Libertarians often have a bad rep when it comes to environmental protection. It’s usually just a hollow, talking-point label slapped on by people who don’t know the first thing about libertarianism.

The truth is, believers in liberty do account for environmental preservation. The difference is that while statists insist on government bureaucracy and subjective, whimsical regulation and lever-pulling, libertarians, as we do, stick to our objective principles to find that environmental protection is baked right in! How convenient.

Vedran Vuk of Casey Research explains,

Since Casey Research invests in energy and mining companies, I want to discuss a theoretical idea regarding the economics of pollution, called “externalities.” Despite what some readers might think, I do care about the environment. I just don’t see current government regulations as a way to solve our problems. In fact, those regulations often make the lives of average people worse.

Let’s start with positive externalities. They’re a little harder to come up with but I’ll try to make a good example. Suppose that I buy a rundown house on a nice block. I put a lot of money into fixing it up and doing some amazing landscaping work. Suddenly, this former dump on the block becomes one of the best-looking houses. My property value increases, but so do the property values of my neighbors. They didn’t put a single nickel into my project, yet their property values may rise by thousands without the eyesore next door. This unpaid gain is a positive externality.

In a way, externalities are inefficiencies. We want people to produce positive externalities, but we often have no way of compensating them for doing so. One is not going to make friends by giving a neighbor $200 and telling him, “It would be great for the whole neighborhood if you would fix your yard.”

The bigger concern is negative externalities. Suppose a coal-powered plant is near someone’s house. The person buys electricity from the plant at market prices. However, along with the price of electricity, the customer pays an additional price from the increased pollution. The fish nearby have more mercury in their bodies, and the air is horrible. Not every customer pays this price. For those living much farther away from the plant, the externalities are lower. The coal plant does not pay the price of this damage; instead the plant’s neighbors pay the price in a reduced quality of life. Yet pollution is a cost of production.

Just like the positive externalities problem, it’s difficult for an individual to be compensated by the coal plant – especially if the damages are hard to quantify. Furthermore, what’s the price of clean air? I don’t know. For some people who enjoy living in the countryside, it could run in the thousands of dollars per year.

To produce good economic incentives, these externalities must be accounted for. After all, society benefits from production only if value is created. For example, let’s consider a company that manufactures cleaning chemicals for $4 and sells them for $5. Society gains by at least $1. Resources worth $4 have been transformed into products worth $5 to someone. The economic incentive is to keep repeating this process until the profit disappears. However, imagine this case: The chemicals cost $4 and can be sold for $5, but the process also causes $2 of environmental damage. The producer doesn’t pay the cost of the environmental damage, but he still has a personal incentive to produce the chemicals. However, society is worse off overall, because the process costs $6 for only an output of $5.

This is where the government economists step in with suggestions for taxes. If we place a $2 tax on the chemical company, then the incentive will be aligned. Yes, that’s partially true. However, this doesn’t necessarily solve the problem of pollution. Think again about the example of living next to a coal plant. Suppose the government places an extra tax on the plant, and it continues to operate. Who will pay for that tax? Unfortunately, the customers will likely bear some of the cost through higher prices. In fact, the resident will be worse off after the tax. He still bears the damages from pollution, and he must pay higher prices. That tax money doesn’t go toward compensating the victim of the pollution – it goes to paying additional bureaucrats at the EPA.

Environmentalists almost always support laws that punish companies but don’t actually protect people. In fact, they actually make things worse for the regular Joe. If a company meets the regulations and pays its taxes, it can basically do whatever it wants from there. And that’s a big reason why I’m not a fan of current regulations. The environmental laws are more often than not just barriers or taxes. They don’t do a good job of protecting the little guy.

So what would be my solution? Make companies respect the private property and lives of other people. Don’t hold them responsible to the government; rather, hold them directly responsible to individuals in the community. If a company is hurting people and their property, the firm better be writing them checks instead of sending money to the EPA. It’s really not a radical idea. We do this in courts all the time. If a business hurts someone, it’s accountable. For some reason, the same thing doesn’t apply to pollution. Rather than devising environmental regulations and taxes, just hold the companies accountable for damages. That should create all sorts of positive incentives regarding pollution and the location of industrial sites.

