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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

A libertarian's prayer

Written by JP Floru | Sunday 18 September 2011

Our Hayek who art in heaven;
Hallowed be Thy Name;
Thy free markets come;
Individuals’ will be done on earth as it is in heaven;
Let us keep our daily bread;
And forgive us our trespasses, as we forgive those who trespass against us;
And lead us not into nannying;
But deliver us from socialism;
For Thine is the peace, and the freedom, and the creation of wealth, forever and ever.


[Have a nice weekend – ed]

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A lie can be half way around the world before the truth has got its boots on

Written by Tim Worstall | Tuesday 11 February 2014

This is a little story close to my heart in the day job:

"I think there is a great commercial potential on the moon," he added, citing significant reservers of helium 3, which is rare on Earth and which could be developed into a clean energy fuel ideal for nuclear fusion. The lunar soil is also rich in coveted rare earth elements: 17 chemicals in the periodic table that are in an increased demand because they are heavily used in everyday electronics. "There are a vast amount of opportunities for a wide variety of companies not only in America but across the globe," Gold insisted, emphasizing Europe and Japan, as well as the US Congress, are enthusiastic about a return to the moon.

The lunar soil may indeed be rich in rare earths: I have no idea myself but it could be. However, absolutely no one, ever, is going to try and mine rare earths on hte Moon and then return them to Earth. It simply isn't going to happen.

What I think has happened here is that people have absorbed the stories of the past few years about impending shortages of the rare earths. All that stuff about China reducing exports of these metals so vital to modern electronics. And thus there's a feeling that any deposit of them, even somewhere as inaccessible as the surface of the Moon, must be something that people would want to exploit.

The problem is in the initial story: yes, China did limit exports but that does not mean that there's any shortage of these minerals here on out little planet. Several of them, individually, are as common as copper down here. And we produce millions upon millions of tonne of that each year while we use only 140,000 tonnes of all 17 rare earths together. There's simply no long term shortage.

And there's absolutely no way therefore that anyone's going to try and mine the Moon for things that can be had down here for $10 a lb.

My major point here being that these people are apparently basing their plans about lunar mining on something that simply never will be mined up there: at least not for returning down here. And it's inevitable that if you start basing your plans on untruths then your plans are going to fail at some point.

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A little bit of inflation is still too much

Written by Dr Eamonn Butler | Wednesday 19 September 2012

Headline inflation in the UK has fallen to 2.5% (from a peak of 5.2% a year ago), so there is great rejoicing. The monetary hawks (such as Liam Halligan) have been proved wrong, we are told – all the Quantitative Easing didn't actually fuel inflation. Meanwhile, the Governor of the Bank of England, Mervyn King, is relieved that he doesn't have to keep writing to the Chancellor, as the law requires when the inflation target is widely missed.

But is everything so hunky-dory in reality? At the most basic level, there are some price-raising pressures in the pipeline. Oil keeps going up, the utility companies are raising their prices, and poor harvests around the world this year cannot help. But as every good monetarist knows, rises in some prices, however important, cannot raise prices overall. If there is a fixed amount of cash around, people can only spend more on one sector (like food and energy) if they cut back on others (luxury goods, say, or housing).

And the fact that prices are rising only moderately suggests that all the Bank's quantitative easing is not actually having much effect on the real economy. It certainly seems to be keeping up asset prices, which is why the stock market is looking so healthy. But maybe it is not seeping into the everyday economy. Maybe it just replaced the collapse in the money supply when the banks found themselves caught in the headlights and stopped giving out loans any more. Still, the monetary hawks would say that as and when the economy recovers, the Bank of England needs to be able to rein things in again or all this new money really will have an effect on prices – and reining people in is a lot harder than engineering a boom.

But as the deepest level, I still wonder why we should regard inflation of 2.5%, or the Bank's central inflation target of 2%, should be remotely acceptable. At that rate, the value of our money halves in 30 years. Which is great if you are a big creditor, like the government, because you are repaying your debts in devalued money. And indeed the government is charging us tax on the interest we get on our savings, even though these are negative in real terms. And as incomes struggle to keep pace with the inflation, more of us find ourselves drawn into the higher-rate income-tax brackets. And so on. It all favours the spendthrifts and punishes the savers.

