The Arab Spring will end with no winners, only losers

Egypt, Syria and Turkey: The Lepers with the Fewest Fingers

By David P. Goldman

With the financial news focused on the unraveling of Europe’s state finances, the mounting economic catastrophe in the Muslim world has barely merited a mention. Egypt and Syria are about to go over a cliff, while Turkey, supposedly the poster boy for Islamic success, faces a nasty economic reversal — not a catastrophe of Egyptian proportions, but sufficient to destroy Tayyip Erdogan’s reputation as an economic wizard and make his fractious country hard to govern. The so-called Arab Spring will end with no winners, only losers.

Egypt: Two Months Import Coverage, and Falling

Egypt’s foreign exchange reserves stood at $36 billion before the February uprising. The central bank claims that it still has $22 billion on hand, but an analysis by the Royal Bank of Scotland reported by the Financial Times puts the true number at just $13 billion, or two months’ import coverage for a country that imports half its caloric consumption. The central bank has lost $23 billion of the $36 billion in the past ten months, the RBS analysis concludes. Adds the FT:

Even that’s not the end of the story. First half 2011 balance of payments figures showed a deficit of $10.3bn in a period when the central bank actually lost $17.6 bn in liquid and other foreign currency assets, says Agha.

So hard currency is going into capital flight and into the proverbial mattress. Egyptians are even hoarding Egyptian currency, with the level of currency in circulation growing dramatically this year at an annual rate of 25 per cent, compared with 13 per cent previously.

By early 2012, expect to find the members of the Supreme Command of the Armed Forces moving into just-purchased mansions in South Kensington or Cannes, and bare cupboards in state warehouses. The military’s only response to the crisis was to fire all the independent directors of Egypt’s central bank, as I reported last month. That implies that they want a free hand to embezzle. By the end of next year, I predict, Egypt will become Somalia-on-the-Nile.

Assad Goes for Broke, Literally

Syria, meanwhile, plans to raise government spending by 60 percent, mainly in the form of salary hikes for state workers, while tax revenues plunged by 40 percent, Bloomberg News reported today. By my back-of-the-envelope calculation, that would put Syria’s government deficit about a third of GDP. Syrians were hungry before the uprising against Assad, which began with a protest over food prices. The Assad regime is betting the Syrian treasury on its survival, and the likeliest outcome is a collapse of the currency and chaos. It is hard to measure the economic misery of a country in civil war, particularly since the government has restricted food, energy and water provisions to areas of opposition strength. If the civil war continues, of course, the body count will take everyone’s mind off the economy.

Erdogan to Turks: “Let Them Eat Baklava”

The Turkish government seems to be losing its grip on reality.

Turkey, hailed as an Islamic economic miracle by credulous observers, is sitting on the the world’s biggest bubble. It imports twice as much as it exports, and the difference (the trade deficit) is greater than 10% of GDP, about the same level as bankrupt Greece. To aid his re-election efforts in the leadup to last June’s national elections, President Recep Tayyip Erdogan encouraged Turkish banks to increase loans to consumers at a 40% annual rate. Turks bought consumer goods on credit at high interest and Turkey borrowed heavily in the short-term money markets to finance the binge, as I reported some months ago in the Asia Times. Turkey’s central bank assured the world that the deficit would shrink; instead, it’s gotten worse, shredding the central bank’s credibility.

A vicious cycle is underway: Turkey has to borrow in the short-term markets to finance its deficit, which makes foreign depositors reluctant to keep their money parked in the weakening Turkish currency, so Turkey has to pay higher rates. Short-term deposits in Turkish lira now pay over 10%, against a quarter of a percent for dollars. High domestic rates squeeze over-leveraged Turkish debtors.

Erdogan’s response is to insist that “real” (that is, inflation-adjusted) interest rates should be at zero, citing Koranic injunctions against collecting interest. Bloomberg News reports that anyone who disagrees with Erdogan’s “vision” of zero interest rates winds up on an “enemies list”:

As Prime Minister Recep Tayyip Erdogan pursues his vision of an economy with real interest rates at zero, critics of Turkey’s monetary policies are increasingly being portrayed as enemies.

Trade Minister Zafer Caglayan says analysts who find fault with the initiative belong to an “interest-rate lobby” that wants to force Turkey to raise rates to help create higher returns. Erdogan says interest rates should be close to zero after inflation. He said during a speech in May to the Islamic business association Tuskon in Istanbul that Turks should earn their money “through work, not interest.”