Perhaps I’ll get back to this subject when we have some extra time. It’s a complicated topic and certainly requires more space than this introduction allows.

Again, because Casey’s BIG GOLD refuses to provide dedicated pages to their individual daily articles I’ll just copy and paste the relevant article here.

The following conversation took place between a friend’s son and I; he’s a bright but relatively young investor. He had purchased some gold based on some things I’d told his father. Shortly afterward, the price dropped hard. As you’ll see, he was not very happy with my advice and said so in an email to me. So I called him…

I: Sounds like you’re upset.

Friend: Yeah, that’s putting it mildly. What the hell am I supposed to do now?

I: Because the gold price has dropped?

Friend: Yes! It’s down 15% in a month! I thought you said this was going to be a good investment.

I: It is. And it will be. You might even consider buying more here if you have the funds.

Friend: I have some other money, but why would I put it in gold? It’s losing money.

I: Because it’s on sale. Because it’s cheaper now than when you bought it. And especially because none of the reasons for buying it have gone away.

Friend: That doesn’t mean it’s going to go back up.

I: As I told your dad, there are no guarantees, but I think it will have to go higher. Either way, it will hold its purchasing power over time. We’re holding it as an alternate currency, a more sound form of money that can’t be debased.

Friend: Yeah, well, my money just got debased, big time. It needs to go up 20% for me just to get back to even.

I: Five years from now your dollars will have lost at least 10% of their value, based just on current trends. There’s a good chance it will lose more than that. And gold will probably rise more than 10% a year. At some point it’’s likely to go into a bubble.

Friend: [silence.]

I: Look, I know you’re upset, but I’d hate to see you bail. This is one of the best investments we can make this decade.

Friend [relenting a little bit]: You really believe that.

I: I can’t promise you anything, but yes, I do.

Friend: And that’s because you think inflation is coming.

I: It’s for a lot of reasons, and that’s one of them. Inflation is virtually baked in the cake; the dollar’s long-term problems will be impractical to resolve; and the global economy is on high alert. This is exactly the kind of circumstances gold is for.

Friend: Then why is it falling?

I: Institutions need cash and liquidity, and gold offers a bid. Besides, nothing goes up in a straight line, and gold had just run up 35%. It was time for a break.

Friend: So this big drop really doesn’t worry you.

I: It doesn’t. I’m buying. In fact, I’ll prove it to you – send me your gold and I’ll buy it from you.

Friend: [Silence.]

I: I know it doesn’t feel good right now, and it may take some time for it to make another new high, but gold is too important not to own here. It’s a long-term trade, so plan on holding it for a while. In fact, if it helps, just forget about the fact that you own it – go do something fun and have a beer at the pub.

Friend: [a little chuckle].

I: I don’t think you made a mistake buying at the price you did, in spite of it being lower now. Odds are high you’ll be happy in a few years.

Friend: [pause] All right…

I’m glad my son’s friend decided to hold on, because that conversation took place in June, 2006. He’d bought gold at around $700 and watched a month later as the price fell to as low as $567.

Gold ended up declining a total of 21% in just five weeks before bottoming, after a run-up of 35% (sound familiar?). And yes, it took over a year before it hit a new high.

Yet my son’s friend – now older and wiser – wishes he could go back in time and make the same mistake again and buy gold at $700. His investment is sitting on more than a double, in spite of buying at a temporary peak.

I think that a few years from now we’ll all wish we could go “back in time” and buy gold at $1,700. And I believe you’ll still feel that way if gold falls to $1,500, as some writers are projecting.

I think this because circumstances now are worse – and hence more bullish for gold – than they were in 2006. Look at how much money we’ve printed (the monetary base now exceeds $2.6 trillion, a mind-boggling 200% increase since 2006). Look at the state of the global economy – highly vulnerable and propped up by governments. Consider the lingering and inescapable predicament of many European nations – scare tactics aside, how, exactly, will this be resolved in a healthy way? Ask yourself if the outlook for the US dollar is out of the woods (roughly 10% of federal revenue goes solely to debt payments, a figure that is projected to triple). Explain how the reckless path of deficit spending will shift without causing some kind of major impact on the economy (history shows abject deficit spending leads to economic downfall, virtually without exception). Tell me how we avoid massive inflation, an outcome that seems so certain at this point that about the only way to avoid it would be a massive global meltdown – and even then, the Fed would surely print to oblivion.

