A matter of degree

The Barbarians Inside Britain's Gates

By THEODORE DALRYMPLE

The youth of Britain have long placed a de facto curfew on the old, who in most places would no more think of venturing forth after dark than would peasants in Bram Stoker's Transylvania. Indeed, well before the riots last week, respectable persons would not venture into the centers of most British cities or towns on Friday and Saturday nights, for fear—and in the certainty—of encountering drunken and aggressive youngsters. In Britain nowadays, the difference between ordinary social life and riot is only a matter of degree, not of type.

A short time ago, I gave a talk in a school in an exquisite market town, deep in the countryside. Came Friday night, however, and the inhabitants locked themselves into their houses against the invasion of the barbarians. In my own little market town of Bridgnorth, in Shropshire, where not long ago a man was nearly beaten to death 20 yards from my house, drunken young people often rampage down one of its lovely little streets, causing much damage and preventing sleep. No one, of course, dares ask them to stop. The Shropshire council has dealt with the problem by granting a license for a pub in the town to open until 4 a.m., as if what the town needed was the opportunity for yet more and later drunkenness.

If the authorities show neither the will nor the capacity to deal with such an easily solved problem—and willfully do all they can to worsen it—is it any wonder that they exhibit, in the face of more difficult problems, all the courage and determination of frightened rabbits?

The rioters in the news last week had a thwarted sense of entitlement that has been assiduously cultivated by an alliance of intellectuals, governments and bureaucrats. "We're fed up with being broke," one rioter was reported as having said, as if having enough money to satisfy one's desires were a human right rather than something to be earned.

"There are people here with nothing," this rioter continued: nothing, that is, except an education that has cost $80,000, a roof over their head, clothes on their back and shoes on their feet, food in their stomachs, a cellphone, a flat-screen TV, a refrigerator, an electric stove, heating and lighting, hot and cold running water, a guaranteed income, free medical care, and all of the same for any of the children that they might care to propagate.

Looters take electrical goods after breaking into a store during the second night of civil disturbances in central Birmingham, England.

But while the rioters have been maintained in a condition of near-permanent unemployment by government subvention augmented by criminal activity, Britain was importing labor to man its service industries. 

You can travel up and down the country and you can be sure that all the decent hotels and restaurants will be manned overwhelmingly by young foreigners; not a young Briton in sight (thank God).

The reason for this is clear: The young unemployed Britons not only have the wrong attitude to work, for example regarding fixed hours as a form of oppression, but they are also dramatically badly educated. Within six months of arrival in the country, the average young Pole speaks better, more cultivated English than they do.

The icing on the cake, as it were, is that social charges on labor and the minimum wage are so high that no employer can possibly extract from the young unemployed Briton anything like the value of what it costs to employ him. And thus we have the paradox of high youth unemployment at the very same time that we suck in young workers from abroad.

The culture in which the young unemployed have immersed themselves is not one that is likely to promote virtues such as self-discipline, honesty and diligence. Four lines from the most famous lyric of the late and unlamentable Amy Winehouse should establish the point:

I

 didn't get a lot in class

But I know it don't come in a shot glass

They tried to make me go to rehab

But I said 'no, no, no'

This message is not quite the same as, for example, "Go to the ant, thou sluggard, consider her ways and be wise."

Furthermore, all the young rioters will have had long experience of the prodigious efforts of the British criminal justice system to confer impunity upon law breakers. First the police are far too busy with their paperwork to catch the criminals; but if by some chance—hardly more than one in 20—they do catch them, the courts oblige by inflicting ludicrously lenient sentences.

A single example will suffice, but one among many. A woman got into an argument with someone in a supermarket. She called her boyfriend, a violent habitual criminal, "to come and sort him out." The boyfriend was already on bail on another charge and wore an electronic tag because of another conviction. (Incidentally, research shows that a third of all crimes in Scotland are committed by people on bail, and there is no reason England should be any different.)

