“Can China save itself?”

How Can China Save Europe When It's Defaulting On Its Own Debt?

By Gordon G. Chang

About 85% of Liaoning province’s 184 financing companies defaulted on debt service payments in 2010 according to a report from the province’s Audit Office.  The report also noted that 120 of these borrowers, de facto government agencies, operated at a loss last year.

Since 1994, provinces and lower-tier governments have not been permitted to issue bonds or borrow from banks.  Despite the strict prohibition, their debt has skyrocketed as local officials incurred obligations through LGFVs, local government finance vehicles.  The central government’s National Audit Office said these companies, at the end of last year, had taken on 10.7 trillion yuan of debt.  No one, however, knows the true amount of LGFV indebtedness, and some have calculated the real amount to be more than double the official figure.

Why the disagreement as to the amount of debt?  Local governments have gone out of their way to hide borrowings, perhaps in part because of their doubtful legality.  As famed economic journalist Hu Shulipoints out, new local officials sometimes do not know the extent of obligations left by their predecessors.  There have been a number of stratagems employed, from the issuance of illegal government guarantees to the transfer of funds in roundabout routes.

The case of China Zhongwang Holdings, a giant aluminum producer, illustrates how Liaoning province effectively went into debt in a roundabout manner—and concealed the borrowing.  As disclosed in a footnote in its 2009 financial statements, Zhongwang had borrowed 2.3 billion yuan from two Liaoning banks and, as reported by Naomi Rovnick of the South China Morning Post, had “given the money” to a government-owned entity.  Zhongwang, based in Liaoning, kept the loan on its books but disclaimed any responsibility for repayment.  Apparently, the series of money transfers among Liaoning’s government-owned entities through Zhongwang was intended to facilitate development of the local economy.

The debt problems of northeastern Liaoning may be worse than those of other provinces because it is in the heart of China’s “rust belt,” but LGFVs in other parts of the country are also beginning to experience difficulties.  Yunnan Investment Group, the largest financing vehicle of southwestern Yunnan province, has just put restructuring plans on hold after China’s most widely followed rating agency warned of a downgrade in July.  Most LGFVs, however, are not rated and so there is virtually no public scrutiny of their activity.

LGFVs can continue to meet existing debt obligations as long as they can borrow new funds.  “If the government doesn’t tighten its policy too much, there shouldn’t be any problem,” said Tianjin Vice-Mayor Cui Jindu on Friday.  “But if we end up not getting a single new loan, there could be problems.”   The problems Cui was referring to, according to the official China Daily, included non-completion of projects.  And if projects are not completed, there will be no sources of repayment.

The problem is that Beijing, to control inflation, is in fact putting the brakes on the money supply.  The growth of M2 is the slowest it has been in six years—less than half of what it was two years ago—and central government regulators are trying to restrict new loans with periodic increases in bank reserve requirements and direct administrative measures.

As a result, China’s debt-fueled growth is slowing fast, probably faster than official GDP figures indicate.  Electricity usage, perhaps the best barometer of economic activity, was essentially flat this summer on a month-to-month basis.  Moreover, export and shipbuilding orders are down.  The closely watched HSBC purchasing managers’ index, at its record lowest point, is close to negative territory and headed south.

Xu Lin, a senior official at the National Development and Reform Commission, says there is no need to “panic,” but there are plenty of reasons to think that China’s economy is already landing hard.  And a hard landing will soon cause LGFV defaults around the country, which will roil banks.  Fitch early this month put China’s local-currency debt on downgrade watch due to concerns about bank asset quality and general concerns about financial stability.

Many analysts, thinking Beijing has plenty of cash, don’t worry.  Yes, it is sitting on $3.2 trillion in foreign exchange reserves, but for various reasons dollars, euros, and yen are of little use in a local-currency crisis.  Of course, the central government can print more renminbi to pay off LGFV creditors, but that, by increasing the money supply, would only aggravate what is China’s most serious economic problem, inflation.

Everyone now wants to know whether Beijing will buy Greek and Italian debt to save Europe.  Yet the better question to ask at the moment is this: “Can China save itself?”

