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United Keynesians
The UK now has riskier credit than Italy.
Investors now view Britain as a riskier lending proposition than Italy, with its cost of borrowing rising comfortably above the 4pc mark for the first time this year.
The yield on 10-year gilts rose briefly above the 4.1pc level in intraday trading and spent most of the day higher than the yield on benchmark Italian bonds, as fears over Britain’s fiscal credibility continued to haunt markets. The news came as analysts warned that hedge funds and other “smart money” traders had been largely responsible for leading the exodus out of UK government debt.
The Treasury’s cost of borrowing has risen by more than a percentage point since March, despite the Bank of England spending £200bn on gilts through its quantitative easing (QE) programme. Experts put the increase down to worries that this and future governments will either prove incapable of reducing their deficit or will resort to inflation in order to erode it. The combined effect has been to catapult UK government bond yields above those of Italy and Spain in the past few weeks alone.
Mama Mia!
Jack Douglas says what I just said: Retiring baby boomers = fiscal Armageddon
I just spent a whole blog post talking about Old People! And now Jack Douglas has exactly the same thoughts!
Amazing. Perhaps I’m not as mad as the doctors say I am? I hope no one is copying my stuff out there in the blogsphere! Give me attribution if you’re going to copy my stuff, please!
How can Peter Schiff see simultaneous hyperinflation and high unemployment?
To pick up a brilliant point made by Peter Schiff in the video to the previous post below (but not understood by those on the brain-dead panel):
Inflation is simply debasement of the currency, or increases in the money supply. Inflation is occurring, just not where you expect it. It’s occurring in govt pork and govt employee numbers and in govt contractors making big bucks off govt spending.
Banks are lending massive amounts of new money – to governments around the world. They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency – ha ha ha!).
Therefore, the “de”-flation that we should have seen occur to “cure” the credit bubble has been deferred – by way of an increase in brain-dead govt employees!
This is unlikely to “cover” for the loss in private sector activity because govt spending is generally unsustainable and therefore has a lower “velocity of money” than genuine private sector investment. However, these ridiculous “heroin stimulus packages” do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the “credit boom” years.
Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable govt spending, crowding out the private sector’s access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment.
Higher unemployment is baked into the cake because of the massive stimulus spending. Take any specific “stimulus” measure, be it “Cash for Clunkers” in the US or the “First Home Buyer’s Grant” or incentives for home insulation or solar panels. Now, simply ask yourself:
What happens when the “stimulus spending” stops?
Most of the “stimulus spending” simply brings forward future consumption patterns – it re-allocates inter-temporal spending patterns, but doesn’t actually increase the total consumption over time.
I explained all of this in much more detail several months ago here. I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same. I see possible inflation (possible hyperinflation) in 2012-2015, but that’s a long way off – and I mightn’t even be alive then (here’s hoping!).
Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity.
When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.
Stop press! Gerald Celente’s Top 10 Predictions for 2010
When Gerald Celente talks, I listen.
Myopic mainstream economists narrow their blinkers even further
I’ve commented previously that mainstream economists wish Austrian economics was dead, wish Austrian analysts never existed, and wish Austrian predictions on the GFC would be wiped off the face of the earth forever.
Austrians show mainstream economists up for the egocentric little blind bureaucrats they really are – sycophants to the bankers and the Establishment.
No one likes to look in the mirror and see a shallow status-seeking shill staring back at them. To know a small group of economists nailed the GFC and are laughing at Keynesian stupidity day after day (check out the US unemployment figures! Ha Ha Ha!) – this is, understandably both frightening and infuriating.
Still, it is amazing how much the useless academics (publishing useless articles in their obscure journals) obsess about the “influence” of the Austrian School. If it’s so “out-dated” why criticise it at all?
There is NOT ONE working Austrian Professor of economics at ANY prestigious university in either the UK or Australia. Not one. Clearly the academic culling has been as successful as… well… as any govt-backed genocidal operation has been (they’re generally pretty successful judging by history).
The last remnents, the last holdouts against Fabian socialism still annoy the academic Daleks. They still scream “Exterminte! Exterminate! Exterminate!” to try to “cleanse” the academy of any ideological impurities.
So much for academic freedom in academia! You would get more open-minded discussion in a Catholic convent compared to the average economics dept in Australia.
John Quiggin, Australia’s poor attempt to produce a Paul Krugman, reloads and shoots blanks at the Austrian target, yet again.
Why he bothers when no one in Australia actually understands Austrianism is beyond me.