The boyfriend arrived in the supermarket and struck a man a heavy blow to the head. He fell to the ground and died of his head injury. When told that he had got the "wrong" man, the assailant said he would have attacked the "right" one had he not been restrained. He was sentenced to serve not more than 30 months in prison. Since punishments must be in proportion to the seriousness of the crime, a sentence like this exerts tremendous downward pressure on sentences for lesser, but still serious, crimes.

So several things need to be done, among them the reform and even dismantlement of the educational and social-security systems, the liberalization of the labor laws, and the much firmer repression of crime.

David Cameron is not the man for the job.

Imperial States always do, finally

Why Is America Committing Suicide?

               The US of A on the road to ruin

by Justin Raimondo, August 05, 2011 

America is committing suicide. That’s the only explanation I have for the course followed by US policymakers in the past decade, a period in which the US budget deficit has skyrocketed beyond all reason. While we have run up deficits before, some of them considerable by the standards of the day, in 2001 – the year we launched ourendless “war on terrorism” – the deficit began to enter new territory. Whereas before it had fluctuated, going up, down, and effectively maintaining a steady state of neutral, after the 9/11 terrorist attacks this country went into debt bigtime, with the deficit climbing steadily, doubling in 2007, and nearly doubling again the next fiscal year.

In the name of fiscal “austerity,” Congress recently authorized yet another raising of the debt ceiling, and everyone sits around waiting for the “draconian” cuts to fall – a “cut,” that is, in the rate at which government spending is projected to grow. Only in Washington, D.C., is a “cut” actually an increase – just not as much of an increase as was anticipated. As Ron Paul pointed out, if Congress had simply frozen spending at 2004 levels, we’d have more of a “cut” than we do now. 

No one is surprised by this Washington doubletalk: that’s the language they speak in the Imperial City, where murdering civilians is “collateral damage” and taxation is “revenue enhancement” instead of good old-fashioned theft. It’s silly season on Capitol Hill: so what else is new? Yet I sense a more sinister pattern in this Kabuki theater known as the debt ceiling drama, the implications of which are darker than I care to contemplate — but then again, that’s my job … 

While governments can only finance their completely non-productive (in reality: counter-productive) activities by incurring debt, it’s rare in human history to find profligacy comparable to our own. One has to go all the way back to ancient Rome, under the heel of its more depraved emperors, to find a precedent. The numbers are not merely astonishing: they are inconceivable. The figure — $14.3 trillion – must forever remain in the world of abstractions, because any attempt by the human brain to concretize it fails. How do our lawmakers imagine we can continue to spend at these levels, living light years beyond our means? 

Their recklessness is epitomized by how the military budget came out in all the deficit dickering. As it stands, real defense cuts only kick in if the “super-Congress” fails to come to an agreement on what cuts to make. Then and only then will the misnamed“defense” department come in for something approximating its fair share of cuts. Put another way: only in the most extreme and politically next-to-impossible case will Congress even consider cutting back on its overseas empire. They’ll yank your grandmother off her dialysis machine before they’ll contemplate getting rid of “foreign aid.”  

We ordinary folk live in a completely different world than the movers and shakers of the Imperial City: no one outside the Beltway bubble can really understand the mental processes that allow for such a massive evasion of reality, a kind of collective madness that infects the ruling elite in this country, regardless of party. They talk down to the hoi polloi, and use a different language when they converse among themselves, but occasionally the truth comes out. In 2004, Ron Suskind wrote a piece for the New York Times Magazine which included this quote from an unnamed top White House aide: 

“The aide said that guys like me were ‘in what we call the reality-based community,’ which he defined as people who ‘believe that solutions emerge from your judicious study of discernible reality.’ … ‘That’s not the way the world really works anymore,’ he continued. ‘We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do.’” 

