Kuroda is the head of the Asian development bank, and is generally seen as an advocate of monetary stimulus, so the markets like this news, etc.
Naming a BoJ chief was one of the most important decisions that the new Prime Minister -- Shinzo Abe -- had to make, given the significance of monetary stimulus in his plans to jumpstart the Japanese economy.
Nomura economist Richard Koo -- who is one of the finest Japan watchers there is -- likes the pick, even though Koo himself is skeptical that monetary policy can accomplish much in a balance sheet recession (Koo is big on fiscal stimulus).
Here's Koo's take:
I have had the pleasure of participating in conferences with Mr. Kuroda on two occasions. The impression I received was of a man with an excellent sense of balance who chooses his words carefully. The flip side is that his comments are often safe and predictable. Still, based on my two encounters with him and his performance as vice finance minister, he appears to be a man who listens well and is good at building consensus.
I first met Mr. Kuroda nearly twenty years ago when I was invited as an instructor at a training session, and I remember a lively discussion with him about the so-called Komiya theory, which says Japan’s trade surpluses are simply the result of investment and savings choices made by Japanese and foreign businesses and households. I was impressed by the fact that he did not seem to be doctrinaire and was able to engage in debate while lending an ear to the other party’s views.
The other time I met him was at the Japan Dinner at Davos forum a number of years ago to which both of us had been invited to speak. His presentation was mostly an orthodox description of Japan’s economy, while I talked about Japan’s balance sheet recession. Nissan CEO Carlos Ghosn was also at the dinner that night and provided strong support for my theory by discussing his company’s experience in paying down debt at a time of zero interest rates. So while the extent of Mr. Kuroda’s understanding of balance sheet recession theory is unclear, he has at the very least heard the term.
And this is probably more important from Koo, given Abe's desire to see the Bank of Japan act aggressively.
I would be remiss if I did not mention that Mr. Kuroda is also a dedicated (and possibly dangerous) advocate of reflationary policies. However, I suspect that as the pragmatic Mr. Kuroda comes to realize that the monetary transmission mechanisms required for reflation (see below) are no longer operative during a balance sheet recession—a time when the private sector is seeking to minimize debt—he is unlikely to push ahead with truly reckless monetary accommodation.
Koo doesn't believe that aggressive reflationary monetary policies will work, which is why he ads the parenthetical "and possibly dangerous" but reflation is what Shinzo Abe is all about, so the pick makes perfect sense
First, a reminder of the degree to which China’s growth has been increasingly fuelled by credit over the past few years:
The chart above doesn’t quite show it, but non-bank credit growth outpaced bank loans last year. The rise of China’s shadow banking scene has happened very rapidly — much of the growth only happened since 2009.
Shadow banking in China is not all necessarily shadowy; in fact some of it, such as trusts, are legal and regulated at least to a degree. A chunk of shadow loans are also originated by banks (Anne Stevenson-Yang of J Capital Research reckons about 30 per cent).
But it does also include a number of ever more complex and opaque products such as wealth management products. The underlying assets are hard to determine and usually turn out to be property or financial in nature. Investors often assume banks and the state are guaranteeing the principle because of the way they are marketed.
Although the regulatory status and state-backing of many shadow products is not clear, it’s not as though the authorities have been fighting their rise. Actually, it’s kind of the opposite: shadow finance has been a vital mechanism for the substantial amounts of money being pumped into the economy:
Yet it’s one that Chinese policymakers have only loose control over. There are clear signs, for example, that the central Chinese authorities are again worried about excessive property prices. And the pace of innovation in unregulated products is at times astounding.
There are numerous reasons to think China’s credit growth is at unsustainable levels. Morgan Stanley’s Ruchir Sharma sums up some of these reasons in a WSJ op-ed, citing a BIS paper by Mathias Drehmann and Mikael Juselius which finds that if the private debt-to-GDP ratio increases by 6 per cent or more above its 15-year average, that is a “very strong indication that a crisis may be imminent”.
The risks are huge. These investment properties and their derivative financial products make up the life savings of many Chinese people. If the credit growth contracts, what happens to the asset values?
Credit Suisse’s Dong Tao and Weishen Deng ask the obvious question: Why doesn’t Beijing stop shadow banking activities? Well, elements of Chinese leadership would like to — particularly at the People’s Bank of China. But there’s reluctance to rein in such a crucial facilitator of growth, write Tao and Deng:
We believe the entire push behind shadow banking is deeply rooted in the government’s desire for growth. Shadow banking activities have increased because China needs growth, and the banking sector has to a significant degree failed in its role of financial intermediary. Indeed, some government bodies have put out some restrictions on certain types of shadow banking operations, but the core issue has not been addressed. Private investment has disappeared in China, as manufacturing production becomes unprofitable due to surging salaries and severe over-capacity. Without the re-engagement of private investment, we believe the government will have no choice but to rely on infrastructure projects. It may ban one type of financial instrument, but it still has to deliver liquidity to local governments through alternative channels.
The CS strategists say 2015 is the time when this could all fall apart. They identify two key reasons: one is the maturation of some of the early wave of the current trust fund era. The other is inflation:
A key catalyst that we think could turn the shadow banking sector upside down is the incoming pick-up in inflation and potential for an eventual interest rate hike. The food cycle, especially the pork cycle, has already started moving upward. By the end of 2013, we project inflation will reach 4%, from its current 2.0%. The PBoC’s window of monetary easing is closed. Judging from the rise in rents and salaries, there is a good chance that the CPI could move towards 5%, forcing the central bank to tighten in 2014.
Credit Suisse are not the only ones anticipating inflation will return to steep levels soon. Nomura have been going on about this for nearly a year, and are forecasting inflation at 4.4 per cent in the second half of 2013.
CS argues that in the face of rising inflation, the shadow products’ “guaranteed” returns may look less attractive than just taking a punt directly in property and stocks. A drop in flows into some of these entities would be difficult to withstand:
Most shadow banking entities run on a thin equity base, so if one or two projects default, the capital base would likely be wiped out. The market would then be much more concerned about credit risk among shadow banking entities, as the funding drain and duration mismatch would be likely to be exposed.
Of course there’s still the possibility that the relevant authorities will do something about this. Our Beijing colleague Simon Rabinovitch revealed last night that plans are firming to more closely regulate the shadow finance sector, and perhaps to rein it in. Simon’s story should really be read in its entirety because it’s a complicated issue, but here’s a couple of representative paragraphs:
Taken together, the new regulations could lead to a slowdown in the explosive growth of China’s shadow banking by making it tougher for banks to funnel deposits into off-balance sheet vehicles.
But the moves would not spell the end of shadow banking. Instead, they reflect a consensus among policymakers that credit flows outside the banking system are a healthy development for China, so long as they are monitored and kept in check.
This isn’t a completely out of the blue — several central agencies have been signalling unease with the recent rate of credit growth, particularly the PBoC but also an influential economic planning agency (the NDRC) and the banking regulator (the CBRC). But again, the question comes back to how much China’s sometimes wild credit growth can be curtailed at the expense of economic growth.
6 - China Hard Landing
ITALIAN ELECTION - Message Given By the People
Italy’s cost of borrowing may rise as the political stalemate threatens to derail 15 months of austerity under mario monti’s technocrat government and revive speculation the country will struggle to pay its debt amid a deepening recession. Italian voters delivered a “catastrophe for europe” by casting more than half their ballots for two candidates opposed to austerity-based remedies to the debt crisis, luxembourg Deputy Premier Jean asselborn said yesterday. no formal steps can be taken until a new parliament convenes on March 15.
A reader of Credit Writedowns recently wrote to us, detailing why Italians voted as they did in the recent general election. Her view speaks more to families’ and small business’ rejection of corporatism and corruption than austerity per se.
I was born in Nova Scotia, where I also grew up. My parents are Italian but immigrated to Canada in the 1960s. In 1987, when i was 17, my dad sold his business and we moved to Italy. So I have lived about half my life there in Canada and half here in Italy. I am neither really culturally Italian, nor Canadian; I am a mix of both worlds. This helps me be objective. I am also a fee only financial advisor (www.idapagnottella.it ). I was one of the first to do this profession in Italy. And I’m often interviewed by “the Sole24Ore” for investing advice. Thanks to my profession, I also talk to many clients about the situation and understand why so many voted for Grillo.
Italians are not very objective. During this crisis, I have found that they tend to blame everyone but themselves. I believe Italy is bankrupt because democracy is not deep enough. Italy had been ruled by kings, invaders, and dictators until it lost the second world war and chose to become a democratic republic. If I could generalize, I would say the main problem is that Italians are very individualistic; in the past they didn’t worry about the long term effects of corruption and inefficiency on society. Instead, they tend to worry about their own family and not about general Italian society.
I believe there is a great cultural difference between northern European countries like Sweden and Norway and Italy. Once I read a study which concluded that in cold countries like Canada, the public system must be efficient and fair otherwise people will just choose to move to warmer places. In places like Italy the quality of life is so good (food, climate, culture, beaches etc) that people tolerate an inefficient public system, corruption, etc.
So let’s get to today.
As long as the economy was moving forward, I never really noticed the masses getting angry with Berlusconi. Keep in mind that he has been in power for almost 20 years, has done almost zero reforms, and has increased taxes during this period, exactly the opposite of what he promised 20 years ago. He has been too busy protecting himself and his interests during this period. That is not just my opinion; journalists like Marco Travaglio have demonstrated against and written about this fact.