Like I told my son’s friend, nothing is guaranteed. But until real interest rates are positive again, government leaders instigate honest solutions to our debts and deficits, the global economy becomes an engine of growth, the sovereign debt issues in Europe are genuinely resolved, and global currencies – especially the US dollar – are strong again, I’m buying gold.

Yes, there will be volatility. And yes, a short-term “solution” to what seems like certain default in Greece, for example, would cause some investors to sell gold. But like in the spring of 2006, these are temporary, short-term fixes only. For the tumult that is most likely ahead, there simply isn’t any better currency protection than gold and silver.

Join me in calling your favorite bullion dealer and making the mistake of buying gold at $1,700.

This really underscores something that has been hammered home again and again by James Turk: continue to accumulate precious metals. Set a day of the month and a dollar amount that you’ll spend and make sure to buy consistently every month despite the price. That way you remove emotion from the equation and you continue to accumulate in the midst of this bull market.

I usually don’t pay that much attention to technical analysis of market charts—mainly because I don’t understand them all that much.

But here is something that I found very insightful, from Scott Pluschau.

The Gold Futures today formed a single candle called a "Hammer" on the Daily chart.  This is a well known and popular reversal pattern in Japanese Candlestick analysis.  The hammer shows strong demand at lower prices in the auction. The lower wick of the candle has to be multiple times the size of the body of the candle which can be seen in the chart where I drew a blue oval.  It would be even more bullish if the closing price was higher than the open. 

The hammer in theory represents a turning point, since the Bears tried to push lower but got rejected, weakening them…and now there’s potential for the Bulls to start a short squeeze.  This single candlestick pattern needs confirmation.

Excerpted from Gary North’s piece on LRC

When we think of bank runs, we have a mental image of a long line of people in front of a bank in the early 1930s. Or we have a mental image of the scene in "It’s a Wonderful Life," where depositors want their money, and Jimmy Stewart hands out – we never quite got this – $33,000 in honeymoon money to calm them. Yes, $33,000, which was what $2,000 was worth in 1932. Check the inflation calculator of the Bureau of Labor Statistics. (There was something endearing about Frank Capra’s movies, but it wasn’t his economics.)

In 1934, the government created the Federal Deposit Insurance Corporation (FDIC) and an equivalent agency for the savings & loan industry, which lent mortgage money. The depositors received government-subsidized insurance for their accounts, up to a limit that covered most depositors. After that, there were no further long lines of depositors trying to get their money out. So, we live in a mental world created by textbooks. The economic theme of the textbooks is universal: the New Deal saved American capitalism from itself. Most modern capitalists believe this.

In fact, the FDIC and FSLIC merely shifted bank runs from the front door to the back door. The large deposits are far above the insurance limit set by the U.S. government. The official limit was raised by the government from $100,000 to $250,000 during the crisis week of October 3, 2008. This temporary measure was made permanent in July 2010.

The big money for large banks is not gained from depositors who walk in the door. It is gained from pools of investment money that are not covered by any form of insurance. This is short-term money, usually tied up for no more than a few days. This is the heart of bank profits. The banks are borrowed short – days, not months – and lent long: years, not months. These are profitable arrangements because, except at the start of traditional recessions, long-term rates are above short-term rates: a positive yield curve. "Borrow low-lend high" is the law and the prophets for fractional reserve banking.

Investment banks – RIP – in August 2008 did not have to deal with the general public. They did not offer accounts to little people. They made lots of money in the far less regulated capital markets for very rich people.