While the context was a discussion of the Iraq war, this mindset – which is dominant in the Washington of Barack Obama just as it was during the Bush era – pervades our ruling elite in all matters. Why shouldn’t they run up a $14.3 trillion debt  — after all, don’t they create their own reality? Armed  with such supernatural powers, we aren’t going to let a little thing like impending bankruptcy stand in our way – not when we can wish it out of existence. 

Except we can’t. World markets trembled this week, and all indications are that the Big One is just now visible over the horizon. Americans are waking from their decade-long dream – or is that nightmare? – to discover that the world as they used to know it is falling apart, and a new world – a poorer, more restrictive, grayer world — is dawning. Yet our “leaders” in Washington are oblivious to the crisis, as much as they posture and pose: they are, personally, practically invulnerable to the effects of the economic collapse – at least, so far – and so don’t take it seriously. Encased in their self-created bubble, and imbued with the radical subjectivism that has taken hold everywhere but in the sorely beleaguered reality-based community, our rulers pursue policies that are suicidal in their effect, if not their intent.  And I am beginning to wonder if that isn’t their intent, at least on some level…. 

I put this out there as a proposition, a speculation, based solely on evidence of the circumstantial sort. When someone habitually engages in suicidal behavior, repeating the same pattern in spite of recognizing, on some level, that their actions are self-destructive, one has to wonder if they harbor a death wish. Which raises the question: So why is the American ruling class intent on committing suicide? 

There is a theory of history, which I don’t agree with, that treats civilizations as organic entities which go through a process of maturation, progressing from youth to senility in stages roughly comparable to the life process of a human being. Could theSpenglerians be right? Is American civilization entering a new phase — one of terminal decadence? This isn’t the first time I’ve thought of these lines from Robinson Jeffers’ poem, “Shine, Perishing Republic”:

“While this America settles in the mould of its vulgarity, heavily thickening
          to empire

And protest, only a bubble in the molten mass, pops and sighs out, and the
          mass hardens,

I sadly smiling remember that the flower fades to make fruit, the fruit rots
          to make earth.

Out of the mother; and through the spring exultances, ripeness and decadence;
          and home to the mother.

You making haste haste on decay: not blameworthy; life is good, be it stubbornly
          long or suddenly

A mortal splendor: meteors are not needed less than mountains:
          shine, perishing republic.”

That's all till August 22

Creative destruction

Job Destruction Makes Us Richer

By Walter E. Williams 

Here's what President Barack Obama said about our high rate of unemployment in an interview with NBC's Ann Curry: "The other thing that happened, though -- and this goes to the point you were just making -- is there are some structural issues with our economy, where a lot of businesses have learned to become much more efficient with a lot fewer workers," adding that "you see it when you go to a bank and you use an ATM; you don't go to a bank teller. Or you go to the airport and you're using a kiosk instead of checking in at the gate." The president's statements suggest that he sees labor-saving technological innovation as a contributor to today's high rate of unemployment. That's unmitigated nonsense. Let's see whether technological innovation causes unemployment.

In 1790, farmers were 90 percent, out of a population of nearly 3 million, of the U.S. labor force. By 1900, only about 41 percent of our labor force was employed in agriculture. By 2008, fewer than 3 percent of Americans were employed in agriculture. Through labor-saving technological advances and machinery, our farmers are the world's most productive. As a result, Americans are better off.

In 1970, the telecommunications industry employed 421,000 workers as switchboard operators, annually handling 9.8 billion long-distance calls. Today the telecommunications industry employs only 78,000 operators. That's a tremendous 80 percent job loss. What happened? The answer: There have been spectacular labor-saving advances in telecommunications. Today more than 100 billion long-distance calls a year require only 78,000 switchboard operators. What's more is the cost of making a long-distance call is a tiny fraction of what it was in 1970. Can we say these technological innovations made the nation worse off?