A Problem

What Chekhov can teach us about the London riots

T. Dalrymple

There is no disguising the fact that those who call for the sterner punishment of criminals, though they might be right to do so, are often an unpleasant lot. Even disregarding the out-and-out sadists among them, who enjoy vicariously inflicting suffering on others, we feel that there is something not quite decent in demanding an increase in retribution. The acceptance that there but for the grace of God go I is much more generous-minded; and as I entered the prison in which I worked, as I did about five times a week for fiteen years, I could not help but feel that if there were any justice in the world I should be retained there not as a member of the staff, but as an inmate. So, of course, should everyone else.

But while my heart is with softness, my head is with hardness. Maybe we should alll go there but for the grace of God, but the fact is that God dooes sometimes extend his grace to us, and therefore we don't actuallly go there. And who are we that we should forgive what people do to others? That kind of forgiveness is for God, and in us partakes of the sin of pride. We are not God: we are earthbound creatures, condemned to do merely our best, which includes, or ought to include, our best to suppress and prevent the crime that causes so much human suffering.

Chekhov has an interesting little story on the matter of crime and punishment. It is called A Problem. In it, a young man of ancient and distinguished lineage has forged a promissory note and is about to face trial for it. The family meets in council to decide what to do about it: to let the young man take his punishment or to pay the promissory note? Which is the best way to save the family honour?

With the precision of a surgeon wielding the knife, Chekhov captures the arguments and feelings (so intimately and inextricably related) that have hardly changed in the century and more since he wrote. The young man, Sasha Uskov, is a good-for-nothing student, for whom pleasure in the form of wine, women and song is all. He lives constantly above his means and is always in debt. Here is how he explains his crime to himself:

He had discounted a forged note. But all the young men he knew did the same. It is true that the use of another's signature was considered reprehensible; but still, it was not a crime but a generally accepted dodge, an ugly formality which injured no one, and was quite harmless… Sasha had no intention of causing anyone damage or loss.

I have heard many convicts say precisely this: nobody was injured (or injured much) by what I did, everyone does it anyway, I meant no harm. Did Chekhov ever hear these arguments in person, or did he merely read them or intuit them?

The three main participants in the family discussion are two paternal uncles, one of whom is a colonel and the other a civil servant, and a maternal uncle. Sasha, the subject of the discussion, hears them from behind closed doors.

The colonel, a most unattractive character, is for taking a hard ine, as they do in such cases (he says) in the army. He argues against saving the family honour by paying the amount due:

How can you say that I don' believe in family honour? I repea nce more: fa-mil-y hon-our fal-sely un-der-stood is a prejudice! Falsely understood! That's what I say: whatever may be the motives for screening a scoundrel, whoever he may be, and helping him to escape punishment, it is contrary to law and unworthy of a gentleman.

One can hear in one's mind's ear the tone in which this is all said.

The civil servant uncle is in favour of hushing the whole thing up, but only on the narrowest of grounds, namely to keep it out of the newspapers. But the maternal uncle, Ivan Markovitch, who is a relative of Sasha's only by marriage, founds his arguments on those to be found in the Guardian:

He began by saying that youth had its rights and its peculiar temptations. Which of us has not been young, and who has not been led astray? To say nothing of ordinary mortals, even great men have not escaped errors and mistakes in their youth. Take, for instance, the biography of great writers. Did not every one of them gamble, drink, and draw down upon himself the anger of right-thinking people in his young days?

Then there is the story of Sasha in particular: They must remember that Sasha had received practically no education:

he had lost his parents in early childhood, and so had been left at the tenderest age without guidance and good, benevolent influences.

In short, to put it in modern psychobabble, he had no role models. Therefore:

Even if he were guilty, he deserved indulgence and the sympathy of all compassionate souls. He ought, of course, to be punished, but he was punished as it was by his conscience and the agonies he was enduring…

Who has not heard these things said of wrongdoers? Ivan Markovitch rises to a rhetorical crescendo:

Shall we be false to civic duty if instead of punising an erring boy we hold out to him a helping hand?

Nor is that all:

Crime is an immoral act founded upon ill-will. But is the will of man free? The latest school [of thought] denies the freedom of the will, and considers every crime as the product of purely anatomical peculiarities of the individual.

Again, this has an all too familiar ring.