So in 2011, the recession deepens, spreads widen, and Italy starts to feel the pinch. Only then did Italian start to reject Berlusconi. (I mean their majority; there has always been a minority of 40% like me that was totally against him for years). Keep in mind that the opposition party PD has been complicit in Berlusconi’s accumulation of power. I don’t know the dates, but the left never really tried to solve the conflict of interest that Berlusconi has (He controls all the main TV stations and many media groups like Mondadori)
So with spreads widening so badly and with the Bunga Bunga scandals exploding, we got rid of Berlusconi. In November 2011, the government fell and Monti was appointed to form a new government. It was not the most democratic moment, but many many entrepreneurs wanted to celebrate. We thought: “finally someone with nothing to lose, who can face up to the emergency and do the reforms that Berlusconi has avoided.”
So Monti arrived and did a pension reform right away. I was enthusiastic and finally hopeful for our future. After that, he just put taxes and more taxes onto people and businesses. For example, the IMU tax on real estate property was introduced. Everyone paid without protests, convinced that we would be rewarded with some strong unpopular reforms. We were wrong.
In Italy we have many protected economic groups. For example, to drive a taxi here, you must get a government license. Since there are not enough licenses available, taking a taxi in Milan for example is super expensive – costs much more than in New York or London or Paris. Also, when I arrive at the Linate airport in Milan, there are always abusive non-authorized taxis (men with a normal car) who offer to take you downtown for a lower price, which means that demand is higher than the supply from official taxi drivers. Monti decided to liberalize the market, abolishing these government permits. The taxi drivers complained, so he didn’t do it. The same thing applies to the pharmacies and to notaries (government lawyers authorized to witness certain documents which normal lawyers can’t). In all these sectors, demand is higher than supply. And so we pay double for pharmaceutical and notary services compared to other European countries. To open a pharmacy, you must get a government license. The government does not give out many licences, so this keeps the price to buy existing pharmacies sky high. Everyone knows that pharmacists and notaries make tons of money for this reason: no market system.
Monti didn’t not even touch this system. We know that you cannot change everything in one year, but he didn’t change anything. So most people didn’t like paying IMU, but they accepted it because working people, professionals, etc, hoped that in exchange for new taxes, we would have less corruption, or at least some reforms. Monti really wasted the chance to improve his country, because he didn’t even try. I have never seen him go on TV to explain why it is better to have reforms toward a more market-based system. All he promoted was taxes in most people’s view. The worst thing was that after saying for a year that he was not interested in politics, he actually candidated himself! During the campaign, he said he would lower IMU (after saying last year that IMU was necessary to not default).
People who vote Berlusconi seem to accept the fact that he always lies and contradicts himself. But people like myself who were fans of Monti a year ago, do not tolerate incoherence or contradictions. I would like to give him a slap in the face. He raised taxes on firms during a really bad crisis (IMU was applied to company factories too). Consider that in Italy it is really hard to cash in your credits, because of the slow justice system, he did nothing to solve these real problems.
So I don’t know anyone who voted for Monti – probably taxi drivers and pharmacists!
Then, this spring another scandal came out surrounding Monte Paschi, which is totally bankrupt, as Grillo has been saying for years. Grillo is not a comedian. He does political satire, and during his shows he talks about scandals regarding companies in Italy which are controlled by the local political class, like Monte Paschi Bank. It turns out that Bersani’s party has a big responsibility in the Monte Paschi Scandal. And instead of nationalizing the bank, they gave them another loan (which will never be repaid).
With this scandal people started to realize that the right (Berlusconi’s party) and the Left (Bersani’s PD) are equally corrupt and are in politics to do favours for their friends. Bersani’s party, though, has some new people in it. In particular, the mayor of Florence, Renzi, was a breath of fresh air. If he had been candidated, the PD would have won and Grillo would have gotten fewer votes. Since the older politicians in the PD don’t want to give up their personal power, they cut Renzi out. And thanks to this decision, Grillo won.
People voted for Grillo because they are sending a message to Bersani and Berlusconi: “go home” They have ruined the country in the last 20 years. If Bersani quits the party and Renzi becomes leader, he will win the next elections. Many people who voted for Grillo don’t even like him that much. But these people could not give their vote to Monti (no guts) Berlusconi (criminal) or Bersani (no guts and corrupt party).
I see that the US media keeps talking about Grillo’s being a comedian. He does satire and is an expert on economics and history. I am particularly proud that for the first time in 20 years we got rid of Berlusconi, a sly, shrewd businessman. It is the first time that I have seen a democratic revolution in Italy. If spreads widen and we don’t form a government, it will be a good thing, because it is time for us to understand that you can’t keep kicking the can down the road, Bersani’s and Berlusconi’s specialty.
EUROPEAN FEEDBACK - #2
I have Charles Gave to have an exceeeding clear and correct perspective on many matters. here is what he has to say about the Italian elections
Italian electors’ rejection of Brussels-imposed economic diktat is an extraordinarily important moment in the history of modern Europe - perhaps the best political news since the fall of the Berlin Wall. Given the power of unelected technocrats, it is easy to forget that sovereignty in Europe still resides with the nation state as expressed through elections. The problem for those unelected officials who conspired to capture the political system - think Jacques Delors, Jean Claude Trichet or Mario Monti - is the obvious failure of their great project. For the first time a majority of electors has decisively voted against the euro and rejected policies imposed by technocrats.
As usual, the proponents of technocracy claim that the Italian vote changes nothing substantively and soon it will be business as usual. This is the standard response whenever European electors express disagreement (think of referendums in Ireland, France, and Holland..) and upset this freedom-killing project. Since more than half of Italian voters chose parties with an overt anti-euro stance, I would beg to differ.
The euro project is a financial Frankenstein which could not and has not worked; this Italian vote may mark the beginning of the system’s ultimate demise. Italy is different from other European problem economies since it runs a primary budget surplus, a current account surplus and finances most of its debt internally. Hence, Italy can leave the euro tomorrow and be much better off. Italians have led the way and soon the Spaniards, French and the Portuguese will reject this slavery in order to achieve "reforms" whose only purpose is to make a dysfunctional system work.
But let us stop and consider what these technocratic elites mean by “reform”—an end which is apparently worth so much suffering. To translate their bureaucratese into a commonly understood language let’s first define the different groups which compete for resources and influence in the modern European context:
The fellows who want to take care of themselves and be left alone - i.e., the entrepreneurs and those working in the private sector. These guys and only these guys create economic growth.
Those who want someone else to look after them. These fellows tend to work in the public sector or be retired and can be called the “new rentiers.” These guys want to lead a stable and uneventful life.
The fellows who want to lead their inferiors to a better future because they are smarter and know what is best. Borrowing from Thomas Sowell, I will call them the "anointed" since they very often have a very special relationship with their God, a kind of idol which they call by a strange name: the State. These guys have one and only one objective: the growth of their own political power.
Europe’s anointed decided a long time ago that we had too many little gods in Europe (The French State, the Italian State, the German State, etc.) and we needed to move to monotheism, thereby creating a European State
or an altar where everybody could properly worship. Previously, each little individual god had its own "money,” with the peseta, drachma, French franc, etc., used by the local citizens to pay their dues to the local god. But as the French free market economist Jacques Rueff said, "a currency is a sewer in which unearned income is collected." In other words, if compensation is awarded even when nothing of value is produced, such “unearned income” will in time drag down the value of the currency.
The stuff that gets distributed through the sewage system varies greatly from one country to the next. Take the example of Italy, a strange country (which I love dearly) if there ever was one. The north has a large community of entrepreneurs, and the south a majority of “new rentiers”. Up until 2000, Italy had a simple way of solving this problem. Massive transfers were made from the north to the south in the local currency, while the fellows in the north were effectively paid in deutschmarks. From time to time, the lira was devalued which guaranteed that the fellows in the north remained competitive against their German competitors. Similarly, the "new rentiers" received their retirement income in the local currency, which minimized transfers taking place between generations.
Balance was maintained since private sector salaries tended to be indexed (with a lag) to the DM, while retirement benefits and public sector salaries were paid in lira. The same thing happened in France, where an abnormally large part of the population (much higher than in Germany) wanted to be "rentiers” i.e. civil servants.
Because the French and Italian currency sewage systems had more waste to recycle than their German equivalent, the exchange rates adjusted accordingly and harmoniously downwards. As 19th century philosopher Ernest Renan noted a nation is defined by "a willingness to live together" - and every nation in Europe, for most of the post WW2 period, found a way to uphold its local social contract.
To cut a long story short, it is the constitutional right of every country to be badly managed if the survival of the social contract binding the population is at stake. Finding a way to live together is much more important than being well managed.
Unfortunately, this common sense formulation was never understood by the European zealots, who were intent on destroying the old gods to replace them with their new and unique god - a new Roman Empire. In this sense, the similarity with the USSR project is striking (see our discussion of a Christian Europe vs the new Roman Empire in Was The Demise Of The Soviet Union A Negative Event?).
The euro was created as a first step towards a new Roman Empire and the result was that Italians had to effectively transfer deutschmarks to the south. France was also forced to pay its innumerable civil servants in DM. Retirement benefits across the eurozone were effectively set in DM, which savaged the younger generations. The result was that local entrepreneurs lost competitiveness and peripheral eurozone economies started to go bankrupt. The euro has thus caused the probability of recurrent devaluations to be replaced by the certainty of national bankruptcy. This fate can only be avoided by a total surrender of national sovereignty to so called creditor nations, which is a remarkable achievement.
It is against this dreadful backdrop that the Italians have just voted.
However, the fact that the euro is a disaster has absolutely no impact on our "anointed." They are not interested in the well being of the local citizens, but are in fact missionaries for a faith. Since they are appointed from upon high, they are able to preach to the sinners and demand their repentance, i.e., that they should "reform". Monti, for example, was very big on preaching the "reform" sermon.