It’s not taught in ANY university in Australia. It’s not even mentioned in any curriculum. I speculate that most economics students in Australia, if pressed, would think “Austrian School” is a school of anti-Semitic Fascist Nazi propaganda promoted during the Second World War, rather than a school of libertarian thought associated with liberal Jews such as Ludwig von Mises and Murray Rothbard.
This probably says something about both the quality of university education in Australia and the reflexive associations most Anglos still have to the terms “German” or “Austrian” philisophical thought.
Getting back to mainstream zealot JQ, he states the following:
But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.
The result (like orthodox Marxism) is a research program that was active and progressive a century or so ago but has now become an ossified dogma. Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections.
Whether he’s being deliberately misleading here or just stupid I don’t know. Austrians scream for a return to the gold standard to stop the mad credit-fuelled misallocation of resources that inevitably leads to financial crises – they do not support “mopping up” the crises afterwards with even cheaper credit or more crazy stimulus spending by govt. What’s inconsistent about that? What’s dogmatic about that? Where’s the Keynesian engagement with Austrians?
To quote WP’s summation of Murray Rothbard’s position on money production:
Rothbard believed the monopoly power of government over the issuance and distribution of money was inherently destructive and unethical. The belief derived from Ludwig von Mises and Friedrich Hayek’s Austrian theory of the business cycle, which holds that undue credit expansion inevitably leads to a gross misallocation of capital resources, triggering unsustainable credit bubbles and, eventually, economic depressions. He therefore strongly opposed central banking and fractional reserve banking under a fiat money system, labeling it as “legalized counterfeiting”[42] or a form of institutionalized embezzlement and therefore inherently fraudulent.[43][44]
He strongly advocated full reserve banking (“100 percent banking”)[45] and a voluntary, nongovernmental gold standard[21][46] or, as a second best solution, free banking (which he also called “free market money”).[47]
In relation to the current central bank-managed fractional reserve fiat currency system, he stated the following:[48]
“Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative.”
JQ can’t have it both ways. He can’t say the Austrians are “dogmatists” screaming mindlessly for a return to the gold standard and also that we “want” to scream for paper monetary stimulus at the end of the credit cycle, but for ideological reasons can’t bring ourselves to do so (rubbish).
If pushed, I’d prefer the term gold standard “dogmatist” to “sell out” any day of the week.
He goes on to add, bizarrely, that “the [Austrian] label has been increasingly associated with gold bugs, critics of fractional reserve banking, neo-Confederates and general fringeness.” In other words, maddies and psychos.
Support for the gold standard is not mindless dogma (unlike Keynesianism which is). To quote again from the WP article on the Austrian School’s view of inflation:
The Austrian School has consistently argued that a “traditionalist” approach to inflation yields the most accurate understanding of the causes (and the cure) for inflation. Austrian economists maintain that inflation is by definition always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.
Given that all major economies currently have a central bank supporting the private banking system, almost all new money is supplied into the economy by way of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles (see Austrian Business Cycle Theory) and maintain that this “wave-like” or “boomerang” effect on economic activity is one of the most damaging effects of monetary inflation.
According to the Austrian Business Cycle Theory, it is the central bank‘s policy of ineffectually attempting to control the complex multi-faceted ever-evolving market economy that creates volatile credit cycles or business cycles, and, as a necessary by-product, inflation (especially in asset markets). By the central bank artificially “stimulating” the economy with artificially low interest rates (thereby permitting excessive increases in the money supply), the government-sponsored central bank itself allows debasement of the means of exchange (inflation), often focused in asset or capital markets, resulting in “false signals” going out to the market place, in turn resulting in clusters of malinvestments, and the artificial lowering of the returns on savings, which eventually causes the malinvestments to be liquidated as they inevitably show their underlying unprofitability and unsustainability.[38]
Austrian School economists therefore regard the state-sponsored central bank as the main cause of inflation, because it is the institution charged with the creation of new currency units, referred to as bank credit. When newly created bank credit is injected into the fractional-reserve banking system, the credit expands, thus enhancing the inflationary effect.[39]
The Austrian School also views the “contemporary” definition of inflation as inherently misleading in that it draws attention only to the effect of inflation (rising prices) and does not address the “true” phenomenon of inflation which they believe is the debasement of the means of exchange. They argue that this semantic difference is important in defining inflation and finding a cure for inflation. Austrian School economists maintain the most effective cure is the strict maintenance of a stable money supply.[40] Ludwig von Mises, the seminal scholar of the Austrian School, asserts that:
“Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”[41]
Following their definition, Austrian economists measure the inflation by calculating the growth of what they call ‘the true money supply’, i.e. how many new units of money that are available for immediate use in exchange, that have been created over time.[42][43][44]
This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply.[45] In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.[46]
Austrian School economists claim that the state uses inflation as one of the three means by which it can fund its activities, the other two being taxing and borrowing.[47] Therefore, they often seek to identify the reasons for why the state needs to create new money and what the new money is used for. Various forms of military spending are often cited as reasons for resorting to inflation and borrowing, as this can be a short term way of acquiring marketable resources and is often favored by desperate, indebted governments.[48] In other cases, the central bank may try avoid or defer the widespread bankruptcies and insolvencies which cause economic recessions or depressions by artificially trying to “stimulate” the economy through “encouraging” money supply growth and further borrowing via artificially low interest rates.[49]
Accordingly, many Austrian School economists support the abolition of the central banks and the fractional-reserve banking system, and advocate instead a return to money based on the gold standard, or less frequently, free banking.[50][51] Money could only be created by finding and putting into circulation more gold under a gold standard.