But in March 2008, Bear Stearns tottered at the edge of bankruptcy. A rumor spread that it could not roll over its debts. The rumor became reality within three days. This was a self-fulfilling prophecy. Wikipedia summarizes:

In March 2008, the Federal Reserve Bank of New York provided an emergency loan to try to avert a sudden collapse of the company. The company could not be saved, however, and was sold to JP Morgan Chase for $10 per share, a price far below the 52-week high of $133.20 per share, traded before the crisis, although not as low as the two dollars per share originally agreed upon by Bear Stearns and JP Morgan Chase.
The bank had existed since 1923. It was highly respected, Wikipedia says:

In 2005-2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune’s "America’s Most Admired Companies" survey, and second overall in the security firm section. The annual survey is a prestigious ranking of employee talent, quality of risk management and business innovation. This was the second time in three years that Bear Stearns had achieved this "top" distinction.
In other words, the financial community didn’t have a clue as to how vulnerable the company was. The experts were idiots. They were convinced that to be borrowed short and lent long is smart business. That is to say, they rejected Austrian School economics in general and Ludwig von Mises’ Theory of Money and Credit (1912) in particular.

"During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages." Lawsuits by investors began. Still, the financial world shrugged its shoulders. "No problem."

But what of the Securities and Exchange Commission, which regulated the investment banks. It was blind right to the end?

On March 20, Securities and Exchange Commission Chairman Christopher Cox said the collapse of Bear Stearns was due to a lack of confidence, not a lack of capital. Cox noted that Bear Stearns’s problems escalated when rumors spread about its liquidity crisis which in turn eroded investor confidence in the firm. "Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns," said Cox. Bear Stearns’ liquidity pool started at $18.1 billion on March 10 and then plummeted to $2 billion on March 13. Ultimately market rumors about Bear Stearns’ difficulties became self-fulfilling, Cox said.
This was indeed the heart of the matter: a lack of confidence. When you are running a confidence game – which is what "borrowed short and lent long" is inherently – you always face the threat of a crisis of confidence by your lenders.

No lack of capital? Ha! The essence of capital for all fractional reserve banking is lenders’ confidence. Lose it, and the end is nigh.

Why? Because short-term debt matures in days and must be re-financed when it matures. If there is no one ready to buy the next round of debt, the bank is busted. This does not take weeks. It takes days.

The bank runs that we have in our mind rest on an image of depositors asking for currency. That image is wrong, and has been wrong since 1934. The correct image is that of a man in a suit looking at a computer screen. He sees that the deadline for repayment of a loan with many zeroes is due today. He contacts the bank to which his firm has made the loan. "Please transfer our money to our bank."

That’s it. Nothing else. No lining up. No presenting of a savings passbook. No exchange of pieces of paper. Just a notification by email that the loan will not be rolled over, so please send a bank wire of the funds. It’s all very clean. It’s all very fast. It takes one working day to complete the transaction. The words, "your check is in the mail," is not applicable.

In mid-September, Lehman Brothers, another investment banking firm, went through the same experience. In this case, however, the U.S. government and the New York Federal Reserve Bank refused to assist the firm. Henry "Goldman Sachs" Paulson, the Secretary of the Treasury, was seized by a fit of debt ceiling fever. He was the man who had unilaterally nationalized Fannie Mae and Freddie Mac on September 7. Over the weekend of September 13, no one came to the rescue of Lehman Brothers. On September 15, it filed for bankruptcy. It was the largest bankruptcy in U.S. history.

That sent a message to the other investment bankers. We read in the Wiki entry for Morgan Stanley,

Morgan Stanley and Goldman Sachs, the last two major investment banks in the US, both announced on September 22, 2008 that they would become traditional bank holding companies regulated by the Federal Reserve. The Federal Reserve’s approval of their bid to become banks ended the ascendancy of securities firms, 75 years after Congress separated them from deposit-taking lenders, and capped weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.
Can you imagine the lawyers? They had to complete the restructuring of these banks in one week. They did it. And then, lo and behold, the FED tossed the lifelines: $107 billion for Morgan Stanley, $69 billion for Goldman Sachs. All of this was done in complete secrecy. Nothing about it appeared on the FED’s balance sheets.

NOW IT’S GOVERNMENTS’ TURN

Greece is now paying 43% per annum on 2-year bonds. This is very close to the end of the road. This is a loan shark interest rate, but it is not the Mafia that is acting as the lender of last resort. It is Europe’s most sophisticated investors. It is also the European Central Bank. The London Telegraph reports:

The International Monetary Fund’s partner in the recent international bail-out missions is itself in danger of becoming a liability, Open Europe has argued.

