The endgame is fast approaching.

Infinite Stupidity

By Detlev Schlichter 

“The unlimited resources” of the European Central Bank (ECB) are quickly becoming the new magic mantra in political commentary and financial market analysis, now that the bigger euro-dominos are beginning to wobble, and everybody realizes that nobody has the firepower to bail out Italy or to “recapitalize” (i.e., bail out again) all the banks that lent to the country. So the chorus that demands that the printing press finally be put to good use is getting louder by the day.

Robert Preston, the BBC economics expert, last week claimed that the solution now lies with the ECB, and he spoke confidently of the ECB’s “unlimited resources.” Yesterday, Vince Cable demanded “unlimited powers” for the central bank. He also shamelessly regurgitated the well-worn politician’s excuse for Europe’s problems, namely, that these countries are under “speculative attack.” The advocates of large-scale ECB intervention now include many pundits and commentators, plus, a sizable group of financial market economists and strategists, whom decency obliges me to leave nameless. “It is important to keep the ECB engaged,” as one economist put it, “as only the ECB has unlimited resources.”

Such proclamations immediately invoke Albert Einstein’s famous dictum: “Only two things are infinite, the universe and human stupidity, and I am not sure about the universe.”

Everything Is Going According to Script.

None of what is going on surprises me. It is perfectly in line with what I predicted in my book. However, I am ready to admit that I am a bit baffled by the quick willingness by so many people to embrace what is, ultimately, a sure road to complete economic destruction. In Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, I explain why systems of elastic money are always suboptimal, unstable and, ultimately, unsustainable. A monetary system like ours must, over time, accumulate dislocations and imbalances that will, finally, become so big that their liquidation through market forces is deemed politically unacceptable. Then, out of desperation, an unwinnable war against economic reality will be fought by means of the printing press. Ever more money will be created ever faster in a futile attempt to outrun the market’s urge to liquidate.

In Chapter 10 of my book, I describe the two final stages of a paper money system as monetization of debt and inflationary meltdown. We are now firmly in the monetization of debt phase. This process will accelerate in coming months and quarters. Not only in the eurozone, but also in the United States and in the U.K. All of these central banks will continue to expand their balance sheets aggressively and use their ability to print money — without limit — to support banks, governments and a wide range of asset classes.

Bernanke (Fed) and Draghi (ECB) pointed out, in their respective press conferences, recently that monetary policy is not a panacea for all economic ills. It doesn’t matter. Policy has no other tools left to postpone the inevitable or to make the status quo appear sustainable again. By the way, it is entirely immaterial what Bernanke or Draghi thinks and says. Their press conferences keep Wall Street and City of London economists busy. But these gentlemen are quickly becoming mere extras in a bigger political game, in which desperation rules, and in which they will simply perform their roles of fiat money producers.

When do we enter the final stage of inflationary meltdown? Difficult to say. It all depends on when the public loses faith in a form of paper money that is being printed in evermore bizarre quantities, only to keep states and banks alive and to project some resemblance of normalcy to the masses.

I do not disagree with the mainstream economists on whether paper money central banks can create, essentially, unlimited amounts of money. Of course, they can. That is precisely why gold and silver as monetary assets were replaced with entirely flexible state money under central bank control in the first place. And I do not disagree that we will soon see more debt monetization by the ECB and other central banks around the world.

What is sheer lunacy, however, is to advocate such a policy as a solution, or part of a solution, to our problems. This is where I draw the line. It is simply beyond me how people who call themselves economic experts, and who must have at least a basic understanding of monetary theory and some knowledge of economic history, can seriously advocate debt monetization as a sensible policy tool.

Dr. Strangelove — Or How I Learned to Love the Printing Press

Our financial market economists now cling to anything that promises to buy them time and some stability, even if logic tells them that what they are advocating is exactly the opposite of what should be done. They are not unlike the gambler who knows he should quit, but out of sheer desperation, is rolling the dice one more time.

Of course, there are always those who are imbued in Keynesian economics and other sorts of interventionist myth to such a degree that they honestly think that there is no problem that cannot be fixed with government stimulus. If the medication hasn’t worked, just keep increasing the dose. Paul Krugman (Nobel laureate) and Christina Romer come to mind. But I don’t quite believe that all economists are in this camp.