At the beginning of his career Alan Greenspan, former chairman of the Federal Reserve, was also a strong advocate of the Gold Standard as a protector of economic liberty:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” [52]
Advocates argued that the Gold Standard would constrain unsustainable and volatile fractional-reserve banking practices, ensuring that money supply growth (“inflation“) would never spiral out of control.[53][54] Ludwig von Mises asserted that civil liberties would be better protected:
“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings.”[55]
Notice how nuanced, how detailed, how sensible the arguments are for a return to gold. Austrians sensibly look at history, see the madness of government, the repeated financial crises caused by over-issuance of paper money and conclude that a gold standard (a monetary system that has applied for 99% of human history) is a better alternative than the certainty of destruction caused by govt manipulation of property rights.
Is it “gold buggerism” to point this out? Is it madness to point out the embezzlement inherent in fractional reserve banking?
Apparently, according to JQ.
JQ is one weird dude. He recognises the success of many Austrians predicting the GFC (and perhaps deeply resents it). He recognises that nearly all mainstream economists failed dismally in predicting anything during this period (including the GFC).
What he doesn’t point out is that (probably) around 70% of practising academic economists in Australia would label themselves as Keynesians, neo-Keynesians or post-Keynesians (or some other variant of quasi-Socialist-Fascist thought), that the other 30% would probably label themselves as mainstream neo-classical economists and that NOT ONE OF THEM would label themselves as “Austrian” and NOT ONE OF THEM would have a clue what Austrianism is all about.
Which is why Australia as a nation is doomed to financial catastophe after financial catastrophe, why JQ’s home state of Queensland is a basket case (despite JQ’s sage socialist advice) and why virtually every state in Australia is headed for a fiscal and/or environmental Armageddon.
And why JQ is not counted amongst the 12 economists in the world who accurately predicted the GFC, but why I did predict the GFC (ha ha ha!) – despite having the burden of a full time non-academic job, despite being ridiculed and rejected for my “gold bug” beliefs in Oz, and despite there being no work for any Austrian economist in the whole of Australia.
JQ, with all his time and academic resources, is essentially a useless redundant fool amongst many useless redundant fools in academia sucking off the teat of the govt’s payroll, whilst screaming at the alleged venalities and corruptions of the private sector – whilst failing in his own job to warn of the precise nature of the GFC and STILL failing to provide accurate predictions regarding GDP, unemployment, stockmarket trends or any other vital piece of economic data needed by the govt and businesses. Talk about useless! Talk about redundant!
Notice how he hasn’t made ONE PREDICTION about 2010 on his own website, but instead issues a steady stream of arrogant “advice” about this policy prescription (ETS please) or that govt policy (no Qld asset sales!). Perhaps making economic predictions is beneath him, but base advocacy of socialism isn’t. Or perhaps he’s too gutless to make them, exposing himself to the reality that his Keynesian theories are useless outside the Dalek-infested world of tenured academia.
For an economist to be afraid (or be incapable) of making real world economic predictions – now that’s true economic Karma!
Big news! Bill Bonner’s NEW Trade of the Decade
When Bill Bonner talks, I listen. In 2000, he recommended you get out of stocks and buy gold. He dubbed this the “Trade of the Decade”. And he was so right, it’s unbelievable how much money you would have made had you followed his advice.