By “reform”, our proselytizing elite mean the dismantlement of "national contracts” which had managed to unify each European polity. In their place, we have been granted a new social contract whereby the Germans pay for the Sicilian and French civil servants (read a “Federal Europe”).
The Germans are not exactly keen on this idea, so in order to placate their own virtuous fellows, Berlin has offered to organize a world of ever falling salaries in southern Europe—to teach the sinners a lesson. For the lapsed southern Europeans, such collapses in their standard of living is the only way to stay competitive so long as the fixed exchange rate stricture remains. Compliance also implies dismantlement of all the social protections that the rentiers of southern Europe have over many years managed to secure.
As a Frenchman, as a European, I want a diverse Europe in which each nation is managed by its own elected people. If the nation chooses to be poorly managed—so be it, this is what democracy is all about. I am not interested in a Europe where the standard of living falls precipitously for a large part of the population, nor am I interested in humiliating what were once proud countries in the hope that they desert their old deities and accept a new god.
And neither do I want to be administered by unelected technocrats delegated by the northern Europeans on the flimsy pretext that my own politicians are useless; they may be hopeless, but I am entitled to have them that way.
What the eurocrats offer under the banner of "reform" is nothing of the sort but just an increase in their power and the destruction of the incredible diversity which made Europe an endlessly fascinating place.
It is time to return to market prices and democracy and to accept that technocracy cannot work. I love Italy more and more. Indeed, for the first time in years, I can envisage a situation in which I feel bullish on Europe.
9 - Global Governance Failure
WHY WE ARE UNGOVERNABLE - Europe Capitulates On Austerity- Never Had The Stomach For It
ITALIANS LITERALLY ELECT A CLOWN - A Complete Disrepsect (and Disregard) for System
“I’m appalled that two clowns have won,” said Peer Steinbrück about the Italian election, referring to former comedian, now hot politician, Beppe Grillo, head of the 5 Star movement, and former Prime Minister Silvio Berlusconi. One of them is “a professional clown who doesn’t mind being called that,” he explained; the other is “a clown with special testosterone boost.”
It was not the first time that Steinbrück, SPD’s candidate to knock almighty Chancellor Angela Merkel from her perch this year, put his foot into his mouth. His countrymen grinned and gnashed their teeth at the same time. In Italy, it caused a media tornado. “My impression is that two populists won,” he added, populists being even worse in Eurozone politics than clowns.
Italian President Giorgio Napolitano, who was supposed to have dinner with him that evening in Berlin at the swank Hotel Adlon, cancelled. But Steinbrück didn’t apologize. “What is said is said,” he confirmed. He wants to be the “plaintext” chancellor, the one that speaks the unvarnished truth, unlike Merkel.
There were feeble efforts from the SPD to protect him. “Regarding Berlusconi, ‘clown’ is the gentlest word that I can personally think of,” said SPD General Secretary Andrea Nahles.
Merkel’s government used this opportunity, handed to them on a silver platter, to lash out at their opponent. “With these kinds of statements, Steinbrück qualifies himself for entertainment TV, but not for the Office of the Chancellor,” said FDP deputy chairwoman Sabine Leutheusser-Schnarrenberger. And so, the Italian election was inserted into the German campaign—and heavy breathing could be heard from all sides.
The government’s enthusiasm for the election results wasn’t palpable either. Spokesman Steffen Seibert only said that the government would work “confidently” with the new Italian government, “whichever it will be.” Finance Minister Wolfgang Schäuble mused on TV that “we’re all not really pleased, but that doesn’t help, that’s democracy.”
Yet there was nothing funny about the election in Italy. The enraged people whose belts had been tightened reacted in a democratic and peaceful manner by voting largely for politicians who opposed Merkel’s debt-crisis policies that had been imposed on them. And until Steinbrück opened his mouth, the biggest loser had been Merkel.
Her man, Prime Minister Mario Monti, the unelected technocrat, got wiped out. He’d been tasked to do the ugly work of pushing through labor reform, pension reform, and property tax reform. The political powers let him. Then, when the economy deteriorated, they blamed him. A convenient setup.
Merkel’s other man, Democratic Party leader Pier Luigi Bersani, didn’t get enough votes to govern, and would need to form a coalition with Grillo or Berlusconi.
With its tempting message to end austerity and hold a referendum on the euro, Grillo’s movement received more votes than any other party. But he is not in parliament himself and has refused so far to participate in a coalition.
Berlusconi’s economic record isn’t exactly sterling. He served as prime minster three times, for almost ten years. But from 2001 through 2011, Italy had one of the slowest growing economies in the world. Now he is back, scandals, trials, and all—and wants to abandon austerity.
Eurocrats got the willies. Because last July, the ECB set out what would become a trap when Mario Draghi promised to do “whatever it takes”—purchase unlimited amounts of bonds from teetering countries—to protect the euro. It calmed the fidgety markets. But attached to it was a conditionality: the country would have to request help and agree to undergo a reform program. Austerity. It allowed Germany and some other hard-money countries to swallow it.
If Italy abandoned austerity, it would become ineligible for Draghi’s promise. It would have to stare down financial markets on its own. In short order, it would be on the brink. There’d be some options, including “unlimited” support by the ECB without the conditionality. No-questions-asked monetization of Italian government debt.
If it worked for Italy, it would work for other teetering countries. Debasing the currency. Central banks master it. But Germany’s dream of a hard currency would be dollarized. Perhaps it too would pass, or perhaps it would lead to a monetary revolt. Eurocrats dreaded this scenario. So they turned their guns on Italy.
“There is no way back,” said EU President Herman Van Rompuy. “This we simply cannot afford.” European Commissioner and French politician Michel Barnier chimed in: Italy has no choice, he said. “This is a catastrophe for Europe,” grumbled Luxembourg Foreign Minister Jean Asselborn. He too lamented the danger of populism.
“I hope we are not going to follow the temptation to give in to populism because of the results in one specific member state,” said European Commission President Jose Manuel Barroso. He feared that anti-austerity passion would spread from Italy to other countries.
They all document with their own words just how fragile the Eurozone has become. Every little thing can break it apart. Democracy itself, instead of being a fundamental strength, is seen as a threat: if the “wrong” party or an anti-establishment populist or an anti-austerity billionaire gains the most votes in one country, the entire 17-nation construct might break apart.
If we can't even cut federal spending by 2.4 percent without much of the country throwing an absolute hissy fit, then what hope does America have? All of this whining and crying about the sequester is absolutely disgraceful. The truth is that even if the sequester goes into effect, the U.S. government will still take in more money than ever before in 2013 and it will still spend more money than ever before in 2013. So it is a bit disingenuous to call what is about to happen "a spending cut", but for the sake of argument let's concede that point. Even if the budget really was being "cut" by 85 billion dollars, that only would only amount to a "cut" of 2.4 percent to federal spending. It would barely make a dent in the federal budget deficit for 2013.
The U.S. government would still accumulate about as much new debt in fiscal year 2013 as it did in all the years from the inauguration of George Washington to the inauguration of Ronald Reagan combined. Our debt to GDP ratio would continue to soar. The sequester cuts would essentially only be a minor bump on the road to financial oblivion. But if you listen to Barack Obama and his allies, they would have you believe that we are facing a great national crisis because of these impending cuts. They would have you believe that hundreds of thousands of people will lose their jobs and that many government agencies will no longer be able to operate effectively. They would have you believe that "granny won't get her lunch" and "roofs blown off by Hurricane Sandy won't get repaired".
Well, if all of that is true, then what in the world would our country look like if we actually cut a trillion dollars from the federal budget this year and started living within our means?
Have you ever known people that are already hundreds of thousands of dollars in debt and yet go out and regularly blow thousands more dollars on wild shopping sprees? Such debt addicts may be very proud of their new homes, their new cars, their new clothes and all of their fancy electronic gadgets, but it was all purchased with debt. When a "day of reckoning" finally arrives, many debt addicts lose absolutely everything and end up in the street.-- That is what America is like today.
Our politicians like to show off all of the stuff that our government is spending money on, but the truth is that we are spending gigantic mountains of money that we simply do not have. We are literally stealing from our kids and our grandkids so that we can continue to enjoy a massively inflated standard of living that we have not earned.
But we can't stop ourselves. Americans are absolutely addicted to big government. They want a gigantic government that sends out free money to more than 100 million Americans every month, but they absolutely do not want to pay for it. They would rather steal money from their children and their grandchildren to pay for it.
This has got to stop, because we are literally destroying the future of this country. If Americans really want a massively bloated government that takes care of everyone from the cradle to the grave then they should pay for it. If Americans don't want to pay for it, then they should reduce the size of the government to a level where they are willing to pay for it. But stealing money from future generations of Americans to pay our bills is absolutely disgraceful. As I talked about in a previous article, we are stealing more than 100 million dollars from our children and our grandchildren every single hour of every single day. Is there anyone out there that is willing to stand up and defend that kind of theft? But the vast majority of Americans don't want to do anything to stop it, because they don't want to harm "the economy" (i.e. our ridiculously bloated standard of living). Will the sequester cuts hurt the economy a bit? Of course. Government spending cuts always hurt the economy. If we raised taxes to help pay the bills that the federal government has been racking up, would that hurt the economy? Of course. Tax increases always hurt the economy. But if we continue on the path that we are today, America is doomed. The U.S. national debt is the biggest single debt in the history of the world. It is now more than 16.6 trillion dollars, and
If our politicians suddenly decided to go to a balanced budget today, our debt-fueled "bubble economy" would disappear and we would immediately plunge into a deep economic depression.
