Tag: economics

The drachma is not catastrophe

As for the Euro, on the other hand…. Ambrose Evans-Pritchard contemplates the upcoming Greek exit from the Euro:

The danger for Euroland is slow contagion later once the sanctity of monetary union is violated, compounding the underlying crisis as Portugal, Spain, and Italy sink deeper into (policy-driven) debt-deflation.

Fitch boss David Riley told a banking form in the City that the Greek saga is “knocking down the central pillars underpinning monetary union”.

EU leaders said successively:

1) There would be no bail-outs.

2) Sovereign defaults inside EMU were inconceivable.

3) EMU exit was out of the question, lunatic, and so forth.

Every one of these claims has been shown to be untrue….

Mr Papademos said withdrawal from the euro would be “catastrophic”
for Greece. This is a religious incantation, or possibly just a threat.
It would be catastrophic if EU leaders and the IMF chose to make it
catastrophic. That is a political decision. Such shroud-waving borders
on political blackmail.

We hear this sort of language before every devaluation crisis.
Argentina in 2001-2002, Mexico’s Tequila crisis in 1994-1995, the East
Asian crisis in 1997-1998, not to mention countless others through
history, including the UK’s two liberations from dysfunctional
fixed-exchange systems in 1931 and 1992.

The reality is that the Euro is intrinsically catastrophic and has been from the start. It’s never been about the economics, but rather, providing a first step towards a single unified European state of the sort previously constructed by Charlemagne, Napoleon, and Hitler. And, like its three predecessors, it is rapidly collapsing, albeit under the weight of its structural inconsistencies rather than any external pressures. Pritchard has made some serious blunders along the way, mostly because he made the mistake of paying too much attention to the mainstream economic experts, but he is entirely correct to remark that “Remaining in the euro is demonstrably catastrophic already.”

Exit Europa

Most Americans want US troops out of Europe:

The Rasmussen polling organization is out with a shock poll that the entire Washington establishment needs to study: 51 percent of voters surveyed said they wanted all US troops out of Europe, now. Only 29 percent favored keeping the troops where they are. US troops have been in Europe since World War Two. In the Cold War, they not only kept the Russians out; they gave the rest of the Old World the confidence that Germany would not come storming back for a rematch. The presence of US troops helped give western Europe its longest era of peace since Roman times.

Since the end of the Cold War the US presence in Europe has made much less sense to the average American, but foreign policy junkies like yours truly think that it still serves a purpose. Not only do those troops provide security in new NATO countries like Poland and the Baltic republics; US bases in Europe are important in dealing with terror and other problems in the Middle East and without the US presence in Europe it is unlikely that NATO in its present form can survive.

Being a sophisticated foreign policy junkie, but not, apparently, a historian or an economist, Walter Russell Mead completely fails to understand the crucial point. It’s not that “the arguments for the US presence in Europe are credible, clear and compelling”, it’s something else that entirely supersedes them. You’re BANKRUPT, dude! The USA cannot afford to pay for the US presence in Iraq, in Afghanistan, in South Korea, or in Europe. It’s done. It’s over. Even the slow-witted American public has finally figured it out.

And the more Hispanics and other third-worlders that enter the country, the less the average American is going to give a damn about the wet dreams of foreign policy junkies.

WND column

The Naked Economy

Facebook represents the ultimate test of two ideas. The first is that traffic once attracted, can successfully be monetized. Facebook is presently earning only $4 per user per year. Its investors are gambling that it can increase annual revenue per user before its users get bored and begin to fade away. The second is that there is real value created in passing personal information back and forth between people. It is the second idea that is the more troubling one. While I personally doubt that Facebook, which in my opinion has a dreadful interface, poor performance and a reprehensible privacy policy, can increase its user revenue faster than it loses users, the ultimate fate of Facebook doesn’t really matter to anyone but its investors and those who were hoping its IPO would somehow magically reinvigorate the stock markets. The second issue is the much larger one, because it calls into serious question the direction in which the U.S. economy has been heading for the last 30 years.

WND column

Immigration and Unemployment

Long before there was a Republican Party, the idea that free trade and immigration foster economic growth was a staple among many Americans. Even today, there are few on the right side of the political spectrum who have bothered to review this centuries-old logic or examine the considerable amount of empirical evidence that has been gathered from decades of quasi-free trade or 47 years of mass foreign immigration.

Last month’s unemployment report was not good. While the U3 unemployment rate was only 8.1 percent, which is bad but not disastrous, the number of Americans not working was actually much higher than it would appear due to the statistical games being played by the Bureau of Labor Statistics. Since the unemployment rate is calculated by dividing the number of unemployed people by the total number of people in the labor force, the BLS keeps the rate down by reducing the size of the labor force. For example, in the April unemployment report, it was reported that the size of the civilian labor force shrank from 154.7 million to 154.5 million.