Professor Russell Roberts, my George Mason University colleague, gives other examples in his Wall Street Journal article (6/22/2011) "Obama vs. ATM's: Why Technology Doesn't Destroy Jobs." He says that today just a couple of workers can manage the egg-laying operation of nearly a million chickens laying 240 million eggs a year, through a highly mechanized and computerized process. Thousands of toll collectors are replaced by E-ZPass machines. Autoworkers are replaced by robots. Fifty years ago, a typical textile worker operated five machines capable of running thread through a loom 100 times a minute. Today machines run six times as fast, and one worker can oversee 100 of them.

You say, "Williams, certain jobs are destroyed by technology." You're right, but many more are created. Think about it. If 90 percent of Americans still had been farmers in 1900, where in the world would we have gotten workers to produce all those goods that were not even heard of in 1790, such as telephones, steamships and oil wells? We need not go back that far. If there hadn't been the kind of labor-saving technical innovation we've had since the 1950s -- in the auto, construction, telephone industries and many others -- where in the world would we have gotten workers to produce things that weren't heard of in the '50s, such as desktop computers, cellphones, HDTVs, digital cameras, MRI machines, pharmaceuticals and myriad other goods and services?

What technological innovation does is reduce the value of some jobs, raise the value of others and create many more jobs. Some workers are made better off through greater employment opportunities. Others are made worse off by having to accept less attractive employment opportunities, an adjustment process that can be painful. Since technological progress makes goods and services cheaper, and of higher quality, to stand in its way, in the name of saving jobs, will make us a poorer nation. What we're witnessing in our economy is what economic historian Joseph Schumpeter termed "creative destruction," the process in which something new replaces something older.

By the way, we can always count upon an infinite number of potential jobs. The reason is that human wants are insatiable. People always want more of something. That want will create jobs for someone else.

Sisyphus Rock and Roll

Warnings Feed Europe Debt Fears

Germany's Finance Minister Says Crisis Isn't Over; Credit Ratings on Cyprus and Greece Downgraded

By GEOFFREY T. SMITH and TERENCE ROTH

Sober warnings that the European debt crisis didn't end with last week's summit of European Union leaders reignited concerns of contagion risks on Wednesday, boosting borrowing costs for high-debt governments and pressuring the euro.

 

German Finance Minister Wolfgang Schäuble said Wednesday in an open letter to lawmakers belonging to his Christian Democratic Party that the euro-zone debt crisis isn't over and that more discipline is needed.

Also Wednesday, Moody's Investors Service downgraded Cyprus and warned it may cut the country's rating further, citing its weak fiscal position, fractious political climate and the exposure of its banks to Greece. The island's economic troubles have been compounded by rolling blackouts after an explosion destroyed the country's largest power station this month. A government spokesman said President Dimitris Christofias will push ahead with a cabinet shuffle planned for Thursday.

And Standard & Poor's Ratings Services cut its ratings on Greece further into deep junk territory, after the ratings company concluded a proposed restructuring by the nation's government would amount to a selective default. Moody's had cut Greece's rating Monday, warning that the bond exchange that is planned would constitute a default, and Fitch issued a similar warning on Friday.

Mr. Schäuble said in his letter that Germany wouldn't write "blank checks" for the European Financial Stability Facility, the EU's bailout fund for distressed governments—again registering German opposition to calls to increase the fund's lending volumes to reassure markets that default risk was being minimized. He also cautioned against putting Spain and Italy in the same boat as Greece, which he described as being at the root of the crisis. "The financial situation in some countries that are now in [the market's] focus, is in itself no cause for serious concern," he wrote.

Late Wednesday, Spanish Finance Minister Elena Salgado reached an agreement with the finance chiefs of Spain's powerful regions on budget targets and spending controls, despite escalating tensions in recent weeks over measures needed to slash one of the European Union's largest budget deficits.

Still, the suggestion of more tests to come and of limits on German support for future safety nets put investors on edge, shaking the comparative calm that followed the EU's decision last week on a second bailout package for Greece totaling €109 billion ($158.17 billion), augmented by debt concessions by creditor banks.