Do the American people have the character to be able to handle that kind of an "adjustment" to our standard of living? Of course not. That is why so many of our politicians are scared to death of doing anything about the debt. And even these small sequester "cuts" are freaking everyone out. Many of our politicians and many in the mainstream media are openly declaring that "the sky is falling". Just check out the following short excerpt from a recent New York Times article...
The owner of a Missouri smokehouse that makes beef jerky is worried about a slowdown in food safety inspections. A Montana school district is drawing up a list of teachers who could face layoffs. Officials at an Arizona border station fear that lines to cross the border could lengthen. And if Olympic National Park in Washington cannot hire enough workers to plow backcountry trails, they may stay closed until the snow melts in July.
But that is nothing compared to what others are saying. CNN is declaring that if the sequester cuts happen, "granny won't get her lunch" and "roofs blown off by Hurricane Sandy won't get repaired". And check out these ominous warnings from Barack Obama about what will happen if the sequester cuts go into effect...
"Emergency responders like the ones who are here today -- their ability to help communities respond to and recover from disasters will be degraded. Border Patrol agents will see their hours reduced. FBI agents will be furloughed. Federal prosecutors will have to close cases and let criminals go. Air traffic controllers and airport security will see cutbacks, which means more delays at airports across the country. Thousands of teachers and educators will be laid off. Tens of thousands of parents will have to scramble to find childcare for their kids. Hundreds of thousands of Americans will lose access to primary care and preventive care like flu vaccinations and cancer screenings."
Immigration and Customs Enforcement officials have released “several hundred” immigrants from deportation centers across the country, saying the move is an effort to cut costs ahead of budget cuts due to hit later this week.
Announcing the news Tuesday, ICE officials said that the immigrants were released under supervision and continue to face deportation. After reviewing hundreds of cases, those released were considered low-risk and “noncriminal,” officials said.
The claims about the sequester cuts just seem to get more ridiculous with each passing day. Homeland Security Secretary Janet Napolitano is warning that the cuts will make the U.S. more vulnerable to terrorist attacks, and Obama recently decided not to send an aircraft carrier to the Persian Gulf because of "budget concerns".
Apparently he sees no problem with using the U.S. military to score political points. And Federal Reserve Chairman Ben Bernanke says that the budget cuts will result in "less actual deficit reduction in the short run". Really? How stupid do they think we all are?
Yes, the sequester cuts will have an impact on the economy, but they won't cause the sky to fall. The following is what the CBO says the economic impact of the cuts is likely to be...
The Congressional Budget Office estimates the cuts will cost 750,000 jobs and hit growth by 0.6 percentage points, assuming the cuts remain in effect for the remainder of the fiscal year. Some economists expect a slightly bigger impact.
Remember, these are actually very small cuts.
In fact, according to U.S. Representative Lynn Jenkins, the U.S. government will actually be spending more money in 2013 than it did in 2012 even if the sequester cuts go into effect...
“There’s a fact that says we are going to take in more money this fiscal year than we have ever taken in before,” Jenkins said. “The budget this year, we will spend more money this year than we spent last year even if the sequester goes into effect. We will spend more money even if the sequester goes into effect.”
So why is everyone whining and crying over such a very small amount of money? If you want to get upset about something, why not get upset about things that are increasing our debt by trillions of dollars? For example, according to a Government Accountability Office report that was just released, Obamacare is going to cause the federal debt to rise by $6.2 trillion. Why aren't more people getting upset over that? Sadly, it is because America is a debt addict. Most Americans don't really care much when federal spending skyrockets out of control, but if anyone tries to slow down the spending a little bit they throw hissy fits. And please don't tell me that "the big government Republicans" are much better than "the big government Democrats" on budget issues. The Republicans have caved in and have gone along with all of this wild spending every single time.
On March 27th, they will have another opportunity to do something. That is when the current continuing resolution expires. At that time, the Republicans could refuse to pass anything but a balanced budget. Or they could at least refuse to pass anything except a budget that would cut the federal budget deficit in half. But they won't do anything once again. They will cave in and go along with the status quo because they are cowards. So we will continue to rip off future generations to fuel our current bloated standard of living.
Thomas Jefferson understood that government borrowing is theft from future generations. He once made the following statement....
And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
Shame on you Democrats. Shame on you Republicans. Shame on you America. You are destroying the future of America for your own selfish reasons.If future generations get the chance, they will look back on what you did to them and they will curse you for it.
Not that living within our means would be easy. Like I said, it would mean a deep economic depression, and it would also likely mean a tremendous amount of societal chaos.
Even now, while we are still living in the boom times, things are really starting to get crazy out there. Just check out what is going on in Oakland...
Oakland’s crime problems have gotten so bad that some people aren’t even bothering to call the cops anymore; instead, they’re trying to solve and prevent crimes themselves.
KPIX 5 cameras caught up with a half dozen neighbors in East Oakland’s Arcadia Park neighborhood Monday as they walked the streets on the lookout for crime. The vigilance has never seemed more necessary than now; 25 homes in the neighborhood have been burglarized over the last two months alone.
In a neighborhood that has started to feel like the wild west, people have even started posting “wanted” signs.
“You have to walk around in your house with a gun to feel safe here,” said Alaska Tarvins of the Arcadia Park Board of Directors.
If this is how bad things are now, how bad will they be when a day of reckoning for our economy arrives? And a day of reckoning is coming.
Our politicians can try to keep kicking the can down the road for as long as they can, but eventually time will run out. Just take a look at what is happening in Greece and Spain. Meanwhile, all of this can kicking is just making the eventual crisis even worse.
We can borrow our way to prosperity for a while, but in the end there is always a very bitter price to pay for doing so.
I would love to tell you that there is a chance that all of this will be turned around, but the truth is that all of this whining and crying about the sequester shows that America is doomed. I hope that you are getting ready.
US PUBLIC POLICY
9 - Global Governance Failure
PUBLIC POLICY - In the Hands of Incompetent Populist Hacks
Government is actually the worst failure of civilized man. There has never been a really good one, and even those that are most tolerable are arbitrary, cruel, grasping and unintelligent.
Mencken also was prescient:
As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their hearts desire at last, and the White House will be adorned by a downright moron.
But this is not about Mr. Mencken. Rather it is about some unknown individual who committed the following to the email world:
Food for thought…
If you can get arrested for hunting or fishing without a license, but not for being in the country illegally … you might live in a country founded by geniuses but run by idiots.
If you have to get your parents’ permission to go on a field trip or take an aspirin in school, but not to get an abortion … you might live in a country founded by geniuses but run by idiots.
If the only school curriculum allowed to explain how we got here is evolution, but the government stops a $15 million construction project to keep a rare spider from evolving to extinction … you might live in a country founded by geniuses but run by idiots.
If you have to show identification to board an airplane, cash a check, buy liquor, or check out a library book, but not to vote who runs the government … you might live in a country founded by geniuses but run by idiots.
If the government wants to ban stable, law-abiding citizens from owning gun magazines with more than ten rounds, but gives 20 F-16 fighter jets to the crazy new leaders in Egypt … you might live in a country founded by geniuses but run by idiots.
If, in the largest city, you can buy two 16-ounce sodas, but not a 24-ounce soda because 24-ounces of a sugary drink might make you fat … you might live in a country founded by geniuses but run by idiots.
If an 80-year-old woman can be stripped searched by the TSA but a woman in a hijab is only subject to having her neck and head searched … you might live in a country founded by geniuses but run by idiots.
If your government believes that the best way to eradicate trillions of dollars of debt is to spend trillions more … you might live in a country founded by geniuses but run by idiots.
If a seven year old boy can be thrown out of school for saying his teacher “cute,” but hosting a sexual exploration or diversity class in grade school is perfectly acceptable … you might live in a country founded by geniuses but run by idiots.
If children are forcibly removed from parents who discipline them with spankings while children of addicts are left in filth and drug infested “homes”… you might live in a country founded by geniuses but run by idiots.
If hard work and success are met with higher taxes and more government intrusion, while not working is rewarded with EBT cards, WIC checks, Medicaid, subsidized housing, and free cell phones … you might live in a country founded by geniuses but run by idiots.
If the government’s plan for getting people back to work is to incentivize NOT working with 99 weeks of Unemployment checks and no requirement to prove they applied but can’t find work … you might live in a country founded by geniuses but run by idiots.
If you pay your mortgage faithfully, denying yourself the newest big screen TV while your neighbor buys iPhones, TV’s and new cars, and the government forgives his debt when he defaults on his mortgage … you might live in a country founded by geniuses but run by idiots.
If being stripped of the ability to defend yourself makes you more “safe” according to the government … you might live in a country founded by geniuses but run by idiots.
US PUBLIC POLICY
9 - Global Governance Failure
ITALIANS REACT BADLY TO AUSTERITY - Hardly a Surprise!
When David Cameron came to power he won praise for pursuing an austerity agenda (unlike Obama) but it's flopped. In a great post, the brilliant pseudonymous finance twitter/blogger @barnejek, asks if Britain has finally cornered itself with its current mix of policy. He starts by noting...
I would like to thank the British government for conducting a massive social experiment, which will be used in decades to come as a proof that a tight fiscal/loose monetary policy mix does not work in an environment of a liquidity trap. We sort of knew that from the theory anyway but now we have plenty of data to base that on.
This idea that Britain has conducted a huge social experiment is not spoken loudly, since it's insensitive, but it's one that economists have talked about. People like that Britain has blown its recovery, because it shows that the theory behind austerity is bunk.
After walking through some slightly technical economics, he goes on to argue that the only hope now is that Britain take a "stop loss" on its austerity agenda, and spend more.
