Days of future past

The days came along one after another, 
and then four months were gone, 
and everything was gone, 
and I was gone.

Europe’s Future: Inflation And Wealth Taxes

This time is no different than other cases of highly indebted countries in Europe’s history – just look to the post-War examples as similar cases in point

by David Howden

Tax burdens are so high that it might not be possible to pay off the high levels of indebtedness in most of the Western world. At least, that is the conclusion of a new IMF paper from Carmen Reinhart and Kenneth Rogoff.

Reinhart and Rogoff gained recent fame for their book “This Time It’s Different”, in which they argued that high levels of public debt have historically been associated with reduced growth opportunities.

As they now note, “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point.”Up to this point in the Eurocrisis the primary tools used to rescue profligate countries have included increased taxes, EU and IMF bailouts, and haircuts on government debt.

These bailouts have largely exacerbated the debt problems that existed five short years ago. Indeed, as Reinhart and Rogoff well note, the once fiscally sound North of Europe is now increasingly unable to continue shouldering the debts of its Southern neighbours.

General government debt (% GDP)

Source: Eurostat (2012)

Six European countries currently have a government debt to GDP ratio – a metric popularlised by Reinhart and Rogoff to signal reduced growth prospects – of over 90%. Countries that were relatively debt-free just five short years ago are now encumbered by the debt repayments necessitated by bailouts. Ireland is a case in point – as recently as 2007 its government debt to GDP ratio was below 25%. Six years later that figure stands north of 120%! “Fiscally secure” Scandinavia should keep in mind that fortunes can change quickly, as happened to the luck of the Irish.

The debt crisis to date has been mitigated in large part by tax increases and transfers from the wealthy “core” of Europe to the periphery. The problem with tax increases is that they cannot continue unabated.

Total government tax revenue (% GDP)

Source: Eurostat (2012)

Already in Europe there are seven countries where tax revenues are greater than 48% of GDP. There once was a time when only Scandinavia was chided for its high tax regimes and large public sectors. Today both Austria and France have more than half of their economies involved in the public sector and financed through taxes. (Note also that as they both run government budget deficits the actual size of their governments is greater yet.)

Read more at:

http://mises.ca/posts/blog/europes-future-inflation-and-wealth-taxes/

Wealth Creation and the State

Money, Savings and Debt

by Pater Tenebrarum

This post can in a way be seen as an addendum to what we wrote regarding the 'gold narrative' the other day. Specifically, we want to return to the argument made in closing, namely that the present situation in terms of private and public debt relative to the economy's ability to create enough wealth to service and repay said debt is a reason to remain bullish on gold and by extension, to remain skeptical regarding the economy's future.

It is important to keep in mind that the level of outstanding debt as such actually does not prove the point. For instance, if all the credit extended were backed by real savings and if the great bulk of the extended credit were employed productively, then the size of the debt would obviously not represent a problem. After all, we would then have very good reason to expect that the investments that have been undertaken are largely sound (given the fact that they are backed by real savings) and that therefore, the economy's future output of final goods will increase sufficiently to create the profits required to service and repay the debt. 

However, we know for a fact that a vast portion of the debtberg does not consist of credit that has been productively employed. Moreover, we also know for a fact that much of it is not backed up by real savings. How do we know all this?

Let us first discuss savings. What are savings? In a monetary economy, people save in the form of money. Money is a claim on real goods, it is the ultimate present good. However, in order to save, one has to refrain from consumption. Let us say that someone saves $200 per month. He certainly could spend these $200 instead of saving them, in which case he would exert a claim on the pool of final goods and consume the goods purchased. Note that by refraining from this act of consumption, not only are there now $200 in his savings account, but the goods the saver has not consumed remain with the economy's pool of real funding (the pool of real funding is the stock of produced, but unconsumed final goods).

This addition to the pool of real funding is what actually makes an increase in production possible. If ten savers put aside $200 per month, the $2,000 worth of goods thus saved could e.g. be used to maintain the life and well-being of one worker employed in production activities. When an entrepreneur applies to a bank for credit in order to expand production, he is ultimately not trying to obtain money as such, but capital. What is required to effectively fund new production activities is not money, but real resources.

