The fundamental difference between intellectual property and physical property is that theft (and duplication) of IP is harmless to its victim. If I steal your car, you are without a car. If I copy your car, you are left unharmed.

The claim that innovators would not develop new products if they knew others could simply copy their ideas is status quo bias. The argument seems very similar to claiming that a 100% income-tax rate would stop people from working, but is fundamentally different. Innovators can protect their ideas, methods, and processes from theft; but no one is able to legally avoid having their earnings stolen by the high tax rate.

Even if we assume that innovation would not occur without IP laws, what is to stop Edison, upon the discovery of a new light bulb design, to contract with a manufacturer (or build a factory himself), to create millions of bulbs before releasing them to the market at monopoly prices? As others scramble to copy his design and materials, he would become wealthy as a direct consequence of his invention. This is a primary reason that Apple was so financially successful -- keeping its designs and products a secret until millions of them flood the market, and competitors scramble to copy them. Notice that even with IP laws, Apple still behaves as if they do not exist in order to capture the full value of innovation.

Patents on various parts of Apple products only serve to throw a wrench into the efforts of competitors, just as patents on flywheel design slowed the improvement of the steam engine.

WD40 is another good example. Its inventor chose not to patent his "recipe" of chemicals, because it would only afford a short period of protection. Instead he chose to closely guard his methods and ingredients, and to this day it has not been successfully copied. The secrets that the WD40 company now protects are almost exactly the same as the secrets of any wildly successful food, like Coca Cola... or Sabra hummus, which are exquisitely balanced and nuanced flavors that are as impossible to reproduce as WD40. Why, then, is it possible to patent an industrial lubricant, but not a soda recipe?

I have developed several commercial recipes, and I can tell you that intellectual property is every bit as relevant to the process of converting plants and animals into a meal is it was to the process of turning rocks (metals) and trees into steam engines.

Additionally, protecting intellectual property is prohibitively expensive; so much so that even a relatively wealthy person cannot reasonably afford to patent and defend what they invent. Protection is effectively afforded only to very wealthy companies or individuals. It is not logical for me to pay taxes to support the courts and judges, socializing the costs of property lawsuits that do not involve me. Claiming that I benefit indirectly by encouraging innovation is like claiming that I benefit from (and must pay taxes for) roads even if I don't use them.

"I worked briefly as a sub-contractor for a company that won a government contract for software development in the mid 90′s. My task was to maintain and “fix” a program another developer had written before leaving that wasn’t working correctly. The program took close to 2 hours to run and spit out an erroneous report. Anyway, after figuring out that the code was complete crap, I went to the specs and re-wrote the code from scratch. Took about a day and a half. The program then ran in under two minutes and spit out the correct data. I took it to my boss, figuring he would be proud of my efficiency and initiative, but he took me outside and told me point blank that he didn’t want the program to run so quickly, nor did he want the news to get out that his department could fix things so quickly. He said I could either maintain the status quo or quit. I quit." --Comment at Cafe Hayek

This is a continuation of a previous post, describing the economics of a WW2 POW camp, in response to a reader's question:

"So what benefit is it to a bank to take deposits? Seems like printing money for loans (and getting back interest) at no cost is a pretty good business to be in! They can offer loans with no risk at all, just print more money, and if someone defaults, they just seize the asset (and even if it's worthless, it is no cost since printing money is free)."

Banks take deposits because the amount of lending they are permitted to do is regulated by the Fed, based on their total customer deposits, but they are not necessary for banks to create paper currency. There are two distinct, separate steps involved -- issuing new paper, and the service of guarding paper that has already been issued.

Imagine the POW camp's store prints new money and trades it for a wool coat, and places it in the store, available in trade for the new money. This is one way to create currency, and does not require deposits of the paper currency with the store. If the store offered to keep paper money in a lock-box at the store, that would be a distinct and separate service unrelated to the process of printing new money.

The operation of modern banks is quite complex. To see how banking works in terms of POW camp paper money, the process would be as follows:

1. John knits a wool coat from yarn.

2. Bob wishes to buy the coat for 50 POW dollars, but does not have enough money.

3. The camp's store brokers the deal; it buys the coat from John with 50 dollars it prints from thin air.

4. Bob buys the coat from the store on credit, owing the store 50 POW dollars, and agreeing to repay the debt over five months, paying 11 POW dollars per month (one dollar per month as an interest fee).