There is no denying that Ivan Markovitch is a much more sympathetic personage than the colonel, and is described by Chekhov as "kind-hearted". His views prevail: Sasha's debt is paid on condition that he goes with his uncle to his farm to do work there of some kind or other.

On hearing the news of his reprieve, Sasha, who had been until then "sick of life", immediately perks up and remembers that it is the name-day of his friend, Von Burst, who wil be having a party at the Bear. He wants to join him there, but to do so he needs money. He asks Ivan Markovitch for the loan of a hundred roubles. His uncle is taken aback and appears not to understand, which Sasha interprets as a refusal. He says:

Listen. If you don't, I'll give myself up tomorrow! I won't let you pay the IOU. I'll present another false note tomorrow!

And Ivan Markovitch hands over the hundred roubles.

In the compass of a few pages, Chekhov depicts our dilemma: to feel like Ivan Markovitch, yet think like the colonel.

Prince of war

Why shouldn’t one of Liberia’s most infamous psychopaths become its president?

By ANTHONY DANIELS

Human rights are universal and indivisible, existing as they do in an unexplored metaphysical sphere in which the European Court of Human Rights plays the role of Christopher Columbus. So it is a wonderful thing to see the court’s discoveries accepted, applied and even extended in a country in which its writ does not yet run, namely Liberia, in West Africa.

There, a man called Prince Y Johnson is running for president in the forthcoming elections. When I met him, a little more than 20 years ago, he was Field Marshal Brigadier-General Prince Y Johnson, but just as he awarded himself these ranks, so he has now divested himself of them.

In those days it was advisable, or so I was told, to visit the Field Marshal in the morning, before he had drunk too much beer and smoked too much dope: for in the event of intoxication he was inclined to take up his AK47 and go round shooting people more or less at random. When I met him, he was affable enough, but I can’t say that I trusted him entirely.

Johnson was principally famous for having led one of the armed factions in the Liberian civil war, the Independent National Patriotic Front of Liberia, that had so destroyed the country that traders of Lebanese extraction fled Liberia for the relative safety of Beirut. Johnson’s greatest military exploit was the capture of the then-president, Samuel Doe, whom he subsequently had tortured to death in front of him, an event so historic that Johnson thought it worthy of capture on video: a video of which he is sufficiently proud that he offered to show it to visiting foreigners.

In the video Johnson sits at a table drinking Budweiser while in front of him, naked and trussed like a chicken, sits the former president. Johnson orders Doe’s ears to be cut off, and they are. It becomes clear that one motives for the torture, apart from to procure Doe’s death, is to make him divulge,  before he expires, the numbers of his bank accounts in London, where it is assumed that he has salted away his ill-gotten gains.

Doe was not an admirable man, and no mean killer himself. It is widely believed that he participated personally in the massacre at St Peter’s Church, Monrovia, where about 600 people who had taken refuge there were mowed down with machine-guns by his men, maddened by their impending defeat at the hands of the rebels. The outlines of the bodies in the dried blood were still visible when I visited the church. I found a New Testament there, in which a young girl,

Martha D. Z. Sonyah, recorded her decision to receive Christ as her Saviour seven days before she was shot and then buried in a mass grave.

Dr Ameche, a Nigerian long resident in Liberia, and practically the only doctor left in Monrovia still in practice at the time, told me how Johnson had had him up against the wall ready to shoot him because he had told Johnson that it was his duty as a doctor to treat the wounded of all sides, and not just those of Doe’s faction, the INPFL. Fortunately, Johnson thought better of it, because Dr Ameche was a popular man, known to the American embassy; but killing was nothing to him.

Another man, a BBC correspondent, told me that he had personally witnessed Johnson killing a young man. The young man had been trying to break into the wreck of a car; Johnson, who was passing, asked him what he was doing. The boy confessed, but then tried to run away. Johnson said, ‘Where my AK?’ and mowed the boy down, afterwards passing on as if he had not extinguished a human life.

I saw Johnson’s capacity for instantaneous change from affability to murderous rage when, to persuade me that behind the murderer was the philanthropist, he took me to an orphanage that his organisation ran. He patted a little boy on the head there who had a protuberant stomach (malnutrition and worms), and said, in Liberian English, ‘What the matter, you pregnant-o?’