I do believe that Britain has finally cornered itself into a situation where there is overwhelming evidence that Mr Osborne should really start spending. He should also assume that Mr Carney will not let that spending lead to appreciation of Real Effective Exchange Rate (a bit more on that mechanism in one of my previous posts entitled “Be careful what you target or am I in the right church?“). That is to say that the Bank of England will keep nominal and real rates very low. In my opinion this is the only rational way of the situation that we’re currently in. Then again, I am assuming the impossible here, i.e. that the politicians know what the stop-loss is.
Says Lyons: The UK must spend, and banks must lend.
Judging by the still pessimistic tone at the beginning of this year, it would seem few are expecting things to go well in 2013. Yet I just wonder whether this may be the year the economy surprises on the upside.
But if it is then the UK needs three things – to SPEND, LEND & CHANGE.
The economy is suffering from a lack of demand. There needs to be more spending by the Government on both infrastructure and construction and people and firms with the ability to spend need to be given the confidence to do so. There has to be more lending by the banks. And the supply side of the economy needs a helping hand and thus there has to be change – which is all part of repositioning the UK in the changing global economy.
The ratings downgrade by Moody's reflects concern about the growth outlook. That is understandable but we should not panic. The UK has gone from the highest to a still high rating and its borrowing rates will stay low.
That's right. In the wake of a debt downgrade, David Cameron must spend more money. This is incredibly difficult, since prima facie, it would fly in the face of the downgrade. And more importantly, it would basically require him (and his finance minister George Osborne) to admit that they were totally wrong since the crisis. That's the really hard part. Perhaps even impossible. But that's what it will take.
EU UK POLICY
9 - Global Governance Failure
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Bubble trouble: Is there an end to endless quantitative easing?
The publication, earlier this week, of the Federal Reserve’s Federal Open Market Committee minutes of January 29-30 ..... Here is the sentence that caused such consternation:
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases (the Fed’s open-ended, $85 billion-a-month debt monetization program called ‘quantitative easing’, DS). Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behaviour that could undermine financial stability.”
Here is how one may freely translate it: “Guys, let’s face it: All this money printing is not without costs and risks.
Three problems present themselves:
1) END GAME: The bigger our balance sheet gets (currently, $3trillion and counting), the more difficult it will be to ever load off some of these assets in the future. When we start liquidating, markets will panic. We might end up having absolutely no maneuvering space whatsoever.
2) INFLATION: All this money printing will one day feed into higher headline inflation that no statistical gimmickry will manage to hide. Then some folks may expect us to tighten policy, which we won’t be able to do because of 1).
3) MISPRICIED RISK: We are persistently manipulating quite a few major asset markets here. Against this backdrop, market participants are not able to price risk properly. We are encouraging financial risk taking and the type of behaviour that has led to the financial crisis in the first place.”
... what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense?
Maybe, but I still doubt it. Of course, we cannot know but my present guess is that they won’t stop quantitative easing any time soon; they may pause or slow things down for a while but a meaningful change in monetary policy looks unlikely to me.
The boxed-in central banker - I consider central bankers to be captives of three overwhelming forces:
1) Their own belief system which still holds that they are the last line of defence between dark and inexplicable economic forces and the helpless public, and that therefore, whenever the data or the markets go down, it is their duty to ride to the rescue. Thus, when the withdrawal of the Cristal, whether actual or only prospective, dampens the party mood, the Fed will soon feel obliged, by its own inner logic and without any motivation from outside influences, to open another bottle. Just wait until the present debate about an end to QE leads to weaker markets and until, in the absence of the diversion from rallying equity markets, the almost consistently uninspiring ‘fundamental data’ becomes the focus of attention again, and we will witness another shift in Fed language, again back to ‘stimulus’. We had these little twists and turns a couple of times without any major change in trend. Anybody remember the talk of ‘exit strategies’ in the spring of 2011?
Of course, like most state officials, central bank bureaucrats are largely preoccupied with the problems of their own making. It is precisely the Fed’s frequent rescue operations that have created the dislocations (excessive leverage, asset bubbles) which cause instability and repeated crises in the first place. However, there are no signs anywhere that, intellectually, the Fed is willing and able to break out of this policy loop.
2) The size of the dislocations, which are – as I just explained – largely central-bank-made and now, after years and years of Greenspan puts and Bernanke bailouts and zero-interest rates, still sizable in my view, maybe as large as ever. The Wall Street Journal reported that total borrowing by financial institutions is down by about $3 trillion from its all-time high in 2008. That’s the widely heralded ‘deleveraging’. But does that mean that the current level of about $13.8 trillion is a new equilibrium? The Fed’s balance sheet expanded by almost $2 trillion over the same period, and super-easy monetary policy has provided a powerful disincentive for banks to shrink meaningfully. What is truly sustainable or not, will only be discernible once the Fed stops its manipulations altogether and lets the market price things freely. My guess is that
we would still have to go through a period of deleveraging and probably of headline deflation. This would be a necessary correction for a still unbalanced economy addicted to cheap credit but nobody is willing to take this medicine.
3) Politics. Falling stocks, shrinking 401K-plans, and shaky banks don’t make for a happy electorate. Additionally, the state is increasingly dependent on low borrowing costs and central bank purchases of its debt.
The chances of the US government repairing its own balance sheet look slim to non-existent so dependence on ultra-low funding rates and the Fed as lender of last resort (and every resort) will likely continue.
Look at Japan
When it comes to any of the major trends in global central banking of the past 25 years, Japan has consistently been leading the pack.
It had 1 percent policy rates for years in the mid 1990s when such rates were still deemed exceedingly low in countries like the US, and when the global community still looked upon them in disbelief – and growing annoyance at the small pay-off in terms of real growth.
Japan was the first to have zero policy rates and
the first to conduct ‘quantitative easing’, albeit on an altogether smaller scale – thus far at least – than some of the Western central banks managed since 2008.
Now the country seems to point the way towards the next phase in the evolution of modern central banking: the open and unapologetic politicization of the central bank and the demotion of the head central banker to PR man.
Any pretence of the ‘independence’ of central bankers has been unceremoniously dumped in Japan. Ministers take part in central bank meetings and give joint statements with central bank governors afterwards.
New Prime Minister Shinzo Abe has made it very clear what he wants the central bank to do (print more money faster, devalue the Yen, create inflation) and to that end he is looking for a new central bank governor. Of course, only accredited ‘doves’ need apply. A few days ago, Mr. Abe also spelled out what skill-set he is really looking for: good marketing skills. Salesmanship.
“Since we all have our national interests, sometimes, there will be criticism about the monetary policy we are pursuing. The person needs to be able to counter such criticism using logic.”
The course of monetary policy is pretty much fixed. Now it is all about marketing.
In the meantime, the debasement of paper money continues.
While cherry-picking individual macro data points to confirm self-referential biases appears to work for the majority of Wall Street's strategists and asset-gatherers, the sad truth is that fundamentally (top-down and bottom-up) things are not doing so great. We have exposed many of the divergences in the last few weeks and some cracks are appearing in the unbreakable vestibule of central bank liquidity; however, just as we saw late last summer (as gas prices rose once again), macro fundamentals have collapsed (based on Goldman's Macro data assessment platform) and with the normal hope-driven 2-3 month lag, equities are set to follow soon. The size of the shift implies a 5-10% correction to revert to 'reality' though we suspect - given positioning - if we ever saw it, the over-reach could be notably worse.
Chart: Goldman Sachs
COMMODITY CORNER - HARD ASSETS
2013 - STATISM
POLITICAL ELITE - The Strategy to Place Power in the Hands of Presidential Appointees
Recently, the White House released a photo of the president shooting skeet. But where's the snap of him fishing for bass? Apparently the White House felt compelled to portray Obama as a marksman in light of the widespread pushback over the administration's gun control agenda but felt no urgency to defend the prospect of the EPA's potential regulation of lead in fishing weights. Yet the agency seriously entertained just such a ban last year. What's next? The lead in barbells?
For hundreds of years, human beings have used lead for many purposes, and life on earth has not exactly come to an end. Now we are told that the lead used in hunting and fishing is harming animals and fish, and it may just have to stop. The scary thing is that one individual, an appointed bureaucrat directing the Environmental Protection Agency, has the power to impose such a ban.
The pattern is familiar with this administration. A small cadre of elite administrators, czars, judges, or politicians -- often just one person -- thinks it (or he or she) has the right to decide what's best for 320 million Americans. Without adequate information, debate, or cost analysis, regulations are written and imposed, and no one, not even the people's representatives in the House of Representatives, has the right to influence them.
Political elites have always existed in America, and during the past 100 years they have gravitated toward the Democratic Party. FDR's "brain trust," which included Guy Tugwell and Hugh Johnson, was just one example. But perhaps no administration in our history has been controlled by elites to the extent that the Obama presidency has. With academics like Cass Sunstein and crony capitalists like those backing green energy projects calling the shots, the elite have stepped in, determined to rule in place of the public will.
What is now happening was predicted -- and celebrated -- over forty years ago by Robert L. Heilbroner, one of the darlings of the New Left.
In The Limits of American Capitalism, Heilbroner laid out a plan by which the innately conservative leanings of the American people could be quashed and replaced by the centralized control of a political elite. Heilbroner's book concludes with a chilling vision of the way forward. What he advocates is, in effect, a socialist totalitarian state, where the government controls every aspect of human life. In the name of reform, this statist system would regulate if not nationalize all major industries -- but it would also go farther than that.
What Heilbroner envisaged was the rise of a ruling elite centralized in government, media, and the universities. This group of decision-makers would operate "on behalf of" the public and on the basis of "scientific principles" of social control. As Heilbroner writes, "[n]ot alone economic affairs ... but the numbers and location of the population, its genetic quality, the manner of social domestication of children, the choice of lifework -- even the duration of life itself -- are all apt to become subjects for scientific investigation and control" (The Limits of American Capitalism, New York, 1966, pp. 129-130).