Other news Wednesday contributed to the unease. The International Monetary Fund, concerned about its enormous long-term exposure to the euro zone, may contribute a smaller share of official financing in the new Greek aid package than it did for the Portuguese and Irish rescue programs, people familiar with the situation said.

IMF financing of a new Greek package "is not a done deal," said Paulo Nogueira Batista, Brazil's representative on the IMF executive board. There are legitimate questions about whether the package is sufficient to lower Greece's debt profile enough to make the country's debt sustainable, he said. Mr. Batista also criticized Europe for assuming IMF funding. "It's inappropriate...they come close to treating the IMF as part of their own structure," he said.

The IMF has already pledged to lend €78.5 billion to Greece, Ireland and Portugal through 2014. That is many times the IMF shareholding of these three countries, a growing source of worry to fund officials.

Greece's debt sustainability is still a concern for fund officials despite the new aid package.

Given the high risk of contagion and the systemic nature of the crisis, however, the fund is widely expected to approve new cash for Greece.

David Beers, Standard & Poor's Corp.'s global head of sovereign ratings, said on CNBC television that Greece faces new ratings downgrades and probably will have to restructure its debt for a second time within the next two years.

Italy had to pay a yield of 4.07% on its new 10-year bond on auction Wednesday, up sharply from 2.51% at the previous sale. The two auctions aren't directly comparable because Tuesday's was an inflation-linked bond. The higher yield was caused largely by the recent increase in the inflation rate.

The wave of news contributed to a revival of caution, as investors again backed away from the high-debt countries on the euro-zone's periphery.

The euro fell to $1.4365 in New York afternoon trading, although the deadlock on the U.S. debt ceiling continued to drag on the dollar.

Spanish and Italian bonds fell, but didn't break out of their recent trading ranges.

The cost of insuring debt issued by highly leveraged governments against default jumped from Tuesday's levels, although later Wednesday it settled from intraday highs.

The cost of insuring European bank debt rose Wednesday, more in response to government debt burdens than to less-than-impressive bank earnings. "If you look at a bank's CDS, and then at the sovereign, they're moving in virtually one line," said Philip Gisdakis, head of credit strategy at UniCredit SpA.

Interest rates are market prices, and you interfere with them at your peril!

Bernanke’s blind side

by DETLEV SCHLICHTER

The world financial system is skating on thin ice, and that ice can crack at any moment.

The instabilities of the global paper money economy are evident everywhere. In Europe, the debt crisis is picking off one euro-member after another like the protagonists of a teenage horror movie, leaving us in no doubt what the final destination for the core is going to be. Yet – bizarrely and inexplicably – German Bundesanleihen still play the role of safe haven. In the U.S. of A., years of near-zero interest rates and two rounds of unprecedented “quantitative easing” have engineered a suspicious-looking rebound in equity markets and other financial assets, yet the victory of the interventionists over market forces looks hollow. Three years into the recovery, the economy is still sick. Manipulating financial markets seems one thing, generating prosperity quite another – only on Wall Street are the two the same. But according to the central bank’s chairman, if a policy fails it means you simply have to do more of it.

Only the intellectual and institutional inertia of the bloated financial industry, overfed on a rich forty-year diet of cheap money and ever-rising asset prices, is – for now at least – preventing a widespread rush for the exit. The industry is sitting on such a massive pile of inflated paper assets that there seem to be few alternatives to further feeding gluttonous governments and their clueless politicians. Additionally, things have gone from pretty bad to mind-blowingly worse too fast for most portfolio managers to comprehend – leading many to cling to the straws of time-worn investment routines and established asset allocation patterns. Did they not all learn back in money-manger school that government bonds were “safe assets”?

Smart ‘private money’ – nimbler, less consensus-oriented and, importantly, eager to sustain real spending power for the long run rather than beat some nominal index over the short run– is already running for the exit. Just look at the gold price and the prices of certain other real assets.