When a psychopathic killer-at-large laughs, you laugh with him. But then a man came out of the orphanage to tell Johnson that there was no ‘soup’ for the children: none of the savoury accompaniment to the starch that was the staple food. Johnson turned on him with fury for having ­humiliated him in front of a foreigner. I wouldn’t have recommended the man as a risk for a life insurance company.

So it is definitely a sign of moral progress that such a man as Johnson should be a candidate for the presidency of his country. First, of course, it helps to overcome the stigma that attaches to people who have done the most terrible things. Surely we must allow them the possibility of redemption? As everyone knows, one of the reasons people keep on doing bad things is that no one will give them a chance to reform. There is no reason why a man who tortured someone to death should not be a head of state 20 years later. Besides, philosophers have difficulty with the concept of personal identity: how do we really know that the Johnson of 20 years ago is the same man as the Johnson of today?

And second, of course, we must return to the European Court of Human Rights. Has it not ruled that prisoners have an inalienable right to the vote? And if they have the right to vote for the rulers of their country, does it not follow that they have the right actually to be the rulers of their country? For to grant them the one thing and not the other would be discriminatory, and there is no crime worse than that of making discriminations. Besides, a decent respect for the opinion of mankind forces us to accept that all politicians, at least of the present day, are criminals, in the moral if not in the legal sense.

Strike a blow, then, for human rights: vote psychopath!

Olive tree plantations and wind farms

Lesson From Europe
        No, social democracy doesn't 'work.'

'The real lesson from Europe," wrote Paul Krugman in January 2010, "is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works." 
Here are some postcards from the social democracy that works:

• In Britain, 239 patients died of malnutrition in the country's public hospitals in 2007, according to a charity called Age U.K. And at any given time, a quarter-million Britons have been made to wait 18 weeks or longer for medical treatment. This follows a decade in which funding for the National Health Service doubled. 

• In France, the incidence of violent crimes rose by nearly 15% between 2002 and 2008, according to statistics provided by Eurostat. In Italy violent crime was up 38%. In the EU as a whole, the rate rose by 6% despite declines in robbery and murder. 

• As of June 2011, Eurostat reports that the unemployment rate in the euro zone was 9.9%. For the under-25s, it was 20.3%. In Spain, youth unemployment stands at 45.7%, which tops even the Greek rate of 38.5%. Then there's this remarkable detail: Among Europeans aged 18-34, no fewer than 46%—51 million people in all—live with their parents. 

• In 2009, 37.4% of European children were born outside of marriage. That's more than twice the 1990 rate of 17.4%. The number of children per woman for the EU is 1.56, catastrophically below the replacement rate of 2.1. Roughly half of all Europeans belong in the "dependency" category on account of their youth or old age. Just 64% of the working-age population actually works.

I could go on in this vein for pages, but you get the point. Europe is not a happy place and hasn't been for nearly a generation. It's about to get much worse.

This isn't simply because Europe's economic crisis is still in its infancy, although it is. The tab for bailing out Greece, Portugal and Ireland alone—which together account for about 5% of euro-zone GDP—already runs to hundreds of billions of euros, with no resolution in sight. By contrast, Italy's GDP is more than seven times as large as Greece's. Italy is too big to fail—and too big to save. If the so-called PIIGS wind up leaving the euro zone (or if Germany beats them to it by returning to a Deutsche mark), the dislocations will take years to sort through.

Even then, Europe will still have to address the more profound challenges of economic growth, demography and entitlement reform. But in order for it to do so it must have a clear idea of the nature of the challenges it faces. It doesn't. It also requires political resources to overcome the beneficiaries—labor unions, pensioners, university students, farmers, Brussels technocrats and so on—of the current system. That's not going to happen.

Politics, for starters, prevents it. Whenever a supposed "neo-liberal" comes to power—whether it's Nicolas Sarkozy or Silvio Berlusconi or Angela Merkel—they typically wind up doing no more than tinkering around the edges of regulatory or tax reform. That's because they are stymied by coalition compromises at home, or by European compromises in Brussels, or by some deeper failure of will and character.

Margaret Thatcher was the exception to this rule. But in both Britain and Europe she has had neither equals nor heirs.