Now, he’s just issued his new Trade of the Decade. Here it is, hot off the electrons spinning around the internet:
Sell US debt/Buy Japanese stocks.
That’s right – buy Japanese stocks!
Unlike Ambi-Pur below, he still believes Japan will produce good Toyotas and great Lexus models and the Nikkei can’t go much lower than it’s dived already. I had the same thoughts. I’m also unsure of myself, which is when I make the most money, because the investment is fraught with uncertainty which makes everyone nervous and therefore the price appealing.
I might buy the Nikkei today, especially given Ambi-Pur predicts that the Japanese economy faces Armageddon. The only comment I would make is that this Deal of the Decade doesn’t look like it’s going to make as much money as the last Deal of the Decade. And I still like gold, I still like cash, and I don’t think US bonds will collapse just yet.
As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.
“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.
“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is – gold.”
So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.
Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed – at least, on paper – it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.
Here’s our best guess:
Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.
We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead – promise!
Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.
But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.
What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.
So, on our sell side…we’ll put US Treasury debt.
How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?
Of course…Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Crazy, right?
Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.
Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.
But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…
If we’re right, over the next 10 years, the most popular investment of 2009 – Treasury debt – will go out of fashion. The least popular investment of 2009, on the other hand – Japanese stocks – will surprise everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”
The motivating madness of government fascism
People don’t see crises coming because they believe in the rationality of government. They don’t see the dynamic inherent in a coercive rent seeking entity that necessarily compels governments worldwide towards madness again and again and again.
WWI was madness. The Great Depression was madness. WWII was madness. Hiroshima was madness. The Cold War was madness. Chernobyl was madness. The deliberate death of the Aral Sea was madness. The destruction of arable land worldwide to convert this precious fertile land into low-density residential development is complete madness. Deliberate and govt-supported over-fishing worldwide is unsustainable madness. The GFC was predictable madness. The continued presence of the West in Afghanistan is madness.
Why do governments the world over act with such apparent suicidal, manic-depressive blind stupidity, such venal short-termism, such environmental destruction, such barbarity?
Because very simple incentive structures built up over time around the coercive activities of government compel it towards destructive barbaric madness. Simple.
Those contractors supplying government make money out of what government does. Government (originally) was developed to provide a limited range of essential services – law and order and defence. Suppliers to government have a natural incentive to try to convince government to spend more, to make government bigger. It’s an easy gig because governments can print to finance their own spending habits (unlike the private sector).
Governments then get bigger doing things they shouldn’t do. And because there is no appeal process beyond government (all you can do is appeal to another agent of government), government has a natural tendency to get bigger because nothing can stop it short of complete anarchy. So it keeps growing until chaos really does ensue.
This happens again and again throughout history and every time people are “shocked” by the chaos, by the suddenness of the social breakdown. The Soviet Union, Iran, the US in the ’60s, Cambodia, the former Yugoslavia, Europe after WWI… all these regions experienced government-induced chaos, government supported madness.
The US will experience exactly the same social breakdown, the same insane bankruptcy, the same comic-tragic stupidity. Why? Because the dynamics of government compel the country towards this inevitable denouement.
Let me explain by providing a quote from Bill Bonner of Daily Reckoning:
Bethesda is one of America’s wealthiest suburbs. Money from all over the nation rolls this way. The playing field is tilted in Bethesda’s direction.
“I was sitting in the Starbucks, having a cup of coffee,” Elizabeth reported. “One man next to me was on the phone. He was talking about some deal he had done with the US Army in Afghanistan. It sounded as though he was very happy with it. The man next to me on the other side was on the phone too. He was a jollier fellow, talking loudly about how much money he had made. I thought he was a stockbroker or something like that. Then, I realized he was talking about a contract with the government.”
While the rest of the nation has suffered a setback over the last ten years…the Washington metropolitan area has boomed more than ever. Real estate prices are down…but less than other areas.
And when we looked for a house to rent, we expected to be able to name our price. We thought it would be a buyer’s market. Not so. Nice houses in Bethesda are still being sought after. How so?
Wars…bailouts…boondoggles – this area loves them. Federal employees’ earnings keep going up…and a higher portion of the US national income goes to Washington.
People make money out of the government’s fascist madness. So the fascist madness increases.
Simple.
What’s hard to understand about rent-seeking?
Keynesian claptrap
When a policy is tried again and again and doesn’t work, if you keep trying it, you’re mad. Verifiably insane.