To illustrate this, imagine that a few people find themselves stranded on a deserted island, and by coincidence one of the things that has been successfully recovered from the shipwreck is a printing press for banknotes and all the paraphernalia required for the printing process. Obviously they could not create any wealth for themselves by printing banknotes. It would be a pointless exercise: the banknotes could not be used to buy the necessary capital goods required to e.g. build a new boat, since these goods are simply not available on the island. This would be so glaringly obvious that they would certainly not even try – they could print billions and would not be an iota richer. If they decide to mix their labor with the natural resources available on the island so as to create primitive capital goods that bring them a few steps closer to their goal of building a boat, they would still be confronted with the problem that at the outset, their pool of real funding would be zero. They would at first have to produce whatever is necessary to keep them alive (i.e., food). If they want to spend time on producing capital goods, enough food would have to be produced that some of it could be saved to maintain their lives while they are busy with building an ax, a net, rudders, sails and so forth.

This example serves to highlight a universal truth: no wealth can be created by  printing money. Money is indispensable for an economy based on the division of labor, as a medium of exchange (and all the subsidiary functions that flow from this, such as the store of wealth function) and a unit of account that enables economic calculation. It should be obvious though that adding to the supply of money does not add to the economy's wealth (in case a commodity money is used, it could be argued that the non-monetary uses of the commodity make additional supplies valuable beyond their exchange value, but as a rule the general medium of exchange derives the great bulk of its value from monetary demand).

Since 1971, the world has been on a fiat money standard. Moreover, the banking system is fractionally reserved, which means that it can literally create additional money from thin air. There is no effort involved except a few keystrokes. This system is backstopped by central banks that 'accommodate' this creation of money from thin air by supplying bank reserves, which are likewise created at the push of a button. In this system, a lot of credit is created that is not backed by real savings. We can get an inkling regarding the size of this credit creation from thin air by looking at the amount of uncovered money substitutes in the economy, i.e., deposit money that is not backed by standard money in the form of currency or bank reserves which can be converted to currency on demand. 

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US money TMS-2 by economic categorization. Covered money substitutes (dark blue) consist of deposit money that is backed by either vault cash or bank reserves held at the Fed. Uncovered money substitutes (also known as 'fiduciary media') represent deposit money that has literally been created from thin air and for which no standard money backing exists – click to enlarge. 

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As can be seen above, although the Fed's 'quantitative easing' policy has vastly increased the portion of money substitutes that are covered by bank reserves (the often cited excess reserves), the amount of uncovered money substitutes outstanding nevertheless stands at a new record high. In theory, all of this money should be available on demand. In practice, the banks could only pay out the covered portion and would have to contract credit if they were required to pay out more than that.

The main problem with the creation of money from thin air is that by throwing additional fiduciary media on the loan market, the market interest rate is pushed below the natural interest rate dictated by society-wide time preferences. This sets the boom-bust cycle into motion. The lower interest rate makes long-term investment projects that appeared to be unprofitable at a higher rate look profitable, so investment will be drawn toward such projects. The lower market interest rate suggests that the pool of real savings has increased so as to make the funding of these long-range investment projects possible. However, this is a mirage: the additional real savings do in fact not exist. To paraphrase Mises, the entire class of entrepreneurs finds itself in a situation akin to that of a master builder who attempts to build a palace with three stories, while unbeknown to him, the building material available is only sufficient for two stories. Obviously, the later he discovers this error, the more significant the loss will be, as a lot of resources will have been wasted.

Moreover, the creation of fiduciary media makes exchanges of nothing for something possible. The early receivers of newly created money can exercise claims on the pool of real savings, although no commensurate contribution to the pool has actually been made. The earlier receivers of newly created money will benefit to the detriment of later receivers, as by the time the new money has percolated through the economy, prices will have risen to reflect the increase of the money supply. Obviously, the earlier in the process one gets to spend newly created money, the bigger one's advantage will be. Thus wealth is redistributed from late to early receivers. Moreover, by exercising their claim without an offsetting contribution to the pool of real savings having been made, these early receivers make life more difficult for genuine wealth creators, who now must contend with a diminished pool of savings. In short, printing additional money enables consumption without preceding production. Obviously this cannot possibly be sustainable – ultimately consumption is constrained by production (one cannot consume what hasn't first been produced).

In a nutshell the problem posed by the mountain of debt that has been built up over time is the following: it has misdirected investment and falsified economic calculation, which in turn has distorted the structure of production and led to the consumption of scarce capital (which is usually disguised as illusionary accounting profits) during the boom periods. Subsequently this became painfully obvious as the inevitable economic busts set in.

What's more, the duration and amplitude of the boom-bust sequences has continually grown, as after every failed boom, the amount of new credit and money thrown at the economy to 'rescue' it from the bust has been vastly increased. Ever larger additions to the amount of money and debt outstanding have resulted in ever smaller additions to economic output. 

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US: total credit market debt outstanding – click to enlarge.