Demography also prevents reform. The median age in the EU is 40.6 years. (In the U.S. it's 36.9). Older populations typically resist change, demand the benefits they've been taxed all their working lives for—and vote. The demographic balance is only going to tip further in their favor, and it will change only when younger Europeans decide that children, plural, are worth having. What that will take, only a faith in future prosperity—and in God—can provide. Outside of its growing Muslim population, Europe has neither.

Finally, there is ideology. For the past four decades, "Europeanism" has been an amalgam of Keynesian economics, bureaucratic centralization, and welfarism, corporate and social. Even now, the ideology remains unshaken by events. Though there is plenty of talk about getting spending under control and balancing budgets (typically by way of tax increases), nobody in Europe is proposing a serious growth agenda. At the beginning of the Greek crisis I asked a visiting official from Athens what his ideas were for growth: He suggested olive tree plantations and wind farms. He might as well have thrown a Sicilian Expedition into the mix.

For the U.S., none of this is yet in our cards: That's guaranteed by the tea party that so many Europeans (and Paul Krugman) find so vulgar. But it's worth noting what the fruits of social democracy—a world in which, as Kipling once wrote, "all men are paid for existing and no man must pay for his sins"—really are. And in the wake of the U.K. riots, the rest of his prophecy also bears repeating:

- As surely as Water will wet us, as surely as fire will burn,

- The Gods of the Copybook Headings with terror and slaughter return!

Τhe explosion of the European project

What Comes After 'Europe'?

 The riots of Athens will become those of Milan, Madrid and Marseilles. Border checkpoints will return. Currencies will be resurrected, then devalued.

By B. Stephens

When the history of the rise and fall of postwar Western Europe is someday written, it will come in three volumes. Title them "Hard Facts," "Convenient Fictions" and—the volume still being written—"Fraud."

The hardest fact on which postwar Europe was founded was military necessity, crisply summed up by Lord Ismay's famous line that NATO's mission was "to keep the Russians out, the Americans in, and the Germans down." The next hard fact was hard money, the gift of Ludwig Erhard, author of the economic reforms that created the Deutsche mark, abolished price controls, and put inflation in check for generations. The third hard fact was the creation of Jean Monnet's common market that gave Europe a shared economic—not political—identity.

The result was the Wirtschaftswunder in Germany, Les Trente Glorieuses in France and il miracolo economico in Italy. It could have lasted into the present day. It didn't.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe. Today it hovers just under 50%. In 1965, the fertility rate in Germany was a healthy 2.5 children per mother. Today it is a catastrophic 1.35. During the postwar years, annual GDP growth in Europe averaged 5.5%. After 1973, it rarely exceeded 2.3%. In 1973, Europeans worked 102 hours for every 100 worked by an American. By 2004 they worked just 82 hours for every 100 American ones.

It was during this general slowdown that Europe entered the convenient fiction phase.

There was, for starters, the convenient fiction that if you just added up the GDP of the European Union's expanding list of member states, you had an economy whose size exceeded that of the United States. Didn't this make "Europe" an economic superpower? There was the convenient fiction that Europe didn't need robust military capabilities when it could exert global influence through diplomacy and soft power. There was the convenient fiction that Europeans shared identical values and could thus be subject to uniform regulations governing crime and punishment. There was the convenient fiction that Continentals weren't lagging in productivity but were simply making an enlightened choice of leisure over labor.

And there was, finally, the whopping fiction that Europe had its own "model," distinct and superior to the American one, that immunized it from broader international currents: globalization, Islamism, demography. Europeans love their holidays and thought they were entitled to a long holiday from history as well.

All this did wonders, for a while, to mask European failures and puff up European pride. But there is always a danger in substituting grandiosity for achievement, mistaking pronouncements for facts, or, more generally, believing in your own nonsense.

Here is where Europe slipped from convenient fiction to outright fraud.

There was the fraud of Greece's entry into the euro, a double-edged affair since Athens lied about its budgetary figures and Brussels chose to accept the lie. There was the fraud of the so-called Maastricht criteria—the fiscal rules that were supposed to govern the euro only to be quickly flouted by France and Germany and then junked altogether in the current crisis. There was the fraud of the European Constitution, overwhelmingly rejected wherever a vote on it was permitted, only to be revised and imposed by parliamentary fiat.