The tunnel vision of macroeconomics

My prediction is that things will get much worse very rapidly, and one of the reasons why I think this is inevitable is the inability of large sections of the political and financial establishment to even grasp what is going on. Of course, the reason for this is not any lack of intelligence. These are smart people. The reason is the oppressive dominance of an economic belief system that only provides a very narrow perspective on the full effects of an expanding supply of money.

And you want to know what really scares me? That the money-printer-in-chief, the man in charge of the printing press for the world’s dominant paper currency, the chairman of the U.S. Fed, not only shares this limited view of the effects of easy money, he is so completely beholden to the mainstream macro consensus that he is entirely incapable of even comprehending that his policy could do more harm than good.

Just look at this video of last week’s congressional hearings. The exchange between Congressman Ron Paul from Texas – the libertarian, Austrian-schooled Republican who is the only politician who ‘gets it’ – and the Fed chairman has been making the rounds on the web, and provoked already a lot of commentary. But what strikes me is not so much Bernanke’s struggle with explaining the monetary function of gold but something else. Something that indeed scares the living bejeesus out of me whenever I hear a Bernanke testimony.

Before I tell you what it is, let me stress that I don’t much like the widespread demonization of the Fed chairman. I have never met him but I cannot say that he comes across as an unpleasant individual. To the contrary, he seems to be a smart and decent person. Call me naïve, but I do not think that he is part of some conspiracy or any backroom dealing, or that he is in the pockets of the big Wall Street banks. I think he was sincere when he said that he never particularly cared about the management or the shareholders of the Wall Street firms he invariably bailed out and is still generously subsidizing with super-low funding rates and periodic debt monetization. He really believes that what he is doing is helping the U.S. economy and the U.S. people.

Bullishness is terrifically expensive.

Continental Drift

                              “I’m counterfeiting euros. If I’m caught I’ll plead insanity.”

By Tim Price

The latest Greek bail-out changes nothing, other than accelerating the pace at which euro zone tax payers have their funds flushed down the toilet, redirected to the banks, or both.  (They may be the same thing.) European politicians appear to be struggling to accept the underlying reality: Greece is insolvent, so simply throwing €180 billion more of other people’s money at the problem doesn’t improve matters, in the same way that violently injecting ever greater doses of adrenaline into a corpse doesn’t change the outlook for the corpse. The package announced last week was admittedly more dramatic than the markets had anticipated, but its confidence-boosting impact will probably have evaporated by the middle of this  week, not least because other sovereign insolvencies are quietly biding their time on the sidelines, oozing poison into the markets. €180 billion doesn’t buy you much of a rally these days. Bullishness is terrifically expensive.

Sometimes, amid the Sturm und Drang of the market, it’s possible to have a blinding moment of clarity. In one such moment, Nomura’s Bob Janjuah we think clearly  identifies the problem facing Europe, in just three little words: weak trend growth.

Most policymakers and many in the market are still desperately hanging on to the view that trend growth rates in developed markets (and emerging markets too) have not been impacted materially as a result of the financial crisis. To me the evidence is clearly “in”. … The only way developed market (and emerging market) policymakers have been able to deliver even barely acceptable trend growth has been through the use of unsustainable policies which put short term gains first but which clearly create huge long term risks to sovereign credit quality and which leave a deeply negative scar in the minds of the private sector, which is attempting to de-lever and which knows it is facing the mother of all tax liabilities going forward. The reality is that absent a private sector debt binge (the private sector is not that stupid) and assuming we are coming to or are at the end of the line with respect to policy, then developed market trend growth over the next 3 – 5 years will be in the 1% to 1.5% range. Once the market is able to see the limits of policy, and once the market is able to see through the excuses (of ‘soft patches’), then it is inevitable that we see a significant re-price lower of earnings expectations, of incomes, of asset values, and a genuine (rather than hypothetical) acceptance that living standards, especially in the developed market economies, are going to be materially lower over the next 5 – 10 years than current consensus expectations / forecasts.