Our politicians in the UK, the US and Australia are all verifiably insane.
Example 142,426,273 in the long, sorry tale of governments trying to “do something” to fix problems they themselves created, is fiscal deficit spending to “cure” a slump caused by too much credit creation (itself caused by the govt’s support of central banking).
The solution to most government-generated economic “problems” is for the government to shrink, to get out of the damn way, to stop interfering, to stop meddling, to stop creating uncertainty in the business plans of real businessmen and women. In other words for bureaucrats to shoot themselves in the head. Of course, that’s the last thing a bureaucrat (or banker) wants to hear, so the madness continues until they really stuff up an economy beyond the point of no return. Like Japan. Or the UK. Ha Ha Ha!
I know it’s old-fashioned to remind the anti-trust regulators, or the cops picking up someone for possessing a few grams of coke or pot, or the central bankers that the real purpose of monopoly government was very limited. It was to provide (1) defence and (2) security services to allow citizens to protect their property rights and (3) very little else (perhaps provide public goods where they genuinely existed).
Now the government appears to try to do everything BUT these things.
They are allowing our soldiers to be killed in Afghanistan, but laughing at me when I say my wallet was stolen in my own suburb at home. They tax me so they can give the money to another homeowner for home improvements (since when was it government’s job to decide who should get home insulation?) or they bailout bankers instead of saving bankrupted small businesses and farmers (since when was the government’s role to pick winners in the economy? Where’s my bailout?). They steal my guns, my gold (gold coin sales are often suspended for no reason), my income, my livelihood, my right to smoke what I want where I want – and yet they don’t provide regular running water (water restrictions are a regular occurrence around here), they don’t defend me against embezzling bankers and they don’t stop robberies in my local area. But they think they’re geniuses when it comes to curing an economic slump!
Are these guys delusional?
Sterling T. Terrell writes:
Fiscal policy, the attempt to use government outlays and revenue to better the economy, simply does not work either a priori or in practice.
But just ask any undergraduate student in Macroeconomics 101 about fiscal policy. They know the “correct” answer: If the economy is “too slow,” the government should lower interest rates and increase government spending. If the economy is “overheated,” the government should raise interest rates and decrease government spending.
The horrors of monetary policy aside, fiscal policy cannot stimulate the economy. As we know, the government has no money of its own. It has only the power to tax and spend the money of others. There can only be a transfer that takes place, not a creation of wealth: jobs in X are gained, but jobs in Y are lost.
However, this transfer is actually a loss. Taxing away a person’s ability to fulfill his own wants and then providing him with things he may not care about makes him worse off. This process condescendingly supposes that individuals cannot decide for themselves what they need.
Furthermore, taxing is not done in a uniform manner. Progressive income taxes, double corporate taxes, and estate taxes all disproportionally take from the people that make, create, invest, and speculate to the betterment of all. Henry Hazlitt famously explained this in his well-known work Economics in One Lesson (see chapter five).
The common objection to such a theoretical analysis is: “Well. No. You have to look at the fiscal multiplier. One dollar in government spending, once it filters through the economy, will make GDP increase by more than one dollar.”
Let us agree to play the empirical game, momentarily.
New work done by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, covering data from 45 countries from 1960 to 2007, casts doubt on the validity of the multiplier in many cases.
Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well -served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.
Read the details for yourself, but the differences they found seem to be the largest when comparing fixed- and flexible-exchange-rate economies,
and closed and open economies:
This all suggests that in a country such as the United States the fiscal multiplier is virtually zero. Robert Barrow agrees.
So, in addition to fiscal policy taking away the freedom to choose, robbing X to hand it to Y, and penalizing the very people that improve our lives, it also fails empirically. Even if it did not, as is seemingly the case in certain closed economies graphed above, there would still not be a valid reason to oppress people further by taxing away their money for “stimulation.” By that rationale, a fiscal policy taking up 95% of GDP would make people better off than a fiscal policy taking up 5% of GDP. Clearly, this is not the case.
Earlier this year, Frank Shostak predicted that the recent fiscal stimulus would not help the US economy. Looking at unemployment, he was right.
Fiscal policy does not work, a priori or empirically, but the Austrians already knew that.
Has the Fed stopped buying long-dated Treasuries?
For those in the know, this is not a good-looking chart:
Hello higher interest rates in 2010!
Is the American economic model a sustainable Ponzi scheme?
“Trader Mark” poses this interesting question: Is America a Ponzi scheme that works?