What is now happening in Europe isn't so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one. The shock is that it's a shock. Greece was never going to be bailed out and will, sooner or later, default. The banks holding Greek debt will, sooner or later, be recapitalized. The recapitalization will be borne by German taxpayers, and it will bring them—sooner rather than later—to the outer limit of their forbearance. The Chinese will not ride to the rescue: They know not to throw good money after bad.

And then Italy will go Greek. Europe's crisis will lap on U.S. shores, and America's economic woes will lap on Europe's—a two-way tsunami.

America will survive this because America is a state. But as Bismarck once remarked, "Whoever speaks of Europe is wrong. Europe is a geographical expression." The "fiscal union" that's being mooted will never come to pass: German voters won't stand for it, and neither will any other country that wants to retain fiscal independence—which is to say, the core attribute of democratic sovereignty.

What comes next is the explosion of the European project. Given what European leaders have made of that project over the past 30-odd years, it's not an altogether bad thing. But it will come at a massive cost. The riots of Athens will become those of Milan, Madrid and Marseilles. Parties of the fringe will gain greater sway. Border checkpoints will return. Currencies will be resurrected, then devalued. Countries will choose decay over reform. It's a long, likely parade of horribles.

Where is the Europe of Ismay, Erhard and Monnet? It's there in memory, if anyone cares to recover it. Give it another 50 years, and maybe someone will.

The wisdom of the governing elites

Greece And The Crisis Of The Governing Elite

By C. Kadlec

“Everyone wants to live at the expense of the state.  They forget that the state lives at the expense of everyone.” — Frederic Bastiat

Europe’s governing elite – and those who believe in the superiority of government in the management of the economy – is in crisis.   Their visions of a more just society and economic security are being shredded by the stark reality that the governments they run are running out of money.

The looming Greek default and the nascent financial crisis in Europe is a symptom of this crisis of the governing elite.  At risk is the background consensus that supported the expansion of government to the point that public spending now accounts for roughly half of all economic activity among the 17 nations in the eurozone.  A destruction of that consensus would imply a massive loss of power by the elites who for decades have declared that given the power, they could produce an economy with less risk and more fairness than free market capitalism.

The pending failure of the governing elites to deliver on their most basic promises is setting off alarm bells in Washington. Treasury Secretary Timothy Geithner, former Treasury Secretary Larry Summers, and World Bank President Robert Zoellick have admonished the Europeans to move forcefully to resolve the European debt crisis lest it threaten the already meager U.S. economic recovery.  Unsaid is the concern that Europe’s failure will tarnish America’s governing elite, providing additional energy to the Tea Party’s call for restoring limited, constitutional government in the U.S.

There is no one to blame for Europe’s debt crisis other than its political class. They are the ones who borrowed extravagantly with the pretense that good intentions trumped fiscal responsibility, who set the rules that require banks to hold zero capital against government debt, and who permitted the European Central Bank to buy billions of euros of that debt from banks.  That has endangering the euro itself, which has fallen 20% against gold since the beginning of the year, signaling that higher inflation and increased economic turmoil in the euro-zone may lie ahead.

In the absence of the next, 8 billion euro loan from its European partners and the IMF, the Greek government will soon simply run out of money to pay public sector wages and pensions. That reality last week triggered a run by dollar depositors on European banks with exposure to government debt prompting the U.S. Federal Reserve to make emergency loans to the European Central bank so it, in turn, could provide dollar liquidity to its member banks.

There appears to be no way out. The economic policies imposed on Greece by the governing elite have made things worse.  The combination of spending cuts and massive tax increases slammed the economy, which shrank 7% in 2010, and 5% in the year ending June 2011.  As a consequence, tax revenues last year fell by 2 billion euros, or 8.3%, instead of rising 3.3 billion euros to 27 billion euros. Social spending rose as unemployment jumped from around 9% to 16%, and the government’s debt became an even greater percentage of a now smaller GDP.