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If we consider the total amount of credit market debt outstanding depicted above, it is clear that large portions of this debt are indeed unproductive and represent a millstone hanging around the economy's neck. There are for instance (in the case of the US) more than $16 trillion in cumulative public debt. This represents the government's debt-financed consumption of the past. Even those who erroneously believe deficit spending to be economically beneficial must realize that this debt that is the residual of past deficit spending can only harm future economic development. 

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US: total public debt on the federal level – click to enlarge. 

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As Ludwig von Mises wrote regarding this point in Human Action: 

“But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government's apparatus. The government pays interest on capital which has been consumed and no longer exists. The treasury is burdened with the unfortunate results of past policies.” 

(emphasis added)

We would note to this: one of the many Achilles heels of deficit spending that aims to provide 'economic stimulus' is precisely that the wealth creators in the economy know very well that they will eventually be taxed to pay for it. It is a good bet their reaction will reflect this knowledge. They will become cautious, take fewer risks and curtail their investment activities. This is one of the reasons why massive deficit spending schemes such as that enacted in Japan over the past two decades consistently fail to work.

Another point worth considering is that there is also still a vast amount of mortgage debt outstanding that is effectively 'underwater'. The collateral is worth less than the remaining debt, as a consequence of the housing bubble. No-one dares to write this unsound debt off, as doing so would denude the banks of capital. And so various extend and pretend schemes have been enacted (ranging from the adoption of dubious accounting methods to delaying foreclosure proceedings to various tax-payer funded interventionist schemes that aim to prevent a write-off of this debt). This is in many ways a drag on the economy, as both lenders and potential borrowers are paralyzed by this overhang of unsound debt. 

Wealth Creation in the Market Economy and the State

In spite of the foregoing, it is important to stress that the market economy, even though it is extremely hampered, continues to create wealth. We once attended a presentation by Professor Hans-Hermann Hoppe, in which he discussed the 2008 crisis and its aftermath. There was one remark he made during the Q&A that struck us as especially pertinent to this discussion. He essentially said (we are paraphrasing from memory): “We can gauge how powerful the market economy's ability to create wealth is by considering that in most modern-day regulatory democracies, perhaps 30% of the population can be said to be involved in genuine wealth creation activities. In spite of the fact that the entire amount of wealth is created by this small minority, and that this minority is subjected to the most onerous regulations and taxes, it still manages to improve the well-being and standard of living of all of society over time.”

Along similar lines, Mises stressed that although an artificial credit-induced boom leads to impoverishment, this does not mean that we should expect that we will necessarily be poorer overall at the end of a boom than at its beginning. This is so because even under the unhealthy conditions of a boom, genuine wealth creation continues. If that were not the case, the capitalist system wouldn't have been able to increase the world's stock of wealth continually ever since capitalist production processes have been adopted. However, it is also important to realize that all of this has happened in spite of the hampering of the market economy by taxation and regulations and the failed central economic planning by central banks.

Obviously though, there must be a limit to the depredations the economy can handle. Today, the State has created an environment in which most of the intellectuals who propagate political and economic ideas are essentially bought off, as the government can offer them levels of remuneration that are way beyond the value their services would command in a free market. Naturally they will tend to sotto voce engage in the vilest statist propaganda. Very few dare to bite the hand that feeds them, even if they are aware that they are promoting a harmful ideology. Presumably, quite a few of them even believe in what they are promoting. 

We can see this in many obvious contradictions, such as the fact that e.g. most economists today agree that the market economy represents the by far best system for creating wealth, but at the same time support fiat money and central economic planning by the central bank, deficit spending by the state, and all sorts of state interventions in the economy. This is an inconsistent position. Either the free market is the best system, or its opposite, full-blown socialism, is. It is simply absurd to claim that what we really need is just enough socialism so as not to kill off the market economy altogether.

We are happy to report though that the intellectual handmaidens of statism are finding it ever more difficult to propagate their memes due to the internet having opened up alternative channels of communication and information that are outside of establishment control. This has made it possible for many people to learn of ideas that have previously been suppressed. On the other hand it is clear that we are still very far from the tide having decisively turned.

In fact, because the State now finds itself under increasing financial and economic pressure, it reacts in a manner that it regards as the politically palatable 'solution' to the debt problem. This solution consists primarily of inflationary policy (see the chart of TMS-2 above for evidence), and various forms of 'financial repression'. Inflation mainly robs the poorest members of society, while financial repression, depending on what forms it takes, robs everyone. The alternatives, such as writing off the unsound debt that has accumulated or cutting unsustainable government spending, are policies that are regarded as highly detrimental to winning elections. The welfare state has created so many dependents and hangers-on, not least including a vast and powerful class of bureaucrats who represent a large block of votes, that no politician dares to veer off established lines too much. Hence financial repression is chosen as the 'lesser evil' from the point of view of the ruling classes (whose main aim it is to preserve their rule and privileges).