Bob  Janjuah is surely almost certainly correct when he concludes that emerging market economies, as a whole, are likely to outperform over the medium term, on account of their “strong balance sheets, huge flexibility in taxation and labour markets, and very low levels of entitlement expectations”.  Or to put it another way: Europe has  –  with the possible exception of Germany  –  gone ex-growth, and faces a future that looks rather similar to the last two decades in Japan. This point is not lost on Merryn Somerset Webb writing for the weekend FT and citing some holiday reading for investors still clinging to a sense of realism. Among her selection is Alex Kerr’s ‘”Dogs and Demons”, which covers Japan;

… for a real insight into how the odd banking crisis can turn into a disaster for public finances, turn to [ironically enough] chapter 11. Here you will learn about how “the ministry of finance‟s support for banks and industry through the manipulation of financial markets has had high costs. Interest rates of 1% or lower have dried up the pools of capital that make up the wealth of ordinary citizens; insurance companies; pension funds; the national health system; savings accounts; universities; and endowed foundations. The prognosis is for skyrocketing taxes and declining social services.

That should have a familiar ring to it – it is a glimpse into our own futures.

And while Europe drifts slowly towards further genteel decline, American politicians wrangle over their own debt  burden, showing, in the process,  an alarming complacency at the prospect of sovereign default, and obvious unfamiliarity with the principle of “risk-free assets” and the capital asset pricing model. Orwell suggested how language would be deployed as the last refuge of the political scoundrel, so we have been treated in recent weeks to concepts such as “restructuring” and “selective default”, as if investors were unaware that huge parts of the sovereign debt structure were buckling under the weight. We take a hugely simplistic view of the global debt landscape: if the (sovereign) borrower is a deadbeat, we don’[t lend to it. In the words of John Badham’s film “War Games”, sometimes the smartest move is not to play.

If it makes sense to be highly selective about bonds, given the risks, it surely makes sense to behave in the same way when assessing equity opportunities. Europe‟s slow decline doesn’t automatically invalidate the shares of European or UK-based companies, for example, but it does suggest that we should be thinking about those businesses with meaningful exposure to faster growing places in the world, and about those businesses whose shares represent deep defensive value. The problem here is nicely expressed by JP Morgan‟s Michael Cembalest. Large cap, blue chip stocks in the UK and Europe trading at single digit price / earnings multiples, with 30% to 50% of their revenues in faster growing economies, and offering 3% to 4% dividend yields, or higher, are surely relatively attractive. But “we don’t expect to get paid in full until (and unless) the world’s largest debtor economies find a way out, which is going to require more leadership than we have seen so far, and perhaps a crisis to bring it about.”  We disagree only on one point: where Michael Cembalest uses the word “perhaps”, we would use the word “certainly”.

Given that the ability to anticipate the macro environment involves a more than ordinary ability to assess just how selfish and stupid politicians are going to be, we feel more uncomfortable than normal allocating capital to macro managers. We favour purely systematic, mechanistic trend-following strategies for our “absolute return” exposure, and we acknowledge that the sector is currently struggling with market headwinds that may be influenced by the extent of political asset price manipulation.

Our fourth asset class commitment in these extraordinary times is to real assets. Observers often complain that we seem to write about little more than gold. Which is wholly unfair. We have often discussed the investment merits of silver.

So we peer into an investment landscape more than usually obscured by uncertainty and with huge prospective tail risks. We draw huge comfort from an investment process that we feel is more genuinely diversified by asset type than those of many of our peers, and that simultaneously benefits, we believe, from a concentration of investments where we have particularly high conviction –  the monetary metals being a special example. There is admittedly not much fun in anticipating what might be years of structural decline in our home markets. But it most certainly takes the edge off when one has a plan.

Greece without the sunshine

Austerity in the U.K.

Britain discovers that shrinking government is a lot harder than expanding it.