Keynes figured that inflation is useful because of the downward inflexibility of wages. People don't like pay cuts, but pay in declining industries can be cut in real terms simply if it does not rise as much as prices. So people are gradually eased into more productive jobs without any nastiness. Keynes, though, did not realise just how damaging inflation is to signals in the economy. When all prices are rising, it is hard to separate the 'noise' of generally rising prices from the 'signal' of prices that rise because demand is not being met. For years, people invested in houses because they saw house prices going up and up, without realising that, after inflation, the rise was much less. So you get bubbles in some places, and underinvestment in others. None of which helps competitiveness and employment.

There is also an argument that a bit of inflation is fine because of the seignorage in the system. Put simply, as people get wealthier they keep more cash to hand, in their pockets, wallets and current accounts, without worrying about it so much. So you can have more money in circulation without it driving up prices, because there is more money lying dormant round the place. Maybe. But I still don't see why that is a reason to create so much money that prices, driven by the non-dormant bulk of the cash, rise beyond zero.

There is also an argument that it is wise to allow a bit of inflation because if by mistake we tipped into deflation things would be really terrible. With falling prices, why should anyone buy today what they could buy cheaper tomorrow? So business would grind to a halt, we're told. But in fact, inflation is equally destructive – killing the incentives for saving and investment, encouraging false booms, diverting resources into the wrong places. Should it not be a key duty of the government to preserve the value of our money – not to let it lose its value at 2.5% or indeed on any scale at all?

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A little detail about the Simon Ehrlich bet

Written by Tim Worstall | Saturday 07 September 2013

Tyler Cowen is recommending a new book about the Simon Ehrlich bet on prices of natural resources in the 1980s. Given my background in the weird metals business thought I'd add the trivial details of why Simon won. No, not the general economic principles of substitution, greater efficient of extraction and so on, but the real reasons, in detail, for the win. The bet was about these metals:

Copper, chromium, nickel, tin, and tungsten

Simon won because copper, tin and tungsten went down by more than the other two went up. But why did those three fall in price? You can track the prices here.

Copper dropped in price in that decade because we worked out a new method of extracting copper. Before the 80s all copper was extracted from copper sulphides. Then someone worked out that a technique used on some other metals, solvent extraction and electrowinning (SX-EW), could be used on copper oxide deposits. Now we always knew that there were mountains (and quite literally mountains) of copper oxide lying around but we didn't know how to get the copper out of them. Now we did and the first plant entered service in 1982. It's not too much of a stretch to think that given a new method of processing entire mountains that the copper price was going to fall. Which it did indeed do.

Tin was a more interesting case. Under the usual UN agreements that we must try to plan everything there was something called the International Tin Council. This tried to manage the world tin price so as to be "fair" to everyone. Not surprisingly, given the cocentration of interest, the producers dominated and so the tin price was kept very high. This increased demand and the tin price started to fall at the end of the 70s. The ITC kept buying in tin to support the price and thus went bust in 1985. Yes, we had the collapse of a producer cartel.

Tungsten, that was a combination of China opening up and the collapse of the Soviet Union. Both led to floods of material out of both countries depressing the price.

This is not to say that Simon just got lucky in this particular decade (as many supporters of Ehrlich try to make out). Rather, that Simon's bet was really that these sorts of things do happen. New technologies are found, market inefficiencies are removed, new entrants do come into markets. And they do so consistently enough that long term prices for commodities like minerals do indeed fall. Simon's ultimate point was correct: I'm just providing the proximate reasons for why that is so.

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A little note for our Robin Hood Tax friends and the World Development Movement

Written by Tim Worstall | Sunday 05 January 2014

You will recall one of the arguments put forward by the Robin Hood Tax crowd: that lots of speculators in futures and options markets drives up prices. This has also been put forward by the World Development Movement, another group of teenage trots only lately out of their mothers' basements. The problem with this idea, as has been endlessly pointed out, is that future prices can only affect current, spot ones, if there is a rise in inventories. And that's not something we've seen in recent price booms.

And here is Craig Pirrong, fresh from the mendacious hit job the NYT did on him, to explain why in more detail:

Back in the 1990s and early 00s, gold prices were low. Very low. $300 and below. Back then, the hue and cry was that prices were artificially low because . . . wait for it . . . producers were massively short because of hedging programs.