However, there is a big problem with this. As the above-mentioned Professor Hoppe e.g. remarks in “The Economics and Ethics of Private Property” with regard to taxation: 

“Thus, by coercively transferring valuable, not yet consumed assets from their producers (in the wider sense of the term including appropriators and contractors) to people who have not produced them, taxation reduces producers’ present income and their presently possible level of consumption. Moreover, it reduces the present incentive for future production of valuable assets and thereby also lowers future income and the future level of available consumption. Taxation is not just a punishment of consumption without any effect on productive efforts; it is also an assault on production as the only means of providing for and possibly increasing future income and consumption expenditure. By lowering the present value associated

with future-directed, value-productive efforts, taxation raises the effective rate of time preference, i.e., the rate of originary interest and, accordingly, leads to a shortening of the period of production and provision and so exerts an inexorable influence of pushing mankind into the direction of an existence of living from hand to mouth. Just increase taxation enough, and you will have mankind reduced to the level of barbaric animal beasts.” 

Hoppe also points out that regulations (which compel or prohibit exchanges between private parties), while they are just as economically harmful as taxation, don't increase the economic resources in the hands of the government. They merely satisfy the lust for power. He concludes that this is the main reason why in wars between industrialized Western States, the less regulated ones tended to win against the more regimented ones.

However, we would point out that even the US economy, which is still widely regarded as one of the less hampered and regulated Western economies, boasts the following statistics as of 2012 (Source: the Ten Thousand Commandments): 

• Total costs for Americans to comply with federal regulations reached $1.806 trillion in 2012. For the first time, this amounts to more than half of total federal spending. It is more than the GDPs of Canada or Mexico.

• This is the 20th anniversary of Ten Thousand Commandments. In the 20 years of publication, 81,883 final rules have been issued. That’s more than 3,500 per year or about nine per day.

• The Anti-Democracy Index – the ratio of regulations issued to laws passed by Congress and signed by the president – stood at 29 for 2012. That’s 127 new laws and 3,708 new rules – or a new rule every 2 ½ hours.

• Regulatory costs amount to $14,678 per family – 23 percent of the average household income of $63,685 and 30 percent of the expenditure budget of $49,705 and more than receipts from corporate and personal income taxes combined.

• Combined with $3.53 trillion in federal spending, Washington’s share of the economy now reaches 34.4 percent.

(emphasis added)

Read the rest at:

http://www.acting-man.com/?p=24479

Why Greece Will Leave the Euro

As Greece's political and economic conditions worsen, the conventional wisdom about Greece never abandoning the euro will be sorely tested

By Desmond Lachman

According to an old Wall Street adage, when the winds are strong even turkeys fly. If ever there was a case to which this adage would apply, it would be that of the market’s present favor for Greek government bonds. Over the past year, as the market has stretched for yield in a low interest rate global environment, the Greek government’s long-term borrowing cost has declined from over 18 percent to its present level of 8.5 percent. And it has done so despite increased signs that Greece lacks the political willingness to resolve the many deep-seated problems that still characterize the Greek economy. 

Anesthetized by ample global liquidity, markets are simply choosing to ignore many warning signals emanating out of Greece about that country’s political and economic future. They certainly seem to be turning a blind eye to the Greek government’s insistence that Greece has reached the social and political limits as to how much more budget austerity and painful structural economic reform the country can tolerate. They also seem to be disregarding Greece’s stalled IMF-EU negotiations and increased signs that its foot-dragging on real economic reform is causing Berlin’s patience to run out.

A troubling indication that Greece may now be on a collision course with its official creditors was the Greek government’s recent presentation of its 2014 budget without the blessing of either Brussels or the International Monetary Fund. According to the IMF, Greece’s 2014 budget has an unfinanced gap of around €1.5 billion. The IMF also notes that Greece’s efforts at structural economic reform have fallen far short of the country’s commitments under its IMF-EU program, especially in the areas of public sector layoffs and privatization policy. This lack of progress would seem to make it highly improbable that Greece’s official creditors would agree to yet more bailout funds.