Italy, Portugal and Spain are headed down the same destructive path. Last week, Italy increased the value added tax a full percentage point to 21%. Portugal has increased its value added tax by 1 percentage point across all categories, while increasing the top marginal tax rate by 1.5% on top earners and by 2.5% on corporations. Spain just announced it would reinstate a wealth tax on approximately 160,000 taxpayers with more than 700,000 euros ($972,000) in declared assets in hopes of raising a little over a billion euros in revenue.

Awakened to Bastiat’s warning by these tax hikes, individuals are rioting in Athens and Rome, diving into the underground economy thereby starving the state of revenue, and rebelling at the polls.  All of this is especially galling to Germans, who can’t help but notice the fundamental unfairness of the welfare state writ large.  In reaction to German Chancellor Angela Merkel‘s support of the Greek bailouts, which effectively punish German taxpayers in favor of irresponsible governments in southern Europe, her party has been handed significant electoral defeats in 6 out of 7 state elections in the past year.

Finnish voters have prompted their government to require collateral in exchange for any additional loans to Greece, further complicating efforts to cobble together a package in time.

The governing class’s response is a call for yet more power through a centralized European government, or institutions that would be able to exert direct control over the budgets of the zone’s member states. Treasury Secretary Timothy Geithner’s advice is for the Europeans to borrow more money by permitting the existing European bailout fund to use leverage to increase its own lending capabilities.

Others call for Greece to withdraw from the euro so it can devalue its currency.  But a plummeting Greek currency would rapidly reduce the government’s revenue in terms of the euro, guaranteeing a massive default on its outstanding euro denominated debts.

All of these proposals are desperate measures designed to cover up the fundamental failure of the underlying political economic model, which assumes that those who govern can provide free goods and services to the population at large, lavish pensions for government employees, impose rigidities onto labor markets and otherwise achieve social goals through their management of the economy.  What we are now seeing is that good intentions are and never were sufficient.  That so-called “rights” to jobs, health care, housing and pensions require real resources that cannot be conjured out of nothing by a good speech or a government decree, but must be taken from those who produce in the private sector.

Yet, the taxes and other exactions used to take those resources have reduced economic activity and income so much that the private sector can no longer fund current government outlays.  Now that investors are less willing to lend money, a rapid, jarring adjustment in which expenditures are brought down into alignment with receipts seems unavoidable.

The promises broken during this adjustment will betray the fundamental belief by many in the wisdom of the governing elites and the benevolence of government. The result may be a new background consensus that recognizes the limits of what governments can do, and the cost of empowering them to do more.  Or, supported by mobs in the streets, the governing elite may declare a state of emergency and seize businesses and property, consuming capital in the name of the greater good.  Either way, the European experience is sure to influence the U.S. political debate swirling around 2012 presidential election.

Definitely Evil and Stupid

Wind farm paid £1.2 million to produce no electricity

 

A wind farm has been paid £1.2 million not to produce electricity for eight-and-a-half hours.

By Edward Malnick and Robert Mendick

The amount is ten times greater than the wind farm's owners would have received had they actually generated any electricity.

The disclosure exposes the bizarre workings of Britain's electricity supply, prompting calls last night for an official investigation into the payments system.

The £1.2 million will go to a Norwegian company which owns 60 turbines in the Scottish Borders.

The National Grid asked the company, Fred Olsen Renewables, to shut down its Crystal Rig II wind farm last Saturday for a little over eight hours amid fears the electricity network would become overloaded.

The problem was caused by high winds buffeting the country in the wake of Hurricane Katia.

In total, 11 wind farms were closed down last week, receiving a total of £2.6 million. The money - detailed in calculations provided by National Grid - will be added on to household bills and paid for by consumers.

As Britain pushes for more and more wind farms, critics claim the size of the 'constraint payments' will grow accordingly - raising serious concern about the long-term suitability of wind power to meet Britain's energy needs.

Crystal Rig received by far the largest single payment because the National Grid runs an auction, inviting energy companies to say how much they want in compensation for switching off.

Crystal Rig's owners asked for £999 per megawatt hour of energy they would have produced had they been switched on. Incredibly, the figure Crystal Rig had bid was accepted by the National Grid.

Had the turbines remained on, Crystal Rig's owners would have received the going rate of about £100 per megawatt hour instead. Half of that is in the form of a generous consumer subsidy.