Heilbroner's books were bestsellers in the 1960s, widely read and admired by liberals everywhere. They were, in effect, neo-Keynesian, pro-statist instruction manuals studied by the likes of Bill Ayers and Cass Sunstein, President Obama's tutors in state control and regulation.
Heibroner's books popularized the liberal premise that the political elite has the right and obligation to make fundamental decisions on behalf of the mass of citizens. In doing so, Heilbroner understood, the elite must find ways to subvert the naturally conservative inclinations of the people -- especially those lumpen-headed businessmen whom Heilbroner so despised.
Decision-making must be shifted from individuals and elected representatives to bureaucrats and judges appointed by leftist politicians.
Public opinion must be shaped and molded by elitist academics and journalists.
The will of the state must be imposed, by violence if necessary.
This was the future of America, according to Robert L. Heilbroner, and it is the vision of America adopted by those young activists in the 1960s and 1970s who now constitute the leadership of the Democratic Party.
Heilbroner believed that it would take hundreds of years to overturn democracy in America, in part because of
The nation's widespread support of capitalism and
The country's pesky tradition of individual rights.
He noted, however, that the process could be speeded up in the event of a severe economic crisis.
Another great national depression or prolonged recession would make it possible for government to enact a series of "reforms" that would shift control from the private sector to government.
Government would then control not just major sectors of the economy, but the personal lives of all citizens.
Their health care,
Their home mortgages,
Their communications and entertainment,
Their access to news and information
would all fall under the control of the political elite. At that point, Heilbroner believed, utopia would be at hand.
Everything that Heilbroner predicted is now coming to pass.
Attorney General Holder has waged a virtual war against Arizona's attempt to defend itself against unchecked immigration.
Congress has created an office of consumer affairs with broad powers to regulate financial transactions.
A European-style bureaucrat has been appointed to direct the rationing of medical services.
The EPA believes that it has the authority not just to police hunting and fishing supplies, but to regulate carbon dioxide, a natural product of the act of breathing.
The preferred modus operandi, in fact, is to appoint a single individual with the power to control some large part of American life. So much power has now been concentrated in the hands of a handful of appointees, most of them reporting directly to the president, that it is now doubtful whether America can still be considered a democratic nation.
Government has become the enemy of the people, because it is now in the hands of left-wing elitists who are opposed to traditional American values and who have only contempt for the democratic process.
Fortunately, Americans are becoming more aware of the concentration of power within the new political elite and more skeptical of the elite's ability to govern. While the president's job approval rating has for the moment risen following his election victory, a growing number of Americans "strongly disapprove" of his performance. An even larger percentage finds that Congress, with leaders like Democrat Harry Reid in charge of the Senate, is incapable of governing.
What's needed is to make 2014 another 2010 and throw the rascals out -- all of them who support Obama's unconstitutional "recess" appointments and agency power grabs.
Dr. Jeffrey Folks taught for thirty years in universities in Europe, America, and Japan. He has published many books and articles on American culture and politics.
ADVANCING STATISM - Tools of Change
CREATING SOCIETAL CRISIS
Lord Keynes and Vladimir Lenin knew this clearly (thank you Paul Brodsky of www.qbamco.com for the expanded quote):
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some (authors note: banksters, leviathan government, crony capitalists, and special interest elites).
The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.
As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose”
UNSOUND MONEY (money printed out of thin air, backed by nothing, yielding nothing, always losing purchasing power and redeemable in nothing) is the father of the "something for nothing societies" we live in today.
POLITICIANS (Psychopaths and Sociopaths) historically have risen to power and met their demise on the shoals of inflation and deflation.
"We all know what to do, we just don't know how to get re-elected after we have done it."
"When it gets serious, you have to lie"
- Jean Claude Juncker, prime minister of Luxembourg
Fixing the bad policies is NOW impossible until the pain of economic and societal failure FORCES the
public servants and their
special interest elites
to change policies or be destroyed.
FIAT CREDIT MONEY IS A WEALTH CONFISCATION DEVICE!
The greatest transfer of wealth from those that hold/store it in paper to those that don’t is underway!
BONDS: IOU’s denominated in IOU’s
PRICE is what you pay, VALUE is what you get. WEALTH is the the accumulation of VALUE.
HOW DO YOU DETERMINE VALUE: REAL Wealth creation is producing more than you consume thereby creating capital to fuel savings and investment. Within a SOUND money economy, money is a store of value and wealth can be denominated in Money. In a fiat economy wealth must be denomiated in value. Asset valuations are based on Discounted Free Cash Flow (unemcumbered, inflation adjusted), then adjusted for currency debasement.
WHAT WILL CAUSE HYPERINFLATION?
"There are TWO reasons why INFLATION has not really accelerated to hyperinflation as all this money has been PRINTED and it is:
The second reason as the real economic activity must collapse as you saw in Zimbabwe, Wiemar Germany, and as you see TODAY in socialist paradises known as Venezuela and Argentina.
The developed world is just a step or two behind them, but rapidly following the same path…"
THE CONCEPT OF THE INDIRECT EXCHANGE
"There are TWO sets of canaries in the coal mine concerning the future and both singing very different tunes. In one corner you have: Ray Dalio of Bridgewater, Bill Gross of Pimco, Kyle Bass of Hayman capital, George Soros, David Einhorn all telling you to take your paper money get into real things, gold, commodities, CASH flowing businesses, etc. In Austrian terms this is called the INDIRECT exchange. It is sound advice from REAL money managers, in fact some of the best in the world.
In the other corner you have Paul Krugman, Larry Summers, Tim Geithner, Barack Obama, Mario Draghli, Francois Hollande, Mariano Rajoy, Mervyn King, Mark Carney, Ben Bernanke, Martin Wolf and The European Commission to name a few. Telling you they “will do whatever it takes” and PRINT THE MONEY as required. All Socialists and academics, with NO experience in the real world or have experience in the belly of the beast known as Banks and Government Treasury departments.
Use Applied Austrian economics, fix your paper currencies and restore the functions of money to stop the printing press.
2012 - FINANCIAL REPRESSION
FINANCIAL REPRESSION - The Meaning of Negative Real Rates
For most portfolio managers, investable assets can be thought of as sitting somewhere on the risk-return curve shown below. Of course, depending on valuations at a particular point in time, positioning in the economic cycle, or overall geopolitical risks, some of the relative positions may change. But over long periods, investable assets have tended to display the risk-reward characteristics highlighted by the efficient frontier below.
THE EFFICIENT FRONTIER
Now in recent decades, investors could assume that across the length of an economic cycle, almost all investments would provide a positive real return. Diversification across the curve made ample sense, and this is precisely what happened: looking at the stock of global assets, one sees that out of an estimated
$209trn in global financial assets (excluding real estate),
$52trn sits in equity with
$45trn in government debt,
$65trn in loans (possibly a good chunk of which finances real estate), and
$46trn in corporate debt.
In other words, roughly one quarter of the world’s financial assets are in equity (on the top-right hand of the risk-return curve) with three quarters in debt (at the bottom left of the curve). This asset mix brings us to the policies followed today by most Western central banks of guaranteeing negative real rates for as long as the eye can see.
This policy of negative real rates has an obvious goal:
push out investors from the bottom left of the curve to the top right, thereby boosting animal spirits,
creating jobs, and
returning Western economies to a more solid growth environment.
But could these policies suffer from the law of unintended consequences?
If we look at the risk-return curve today it is obvious that 75% of global financial assets are now locking in real losses, unless of course, inflation collapses and deflation takes hold in the major economies.
Consider a 2 year treasury bond yielding 0.25% as an example. With inflation running at around 1.7%, anyone buying such an instrument is locking in a -1.5% real capital loss for the next two years. The same argument can be made for Germany where yields are even lower than in the US, even if inflation is running at the same pace (and likely to accelerate further), or indeed Japan, France or the UK... In short, in today’s world, it is almost impossible to gather any kind of real returns on fixed income instruments without either taking significant duration risk and/or quality risk, i.e.: moving up to the right of the curve.
Now let us assume for a second that the world will be spared a massive deflationary wave and that, consequently, the assets at the bottom left of the curve will lose 1.5% real per year every year for the next five years. This means that, for global assets to stay roughly in the same place, equities will need to provide a real return of 4.5% per annum every year for five years. This is broadly in line with the long term return of equity markets and, given that global equities are not blatantly overvalued, such returns may well be achieved. However, it is important to note that such returns will only serve to compensate for the capital destruction taking place in the fixed income market. Real returns on equities of 4.5% will not leave us any richer compared to our starting level. This means that investors will have effectively spent five years on a treadmill running to stand still. When you consider that no asset growth was registered in the previous five years,
we are facing a whole decade devoid of capital accumulation.
Given the world’s ageing population, isn’t this bound to be problematic?
Indeed, at a time when most pension funds are already far under water, does a policy that locks in real losses for plan managers really make sense? In short, can the world today afford the real capital destruction central banks are engineering through negative real rates (perhaps we can if that capital destruction mostly occurs on the central banks’ own balance sheets?). This quandary brings us back to the law of unintended consequences: just like the pensioner who, sitting on a fixed amount of capital, will simply buy more and more bonds as interest rates are pushed down (for he needs a fixed level of income—witness Japan over the past twenty years), won’t the world’s pension funds, sitting on real losses because of their existing large fixed income holdings, prove ever more resistant to moving to the far right of the curve? Could the negative real interest rate policies, by destroying capital, guarantee the world a period of sub-par investment growth, sub-par productivity growth, and sub-par economic growth instead? This is what occurred in Japan for a decade, once the bank of Japan moved to a zero rate policy.