Whatever their reasons and motivations, it is quite clear that all these economists are now mouthpieces for the establishment. They are all defenders of the status quo, or of what has passed for the status quo for the past 30 years.

Government bonds should again be considered “risk free” assets, and banks should again be considered “too big to fail” and “too important to fail.” This is so the symbiotic relationship between states and banks that fiat money system fosters, and that has been so mutually beneficial to the political class and the banks, can finally be restored. It is a sad spectacle to see people who call themselves economists — and often, even free-market economists — come up with evermore extreme recommendations of how we can fund Big Government.

To the broader public and the economy as a whole, the collapse of this system would be painful first, but ultimately, hugely advantageous. It would allow a renaissance of real capitalism, rather than the continuation of this system of monetary interventionism that has allowed the state to assume control over such vast resources and the financial sector to enjoy uninterrupted fiat-money-fuelled growth for decades.

What good do these economists expect to come out of ECB debt monetization? Do they really believe that once the ECB has committed itself to buying hundreds of billions worth of Italian government bonds, in order to manipulate the yield on these bonds — against market forces — down to what the political class deems sustainable (let’s say 5%), that then Italian politicians will reform public finances in the country? That they will quickly bring down deficits and the debt load to sustainable levels, at which point, Italy can borrow from the market again, the ECB can safely sell its bonds and reduce its balance sheet and everybody lives happily ever after? Does anybody seriously suggest that this scenario is likely, probable or even possible?

The fact is that none of these governments can be trusted to bring their finances under control, as long as they have access to cheap credit, i.e., to funds at “sustainable” interest rates. Germany forced through the Stability and Growth Pact at the start of EMU (does anybody remember Theo Waigel?) that should have limited debt-to-GDP ratios to 60%, only to violate it herself. Germany’s ratio is now, officially, at 83%. The government is already on the hook for another €211 billion under its EFSF commitments, which are now all but guaranteed to come due, as the bailout fund is supposed to cover first losses on bonds in order to maximize its “firepower,” meaning Germany is already set for more than 90% of debt to GDP. And that is supposed to be Europe’s “stability anchor.”

All rules and guidelines that were designed to guarantee the fiscal and monetary stability of EMU and were implemented at its start have, by now, been broken — without exception. Do you think that this will change once the politicians have obtained the unlimited support of the printing press?

“Quantitative easing” in Japan, the United States and the United Kingdom goes hand in hand with growing debt, not debt reduction. Providing a lender of last resort and easy money and cheap credit to governments does not lead to deleveraging, but to the opposite.

Only default and cutting off a government from additional borrowing will reform the government. That is why I say: Embrace default!

The Future

When the ECB will have implemented its backstop for Italian government bonds, it will end up buying vast amounts of these securities at above-market prices. Draining equal amounts of liquidity from somewhere else in the system, in order to minimize the inflationary impact, will be illusionary. Inflation will creep higher. Concerns about sovereign solvency are, of course, not restricted to Italy. These concerns, plus rising inflation, will put upward pressure on the yields of other bond markets, in particular, Spanish and French bonds. The ECB will have to expand its support program in order to stabilize these bond markets as well. Why should unlimited ECB support be limited to Italy? What is good in the case of Italy must be equally good for Spain and France!

The notion that the ECB could ever change course now and tighten policy, in order to fight rising inflation pressure, will appear increasingly fantastical. Market participants and the wider public that uses the euro will simply not believe it. Inflation expectations will rise rapidly. Money will become a hot potato. When money demand falls, inflation will shoot up quickly, which would require the central bank to establish markedly positive real interest rates in order to restore confidence in paper money. But this would mean allowing several governments that are now reliant on cheap central bank funding to go bankrupt. This will not be allowed to happen, which will undermine confidence in paper money further. We will have reached the inflationary meltdown phase.

All complete paper money systems in history were established to fund the state. Our system is no exception, as becomes increasingly clear. All paper money systems in history failed. Ours will be no exception, either. Our system is the most ambitious. We had a global system of unrestricted fiat money production for 40 years. 