Tim Yeo, chairman of the Energy and Climate Change Select Committee, called for an urgent inquiry into the prices paid to the wind farms.

"The very principle of paying wind farm owners for not producing is one that is offensive to consumers," said Mr Yeo, "It looks like a new version of the Common Agricultural Policy where people are paid not to produce things.

"It looks on the face of it like an extraordinary overpayment by National Grid, for which an urgent explanation is required. This requires an immediate investigation by the energy watchdog Ofgem."

The National Grid runs a 'balancing mechanism' to ensure electricity supply meets national demand. Electricity cannot be stored.

In a further twist, traditional coal- and gas-fired power stations were also running on reduced power last week - but energy companies actually paid the National Grid to do so. That is because the companies made savings by not having to burn as much fossil fuel.

Dr John Constable, director of the Renewable Energy Foundation, an energy think tank which spotted the size of the payment at Crystal Rig, said: "This system appears to be unreasonable, is certainly not in the consumer interest, and requires the urgent attention of the regulator, Ofgem.

"These very high constraint payments show that the scale and pace of government's subsidy-driven push for wind has outstripped National Grid's ability to integrate this uncontrollable source of energy at tolerable cost. A pause for thought would seem to be wise."

The National Grid spokesman said: "The payments are based on what the operators bid and how many megawatt hours are constrained off."

The spokesman said they took the cheapest bids first before being forced to accept the Crystal Rig bid in order "to operate the network safely".

A spokesman for Fred Olsen Renewables said: "Crystal Rig is one of the largest wind farms in the UK so it is one of the last farms we intend to get switched off, so the price is set that high.

"There are about four or five developers who do the same thing, set it at the £999 level to try and keep it up as long as possible. Crystal was one of the last to be shut off."

An Ofgem spokesman said: "We routinely monitor the market and over the past few days we have been looking carefully at the bidding behaviour of generators behind constraints, including wind generators.

RenewableUK, the industry trade body, said wind farms were not the only sources of energy to be occasionally paid to be shut down.

A spokesman said: "Wind turbines are generating a great deal of clean, green energy – the problem is that the National Grid simply doesn't have the capacity to take it all in.

"This shows that we urgently need the National Grid to be upgraded to cope with the extra electricity that the wind industry is generating with increasing efficiency."

Evil or Stupid ?

"Missing" global heat may hide in deep oceans

By Reuters

The mystery of Earth's missing heat may have been solved: it could lurk deep in oceans, temporarily masking the climate-warming effects of greenhouse gas emissions, researchers reported on Sunday.

Climate scientists have long wondered where this so-called missing heat was going, especially over the last decade, when greenhouse emissions kept increasing but world air temperatures did not rise correspondingly.

The build-up of energy and heat in Earth's system is important to track because of its bearing on current weather and future climate.

The temperatures were still high -- the decade between 2000 and 2010 was Earth's warmest in more than a century -- but the single-year mark for warmest global temperature was stuck at 1998, until 2010 matched it.

The world temperature should have risen more than it did, scientists at the National Center for Atmospheric Research reckoned.

They knew greenhouse gas emissions were rising during the decade and satellites showed there was a growing gap between how much sunlight was coming in and how much radiation was going out. Some heat was coming to Earth but not leaving, and yet temperatures were not going up as much as projected.

So where did the missing heat go?

Computer simulations suggest most of it was trapped in layers of oceans deeper than 1,000 feet during periods like the last decade when air temperatures failed to warm as much as they might have.

This could happen for years at a time, and it could happen periodically this century, even as the overall warming trend continues, the researchers reported in the journal Nature Climate Change.

"This study suggests the missing energy has indeed been buried in the ocean," NCAR's Kevin Trenberth, a co-author of the study, said in a statement. "The heat has not disappeared and so it cannot be ignored. It must have consequences."

Trenberth and the other researchers ran five computer simulations of global temperatures, taking into account the interactions between the atmosphere, land, oceans and sea ice, and basing the simulations on projected human-generated greenhouse gas emissions.

These simulations all indicated global temperature would rise several degrees this century. But all of them also showed periods when temperatures would stabilize before rising. During these periods, the extra heat moved into deep ocean water due to changes in ocean circulation, the scientists said.