Modern banking is the same, but the wool coat is a house or car and the terms of the loan are longer. Banks broker deals in exactly the same way, making it easier for a home-builder to sell to a person who lacks the capital to make the purchase.


Notice that in this system there is not enough paper money to both pay off all the loans and the added interest payments. To correct this problem, the store would need to purchase supplies and keep them off the shelves, balancing the amount of supplies and paper. This is why the Fed engages itself in "quantitative easing," purchasing assets with new money, and keeping them off the market.

Later, if the value of paper falls in value, the store would be able to place additional items on the shelves to raise the value of paper -- by making it less plentiful relative to the supplies available in the store.

Don Boudreaux writes that trade deficits are irrelevant, both because of the way they are calculated, and additionally, because dollars must always eventually return to the United States, to purchase goods and services from US producers.

He correct in stating that deficits are of no concern to the well being of Americans, but is wrong in assuming that US dollars must always eventually purchase US goods or services. Dollars may be circulated indefinitely without enjoying the ownership of an American citizen ever again. Some nations use them as national currency, others use them as central-bank reserves, and foreign individuals may hold them as investments, trading them back and forth, indefinitely absent of American ownership.


Further, Mr. Boudreaux assumes that when American buys something from China using dollars, that those dollars are not immediately traded for Chinese currency on the forex.

And finally, Americans are the primary debtors to US banks, and are therefore, as a group, more negatively affected by deflationary pressure on US dollars. The supply of dollars is made lower if they are held in foreign bank accounts, because US banks no longer include them in the reserve calculations used to create new dollars. The citizenship of the dollar’s owner is always irrelevant — it is only the citizenship of the bank that matters to Americans.

The reality is likely that dollars are either quickly repatriated using currency exchanges, or that foreign companies hold accounts with US banks, and payments are accepted in dollars that never leave the United States banking system.

Much of the trouble in visualizing the impact of foreign trade is borne of a failure to regard dollars as a form of wealth, with an intrinsic value to those that must ultimately consume them. Dollars are born when banks issue new loans, and are consumed when those loans are repaid, in the same way that wine is created  in when grapes are fermented and destroyed when poured at the dinner table. Wine has value for the same reason as any paper currency, and both are created and destroyed in ongoing cycles. There is no such thing as "intrinsic value," or "real value," or "use value." All are childlike concepts invented to legitimize or quantify the reasons that any object is valuable. To avoid the truth -- that any object has value only because someone values it, is a grave error.

Some countries, like Canada and Australia, have a fractional reserve banking system with a zero reserve requirement. The fact that inflation does not run rampant in these countries is evidence that the traditional view of FRB is flawed; the reserve requirement is not a the limiting factor stopping banks from infinitely multiplying the money supply. Collateral is the limiting factor.


When banks make new loans, they are not re-lending money that is supposed to be sitting in individual accounts, as is commonly understood. They are creating brand new money. Period. Full stop.


New money is traded for collateral. There is no theoretical reason that a bank should not have a negative reserve; a bank could begin operation with no reserves whatsoever, no deposits at all. It could print new money and exchange it for collateral without limit, and without detrimentally affecting the value of dollars. Inflation would only occur if banks issued unsecured loans.


The purpose of reserve requirements is not to throttle the money supply, per se. Its true purpose is to regulate the amount of business each bank is permitted to do -- the biggest banks, with the most depositors, will be permitted to issue the most loans. Reserve ratios are the way the banking cartel divides business amongst its members.

R. A. Radford described in 1945 an account of trade in World War Two POW camps. Cigarettes, being the most liquid asset available, quickly became money; prices were listed in cigarettes and even non-smokers accepted them for their own rations of food and supplies, intending to use them as a store of value and in future trade.

Prices rose and fell depending on the influx of Red Cross supplies. When cigarette rations were reduced, prices rose. Markets were created by lists on the wall of each building, showing offers to buy or sell various goods, with prices listed in cigarettes.

The most fascinating part of the story is how closely it mirrors modern life; professional traders emerged, attempts to fix prices led to black market trading, and a fiat paper currency was created. A shop and restaurant were organized, and in order to purchase raw supplies for the store, issued paper notes that were each worth one cigarette, and were accepted in payment for anything in the store. The store became a bank, issuing paper money out of "thin air," and prisoners willingly accepted the paper because the shop agreed to trade it for goods at any time in the future. The paper money traded at par with cigarettes for a time, until the camp store began price-fixing schemes, and the camp became destabilized by bombing raids.