Putting India back to the Stone Age

India’s “Democratic Capitalism”

By Jeff Harding

I think I’ve figured out why India has problems and why economic growth is stagnating. I’ve been getting material from the World Economic Forum which is a kind of leftist kumbayah think tank that sponsors a lot of forums dealing with emerging economies. Their latest forum is on India, India Economic Summit 2011. 

Here are some of the highlights of the Summit. I think you will find it astonishing:

India Can Become a Model for a New “Democratic Capitalism”

·         India should deepen its democracy and strive to create a new model of “democratic capitalism”

·         While India should focus on pushing reforms, the government should remember that growth is critical

·         Technology can be used to enhance talent development, financial inclusion, transparency and good governance

Mumbai, India, 14 November 2011 – As India strives to achieve the vision of sustainable and equitable growth, it must deepen its democracy, Arun Maira, a member of India’s Planning Commission, the Cabinet-level agency that drafts the country’s Five-Year Plans, told participants in the closing session of the World Economic Forum’s India Economic Summit 2011. “We must have much faster inclusion along with growth,” Maira said. “We celebrate India as a democracy. What Indians are saying is that we want to participate in the decisions that affect our lives. We want to have a more democratic market and democratic capitalism – business by the people, of the people and for the people.” Noting the demonstrations around the world against what protesters regard as the unfairness of capitalism, Maira concluded: “India needs much more democratic capitalism. India could be an emerging model of what can be done.”

In China, every 1% growth in GDP has reduced poverty by 0.8%, explained Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila, whereas in India 1% growth has reduced poverty by only 0.3%. “This is because our growth driver has only been services, not manufacturing,” said Nag, adding that India’s manufacturing needs to shift from a capital-intensive to a labour-intensive model. 

Turning the policy into reality will need investment in infrastructure, good governance and skills development. “If we can’t move a box from A to B, nothing will happen,” cautioned Rudolf W. Hug, Chairman of the Board of Directors, Panalpina World Transport Holding, Switzerland. Hug complained that India’s logistics infrastructure is “overstretched and stalled by high bureaucracy”. A truck taking goods from Gurgaon to Mumbai has to pass through 36 checkpoints and takes up to 10 days to arrive. While 57% of goods in India are transported by road – the most inefficient, expensive and emissions-intensive mode of transport – the figure in China is 22%.

This is all pretty sad stuff. Any country that is still drafting five-year plans is doomed. When you hear the words “democratic capitalism” it means that a bunch of socialists want to gain more control over the economy and dictate policy from the top down. When they say they “want to participate in the decisions that affect our lives” they mean that the government should control the economy. Unfortunately India tried that for 50 years and was mired in poverty. The modest liberalization of the Soviet central planning economic model enacted by the Nehru family (Congress Party) has finally allowed India to experience some of the power of capitalism to raise the standard of living.

The call to shift from capital intensive models to labor intensive models would put India back to to Stone Age. For millennia it was the lack of capital in India and China, as well as all other poor countries, that held back economic growth and social welfare. The very suggestion is shocking and demonstrates an appalling lack of economic understanding.

With the remnants of the socialist bureaucracy still politically very strong, India’s economic “miracle” could be jeopardized by “democratizing” capitalism.

Spontaneous Order behind Bars

State of Incarceration

by James E. Miller

A case study from David Skarbek of Duke University that analyzes how the Mexican Mafia developed its own form of governance within the Los Angeles county prison system recently appeared in the American Political Science Review. The following is a portion of the study's abstract:

How can people who lack access to effective government institutions establish property rights and facilitate exchange? The illegal narcotics trade in Los Angeles has flourished despite its inability to rely on state-based formal institutions of governance. An alternative system of governance has emerged from an unexpected source — behind bars. The Mexican Mafia prison gang can extort drug dealers on the street because they wield substantial control over inmates in the county jail system and because drug dealers anticipate future incarceration. The gang's ability to extract resources creates incentives for them to provide governance institutions that mitigate market failures among Hispanic drug-dealing street gangs, including enforcing deals, protecting property rights, and adjudicating disputes.

The formation of "spontaneous order" often comes as a surprise to those who see the state as the end-all to civilization. Spontaneous order was defined by Friedrich Hayek as

A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error.