To quote from the article:
America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.
First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.
Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.
Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.
The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.
By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it’s resources!) That means America could remain the pre-eminent nation for longer than many people expect.
My take on this article: The question is not whether a Ponzi scheme can work (all Ponzi schemes that get off the ground work to some degree). The essential questions are (1) can a Ponzi scheme work indefinitely (answer: no, no Ponzi scheme has ever worked indefinitely) and (2) has the U.S. Ponzi scheme just irreversibly burst (answer: yes, immigration levels are falling dramatically if you count illegals and, incredibly, net repatriations of money to Mexican relatives have in many cases reversed – poor Mexican relatives are now in many cases giving money back to newly homeless Mexican families living in the US!).
Once a Ponzi scheme bursts, you cannot ever put it back together because the suckers have dried up and are unwilling to finance the earlier entrants. The latter entrants always have to subsidise the earlier entrants. Once there are no more “latters” the whole thing blows up.
The U.S. is simply running out of “latters”. It’s over, in my view.
The new Ponzi schemes will continue in places like Cambodia, Vietnam and (perhaps) Australia and New Zealand. Until environmental and population problems mean the “latters” again have to go elsewhere.
But the U.S. in my view has just run out of suckers. The price for entry into the scheme is too high and the rewards too low. Everyone sees the Ponzi scheme is a fraud and once that’s exposed it’s all over for any Ponzi scheme. The illusion is shattered – and once the love’s lost, there ain’t no goin’ back.
Twitch, twitch…
More twitches on my financial seismograph. This time on the fringes of Europe.
Enormous pressure will be brought to bear on Latvia, Iceland and Greece to get their budgets under control and pay their debts.
If one country is allowed to run, then chaos will ensue, with lots of other indebted governments asking the question, “If there’s no shame in defaulting, why don’t we do it too?”
That’s what’s happened in the US, with housing debt. It’s no longer a source of shame to walk away from an underwater house. So the whole housing crisis has become the creditor’s problem, not the debtor’s.
Shame is really the only thing holding back the tide at the government level. And once people work through the shame of default, anything can happen.
Which is why creditors cultivate shame in their debtors.
Perhaps the Greeks have no shame?
We’ll see.
Worst decade EVER for stocks
We’ve just come through the worst decade ever for U.S. stocks. Ever. Worse even that the 1930s.
If you think the economic crisis is over within 2 years because of the various stimulus plans then you need to read history.
It ain’t over just yet.
Visualising the deflationary denouement
We already know it’s going to be hyperinflation or deflationary depression.
The Makian Distribution predicts this: unprecedented public and private debt means unprecedented volatility. The one absolute certainty is that you will no longer get steady 4% returns year-by-year in any asset class. You will either double your money in a year or be wiped out completely. Government bonds will have insanely low (even negative) yields – and then suddenly be worthless within weeks.
Now, David Calderwood imagines the deflationary scenario as vividly as anyone has this year. As a deflationist, I’m visualising something very similar to happen, short of Bennie Boy dropping toilet paper fiat from helicopters – which ironically is unlikely given he speculated he’d do it if he had to. Once an academic speculates on something so stupid in an academic paper, he’s highly unlikely to follow through in reality.
The only question I have for David Calderwood is the same one I have for Steve Keen: WHEN?
Duh…
Duh.
This gets today’s “blindingly obvious” insight award.
Bankrupt venal govts look to ETS as saviour
It is so obvious that the push for an ETS is all about new sources of govt revenue, it is not funny.
What is funny is that AT THE SAME TIME as govt bureaucrats are “promising” (hand on heart, promise!) to reduce carbon emissions some of the biggest govts in the world are neck high in debt, facing multiple financial crises and can no longer hide their embarrassing fiscal and managerial incompetence – incompetence that would make a compulsive gambler or drug addict blush with shame!
The NYTimes reports that the State of New York faces a massive financial crisis (again).
Greece is in big trouble, with a €300 billion debt black hole.
Central Europe is in big trouble.
The UK is in big trouble.
The US is in big trouble.
Heck, even Queensland may default on its massive debt.
And you think these SAME incompetent, blind, short-sighted govts, these same govts that have caused such unprecedented, massive environmental, financial and human suffering over the past recent decades are genuinely concerned about the environment, are genuinely concerned about our children, are genuinely interested in saving the planet and are not just desperately grabbing for another tax buck to save their own stupid short-sighted venal little skins?!
Ha. Ha. Ha.