Markets also seem to be totally discounting the possibility that the Greek government could fall next year and that the far-left Syriza party, which is not known for supporting the IMF-EU policy prescriptions, could be swept to power. They do so despite the deep divisions that are now clearly apparent in the Samaras coalition government, which has already seen its majority in Greece’s 300-member parliament whittled down to only three members. They also do so despite the very real likelihood that the Greek government will suffer a humiliating defeat in the May 2014 European parliamentary elections that would make it difficult for it to continue governing.

Equally surprising is the market’s apparent equanimity about Greece’s dismal economic outlook, which seems to be driving its political fragmentation. Despite the fact that Greece’s economy has contracted by almost a quarter over the past six years and that Greece’s unemployment rate is around 28 percent, both the OECD and Moody’s are forecasting another small decline in Greek GDP in 2014. They are doing so in recognition of the additional budget tightening that Greece has to undertake to put its public finances on a sounder footing as well as of the ongoing domestic credit crunch that is making it difficult for households and companies to obtain much-needed bank financing.

Read more at:

http://american.com/archive/2013/december/why-greece-will-leave-the-euro

North America to Drown in Oil as Mexico Ends Monopoly

Adding another Nigeria to world oil supply

By Joe Carroll and Bradley Olso

The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields.

Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding another Nigeria to world supply, or about 2.5 million barrels a day.

That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to ConocoPhillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades.

“This is going to be a huge opportunity for any kind of player” in the energy sector, said Pablo Medina, a Latin American upstream analyst at Wood Mackenzie Ltd. in Houston. “All the companies are going to have to turn their heads and start analyzing Mexico.”

Unprecedented Output

An influx of Mexican oil would contribute to a glut that is expected to lower the price of Brent crude, the benchmark for more than half the world’s crude that has averaged $108.62 a barrel this year, to as low as $88 a barrel in 2017, based on estimates from analysts in a Bloomberg survey. Five of the seven analysts who provided 2017 forecasts said prices would be lower than this year.

The revolution in shale drilling that boosted U.S. oil output to a 25-year high this month will allow North America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast on Dec. 12. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.

Exxon’s forecast, compiled annually by a team of company economists, scientists and engineers, didn’t take into account any changes in Mexico, William Colton, the company’s vice president of strategic planning, said during a presentation at the Center for Strategic and International Studies in Washington on Dec. 12.

Opening Mexico’s oilfields to foreign investment would be “a win-win if ever there was one,” said Colton, who described the move as “very good for the people of Mexico and people everywhere in the world who use energy.”
....

Read more at :

http://www.bloomberg.com/news/2013-12-16/north-america-to-drown-in-oil-as-mexico-ends-monopoly.html

How the Paper Money Experiment Will End

We are now in a situation that looks like a dead end for the paper money system

by Philipp Bagus

A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. In such a system with a constantly increasing money supply and, as a consequence, constantly increasing prices, it does not make much sense to save in cash to purchase assets later. A better strategy, given this senario, is to go into debt to purchase assets and pay back the debts later with a devalued currency. Moreover, it makes sense to purchase assets that can later be pledged as collateral to obtain further bank loans. A paper money system leads to excessive debt.

This is especially true of players that can expect that they will be bailed out with newly produced money such as big businesses, banks, and the government.

We are now in a situation that looks like a dead end for the paper money system. After the last cycle, governments have bailed out malinvestments in the private sector and boosted their public welfare spending. Deficits and debts skyrocketed. Central banks printed money to buy public debts (or accept them as collateral in loans to the banking system) in unprecedented amounts. Interest rates were cut close to zero. Deficits remain large. No substantial real growth is in sight. At the same time banking systems and other financial players sit on large piles of public debt. A public default would immediately trigger the bankruptcy of the banking sector. Raising interest rates to more realistic levels or selling the assets purchased by the central bank would put into jeopardy the solvency of the banking sector, highly indebted companies, and the government. It looks like even the slowing down of money printing (now called “QE tapering”) could trigger a bankruptcy spiral. A drastic reduction of government spending and deficits does not seem very likely either, given the incentives for politicians in democracies.

So will money printing be a constant with interest rates close to zero until people lose their confidence in the paper currencies? Can the paper money system be maintained or will we necessarily get a hyperinflation sooner or later?

There are at least seven possibilities:

1. Inflate. Governments and central banks can simply proceed on the path of inflation and print all the money necessary to bail out the banking system, governments, and other over-indebted agents. This will further increase moral hazard. This option ultimately leads into hyperinflation, thereby eradicating debts. Debtors profit, savers lose. The paper wealth that people have saved over their life time will not be able to assure such a high standard of living as envisioned.