Through the past 50 years, the Mexican Mafia has developed its own system of property rights, protection, and order within the Los Angeles prison system. This phenomenon began in 1956 as incarcerated Hispanics joined together for the sake of protection. Since the government, which initially locked up the inmates, failed to enforce adequate property rights, an internal system of government emerged as a response. From this establishment of basic protections arose a governing arrangement to both extract wealth over a given geographical area and provide law and order. The Mexican Mafia has essentially created a state within the confines of the United States and the state of California.

Like many states, some have risen to positions of more influence despite the egalitarian model of members having "only one official rank … one vote, and no one can give another member an order." No state would be complete without taxes and the Mexican Mafia doesn't disappoint. By utilizing a form of extortion by taxing profits from drug dealers with the threat of violence upon incarceration, the Mexican Mafia plays the role of enforcer even behind bars. This tax typically runs in the range of 10–30 percent of revenues. In exchange for tax revenues comes protection from fellow inmates if one is unlucky enough to be locked up. In order for the Mexican Mafia to maximize tax revenue from drug sales, this practice strives to mitigate actual violence.

A system of dispute arbitration has also developed to ensure peace. Skarbek points to an example in February of 1994 where representatives of the Mexican Mafia and the representatives of two street gangs known as 18th Street Gang and MS-13 met to resolve animosity stemming from one gang member killing another. After arbitration, peace was reached and a gang war averted for the sake of maintaining cash flow from drug dealing. This process was repeated to settle future conflicts. Drive-by shootings are even regulated by the Mexican Mafia as unauthorized shootings are punishable by death on incarceration.

Though it is based on the threat of coercion, the system of governance by which the Mexican Mafia engages in is quite entrepreneurial. In Man, Economy, and State, Murray Rothbard describes the actions of an entrepreneur in this way:

In his quest for profits he saw that certain factors were underpriced vis-à-vis their potential value products. By recognizing the discrepancy and doing something about it, he shifted factors of production (obviously nonspecific factors) from other productive processes to this one.

The Mexican Mafia engages in such a process by vetting each target's potential for incarceration. Those who have a good chance of being arrested and subsequently locked up are pressured into paying taxes. The same goes to those whose friends or family have a high probability of being jailed. Say what you will about this type of extortion, but the entrepreneurial spirit pops up in even the most unlikely of places.

So what should Austro-libertarians, who recognize the importance of property rights but are wary of coercion, take away from this phenomenon of emergent order? After all, the Mexican Mafia has established a semimonopoly of violence and coercion over a geographical area, meaning it has become its own state even within the jurisdiction of the United States and California government.

First, the demand for basic protection and property rights amidst the failure of public authorities provided the incentive and profit motive for inmates to form the Mexican Mafia and its practice of taxation. Had adequate protection been offered, such an underground system of law and order might not have emerged.

This takes us to the next point: the Mexican Mafia's taxation and protective model was indeed the result of spontaneous order. As Hayek outlined, the original members of the Mexican Mafia established this system to better their own interests.

Where Hayek's insight doesn't apply is the use of coercion by the Mexican Mafia. While emerging order as the result of purposeful action is something to be celebrated when it results in peaceful, voluntary cooperation, the violent tactics employed by the Mexican Mafia are a sight to abhor. As the nonaggression axiom — the foundation for Austro-libertarianism — shows, unjustified aggression toward one's property is morally reprehensible.

And this leads to the final point. The Mexican Mafia's system of governance can be attributed to the state's prohibition of narcotics. If the state regarded property rights as sacrosanct, there would be no laws against drugs and therefore far fewer people in prison. Without the threat of incarceration and subsequent assault, the Mexican Mafia would lose much of its ability to tax.

Like the system of private law and property that developed during the settlement of the American West, the Mexican Mafia's creation of governance is demonstrative of man's ability to develop protective services among the failures of existing governments. In the case of the "not-so-wild" American West, property protection and order were developed to ease the living conditions of settlers in the absence of any governmental structure. In the Mexican Mafia's case, protection and arbitration were not only responses to a lapse of government enforcement but also mechanisms for violent exploitation. The two instances, though similar as emerging orders, yielded two different outcomes: one that decreased the amount of violence through volunteerism and one that utilized state-like force to maintain control.