This method for issuing new paper money is the same system used today by modern banks. They issue new notes when they create new loans (mortgages, car loans, etc) with a few keystrokes, and insure that they are valuable by agreeing to exchange their collateral for notes in the future. The bank agrees to exchange a car title for dollars in the same way that the POW store agreed to exchange soap for new paper money.

The most interesting part of this narrative is that inflation eventually destroyed the paper money, but it was not because of excessive printing of notes. Printing too many notes would have been impossible; every purchase the central-store made with its new paper notes was kept in the store, available to be traded back to the men at the same fixed-price. If butter had been purchased for ten new paper notes, it would sit in the store, available for purchase for ten paper notes until it was sold.  Even if the store went crazy, buying up all of the assets in camp with new paper money, inflation would not occur, because everything purchased would still be available for sale, priced in paper money.

Paper notes lost value for two reasons. First, they lost value when the future of the camp was in jeopardy; when prisoners feared that the store might not exist in the future. Second, they lost value because of the store's efforts to fix prices, and its policy of removing an item from the shelves if the "official price" was too low compared to the black market. If soap's official price was ten cigarettes/paper notes, and was selling for 20 outside the store, it would be removed from shelves. Eventually the store only contained items that were not very desirable, and thus paper notes could only buy a few limited items in the store. When the camp was disbanded, all paper notes were eventually exchanged as agreed in the store, but the variety of items available was limited.

It follows that inflation of a paper currency in modern economies is created by destabilization of government (war), and by the implied price-fixing that occurs when a bank agrees to exchange loan-collateral at a fixed price. If a loan is issued for a car, the bank agrees to exchange dollars for collateral-free ownership if the loan is paid off.  The bank is effectively offering the home for sale in paper money at an "official,"fixed price.

If the market exchange-rate for soap goes too high, the store stops selling soap. The same thing effectively occurs in a market where home prices are rising; banks "take the soap off the shelf" by adding pre-payment penalties to mortgage contracts, which make it more expensive the pay off the mortgage; makes it more expensive to "buy the home" by paying off the loan. Banks don't remove the possibility of trading paper for the house completely, as was done with POW soap, but the inflationary effect should still be there.

A third way that inflation may occur is if the POW store began buying supplies with new paper and did not offer them for sale at all. This is what the Fed does when it engages in quantitative easing.

A fourth possible cause for inflation would involve the store accidentally buying supplies above the market price, and upon placing the asset on its shelf, finding that no one will pay 40 for soap because it trades at 20 outside the store. This effectively removes the bar of soap from the market, but leaves the new money in circulation to purchase anything else in the store, putting pressure on all other prices to rise and lowering the value of paper. This is what has effectively happened when housing prices collapsed and left many in upside-down mortgages -- the money remains in circulation but the home is priced incorrectly in the mortgage contract. The home is now effectively "off the market" just like the soap, no one will pay off a $500,000 mortgage on a house now worth $300,000. This effect is countered by mortgage defaults, which is equivalent to the POW camp store changing the price of soap to match market value. A bank prices the home correctly when it repossesses it and sells it at auction.

A final possible method for creating inflation would manifest itself if the camp's store were to begin issuing unsecured loans with new paper money. Nothing would be available in the store to match the new paper, and prices would be pressured to rise as the supply of new dollars outpaced the goods available in the store. This occurs today any time a bank issues an unsecured loan, and occurred heavily during the 1970s when banks issued massive amounts of unsecured loans to South American nations, causing massive inflation during that era and culminating in the August 1982 default of Mexico and eventually to a reduction of unsecured lending to the third world and a reduction in inflation during the 1980s.

What can rental cars teach us about yield curves? What are credit default swaps? Is borrowing a car fundamentally different from borrowing a dollar?

The longer one borrows a car, the lower the daily rate, but the longer one borrows money, the higher the daily rate becomes. Why? Another way to ask this question might be: "Why do yield curves slope upward for dollars and downward for cars?" Additionally, why does the shape of the curve change? What affects the rates that lenders charge to borrow cars and cash?

At first the question seems strange; we don't normally think of cash and cars as assets that are both being leased. We tend to avoid thinking of dollars as an asset that is being rented out, just like a rental car. We even have different names for the same things when speaking about dollars. Dollars do not depreciate, they are subject to inflation. Dollars are not rented to customers, they are loaned. One can lease a new car, but one borrows money. One pays a fee to rent a car, and pays interest to lease dollars. One signs a rental contract to borrow a car from Hertz, but signs a mortgage to borrow dollars from Chase.