No-Growth Nation

I no longer pay any attention to the headline unemployement rate, which is presently reported at 8.1 percent for U3. But it is relatively meaningless due to the statistical shenanigans that are being played with the labor force participation rate, as various commentators are now noting. For me, the more important and less easily gamed statistic is the EPR, or Employment-Population Ratio, which has remained essentially flat, between 58.5 and 58.2 percent, since October 2009. Needless to say, this is not indicative of a growing economy, since it reflects a ratio not seen in the USA since the recession of the early 1980s. One wonders how low the EPR has to fall before people begin to connect their unemployment to the 60 million population increase since 1990 – more than the entire population of the UK – most of which is the result of the post-1986 immigration wave.

Suffice it to say that the present economic depression will eventually kill the claim that immigration is good for the economy as dead as the 1970s recession killed the Keynesian claim that it was impossible to simultaneously have inflation and unemployment.

Mailvox: the fifty trillion dollar question

KJ offers the opportunity to ask a question of some European functionaries:

The former and long-serving vice chancellor of Germany (Dr Joschka Fischer) and the EU’s High Representative for Common and Security Policy (Dr. Javier Solana) are here… debating the economic situation (and potential solutions). The Spaniard is (in summary) saying the situation is looking pretty shit right now and it could be fixed by Germany “opening up” to the rest of poorer/less-productive Europe (when pressed he confessed that includes offering up more of its – i.e. Germany’s – money).
The German is (in summary) saying the situation is looking pretty shit and what we need is to centralise and consolidate political power in Europe. Lol! 4th Reich anyone!? According to both, the Euro breaking up would just be catastrophic. We can ask questions but I don’t have the heart to ask any. It’s so depressing listening to this glossy, typical politic speak from which no straight answers can be extracted. Do you questions for the German Vice Chancellor or EU’s High Representative?

I wrote back: Yes. Since inflation or default are the only way to escape debt of this magnitude, which is the vice-chancellor’s preference? If you get a second question, ask why the successful bank defaults in Iceland have not been permitted to take place in the EU.

Completely admits that historic 1920s inflation destroyed the German middle class, and admits not a result of market developments but intentionally by German central bank to write off war debt, so accepts inflation is going to have to play its part in the current situation!! Greek default, (and kicking them out), is not an option apparently, not forthcoming as to why other than that it would be “hugely detrimental to the rest of Europe”. No luck on the second question; earlier on he had alluded to “endless lawsuits” and “serious capital restrictions” to anyone taking the opt-out of paying their debts which he implied would make that option not viable. I didn’t hear Iceland mentioned at all.

This lends further support to what most of us here have always assumed, that the central banks and governments will inflate. The question is, can they do so? This is where the question of the nature of money, and if credit is more properly considered money or simply the accounting of money, becomes the 50 trillion dollar question. Nate and I will be debating this in the reasonably near future, but I’ll leave you with this thought: given their performance over the last four years, what are the chances that the core monetary assumption of the central banks and governments is correct?

Paul vs Paul

Best paraphrase:

Krugman: You want to go back decades ago in time.

Ron Paul: You want to go back a thousand years, two thousand years, to Roman and Greek times!

It’s interesting to see that Krugman understood exactly what Paul was saying and attempted to deny his support for the Emperor Diocletian’s policies, although Diocletian-style inflation precisely what he’s advocating. And if we’re not sure where the line between money and non-money is, how on Earth can we expect to correctly manage the economy through the use of precise interest rates?

WND column

An Austrian in the Lion’s Den

It may be one of the greatest and most courageous speeches ever spoken. It is arguably one of the most important speeches ever given in the United States, considering the current fragility of the national economy and the central position that the financial system presently plays in American society. Earlier this month, Robert Wenzel of the Economics Policy Journal spoke to the New York branch of the Federal Reserve. In his speech, he called the central bankers to account for their complete failure to provide the economy with either of their two responsibilities set by the U.S. Congress, price stability and full employment.

The Greatest Speech Ever Given

The greatest economics-related speech, at any rate. I kid you not. I found myself sounding like a Spirit-infused Southern Baptist listening to a fiery old preacher thundering from the pulpit as I read it:

Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.

Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.

That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System

My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.

I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality.

Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed..

There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.

And the close, Sweet Mises, the close! It is unbelievable! If you can read Robert Wenzel’s speech to the New York Federal Reserve without involuntarily emitting one “that’s right”, “amen”, or “halle-fucking-lujah”, you simply do not belong at this blog. I sent him the following email:

Please allow me to compliment you, no, praise you, for giving what henceforth must be known as The Greatest Speech Ever Given in the field of economics. It was as if Daniel not only entered the lions’ den without fear, but voluntarily, to preach to the beasts of the merits of vegetarianism. The English language simply does not possess the words to describe how magnificent your speech was.

A brilliant solution

Former FDIC head Sheila Bair fixes the economy:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years…. And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough.

One rather gets the idea that Sheila has a certain lack of confidence in Ben Shalom’s ability to successfully extricate the U.S. economy from the 30-year debt bubble the Fed created. The frightening thing is that her Swiftian solution differs only in its degree from the strategy that Bernanke is actually utilizing. Bernanke is trying to continuously inflate just enough to prevent massive default and deflation, but this is akin to bailing water rather than fixing the big hole in the bottom of the boat… and without any land in sight.