Though it's a shame the Mexican Mafia's system of law and order devolved into coercion, Skarbek's case study is an important tool to analyze an instance of spontaneous order, as mankind, possessing infinite desire, continues to transform and adapt to changing circumstances.

Now if only our elected leaders appeared as the tattoo-laden thugs whose behavior they inspire, perhaps the public would be more reluctant to endorse their wielding of coercive power and authority. After all, skin-deep appearances are the only thing separating our friend pictured above from those who legislate in the confines of Congress, state capital buildings, or city hall.

Dire predictions for USA and Europe

Must View Video on the Coming Inflation

By R. Wenzel

GoldMoney founder James Turk interviews Adam Fergusson, a historian who has studied in detail the hyperinflation of the Wiemar Republic, in the video clip below. Fergusson discusses the parallels and differences between the Weimar inflation and the situation in the US and Europe today.

Given that we appear to be headed for very strong inflation in the United State, I try to learn from those who have experienced hyper-inflation, or studied it, so that I can gain some clues and get an edge should such a hyper-inflation hit. That is what this clip is about, Fergusson discussing the Wiemar inflation and telling us who the winners were, who were the losers and why. I consider this video must viewing.

Quotes of the day

Happy Birthday P.J. O'Rourke

By Mark Perry

It's P.J. O'Rourke's 64th birthday today, here are some quotes:

1. Giving money and power to government is like giving whiskey and car keys to teenage boys. 2. If you think health care is expensive now, just wait till you see what it costs when it’s free. 3. The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it. 4. The mystery of government is not how Washington works but how to make it stop. 5. The Clinton administration launched an attack on people in Texas because those people were religious nuts with guns. Hell, this country was founded by religious nuts with guns. Who does Bill Clinton think stepped ashore on Plymouth Rock? 6. Social Security is a government program with a constituency made up of the old, the near old and those who hope or fear to grow old. After 215 years of trying, we have finally discovered a special interest that includes 100 percent of the population. Now we can vote ourselves rich. 7. When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. 8. No drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. 9. If government were a product, selling it would be illegal. 10. Feeling good about government is like looking on the bright side of any catastrophe. When you quit looking on the bright side, the catastrophe is still there. 11. America wasn't founded so that we could all be better. America was founded so we could all be anything we damned well pleased. 12. Bureaucrats want bigger bureaus. Special interests are interested in whatever's special to them. These two groups bring great pressure to bear upon politicians who have another agenda yet: to cater to the temporary whims and fads of the public and the press. 13. People who are wise, good, smart, skillful, or hardworking don't need politics, they have jobs. 14. If we're going to improve the environment, the first thing we should do is duck the government. The second thing we should do is quit being moral. Screw the rights of nature. Nature will have rights as soon as it gets duties. The minute we see birds, trees, bugs, and squirrels picking up litter, giving money to charity, and keeping an eye on our kids at the park, we'll let them vote. 15. The U.S. Constitution is less than a quarter the length of the owner's manual for a 1998 Toyota Camry, and yet it has managed to keep 300 million of the world's most unruly, passionate and energetic people safe, prosperous and free. 16. When you look at the Republicans you see the scum off the top of business. When you look at the Democrats you see the scum off the top of politics. Personally, I prefer business. A businessman will steal from you directly instead of getting the IRS to do it for him. And when Republicans ruin the environment, destroy the supply of affordable housing, and wreck the industrial infrastructure, at least they make a buck off it. The Democrats just do these things for fun.

Warriors for truth, justice, and the American way of debt

Deficit-Reduction Fever

 

President Obama launches the war on tchotchkes.

By Mark Steyn

Have you been following this so-called Supercommittee? They’re the new superhero group of Superfriends from the Supercongress who are going to save America from plummeting over the cliff and into the multi-trillion-dollar abyss. There’s Spender Woman (Patty Murray), Incumbent Boy (Max Baucus), Kept Man (John Kerry), and many other warriors for truth, justice, and the American way of debt. The Supercommittee is supposed to report back by the day before Thanksgiving on how to carve out $1.2 trillion dollars of deficit reduction and thereby save the republic.

I had cynically assumed that the Superfriends would address America’s imminent debt catastrophe with some radical reform — such as, say, slowing the increase in spending by raising the age for lowering the age of Medicare eligibility from 47 to 49 by the year 2137, after which triumph we could all go back to sleep until total societal collapse.