The situation is further complicated when considering financial investments and bonds. If a company issues a bond it is borrowing dollars from an investor; it is renting dollars from an investor. Buying a bond is the same as loaning dollars; the same as renting dollars to the company that created the bond. Buying a bond is considered an investment, but buying a bond is the same as loaning money, the same as renting out dollars for a fee. In this sense a rental-car agency is no different than an investor -- it is renting out cars for a fee. Because both cars and dollars are assets, Hertz is "investing" in rental-car contracts, just as you might "invest" in bonds. A bond is a loan contract, and a loan contract is a rental agreement.

When a rental agency rents a car to its customer, the customer issues a bond (rental contract) -- the customer agrees to pay a fee for the right to use the car. The same thing occurs when a company issues a bond -- it agrees to pay a fee (interest) for the right to use an investor's dollars. Both borrowers agree to return the borrowed asset (dollars or a car) at a certain time and place, and pay a fee for the privilege of its use. The paperwork for this agreement is the same.

Back to the original question: why does a 15 year mortgage carry lower rates than the same agreement over 30 years... but borrowing a car becomes cheaper if it is rented for a week instead of a day? At first it seems like the answer is simple -- it costs money to process the car rental (building, desk clerks) and its return (cleaning etc), and the car loses value over time, and it can't make money sitting idle on the lot, so long-term rentals are more cost effective and avoids the paperwork of the turnover. The trouble is that mortgages require all of the same things, and dollars lose value over time as well. 

The are three main differences here. One is that dollars can be immediately loaned to new customers upon their return; they can always find a new investment (person willing to borrow them). Dollars sitting in an account are not idle like cars in a parking lot. The cars are losing value and failing to generate income, but the dollars in the account are generating interest.

Money is so liquid that it can be instantly rented out to myriad borrowers. Cars are illiquid, and there is always a risk that they will sit idle on the lot, which gives rental agencies an incentive to make long-term agreements to avoid idle time. Companies that rent cash (make loans) have zero risk of the money sitting idle, and therefor no incentive to offer a long-term discount on the rental fee. The yield curve flips when any asset becomes so liquid that there is no risk of the asset sitting idle. Until that point, short term rates are higher because of the idle-time risk.

Another main difference is the rate of depreciation; care lose value much faster than dollars, and because of the exponential nature of depreciation (assets lose value faster tomorrow relative to next year), depreciating assets cost more to hold now than in the theoretical future. This is obvious with cars and not so obvious with dollars, but both experience an exponential loss of value over time. 

A new car will lose perhaps half its value in the first three years, but may take another six years to lose half its value again. Eventually, a very old car will be nearly stable, losing only a fraction of a percent of its original value. The same thing happens to dollars, and for this reason if inflation (depreciation of dollars) is expected to be high, short-term rental of the dollars must be more expensive -- because of the nature of exponential depreciation -- dollars are always losing more value today than they will lose tomorrow. A dollar is today worth about 5% of its value 100 years ago, and is expected to again be worth 5% of its current value 100 years in the future, relative to today.

For example, if a car is expected to lose half its value per year, I must charge more than half its value to earn a profit on one-year rentals. But I can charge less per year if you agree to rent it for two years -- at the end of two years a $20,000 car will be worth $5,000; it will have lost $7,500 per year. So I must charge over $10,000 per year on one-year rentals and over $7,500 per year on two-year rentals, and so on. The price per year will be lower if you agree to lease it for a longer term. The same pressure applies to dollars, but because they are expected to lose only 2% of their value per year, I can make a profit by renting dollars (loaning them) at anything over two cents per year, per dollar.

A third difference is that the car rental-fee is paid in an asset other than cars; it is paid in dollars. With the rental of dollars, the fee is paid in the same asset that is leased. Borrowers of dollars pay their fee in dollars, and this turns out to be a key difference, and perhaps a good reason for using different terminology. To judge its equivalent in car rental, one would need to pay for the rental with rental cars.

So why do we see upwardly sloped yield curves if dollars are expected to depreciate in the same way as cars? Shouldn't I be willing to offer discounts on the rental fee if you agree to rent my dollars for a longer term? Yes, but there is another consideration in the business of renting property: default risk.

