benefit.

After further reflection, the punitive damages rate for negligent behavior should be the same rate as an accident. Suppose that, for a drunk driving accident, you would owe $1M in compensatory damages and $9M in punitive damages. If you are caught drunk driving with a 1% chance of causing an accident, then you owe $10k in compensatory damages and $90k in punitive damages, paid to the police/insurance agency. If you are caught drunk driving with a 0.5% chance of causing an accident, then you owe $5k in compensatory damages and $45k in punitive damages.

I think that's better. Punitive damages should be charged at the same rate for negligence as for an actual accident. For negligence that's caught before injuring someone, then the damages are based on the % chance of an actual accident.

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I noticed that LEAP options are now being offered on GLD (gold ETF). The 105 strike 2010 GLD calls can be bought for $6.25. GLD is currently around $85.5/share. That means that if GLD increases by 31% between now and January 2010, you break even. Gold is increasing at a rate of 20%-30%/year, making this very attractive!

The GLD ETF LEAP calls are a *GREAT* way to bet *ON* inflation!