2. Default on Entitlements. Governments can improve their financial positions by simply not fulfilling their promises. Governments may, for instance, drastically cut public pensions, social security and unemployment benefits to eliminate deficits and pay down accumulated debts. Many entitlements, that people have planned upon, will prove to be worthless.

3. Repudiate Debt. Governments can also default outright on their debts. This leads to losses for banks and insurance companies that have invested the savings of their clients in government bonds. The people see the value of their mutual funds, investment funds, and insurance plummet thereby revealing the already-occurred losses. The default of the government could lead to the collapse of the banking system. The bankruptcy spiral of overindebted agents would be an economic Armageddon. Therefore, politicians until now have done everything to prevent this option from happening.

Obamacare Is Dead. Long Live Obamacare!

Squaring the circle

By Victor Davis Hanson

In the next 90 days, the Obama administration will have to declare victory and then abandon most of Obamacare. 

The legislation defies the laws of physics—more and broader coverage for more people at less cost—as well as logic: Young people, on average as a cohort with higher debt and less employment, will pay more for coverage they do not use much to subsidize others, often better off, to pay less for coverage they use a lot. It will be interesting how the administration pulls it off, given its past record of often being successful at this sort of dissimulation.

The “Patient Protection and Affordable Care Act”—despite the euphemistic name, the legislation has caused millions to lose their coverage and upped the costs for millions more—is a stone around the necks of Democratic congressional candidates, and something political will have to be done within the next year to address it. The Obama administration’s first impulse will probably be haphazard and periodic non-compliance with the law in the manner of its treatment of the employer mandate, and, for that matter, all sorts of other “settled” legislation that, for political reasons, it simply chose not to enforce, from pre-election border enforcement and the Defense of Marriage Act to the contractual order of the Chrysler creditors. In that regard, the administration might table the individual mandate or administratively change the wording of required insurance protocols to let people keep their old plans that were recently dismissed as “bad apples” or “junk.” Maybe they could call all that “pro-choice,” or “good apples.”

Theorists lose the plot

If poor economic performance produces even worse politicians, the downside risk to living standards is essentially unlimited

By Martin Hutchinson 
Add Milton Friedman to the list of economists whose solutions have come under fire. Predictors - including this column - have been confounded by strange economic behavior in the five years since the 2008 downturn. 

For monetarists, whether Friedmanite or Austrian like me, the strangest feature has been the failure of inflation to re-emerge, in spite of massive overstimulation of the money supply and prolonged negative real interest rates. For others of different persuasions, the Great Recession has surprised by failing to produce results from massive Keynesian stimulus, by the prolonged failure of labor force participation to return to its pre-recession levels and by the persistent decline in real wages even in a time of economic recovery. Existing economic theories of all political shades have failed to predict the course of reality. 

The biggest casualty of the last few years should surely be Friedmanite monetarism. M2 money supply in the United States is currently expanding at 6.5% over the last year and 11% over the past two months, and has been expanding at a steady 7% over the past five years, much faster than nominal GDP. Yet, rising consumer price inflation is nowhere to be seen. 

Add to that Friedman's own apostasy in the last few years of his life, when he praised then Federal Reserve chairman Alan Greenspan's mad expansion of the money supply, at a time when he could really have helped sound-money believers, and the man's credibility is shot. (Maybe not as badly shot as Maynard Keynes's, but dented nevertheless.) 

Friedmanites will make two responses to this. First, they will claim that we should be looking at M4, which has been expanding much more slowly than narrower measures, rather than any of the narrower measures of money supply. While the Fed has been expanding the monetary base like madmen, the banking system has not been making business loans aggressively, but instead has placed over US$1 trillion of extra reserves on deposit with the Fed. 

There is a certain amount of truth to the above claim, but there is a lot more to the Friedmanites' second claim, that inflation has been rampant over the last five years, but has manifested itself in asset prices and (until 2011) commodity prices. 

There is no question US stocks, in particular, are in a major bubble that shows increasing similarities to that of 1997-2000, while the prices of such assets as farmland and collectibles are reaching levels never before dreamed of. But to some extent this isn't a very helpful response; arithmetically, the gigantic money creation has to go somewhere, and it isn't clear at first glance whether rising prices of miscellaneous assets are particularly significant or damaging. 

Puerto Rico the Next Detroit?

So how is Puerto Rico's debt going to be paid back? The answer is it won't.

By Mike "Mish" Shedlock

Puerto Rico has been in recession for 8 years. The unemployment rate is 15% and debt has piled up to the tune of $70 billion. For Comparison purposes, California public debt is $96 billion and Detroit debt was $18 billion. Wall Street rates Puerto Bonds at one step above junk.