But I underestimated the genius of the Superfriends’ Supercommittee. It turns out that a committee created to reduce the deficit is instead going to increase it. As The Hill reported:

Democrats on the supercommittee have proposed that the savings from the end of the wars in Iraq and Afghanistan be used to pay for a new stimulus package, according to a summary of the $2.3 trillion plan obtained by The Hill.

Do you follow that? Let the Congressional Budget Office explain it to you:

The budget savings from ending the wars are estimated to total around $1 trillion over a decade, according to an estimate in July from the Congressional Budget Office.

Let us note in passing that, according to the official CBO estimates, a whole decade’s worth of war in both Iraq and Afghanistan adds up to little more than Obama’s 2009 stimulus bill. But, aside from that, in what sense are these “savings”? The Iraq War is ended — or, at any rate, “ended,” at least as far as U.S. participation in it is concerned. How then can congressional accountants claim to be able to measure “savings” in 2021 from a war that ended a decade earlier? And why stop there? Why not estimate around $2 trillion in savings by 2031? After all, that would free up even more money for a bigger stimulus package, wouldn’t it? And it wouldn’t cost us anything because it would all be “savings.”

Come to think of it, didn’t the Second World War end in 1945? Could we have the CBO score the estimated two-thirds of a century of “budget savings” we’ve saved since ending that war? We could use the money to fund free master’s degrees in Complacency and Self-Esteem Studies for everyone, and that would totally stimulate the economy. The Spanish–American War ended 103 years ago, so imagine how much cash has already piled up! Like they say at Publishers Clearing House, you may already have won!

Meanwhile, back at the Oval Office, the president is asking for your votes for the 2011 SAVE Award. To demonstrate his commitment to fiscal discipline, he set up a competition whereby federal employees can propose ways to cut government waste. A panel of experts (John Kerry, Paula Abdul, etc.) then weigh the merits, and the four finalists go up on the White House website to be voted on by members of the public: It’s like Dancing with the Czars. Last year, Marjorie Cook of Michigan, a food inspector with the Department of Agriculture, noted that every year USDA inspectors ship 125,000 food samples to its analysis labs by “next day” express delivery, and that a day or two later the labs ship the empty containers back to the inspectors using the very same “next day” service. Marjorie suggested that, as the containers are empty, they can’t be all that urgent, and should be mailed back at regular old ground delivery rates.

But this reform was way too radical, so it didn’t win. And happily, even as we speak, mail couriers are rushing empty containers back and forth across the USDA-inspected fruited plain at your expense. This year’s SAVE Award nominees include Faith Stanfield of Toledo, a “General Technical Expert” with the Social Security Administration. As someone who’s technically expert in a very general sense, she sees the big picture. It’s on the front of the SSA’s glossy magazine. Did you know Social Security has its own glossy magazine? It’s called Oasis and it’s sent out to 88,000 SSA employees plus about a thousand government retirees. It’s like Vogue or Vanity Fair, but without the perfume and fashion ads, because who needs Givenchy and Yves St. Laurent to fund your mag when you’ve got the U.S. taxpayer? It’s the magazine that says you’re cool, you’re now, you’re living the SSA-bureaucrat lifestyle. But Faith thinks they should scrap the glossy pages and only publish it online.

Ooh, I dunno. Sounds a bit extreme to me. Could result in hundreds of Social Security lifestyle editors being laid off and reduced to living on Social Security.

Anyway, the winner of the SAVE Award gets to meet with the president to discuss his or her proposal. The proposal then gets submitted to a committee for further discussion on whether to set up a committee to discuss discussing it further. But, unlike the Superfriends’ Supercommittee, the lunch expenses are cheaper.

What with the proposal to use the nearly two centuries of budget savings from the end of the War of 1812 to fund the construction of high-speed monorails and the plan to turn the Social Security Administration’s in-house glossy into an in-house virtual-glossy, it’s no surprise that the president himself has got the deficit-reduction fever. On Wednesday, he signed an executive order “Promoting Efficient Spending” — and ending government waste. Just like that! According to Section Seven:

Agencies should limit the purchase of promotional items (e.g., plaques, clothing, and commemorative items), in particular where they are not cost-effective.