Well, if producers were massively short that means that speculators were massively long. So if speculators drive prices, why weren’t gold prices stratospherically high in the late-90s early-00s? After all, supposedly in 2008, and the last couple of years, the massive long speculative positions were inflating prices. Why didn’t the massive long speculative gold positions a decade ago inflate gold prices?

Flipping things: If short commercial positions were depressing gold prices a decade ago, why didn’t they depress oil prices in 2007-2008, and over the last couple of years? Hence the danger of superficially examining net positions and claiming that one side of the market is inflating (or depressing) prices: an equally legitimate argument is that the other side of the argument is depressing (or inflating) prices.

But the point is that neither argument is legitimate: both are equally illegitimate. Derivatives positions net out to zero. Derivatives are in zero net supply. Looking at one side of the market, and ignoring the other, makes no sense.

In the absence of changes in physical stocks driven by those future prices, futures speculation simply will not change current, spot, prices.

Worth adding I think my favourite mistake by the WDM on this point. They looked at grain prices in 2008. Wheat and corn (maize) moved a bit. Rice moved massively. OK: but they used this as proof that futures and options speculation really does change spot prices. Failing to note that the futures market for rice is very thin and small while those for wheat and corn are vast and deep. Thus the grains with more speculation in them had lower price rises: not exactly a confirmation of their thesis.

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A little reminder of how far we've come

Written by Tim Worstall | Thursday 17 April 2014

This is a little way off our usual beaten track here but there's an important point underneath it. An excellent piece in the NY Times about the impact of the deaths of the US Civil War upon that country. We look back now at the numbers, 750,000 or so killed, equate that to perhaps 7 million now in the much larger population, and think that these numbers must have terrorised the country, as that larger one would us today. But that's not quite how it was: people didn't brush off the casualties, but they didn't loom as large in the societal mind as we might think.  Partly because two thirds of those were due to disease and only one third to actual action. And while death from disease on campaign was at least partly caused by being on campaign death from disease while not on campaign was common enough so it wasn't looked at in quite the same way. But more than that:

If we work from an assumption that deaths from disease were not viewed at the time as war casualties, but rather as a continuation of prewar circumstances, instead of 750,000 casualties faced by Civil War-era Americans, we are left with 250,000. If we divide this figure by the four years of war, we have a crude estimate of 62,500 battlefield deaths per year. But even this figure requires context to understand its significance. It is important to keep in mind that death rates were tremendously variable in the period, even within relatively stable locales, because of the unpredictable nature of contagious disease. Some areas reported rates that varied from below 2 percent up to 6 percent. A conservative estimate of a 2 percent death rate for 1860 would have meant about 629,000 deaths that year for the nation as a whole, while a 3 percent rate would have resulted in 943,000 deaths (today’s rate is consistently below 0.8 percent). The additional battlefield deaths in the war would thus represent an increase of between 7 and 10 percent over the normal rates. Significant, but hardly catastrophic.

Yes, the deaths in that war (as in any) were horrendous, wasteful and we would most certainly hope to avoid any more in the future. But it's worth noting how far we've come since those days, our total death rate now is lower than just the variation in the total death rate at that time from year to year. This is basically the effect of sewage and vaccination (other medical treatments a little, but the real drivers are those first two). Two things that our now much richer society can afford as a matter of course.

Another way of putting this is rather hopeful. I tend to doubt that rich countries will ever be persuaded to get into an all out war ever again. Simply because there are so many fewer things that kill us now that we'll not, in terms of mass armies and mass battles, ever be prepared to take the risks.

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A little something from the frontlines of international industry

Written by Tim Worstall | Thursday 15 August 2013

Most of you will know that my day job is dealing with the weirder end of the metals market, most especially the rare earth scadnium. This popped into my inbox as a result of one of those automatic alert jobbies:

Guangdong Orient Zirconic Ind Sci & Tech Co. is going to spend 30 million yuan ($4.9 million) to build facility to recycle scandium from zirconium oxychloride acid mother liquor. It will take six months to construct the facility, Orient Zirconic told Shenzhen Stock Exchange on August 10. When completed, the facility will have production capacities of 2,500 kilograms for high purity scandium oxide a year, 20 tpy for mixtures of rare earth oxides and 150 tpy for zirconium oxychloride, it said.