BY THEODORE DALRYMPLE

In Britain, government spending is now so high, accounting for more than half of the economy, that it is increasingly difficult to distinguish the private sector from the public. Many supposedly private companies are as dependent on government largesse as welfare recipients are, and much of the money with which the government pays them is borrowed. The nation’s budget deficit in 2010, in the wake of the financial crisis, was 10.4 percent of GDP, after being 12.5 percent in 2009; even before the crisis, the country had managed to balance its budget for only three years out of the previous 30.

Deficits are like smoking: difficult to give up. They can be cut only at the cost of genuine hardship, for many people will have become dependent upon them for their livelihood. Hence withdrawal symptoms are likely to be severe; and hardship is always politically hazardous to inflict, even when it is a necessary corrective to previous excess. This is what Britain faces.

For some politicians, running up deficits is not a problem but a benefit, since doing so creates a population permanently in thrall to them for the favors by which it lives. The politicians are thus like drug dealers, profiting from their clientele’s dependence, yet on a scale incomparably larger. The Swedish Social Democrats understood long ago that if more than half of the population became economically dependent on government, either directly or indirectly, no government of any party could easily change the arrangement. It was not a crude one-party system that the Social Democrats sought but a one-policy system, and they almost succeeded.

For countries that operate such a one-policy system, especially as badly as Britain does, economic reality is apt to administer nasty shocks from time to time, requiring action. When the new coalition government, led by David Cameron of the Conservatives and Nick Clegg of the Liberal Democrats, came into power last year, the economic situation was cataclysmic. The budget deficit was vast; the country had a large trade deficit; the population was among the most heavily indebted in the world; and the savings rate was nil. Room for maneuver was therefore extremely limited.

The previous years of fool’s gold—asset inflation brought by easy credit—had allowed the Labour government to expand public spending enormously without damaging apparent prosperity. Labour’s Gordon Brown, chancellor of the exchequer from 1997 to 2007 and then prime minister for three years, boasted that he had found the elixir of growth: his boom, unlike all others in history, would not be followed by bust. During Brown’s years in office, however, three-quarters of Britain’s new employment was in the public sector, a fifth of it in the National Health Service alone. Educational and health-care spending skyrocketed. The economy of many areas of the country grew so dependent on public expenditure that they became like the Soviet Union with supermarkets.

Britain was living on borrowed money, consuming today what it would have to pay for tomorrow, the day after tomorrow, and the day after that; the national debt increased at a rate unmatched in peacetime; and when the music stopped, the state found itself holding unprecedented obligations, with no means of paying them. Without aggressive reforms, it was clear, Britain would soon have to default on its debt or debauch its currency. Both alternatives were fraught with dire consequences.

In the end, the new government chose to attack the deficit from both ends: by cutting spending and by increasing taxes. As many commentators noted, this approach risked a reduction of aggregate demand so great that short-term growth would be impossible and a prolonged recession, even depression, would be probable. Domestic demand would plummet, and export-led growth, many feared, would not be able to rescue the economy, for two reasons: first, Britain’s industry was so debilitated that its competitiveness in sophisticated markets could not be restored from one day to the next by, say, a favorable change in the exchange rate; and second, the country’s traditional export markets were experiencing difficulties of their own.

But the general economic argument was not what fueled the fierce intellectual and street protests that in recent months have opposed the government’s efforts to reduce the deficit—efforts so far more symbolic than real, for state borrowing requirements have only increased since the coalition’s arrival in power. Nor were the protests directed against the tax increases. Since the end of World War II, the British have grown accustomed to the idea that the money in their pockets is what the government graciously consents to leave them after it has taken its share. When (as rarely happens) the chancellor of the exchequer reduces a tax instead of increasing it, even conservative newspapers say that he has “given money away,” as if all money came from him in the first place. The wealth is the government’s and the fullness thereof: where such a belief is prevalent, no tax increase will seem either illegitimate or oppressive.