If deficits don’t matter during recessions, why is everyone worried about Greece?
Michael Panzner makes a good point – If Keynesians like Paul Krugman are right in arguing that deficits don’t matter during recessions, why is everyone quietly having a heart attack over Greece, over Ireland, over Eastern Europe? Why did Iceland blow up?
Methinks deficits DO matter.
This is NOT a natural disaster!
The tragic loss of farmland and livelihoods in central NSW is NOT a natural disaster.
The NSW government has stemmed the flow of the Lachlan River, so farmers around Lake Cargelligo are dying just as much as the Lake is dying.
This is too important to treat lightly. My heart is heavy seeing these pictures in my own State:
To quote directly from SMH:
Lake Cargelligo, a settlement of 1300 in the geographical heart of NSW, was once a holiday haven for swimmers and waterskiers. Now empty shops line the street and even the post office is for sale.
On Tuesday hundreds of those who are still here gathered to listen to a travelling roadshow of water bureaucrats about what was going to be done with the little bit of water that remains in the dam upstream.
The Lachlan River, muse of Banjo Paterson and lifeblood to tens of thousands in the region, is being cut off at Condoblin, with only small flows being released below. Towns further south-west will go without.
If they did not do this, State Water staff told the meeting, the dam would be sapped by February.
The plan was met with uproar.
”Why are we expected to take the pain for the whole valley?” one man yelled. ”You’ve forgotten a whole section of the river,” a woman said through tears.
In splitting the river, the State Government has split the people of this region. It is not the first time water has been held back to conserve what is left. A similar plan involving controlled releases is in place for the Namoi River.
But since the Water Minister, Phil Costa, made a decision to restrict the river earlier this month, tempers have flared among those downstream.
Farmers with thirsty cattle want to know why people upstream in Forbes are still allowed to put sprinklers on their lawns, and why fruit farms still receive water, albeit at reduced rates.
They also want to know if this is the future of water management in a state where almost 74 per cent of the land is in drought, and hotter and drier conditions are on the way.
”If this is the Government’s climate change policy,” said Patti Bartholomew, a cattle farmer, ”then God help NSW.”
The Lachlan River winds from Wyangala Dam, through Cowra, Forbes, Condoblin and almost to the Victorian border. It is a region heavy with grain, cattle and sheep that has endured three devastating droughts in the past century.
”Just now there is a howling drought. That pretty near has starved us out,” wrote Paterson more than 100 years ago of Boolilgal, a town at river’s end.
But this is a dry like no other.
Ten years ago Wyangala Dam was at 99 per cent, a wall of water 25 storeys high licked the top of its wall. Since then the inflows have been the lowest on record, less than half of what they were during the Federation drought. The dam is now less than 5 per cent full.
As water disappears, cracked creek beds and muddy embankments are left exposed. Animals searching for water are getting bogged up to their necks.
The Herald saw a farmer crawl out on logs and sink his hands deep into the thick mud to wrench out his neighbour’s sheep. Most of the people the Herald spoke to are sceptical about climate change, but according to CSIRO and other climate models, they are some of the hardest hit. ”Certainly the southern part of the Murray-Darling Basin, which includes the Lachlan, [is] looking at hotter and drier projections in the future,” a senior research fellow at the Climate Change Research Centre at the University of NSW, Dr Jason Evans, said.
Upstream, at a meeting in Forbes on Monday, scenes were very different. There were no interjections from the floor. People stayed for tea and sandwiches. One man, who asked not to be named, said he would be voting Labor for the first time at the next state election.
Ian Smith, a cattle farmer, has bores on his property that provide him with a secure water supply. ”I can’t really see they’ve mismanaged anything,” he said. ”There’s just been no rain.”
Bores are being sunk all along the Lachlan as towns such as Boolilgal and Oxley look to shore up their supply of water. But it is not an option for many Lake Cargelligo farmers. Some have invested heavily only to discover the water is salty and useless.
Rod Middleton and his wife Leanne live with their three sons on a cattle and grain farm.
The creek that has been their water source, a tributary of the Lachlan, is dry. The pump sits on the exposed creek bed. ”I think the worst thing about it is the mines and fruit trees still getting water and we’re not,” Mr Middleton said.
The young farmer, whose parents came to the area 30 years ago, said he would have preferred to see the river run its course, whatever the consequences. ”The fairest thing would’ve been to let it run till everyone’s out, rather than have the top end get themselves through till next year and us being out now.”