If I rent out my car, there is virtually no default risk; I will always get my car back. It is insured against theft and destruction. If I rent dollars to you and you default, I have no insurance, and have little hope of having my dollars returned to me. For this reason, the rental of dollars becomes more risky the longer I agree to let you use them. Credit default swaps, invented in the 1990s, are a form of insurance on rented (loaned) dollars. They allow people who rent out dollars to purchase insurance that pays if the rental money is not returned in the same way that Hertz carries insurance that protects them from renters who do not return their vehicles. CDS obligations lower the cost of lending money, making borrowing money cheaper in the same way that auto-insurance lowers the cost of renting a car from Hertz.

If you screw up and crash my car, I am not affected. If you screw up and go bankrupt, I lose my dollars (unless I purchase CDS insurance). Running your life without going broke is like driving a car without running it off a cliff -- both are more likely as the time-frame grows larger. The longer you drive, the more likely you are to crash. The longer you use my dollars, the more likely you are to go broke. However, we must not make the mistake of assuming that the fee is higher because the total risk of default is higher. The risk of default each year is what matters, because the rental fee (interest fee) is paid per year. It is paid based on the amount of time a borrower holds the car or the cash. 

If the borrower is a robot and his credit rating will not change from this moment until 30 years from now, the risk of default is the same for each of those 30 years, all else being equal. But he is not a robot; he is human, and I may be able to see how he drives today, but it is impossible to see how he will be driving 30 years from now. I know a loan may be a good idea for a business in its current state, but how can I know how stable it will be in the distant future? To take that gamble I must be paid a higher fee, and it is because conditions change over time. That man who borrows a car today will not be the same man in 30 years. Short-term loans are safer because it is easier to predict the near future. Tomorrow's weather is easier to predict than next week's.


However, a lender with a default swap does not fear losses in the same way that a rental-car company does not fear losing a car. The price of insurance varies from year to year, and there are myriad insurance companies available. The only risk in lending is that the insurance company will go broke at the same time that a car is stolen (which happened in 2008 with AIG's failure), so the credit rating of borrowers should not affect long and short-term rates differently.

Additionally, the final consideration is commonly known as a liquidity premium. If I am going to invest in something that is difficult to sell, I want to be paid a higher rental fee. If I invest in a rental property I want a higher return than if I invest in treasury bonds, because I can sell the bonds almost instantly, but may have to wait months or years to find a buyer for my rental property. The liquidity premium is the additional fee that is charged by people who rent their assets (invest) for longer periods of time. This consideration is mitigated by the securitization of long-term loans. Because lenders can resell their loan contracts easily, their capital is not tied up for the full term of the loan, and they don't mind issuing long-term loans any more than short-term loans.

Summary:

The shape of the yield curve (price list lenders and investors set) is determined by four distinct forces:

1. The risk that the asset may sit idle and lose value when it is not leased to a customer. This relates to the liquidity of the asset. Liquid assets carry lower risk of idle time, and liquidity is a measure of how quickly an asset can be traded, sold, or rented. Mitigated by liquid markets.

2. The risk that the asset may not be returned as agreed (default). This depends on both the credit of the borrower and the uncertainty of the future. If war is on the horizon this risk is higher for all borrowers. Mitigated by CDS.

3. The expected depreciation rate of the asset; inflation.

4. The liquidity premium (term premium). People don’t like to own assets that are difficult to sell (trade), preferring to own 100 gold coins instead of a solid block of gold weighing the same amount, because the coins are more liquid; they can be traded more easily. Mitigated by securitization of loans -- similar to selling paper shares that represent a fraction of the gold brick. Because they are smaller, they are more liquid.

5. The difference between the depreciation of the loaned-asset and the asset used as payment. With rental cars, this involves comparing the depreciation of the car with the depreciation of the dollar. 

The liquidity of the asset affects the first risk -- the more liquid the asset, the lower the risk of holding an "idle asset." If it is very liquid, idle time will be near zero; cash can be immediately re-leased (invested at interest) upon its return.

A person in the business of renting out his assets must consider all of five items in setting a pricing schedule. Each lender (investor) will have a different yield curve (pricing schedule).

Implications:


Long-term leases of depreciating assets should be cheaper (per day). Long-term leases of assets expected to rise in value should be more expensive (per day), even if no change in the value of money or interest rates is expected. Renting a building for five years should paradoxically carry a higher daily fee than renting a car for same amount of time, if default-risk is removed (with insurance).