How did Puerto Rico get into trouble? The short answer is the same way as Detroit: loss of industry coupled with lavish pensions.

The Washington Post reports Puerto Rico confronts a rising economic misery.

 Boxes and wooden crates filled with household items bound for the U.S. mainland are stacked high in the Rosa del Monte moving company’s cavernous warehouse, evidence of the historic rush of people abandoning this beautiful island.

The economy here has been in recession for nearly eight years, crimping tax revenue and pushing the jobless rate to nearly 15 percent. Meanwhile, the government is burdened by staggering debt, spawning comparisons to bankrupt Detroit and forcing lawmakers to severely slash pensions, cut government jobs and raise taxes in a furious effort to avert default.

Officials in San Juan and Washington are adamant that a federal bailout is not on the table, but the situation is being closely monitored by the White House, which recently named an advisory team to help Puerto Rican officials navigate the crisis.

The island’s problems have ignited an exodus not seen here since the 1950s, when 500,000 people left for jobs on the mainland. Now Puerto Ricans, who are U.S. citizens, are again leaving in droves.

Puerto Rico lost 54,000 residents — 1.5 percent of its population — between 2010 and 2012 alone. Since recession struck in 2006, the population has shrunk by more than 138,000 to 3.7 million, with the vast majority of the outflow headed to the mainland.

The brutal combination of a long recession, a shrinking population and overwhelming debt has left Puerto Rico’s political leaders struggling to manage a conundrum: How do they tame at least $70 billion in debt while marshaling the resources to grow a shrinking economy and battle corrosive social problems, including a homicide rate that is nearly six times the U.S. average?

Obamacare Will Follow the Fate of Prohibition

"Unintended Consequences" will be written on the tombstone of Obamacare

by Norman Berdichevsky

It may take as long, but Obamacare will certainly follow the ignominious example of Prohibition (the notorious 18th amendment that was the law of the land from 1920 to 1933) and ultimately be rescinded whether by simple legislative majorities in Congress with the approval of a sitting President or the much longer and demanding route of a constitutional amendment (the 21st which simply repealed the 18th).

Like Prohibition, Obamacare is a massive intrusion into the private lives of ordinary citizens with respect to the decisions they had always deemed their own responsibility in the marketplace. Like Prohibition, all sorts of pseudo-moral arguments about providing “care” for everyone, regardless where (if anywhere at all) on their list of priorities. Like Prohibition, it was exploited by politicians who argued that it was a step to protect the most innocent, defenseless segment of the population – women, the disabled, the aged, infirmed and very young.

This goes against the grain of many on today’s political scene who, when recalling Prohibition, cast it in terms of a move made by the most conservative elements in society attempting to impose their religious or moral values on those citizens who had other and more “liberal” social mores. This was a screen as is Obamacare today, hiding the triumph of massive federal power over individual liberties and states’ rights. Prior to 1920, the prohibition of the manufacture, sale and transport of alcoholic beverages had only been regulated at the county or state level.

The enforcement of Prohibition was beyond the capabilities of the Federal government and led to widespread flouting of the law and a massive “unintended” increase in violent crime, smuggling and the rampant corruption of public officials and the police forces of many major American cities. Although the  arguments used by some conservative and very naïve clerical circles made it initially appear that support for Prohibition came from the conservative Right and “traditionalists," it was criminal organizations, notably the organized Mafia and corrupt politicians working hand in glove through the Democrat Party in big city machines that protected racketeering and the ill-gotten gains of the bootleggers and smugglers. By 1925, in New York City alone, there were anywhere from 30,000 to 100,000 speakeasy clubs. Only when the Democrats finally understood that Prohibition was costing them votes, did they call for its repeal.

Prohibition lost its advocates one by one but it still took the hard and very long route of a constitutional amendment to alter the law. Obamacare’s victory in the Supreme Court promises that it too will resist all attempts to get rid of it because of the legal precedent. What had been a local issue in many “dry counties” where fundamentalist protestant sects predominated was elevated into a nationwide movement at the end of the 19^th century largely by what we would call the LEFT.

Who originally supported Prohibition and why it reveals much the same “logic” as the one behind Obamacare, the protection of the weak and the cries for social justice. The leading advocate on the national scene arguing for prohibition was the American Temperance Society (ATS). By 1845, a decade after its founding, the ATS had reached 1.5 million members. Predictably, women constituted from 35% to a majority of 60% of membership in local chapters. They argued from the very beginning that alcohol and saloons were intimately connected with prostitution and violence against women. Just as the Democrats cast their approach to health care with accusations that anyone opposed were mean spirited and lacking in compassion, they framed their arguments over prohibition in the same way as many in the clergy arguing that failing to ban alcoholic beverages would leave women and children unprotected.