Sounds like someone’s seen one amusing Janet Napolitano bobblehead too many at the DHS holiday party. About to stick in one of those giant commemorative plaques on the side of the road saying “These next three miles of single-lane scarified pavement brought to you by the American Recovery & Reinvestment Act”? Don’t even think about it.

Fresh from launching the war on tchotchkes, the administration then proposed a 15-cent tax on Christmas trees in order to fund a federal promotional campaign to promote the sale of Christmas trees. Possibly Commerce Department research showed that there’s a dramatic fall-off in the sale of “holiday trees” round about December 26 every year, and Obama figured a little stimulus surely couldn’t hurt. He was forced to rescind the proposal, presumably after an ACLU chum pointed out that settling the Bureau of Christmas Tree Promotion lawsuit would wipe out all the budget savings from the French and Indian Wars.

Meanwhile, as these ruthless austerity measures start to bite, the government of the United States continues to spend one-fifth of a billion dollars it doesn’t have every hour, every day, every week, including Thanksgiving, Christmas, and Ramadan.

And remember, folks, Rick Perry is the dummy because he wants to abolish so many government departments, he can’t keep track of them all. Keep it simple, Rick. Just stick to a campaign pledge to set up a supercommittee to report back on the possibility of using savings from mailing back empty specimen beakers by three-day ground service to fund Medicare. Then people will take you seriously.

Wishful thinking

Is Europe on the Verge of a Depression, or a Great Inflation?

The news from Europe, particularly from within the euro zone, seems all bad.

By SIMON JOHNSON

Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?

In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely.

According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (see Statistical Table 9), on Page 72). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent.

And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.

All of this is a serious possibility – and the lack of understanding at top European levels is deeply worrisome. No one has listened to the warnings of the last three years. Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.

But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason.

There is no way to have just a little debt restructuring for Italy. If Italian debt involves serious credit risk – an end to the view that government debt has “no credit risk” and is a “risk-free asset,” with zero probability of default – then all sovereign debt in Europe will need to be repriced downward.

Will Germany will remain a safe haven? Even that is far from clear. According to the I.M.F., gross government debt in Germany will be 82.6 percent of gross domestic product at the end of this year (Statistical Table 7 of the Fiscal Monitor, on Page 70; the net government debt number for 2011, in Statistical Table 8, on Page 71,is 57.2 percent). Reports of German fiscal prudence have been greatly exaggerated.

German policy makers and the German public will not do well in the event of a major sovereign-credit disaster. Credit would tighten across the board. German exports would plummet. The famed German social safety net would come under great pressure.

There is an alternative to a decade of difficult austerity. The Germans could agree to allow the European Central Bank to provide “liquidity” support across the board to the troubled governments.

Many things are wrong with this policy – and it is exactly the kind of moral hazard-reinforcing measure that brought us to the current overindebted moment. None of us should be happy that Europe – and the world – has reached this point.

Among others, the bankers who bet big on moral hazard – i.e., massive government-backed bailouts – are about to win again. Perhaps the Europeans will be tougher on executives, boards and shareholders than the Obama administration was in early 2009, but most likely all the truly rich and powerful will do very well.

But if the German choice is global calamity or, effectively, the printing of money, which will they choose?

The European Central Bank has established a great deal of credibility with regard to keeping inflation at or close to 2 percent. It could probably offer a great deal of additional support – through creating money – without immediately causing inflation. And if the bank is providing a complete backstop to Italian government debt, the panic phase would be over.

None of this is a lasting solution, of course. Europe needs a proper fiscal center – much as the United States needed in 1787 and got under Alexander Hamilton’s policies from 1789. When he became Treasury secretary, the United States was in default and the credit system was almost completely broken. Some centralized tax revenue and control over fiscal deficits are needed.

Silvio Berlusconi stood in the way of all this. Other European leaders would not trust him to tighten Italian fiscal policy. But if he is really gone from power – and we should believe that only when we see it – there is now time and space for Italy to stabilize and, with the right help, find its way back to growth.

Of course, if the European Central Bank provides unconditional financial support to Italian, or other, politicians who refuse to bring their deficits under control, we are heading for another Great Inflation.