Lower liquidity of the rented (loaned) asset flattens the curve, moving it towards inversion, because of the risk that the asset may sit idle between rentals. The leasing company has an incentive to avoid idle time by charging a lower daily rate on long-term rental agreements. 

Increased depreciation expectations flatten the curve for rental-car loans, making long-term rates lower relative to short-term rates, because cars exponentially decay to zero value over time. The faster the asset loses value, the cheaper long-term rentals become (relative to short-term rentals). However, if payments are made in the same asset, rates must be higher over longer periods (curve becomes steeper).

To see why, imagine that you and I both own 100 sealed bags of grain, each weighing 100 grams. Each year, mice are expected to pilfer 5% of the grain from each bag, until all of them are nearly empty. If I want to borrow all of your bags (10,000g) for a year, and wish to pay interest payments with my unopened bags, how much would you ask me to pay? Because the bags will be 5% lighter, and will weigh 95g each, you would need to be paid at least 105.26 bags (10,000/95) just to receive the same amount of grain (value) you loaned to me a year ago. The interest rate in whole bags of grain would have to be 5.26% per year, if I wished to repay exactly the amount of grain I borrowed.

Now imagine I want to borrow them for two years. What would you charge then? The bags would after two years contain 90.25g of their original grain (value), and they would have lost 9.75g of their original weight (value). To repay you I would need to give you 10,000g of grain(value), or 110.8 bags, which is 5.26% more than the 105.26 bags I owed from the first year. In the third year, the bags weigh 85.7375g each, and you would have to receive 116.64 bags.

So even if we know the exact inflation rate of our grain-bags, borrowing them for one year will cost 5.26 bags, and borrowing them for three will cost 5.55 bags per year (116.64/3). The cost to borrow for longer periods must be higher because payments are made in the same asset, depreciating at the same rate. Over time, the payments become devalued as well, which is not the case with car rentals, where dollars hold their value relative to the leased asset.

Uncertainty about the future does not make the curve steeper. Long-term rentals of cash seem like they should have higher fees because it is easy to judge the risk of a loan today, but very hard to predict risk of default in the distant future, but because of credit default swaps (insurance), the risk is mitigated. Reduced solvency of insurers affects the slope, not the solvency of borrowers.

The yield curve does not indicate where investors think interest rates will move in the future. It is a reflection of the pricing schedules of firms and individuals that rent out their dollars, and those pricing schedules are based on the five points above. The curve does not represent the expected change in inflation rates, but shows the current opinion regarding the average inflation rate in the future. It is a snapshot of lender opinions regarding how much grain the mice are expected to steal from the bags, on average.

Flat yield curves do not indicate an economic slowdown.  They indicate that people don’t expect any grain to be stolen from the bags in the future; inflation expectations are zero.

Liquidity preference does not affect the yield curve of bonds, because  bonds are also highly-liquid assets. Rental-car contracts are very illiquid. It would be difficult for a rental company to sell a rental contract, midway through a car loan. They must wait for the contract to reach maturity to get their car back. Bond holders don’t have to wait to get their dollars back; they can easily sell the bond in organized bond-markets.

Bonds that are not heavily traded would have a lower price, and thus a higher interest rate across all maturities, because lenders would be trading highly-liquid assets (dollars) for a less-liquid asset (bond). Similarly, a person trading a gold brick for gold coins may accept slightly less total weight in coin, because he values their liquidity; 15.9 oz of gold may trade for a one-pound brick.

High interest rates do not indicate high inflation expectations. If all rates are high and the curve is flat, inflation is expected to be zero. If all rates are high it indicates that there is a high demand for dollars. This is similar to high prices for rental cars -- it does not indicate that the cars are expected to depreciate (inflate) faster than normal, it means that people have a greater need for cars and rentals cost more. The shape of the curve indicates inflation expectations and the general level indicates how badly businesses and individuals want to borrow money.

Production, innovation and wealth are produced by peaceful cooperation, efficiency, innovation, thrift and honesty.

Leading an army, to defend the innocent from slavery and murder at the hands of foreign invaders, is done with top-down, statist, hierarchical organization, prowess, honor, ostentatious waste and violent deception. Soldiers blindly follow their leaders, and that is all well and good in times of war, when warriors support themselves by stealing from productive and peaceful men in order to defend those from whom they steal.

The trouble arrives when statists become friends with productive people, and are so bold and corrupt as to trade their power for material wealth. The result is a gruesome combination of treachery and corruption, leading eventually to the fall of empires throughout history.