Implosion of Social Security Disability Ponzi Scheme Accelerates

Τhe Ponzi scheme is going to continue until its statistically inevitable demise

by  Bob Adelmann

Fresh data just released by the trustees of the Social Security Administration show that the number of people receiving benefits from the Disability Insurance Trust Fund has exploded over the last five years, reducing the surplus in that fund from $216 billion in 2008 to just over $100 billion in 2013. There were 7.4 million recipients in January 2009, but as of October 2013, there are nearly nine million beneficiaries, not including another two million spouses and children of disabled workers who are also receiving benefits.

Simple math illustrates the inevitable: If those receiving benefits for disability (real or faked) continues to increase, the trust fund will be bankrupt in less than three years. This is small potatoes when compared to the Medicare and Social Security programs, but illustrates the inevitability of the ending of all Ponzi schemes, large or small.

When Senator Tom Coburn (R-Okla.) claimed on October 20 that “We have $128 trillion worth of unfunded liabilities … and another $17 trillion worth of debt,” Glenn Kessler at the Washington Post preferred to question the amount rather than the imminent failure of these schemes. He claimed that the real number was perhaps closer to $43 trillion, using numbers from the Social Security trustee themselves, or suggested that perhaps the real number was $84 trillion, relying on the National Center for Policy Analysis for that one.

Kessler finally concluded that, without mentioning the imminent implosion occurring at the Disability Trust Fund, the real number to be concerned about was only $30 trillion — equal to the entire economic output of the United States for two years. He did, however, manage to say that whatever number is correct, that it didn't really matter anyway:

After all, most of these unfunded liabilities are … benefits that this generation’s children and grandchildren will be receiving, and presumably the generation 100 years from now will be able to figure out the best course for their society in their time.

This is what passes for economic wisdom in the present time: It’s a restatement of the hoary quip: “IBD/YBD” – by that time “I’ll be dead and you’ll be dead.”

Accelerating the implosion of these welfare state programs will be new “enhancements” such as those offered by Massachusetts Senator Elizabeth Warren. In an interview on MSNBC with Rachel Maddow, she said:

This is no time — this is the last time — to be talking about cutting Social Security. This is the moment when we [should] talk about expanding Social Security…

I believe fundamentally [that] we are a people who believe that anyone should be able to retire with dignity. And that’s what Social Security is about. People who work all their lives and pay into it should have a minimum level that they don’t fall beneath. That’s good economics…

Economic reality is vastly different, according to economist Daniel Stelter, author of a report by The Boston Consulting Group (BCG) entitled“Ending the Era of Ponzi Finance.” Wrote Stelter:

It may seem harsh or exaggerated to liken the current troubles of the developed economies to a  Ponzi scheme. I do so deliberately to emphasize the scope and seriousness of the problem.

US-Afghan pact at impasse?

The Indian Ocean region will now inherit the tensions and contradictions of the new cold war

by John Holmes
Every cloud has a silver lining. When it seemed that the US-Afghan pact is all but wrapped up on Washington’s terms and nothing can now stop its signing before the end of the year — the Obama administration has even begun briefing lawmakers on Capitol Hill regarding the provisions of the pact — a glitch seems to pop up from nowhere. 

The BBC has flagged, here, that the deal is “at impasse” ahead of the Loya Jirga meeting in Kabul next week because of disagreement over a key provision concerning the prerogative of the US forces’ operational freedom to enter Afghan homes. 

Kabul apparently feels “very strongly about this,” while the American side wants to continue the practice of entering Afghan properties. The quarrel may seem a storm in a tea cup but it isn’t really, since the Afghan opinion strongly militates against the manner in which foreigners invaded the privacy of their homes. 

Yet, this could also be a clever PR ploy by President Hamid Karzai after having caved in to meet the American demands on the key provisions of the pact. Karzai is brilliant in grandstanding and he probably hopes to present himself as an honest broker in front of the 3000 tribal leaders who assemble for the jirga in Kabul. 

He’s reason to be nervous that he is ramming down the throat of the Afghan nation a deal that formalises the open-ended foreign occupation of his country — and, there are already bad omens. Having said that, it is tempting to hope that the BBC report is for real and the US-Afghan difference would prove a deal-breaker.