Basically, ZIRP meant the banks could not make much money, nor were they interested in taking much risk or making loans. And without bank credit, the economy just puttered along, while equities continuously de-rated.
Officials at the US Federal Reserve may be more worried than they have let on about the treacherous task of extricating America from quantitative easing. This is an unsettling twist, with global implications. A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out "several times" once borrowing costs start to rise in earnest.
A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014.
It argues the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years, and the longer the date, the bigger the losses when yields rise. The Bank of Japan has kept below three years.
Trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default."Sovereign risk remains alive and well in the U.S, and could intensify. Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in official estimates," it said.
Europe has its own "QE" travails. The paper said the ECB's purchase of Club Med bond amounts to "monetisation" of public debt in countries shut out of global markets, whatever the claims of Mario Draghi.
"We see at least a risk that the eurozone is on a path to become more like Argentina (which of course is why German central bankers are most concerned). The provinces overspend and are always bailed out by the central government. The result is a permanent fiscal imbalance for the central government, which then results in monetization of the debt by the central bank and high inflation," it said.
In America, the Fed would face huge pressure to hold onto its bonds rather than crystalize losses as yields rise -- in other words, to recoil from unwinding QE at the proper moment. The authors argue that it would be tantamount to throwing in the towel on inflation, the start of debt monetisation, or "fiscal dominance". Markets would be merciless. Bond vigilantes would soon price in a very different world.
Investors have of course been fretting about this for some time. Scott Minerd from Guggenheim Partners thinks the Fed is already trapped and may have to talk up gold to $10,000 an ounce to ensure that its own bullion reserves cover mounting liabilities.
What is new is that these worries are surfacing openly in Fed circles. The Mishkin paper almost certainly reflects a strand of thinking at Constitution Avenue, so there may be more than meets the eye in last week's Fed minutes, which rattled bourses across the world with hints of early exit from QE.
Mr Bernanke is not going to snatch the punch bowl away just as the US embarks on fiscal tightening this year of 2pc of GDP, one of the most draconian budget squeezes in the last century. But he may have concluded that the Fed is sailing too close to the wind, and must take defensive action soon.
Monetarists say this is a specious debate -- arguing that the losses on the Fed balance sheet are an accounting irrelevancy -- but Bernanke is not a monetarist. What matters is what he thinks.
If this is where the Fed is heading, the world is at a critical juncture. The US economy has not yet reached "escape velocity", and in fact shrank in the 4th quarter of 2012. Brussels has slashed its eurozone forecast, expecting a second year of outright contraction in 2013.
The triple "puts" of the last eight months -- Bernanke's QE3, Mario Draghi's Club Med bond rescue, and Beijing's credit blitz -- have done wonders for asset markets but have not yet ignited a healthy cycle of world growth. Nor can they easily do do since the East-West trade imbalances that caused the 2008-2009 crisis remain in place.
We know from a body of scholarship that fiscal belt-tightening in countries with a debt above 80pc to 90pc of GDP is painful and typically self-defeating unless offset by loose money. The evidence is before our eyes in Greece, Portugal, and Spain. Tight money has led to self-feeding downward spirals. If bondyields are higher thannominal GDP growth, the compound effects are deadly.
America may soon get a first taste of this, carrying out the epic fiscal squeeze needed to bring its debt trajectory back under control with less and less Fed help. Gross public debt will hit 107pc of GDP by next year, and higher if the recovery falters as pessimists fear.
With the fiscal and monetary shock absorbers exhausted -- or deemed to be -- the only recourse left is to claw back stimulus from foreigners, and that may be the next chapter of the global crisis as the Long Slump drags on.
Professor Michael Pettis from Beijing University argues in a new book -- "The Great Rebalancing: Trade, Conflict, and the Perillous Road Ahead" - that the global trauma of the last five years is a trade conflict masquerading as a debt crisis.
There is too much industrial plant in the world, and too little demand to soak up supply, like the 1930s. China is distorting the global system by running investment near 50pc of GDP, and compressing consumption to 35pc. Nothing like this has been seen before in modern times.
This has nothing to do with the "Confucian" work ethic or a penchant for stashing away money. Fifty years ago the stereotype was the other way round. Confucians were seen as feckless. In fact, Chinese families never get the money in the first place. The exorbitant Chinese savings rate is due to a structure of taxes, covert subsidies, and banking rules.
Variants of this are occuring in many of the surplus trade states. Germany is doing it in a more subtle way within Euroland. The global savings rate is almost 25pc and climbing to fresh records each year. The overstretched deficit states in the Anglo-sphere and Club Med are retrenching but others are not picking up enough of the slack. Germany has tightened fiscal policy to achieve a budget surplus. This is untenable.
In the Noughties the $10 trillion reserve accumulation by Asian exporters and petro-powers flooded the global bond market. At the same time, the West offset the deflationary effects of the cheap imports by running negative real interest rates.
The twin policy regimes in East and West stoked the credit bubble, and this in turn disguised what has happening to trade flows. These flows were disguised yet further after 2008 by QE and fiscal buffers, but the hard reality beneath may soon be exposed as these are props are knocked away.
"In a world of deficient demand and excess savings, every country will try to acquire a greater share of global demand by exporting savings," he writes. The "winners" in this will be the deficit states. The "losers" will be the surplus states who cannot retaliate. The lesson of the 1930s is that the creditors are powerless. Prof Pettis argues that China and Germany risk a nasty surprise.
America's shale revolution and manufacturing revival may be enough to head off a US-China clash just in time. But Europe has no recovery strategy beyond demand compression. It is a formula for youth job wastage, a demented policy when youth a scarce resource. The region is doomed to decline until the boil of monetary union is lanced.
Some will take the Mishkin paper as an admission that QE was a misguided venture. That would be a false conclusion. The West faced a 1931 moment in late 2008. The first round of QE forestalled financial collapse. The second and third rounds of QE have had a diminishing potency, while the risks have risen. It is a shifting calculus.
The four years of QE have given us a contained depression and prevented the global strategic order from unravelling. That is not a bad outcome, but the time gained has largely been wasted because few wish to face the awful truth that globalisation itself -- in its current deformed structure -- is the root cause of the whole disaster.
It will be harder from now on if central banks conclude that their arsenal is spent. We can only pray that their help will not be needed.
Thanks to James Hall at BATR.org for this excellent piece of research
There are many forms of government subsidies. Ambitious politicians ingeniously design schemes to expand their power and repay their donor patrons. Opportunist corporate enterprises beg for favor to fund projects or guaranteed loans. The role of government venture capitalism has produced a much-sordid record for the taxpayer. The sheer concept of picking winners and losers is a pure political play that defies pragmatic prudence. In spite of this, actuality, the rush to squander public money is one of the few growth industries. The pitiful results of the predictable bankruptcy are the common fate of this flawed business model.
"But the fact that potential buyers are from China is already raising alarms about Fisker, which raised $1.2 billion in venture capital and spent about $192 million in federal loans to build a factory. "Technology developed with American taxpayer subsidies should not be sold off to China," Republican senator Charles Grassley told Bloomberg. He compared it to the acquisition of A123 Systems by China-based auto parts company Wanxiang Group.
By contrast, Tesla Motors, which also received a DOE loan to build its factory, is crossing into higher volume production. Yesterday, Tesla announced that it expects to be profitable this quarter and is making its Model S at a rate of 400 a month, which will allow it to hit its annual target and meet demand for the electric sedan. (See, Tesla's Explosive Revenue Suggests a Bright Future.)
One crucial difference between Tesla and Fisker, which is well known for its bold designs, has been Tesla's manufacturing expertise. Fisker may well still go public and be a successful EV supplier. But for energy-related startups to go the route of Tesla rather than Fisker, they'll need innovative technology, access to capital, supportive policies, and great business execution."
The Obama environmental cult would argue that it is largely appropriate to spend public resources to fund private technological businesses. Some will be successful while others will fail. However, the partnership role with government in this new state/capitalist prototype is necessary to achieve the greater good of a fossil free ecosystem. Expensive cars, not designed for the commuter, are now joint venture public finance missions, in order to curtail gas fumes.
Henry Ford is rolling in his grave and Enzo Ferrari is searching for the electric switch.
The notorious "Green" sector has vivid examples of bribery, theft, incompetence and high-priced inefficient technology.
The Foundry publishes a most informative list ofPresident Obama’s Taxpayer-Backed Green Energy Failures. "So far, 34 companies that were offered federal support from taxpayers are faltering — either having gone bankrupt or laying off workers or heading for bankruptcy." Examine the specific site links for expanded details.
"Last year, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union refused to accept concessions that would have kept Hostess in business. The company had tried to cut costs as it faced high labor expenses, rising ingredient costs, and decreasing sales. The Teamsters union accepted the concessions, but the Bakery union would not, choosing to strike. Unable to continue operating, Hostess filed for bankruptcy.
Now those who helped bring down an American icon will receive generous, taxpayer-funded benefits from the Trade Adjustment Assistance (TAA) program. These generous benefits come in addition to existing unemployment insurance, job placement, and job training programs. TAA benefits include:
• Up to two years of job training in an approved training program,
• Up to 52 weeks of Trade Readjustment Allowances for workers in job training,
• Job search and relocation allowances,
• A refundable "health care tax credit" that covers 65 percent of a worker’s health insurance premiums in qualifying health plans, and
• A two-year wage insurance program that partly replaces workers’ earnings if they accept lower-paying jobs."