Let history record that this is not a natural disaster, that this was and is perfectly predictable, that this is one of the worst cases of government negligence in the long history of government stupidity and insane zoning and planning, that this is comparable to the loss of the Aral Sea in Central Asia due to EXACTLY the same idiotic short-term government planning!
First, maps showing average rainfall are now available for all of NSW (indeed for the whole country). We all know these areas are subject to drought. This is a once-in-a-hundred year drought – but these droughts should occur once in a hundred years, so they are going to happen. You have to plan for them.
What is the obvious solution?
The obvious solution was never to grant farming leases and farming rights on areas of NSW land that would be subject to sustained drought or over-farming.
Farming land should have been retained in areas of high rainfall, close to the population centres of NSW, so that food security for the NSW population was maximised. Areas in Dural, in Hornsby, in Penrith, in Southern Sydney… all these outer “suburbs” of Sydney should have had their zoning as farmland preserved. Farmers should be on this land – not on land in drought-striken central NSW!
Why are they way out there and not close to the cities? Zoning decisions of a NSW govt bureaucrat!
The “natural market” would have prevented this if there were no zoning laws arbitrarily imposed by govt. Farmers on marginal land (without drought assistance) would have given up on farming in central NSW decades ago and focused on farming in more productive high rainfall areas. Most farmers in these productive areas would never have sold their land to residential developers, because the returns from farming would have been strong.
You don’t believe me? Go to Europe. Before insane govt bureaucrats took over zoning, people “naturally” organised themselves. In old European cities you can still see farms within 20 kms of major metropolitan areas. There are farms within a 20 minute drive from Paris! A 15 minute drive from Amsterdam!
Why? Because these “plans” were not drawn up by a NSW govt bureaucrat, but by God. This could be considered “anarchic” – but it works! Farms are still close to cities. People can still buy farm-fresh produce produced locally.
In Australia, as a young, highly bureaucratised nation, local govts wanted to squeeze every last drop of money out of surrounding land so re-zoned ALL the land around cities as either residential, or industrial/commercial. There is no mix of residential and rural anywhere in Australia close to our major cities.
This is not natural. This is not the way it should be. Sydney has one of the highest rainfall yields of any area in NSW. People originally settled here because it was fertile land. Then govt came along and tried to squeeze every last drop of development rights from our highest yielding farmland. Millions of megalitres in Sydney gets flushed down stormwater drains, whilst farmers get pushed to the edge of the earth, pushed into marginal areas never meant to be farmed.
If I hear from one more idiotic govt spokesperson that this is a “tragic” natural disaster, I think I’m going to puke.
There is no hope for this State with idiots like this in charge of our future.
And just recently, adding to the pain, Kristina Keneally (possibly the dumbest person in politics – and that’s saying something!) took a photo opportunity beside a central NSW dam at 4% capacity, trying to show compassion to the local people for this “natural” disaster.
Errr…
(1) The dam is man-made, by govt (so is its location).
(2) Govt zoned the area fit for human settlement years ago.
(3) Govt gave excessive water rights to farmers that produced the disaster.
(4) Govt zoned other areas closer to major cities as exclusively residential, so that’s why farmers are pushed out to these unsustainable areas.
This is a classic example of criminally negligent, short-term govt planning, resulting in a predictable man-made disaster.
And now a govt idiot sits there beside the dam they built, looking on forlornly as though this is an act of God.
These are the same idiots who want to tackle climate change. When these govt disasters follow them in the Co2-laden jetstream to Copenhagen.
I really can’t stand this level of stupidity any more. I just can’t take it.
Jim Willie (a.k.a. The Golden Jackass) nails it
Fantastic blockbuster post, predicting multiple, cascading sovereign debt defaults, a run on US debt and a final run to gold and silver.
I agree with all of this analysis, as can be seen in previous posts on gold, silver, fiscal Armageddon and other entries.
This is the best current synopsis on what’s coming that I’ve seen to date. The question is timing. I cannot say this will happen in 2010. But it will happen.
The only question is when.
One year to go, Germany
On 3 October, 2010, Germany will make its final payment on its WWI debts, imposed on it by the Allied Powers via the illegitimate, coercively imposed Treaty of Versailles, which precipitated the Weimar Republic’s hyperinflation, which wiped out the German middle class and precipitated WWII.
Can you believe that through all of this, the debt was still enforced, payments still honoured, and interest paid on the debt for nearly a century?
Oh, the humanity!
Karma is King 