I don't know this particular company and have no contact with them. But those numbers all look about right, believable certainly. For I have looked at that (and many other viable ones) method of extracting scandium. It works, no doubt about it.

The thing I'd just note though is that they're going from a standing start to production in 6 months. If I were to pursue exactly the same technology here in the European Union it would take me 18 months just to get the environmental permit to proceed.

No, I don't advocate Chinese levels of environmental non-protection. But I do want to point out that such protection does come at a price: it takes much longer to do things therefore economic growth is slower than it would have been without such enviromental protection. It might even be that the level of protection we have is the right amount: I really do just want to point out that it comes with a cost attached to it.

And we have all noted that economic growth has been slower in recent decades than it was in those before we imposed the current level of regulations, haven't we?

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A load of balls

Written by Andrew Hutson | Wednesday 10 December 2008

So, Ed Balls has backed yet another brainless scheme, this time relating to child obesity. This latest plan is to ban fast food and takeaway restaurants from within 400m of every school, youth centre or park. As soon as I read about this proposed scheme the impracticalities of it became apparent.

Firstly, having only left sixth form this year, I would like to think I understand the psyche of the average school student better than Ed Balls. My school had a national ‘Healthy School Status’: as such there was an abundance of reasonably priced salads, fruit, nut-bars and low-fat yoghurts. But every day there were still hoards of my peers walking down the road to every type of takeaway restaurant imaginable. Clearly, forcing healthy food onto young people does not work. In fact, from my experience, it only created resentment towards our school canteen as we were being forced further away to find the choice of foods we wanted.

Quite apart from that though, the idiocy of this scheme is laughable. I am trying to think how far I would have to travel from my house to find an area which is at least 400m from a park, youth centre or school: it’s quite a way! And what would happen if a new youth centre was opened in a high street – would all the takeaway shops have to close their doors immediately?

According to the Federation of Small Businesses, this industry is worth £20bn a year, and Balls' scheme could significantly damage small firms. In the current economic climate, the government should be encouraging businesses and entrepreneurs rather than working to ensure their demise. This is yet another example of a poorly planned top-down scheme with little consideration for people, businesses or local issues. By all means let schools educate children about the dangers of obesity (although perhaps teaching them to read and write properly should be the priority). But then allow them or their parents to make their own free choices.

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A local problem for local people?

Written by Eben Wilson | Sunday 13 March 2011

The news that the BBC may be planning to radically shrink the output of its local radio stations, merging them into the output of Radio Five Live, should not surprise us.

The ASI has been saying for some years that the BBC – as a free-to-air tax-funded institution – is fatally flawed. Our view has also been that it will die of a thousand cuts like this week's news, as it fails to cope with multiple global media organisations that can price their services for customers.

Crucially, those competitors learn from those customers and can innovate to capture new revenues. If it were priced, some local BBC stations might well find their feet as a voice for a subscribing local community audience. They would use low powered cheap transmitters, small studios with modern small scale equipment and a lot of volunteer staff. Of all electronic media radio it might be the one to survive like this, although my bet is that it would be on the internet more than the airwaves.

Instead, BBC local radio carries all the overheads of cushioned personnel, over-sized buildings, globally capable equipment, and the electronic networking capabilities of the worldwide BBC News agency, acting as a journalistic "stringer" to the very expensive core news operation.

The BBC cannot go on like this. It has to face the real world, grow into new challenges and compete with new media. It does not need to retain its local arms at high cost to the taxpayer. Shrinking their airtime to become a small element buried inside Radio Five Live which is the present proposal is a good start. My guess is that this is the beginning of the end for the network of local stations.

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A lot of hot air

Written by Tom Clougherty | Tuesday 20 November 2007

On the train this weekend, I was sitting accross the aisle from a lady reading George Monbiot's new book.

Every few minutes, she put the book down and loudly pontificated on global warming. We should all stop flying, of course, and carbon emissions should be set at a world level (!) with everyone given the same individual ration (never mind the economics or enforceability of that one...).

I was sorely tempted to point out the error of her ways, when her husband stepped in and did the job for me. Eager to get on with reading his own book, he said: "You know darling, there would be a lot less carbon dioxide in the atmosphere if people would just shut up!"


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