The civic grant philosophy is not just for corporatists. Union goons prefer that their rank in file lose their livelihood, so that they can enjoy the welfare stipends of the state-run insolvent society. The prospects of a Mandarin logo on a Fisker vehicle are hardly on the same scale of transferring innovative technology to Cantonese creditors. However, the common practice of squandering national treasure for dubious purposes seems to be the primary product of the political careerists.
Leave it to the progressives over at The American Prospect, for an unintended analogy, in the essay The Twinkie Defense - the unions made us do it. "Hostess Brands is classic case of private equity engineers and executives looting a viable company, loading it up with debt, and then asking the employees to make up the difference."
Regretfully, but with no remorse; the political class plays the role of private equity engineers, as the government plunders our economy, through crony spending and swelling of the debt, while saddling the taxpayer with the bill.
James Hall – February 27, 2013
TOO BIG FOR TRIAL - When Was the Last Time A Financial Institution was Taken To Trial
Best Congressional Grilling Since Alan Grayson or Ron Paul
The Independent reports that small farmers are being challenged by food companies are becoming insanely concentrated:
Increasingly, a handful of multinationals are tightening their grip on the commodity markets, with potentially dramatic effects for consumers and food producers alike.
Three companies now account for more than 40 per cent of global coffee sales, eight companies control the supply of cocoa and chocolate, seven control 85 per cent of tea production, five account for 75 per cent of the world banana trade, and the largest six sugar traders account for about two-thirds of world trade, according to the new publication from the Fairtrade Foundation.
This is the year “to put the politics of food on the public agenda and find better solutions to the insanity of our broken food system”.
More people may be shopping ethically – sales of Fairtrade cocoa grew by more than 20 per cent last year to £153m – but, according to the report, the world’s food system is “dangerously out of control”.
How is that effecting the safety of our food supply? Reuters notes:
Multinational food, drink and alcohol companies are using strategies similar to those employed by the tobacco industry to undermine public health policies, health experts said on Tuesday.
In an international analysis of involvement by so-called “unhealthy commodity” companies in health policy-making, researchers from Australia, Britain, Brazil and elsewhere said … that through the aggressive marketing of ultra-processed food and drink, multinational companies were now major drivers of the world’s growing epidemic of chronic diseases such as heart disease, cancer and diabetes.
Writing in The Lancet medical journal, the researchers cited industry documents they said revealed how companies seek to shape health legislation and avoid regulation.
This is done by “building financial and institutional relations” with health professionals, non-governmental organizations and health agencies, distorting research findings, and lobbying politicians to oppose health reforms, they said.
They cited analysis of published research which found systematic bias from industry funding: articles sponsored exclusively by food and drinks companies were between four and eight times more likely to have conclusions that favored the companies than those not sponsored by them.
How are giant food manufacturers trying to influence legislation?
As Waking Times reports, they’re trying to gag all reporting:
Big Agriculture says you don’t and it shouldn’t. Armies of Big Ag lobbyists are pushing for new state-level laws across the country to keep us all in the dark. Less restrictive versions have been law in some states since the 1980s, but the meat industry has ratcheted up a radical new campaign.
This wave of “ag-gag” bills would criminalize whistleblowers, investigators, and journalists who expose animal welfare abuses at factory farms and slaughterhouses. Ten states considered “ag-gag” bills last year, and Iowa, Missouri, and Utah approved them. Even more are soon to follow.
Had these laws been in force, the Humane Society might have been prosecuted for documenting repeated animal welfare and food safety violations at Hallmark/Westland, formerly the second-largest supplier of beef to the National School Lunch Program. Cows too sick to walk were being slaughtered and that meat was shipped to our schools, endangering our kids. The investigation led to the largest meat recall in U.S. history.
The bills aren’t identical, but they share common language — sometimes even word-for-word. Some criminalize anyone who even “records an image or sound” from a factory farm. Others mandate that witnesses report abuses within a few hours, which would make it impossible for whistleblowers to secure advice and protection, or for them to document a pattern of abuses.
Ag-gag bills aren’t about silencing journalists and whistleblowers. They’re about curbing consumer access to information at a time when more and more Americans want to know where our food comes from and how it’s produced.
The problem for corporations is that when people have information, they act on it. During a recent ag-gag hearing in Indiana, one of the nation’s largest egg producers told lawmakers about a recent investigation. After an undercover video was posted online, 50 customers quickly called and stopped buying their eggs. An informed public is the biggest threat to business as usual.
An informed public is also the biggest threat to these ag-gag bills. In Wyoming, one of the bills has already failed. According to sponsors, it was abandoned in part because of negative publicity. By shining a light on these attempts, we can make sure that the rest fail as well, while protecting the right of consumers to know what they’re buying.
So what – exactly – are the giant food corporations trying to hide?
A devastating series by our colleagues at Bloomberg News shows that “the defense budget contains hundreds of billions of dollars for new generations of aircraft carriers and stealth fighters, tanks that even the Army says it doesn’t need and combat vehicles too heavy to maneuver in desert sands or cross most bridges in Asia, Africa, or the Middle East.”
BusinessWeek also notes that redundancy wastes a lot of money:
“One need only spend 10 minutes walking around the Pentagon or any major military headquarters to see excess and redundancy,” former Defense Secretary Robert Gates said in September at an event organized by the Center for Strategic & International Studies in Washington. He should know. As defense chief in 2009, he culled 20 weapons systems he thought unnecessary or too expensive, including the F-22 fighter. One place to start thinning the bureaucracy: the staff of the Joint Chiefs of Staff. That office has more than tripled in manpower, to 4,244 in 2012 from 1,313 in 2010, according to the Pentagon’s annual manpower report. (Fewer bureaucrats means fewer memos and fewer meetings. Win-win-win.)
BusinessWeek provides a list of cost-cutting measures which will not undermine national security. American Conservative does the same.
So why doesn’t Congress trim the fat? Because politicians want to bring home the pork. As BusinessWeek notes:
Why is sensible military budgeting so difficult? Because lawmakers, including small-government Republicans, protect defense business in their home states with the ferocity of Spartans. Even if the Pentagon offered up the cuts we’ve outlined here, Congress would almost certainly reject them. The senators and representatives don’t have the political courage to face voters and tell them that the republic simply does not need the weapon under construction in their hometown.
The cuts to the Pentagon budget will be only 7% or some $40+ billion, not the $500 billion they bandy about! Anyone who confuses the (unlikely) ten year cut with next year’s cut is just promoting lies. A good example is the Wall Street Journal editorial, “The Coming Defense Crackup,” warning that the cuts would create the smallest navy since 1914. It intentionally confuses next year’s cut with the consequences of 10 year cuts. [In reality, the size of the proposed sequestration cuts aren't really that big.]
Ok, but when every smart bomb and missile hits its target, why does one need as many shells as the old battleships where most shots missed? During the Korean war the Air Force tried futilely for months to bomb a bridge over the Yalu River. Today destroying a bridge takes one cruise missile from a hundred miles away. In Washington we find all the big media opposed to cutting defense spending, waste and all, even the Washington Post. Politico, usually a leftist paper, publishes articles also intentionally confusing 10 years of cuts with a one year cut. Today’s congressmen can’t oblige future congresses on what they will spend; defense apologists use the 10-year number to try to stop the sequestration for one year, 2013. All the big Washington newspapers are full of costly ads from defense contractors.
The Secretary of Defense acknowledged in May 2012 that the DOD “is the only major federal agency that cannot pass an audit today.” The Pentagon will not be ready for an audit for another five years, according to Panetta.
A $100,000 Defense Advanced Research Projects Agency strategy planning workshop including a session entitled “Did Jesus die for Klingons too?” that entailed a panel debating the implications for Christian philosophy should life be found on other planets
A DOD and Department of Agriculture co-produced reality cooking show called “Grill It Safe”
In addition, the defense department spends huge sums securing our access to oil. In 1991, the Government Accountability Office estimated that – between 1980 and 1990 – the US spent $366 billion to defend oil supplies in the Middle East. America was not fighting any major wars – in the Middle East or elsewhere – at the time.
Security experts – including both hawks and doves – agree that waging war against Iraq and in other Middle Eastern countries weakens national security and increases terrorism. See this, this, this, this, this, this, this and this.
[The war-monger's] big government program is unending wars, imperialist foreign policy, and ever expanding Homeland Security.
The money is not all for defense. At least half is for attacking other nations, as Ron Paul called it the defense/militarism budget. Roughly half goes for defense, the rest is for military adventures abroad, most of them quite unnecessary, indeed counterproductive as they just create more enemies for America. Look at Turkey where 90% of the population used to support America; now 85% oppose us. Obviously if we attacked fewer foreigners we could do with much less spending. Firing 250,000 bullets for each dead guerilla can get expensive. As also paying $400 per gallon to get fuel to the front lines.
Any lingering doubts about whether we can cut defense costs without undermining our national security can be dispatched with a few facts:
The American government has directly been supporting Al Qaeda and other terrorist groups for the last decade. See this, this, this, this and this.
(Remember, if there aren’t scary enough enemies in real life, we’ve got to create them. Oops … did I say that out loud?)
A lot of the bailout money is going to the failing companies’ shareholders
Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”
The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
And as the New York Times notes, “Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners”.
In other words, through a little game-playing by the Fed, taxpayer money is going straight into the pockets of investors in AIG’s credit default swaps and is not even really stabilizing AIG.
A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.
And the Special Inspector General of the Tarp bailout program said that the Treasury Secretary lied to Congress regarding some fundamental aspects of Tarp – like pretending that the banks were healthy, when they were totally insolvent. The Secretary also falsely told Congress that the bailouts would be used to dispose of toxic assets … but then used the money for something else entirely. Making false statements to a federal official is illegal, pursuant to 18 United States Code Section 1001.
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