In a report published on Monday entitled "A House Built on Sand?", Open Europe has calculated that the ECB has a total exposure of about €444bn (£397bn) to "struggling eurozone economies".
The bank is now "23 to 24 times levered" as a result of bailing out Greece, Ireland, Portugal and Spain.

The London-based think tank argued: "Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out."

The experts are desperately trying to conceal the thinness of the ice they are skating on. Legally, they are skating on behalf of the voters. Operationally, they are skating on behalf of the largest commercial banks. Their sovereign status makes them immune to lawsuits. But the market is imposing sanctions: 43% interest.

Bill Clinton avoided this, because he took Robert Rubin’s advice. The bond traders did not get him.

They are going to get Greece. They are going to get Portugal, Spain, and Italy.

Who will bail out the banks? How much money will it take?

CONCLUSION

You might imagine that very smart experts would have seen this coming. They did not, any more than they saw the Bear Stearns/Lehman Brothers crisis coming. The best and the brightest respect each other. They see their peers borrowing short and lending long, and they conclude that their peers are the smartest guys in the room.

These are people who thought Bernie Madoff was an investment genius. They thought the same of Bernie Cornfeld a generation earlier.

Avoid thin ice.

The debt ceiling drama is finally over, and as far as I’m concerned only one thing was proven in all of this: A U.S. government default will not be a nominal default, it will be a hyperinflationary one.

This was it, as Michael Jackson would say.

This was the moment of truth, the time when my thesis would really be put to the test. And now I have finally been thoroughly convinced of what the future of the United States will look like.

The question to be answered in the last few weeks boiled down to this: Would the U.S. finally swallow its bitter medicine, or will it continue to kick-the-can and eventually meet a much more grievous fate? In my mind, this has been answered. The final nail is in the coffin.

If the U.S. government had refused to go further into debt and instead the public treasury was forced to live within its means, then painful as it would initially be, the ship would ultimately be righted. I would have been proven dead wrong on my expectation for a hyperinflation of the U.S. dollar. But that is not what happened.

Don’t get me wrong, this outcome is not what I hoped for. It is not bittersweet, it’s even beyond bitter. It’s just plain horrible.

In a few years I would have loved to have been humbled by missing the mark on my hyperinflation forecast. But that won’t be the case now.

There are two astonishing facets of this debt drama that have revealed themselves over the course of the last few weeks. These provide the foundation for my nail-in-the-coffin declaration.

The first is concerning the D.C. politicians. These clowns have proven once and for all that they simply do not have the stomach to make the cuts necessary for the U.S. to get its fiscal house in order. Maybe this one is not so astonishing.

The second facet of this circus which should be considered has to do with the voters. Just like their representatives, the voters themselves proved that they too do not have the stomach to make the cuts necessary in order for their own treasury to remain solvent. What’s more, the frenzy they were whipped into by the demagogues and boogeymen was almost comical.

Get this: American voters were told that their treasury, which takes in over $2 trillion a year was going to default on interest payments that amount to a little over $300 billion a year. This caused outright hysteria. I even noticed it among New Zealanders.

It’s almost as if nobody has ever been in debt before. Not even that, it’s almost as if nobody can do some simple math.

Look, you don’t have to default on a payment of 30 cents if you have $2.20. You don’t need to extend your line of credit to pay the 30 cents, either. Even a product of the American public school system should be able to figure that one out.

The ridiculous thing about all of this is that total U.S. government debt is well north of the often cited $14 trillion and change. The treasury uses accounting techniques that would land any private corporation in court–the most blatant of which is that they just simply don’t count their pension liabilities.

In any case, I’m glad that’s all over.

I’ll be watching for a significant correction in all things that have moved conspicuously of late (like gold and the NZD) as the world breathes a sigh of relief and “normal” market trends kick back into gear.

If we’re lucky, the can still has another 2 or 3 years of road left, but it’s now a certainty that the road leads off a cliff.