The skeptics are seeking to “suck Turkey’s blood,” stop its growth and keep the country indebted to foreigners, Caglayan was quoted by state-run Anatolia news agency as saying in July. In a written response to Bloomberg questions on Nov. 3, Caglayan said the government’s view hasn’t changed. He declined further comment.

Erdogan probably is not as stupid as he appears: with the bubble about to burst, he is spinning a story about a conspiracy against the Turkish economy (just as he spun a story about a supposed military coup plot against his Islamist government). But the outcome will be no less messy for the spin.

The global murder capital

Four Things You Need to Know about Venezuela

By Jaime Daremblum 

Amid the many depredations of Hugo Chávez, it is easy to forget that Venezuela has turned into the most violent country in South America, and that Caracas has become a global murder capital^[1]. According to the independent Venezuelan Observatory of Violence, the annual number of homicides nationwide grew ^[2] from 5,974 in 1999 (when Chávez took power) to 17,600 in 2010. Venezuela today is a haven for international terrorist groups (including the Colombian FARC, the Iranian-backed Hezbollah, and the Spanish ETA), and it is also a veritable gangster’s paradise of narco-trafficking, kidnapping, and armed robbery, with brutal crime syndicates running drugs, transforming prisons into battlefields, and driving up the body count. The recent kidnapping and rescue ^[3] of Major League Baseball star Wilson Ramos highlighted these problems in spectacular fashion, thereby drawing global attention to a frequently overlooked aspect of the Chávez legacy.

Indeed, to truly appreciate what the Bolivarian socialist has done to a once-prosperous country awash in oil, we must go beyond his vitriolic anti-U.S. rants, his attacks on democracy, and his disastrous economic policies. Here are four things you must know to understand (a) how the Chávez regime has survived this long and (b) where Venezuela might be headed:

(1). The regime is financially dependent on China.

The combination of a ruined private economy and profligate government spending has utterly wrecked Venezuelan public finances. While the country still collects sizable oil revenues, Chávez has badly mismanaged Petróleos de Venezuela (PDVSA), the state-owned energy giant, which is slowly crumbling. “Hugo Chávez is putting on a clinic,” energy expert Robert Rapier wrote ^[4] last year. “The theme is ‘How to Destroy a Domestic Oil Industry.’” Thanks to his calamitous oil policies and fiscal recklessness, Chávez needs generous outside support to continue funding his expensive social programs. In other words, he needs a foreign sugar daddy.

Enter China, which has been pouring money ^[5] into the Venezuelan oil sector. Moreover, under various “oil for credit” deals signed with Beijing, Chávez has secured a whopping $32 billion of low-interest Chinese loans. According to a Wall Street Journal report ^[6] last week, the Chinese government had loaned Venezuela $20.8 billion through mid-April, and daily Venezuelan oil shipments to China under the agreements now total roughly 400,000 barrels. “This is a win-win for China and the Chávez government, but not for Venezuela or PDVSA,” former PDVSA board member Pedro Burelli told the Journal. Earlier this year, BCP Securities analyst Walter Molano estimated ^[7] that the oil-for-credit deals were causing Venezuela to lose “almost half of the oil revenue that was being generated to service its external debt obligations.” But as far as Chávez is concerned, the Chinese loans are enabling him to shower his constituents with politically popular goodies in advance of the 2012 Venezuelan presidential election. As the Journal put it, he is using the loans to fund projects “that are likely to help him at the ballot box.”

(2). The regime is run partly by Cubans.

In early 2010, several former Chávez loyalists published a letter ^[8] denouncing the “incursion of outside elements” into key Venezuelan institutions, including the armed forces. As if to demonstrate their point, Cuban Gen. Ramiro Valdés, founder of the notorious G2 intelligence service, arrived in Venezuela to help Chávez consolidate his burgeoning autocracy. (Valdés was supposedly visiting the South American country as an energy consultant, but the real purpose of his trip was easy to discern.) The cash-strapped Castro government desperately needs Venezuelan oil subsidies, so it is desperate to keep Chávez in power. Hence the influx of Cuban “advisers” working to strengthen his Bolivarian revolution. Caracas is now persecuting ^[9] retired Gen. Antonio Rivero for decrying the Cubanization of the Venezuelan military.

By giving Cuban officials such important roles in Venezuela’s security apparatus, Chávez has done two things: First, he has brought in trained Communists with a wealth of experience running a dictatorship. Second, he has given Havana significant influence over Venezuelan government operations — as long as he remains in power. A non-Chávez government, whether democratic or not, might well seek to reverse the process of Cubanization, which has inflamed nationalist passions and angered senior members of the Venezuelan armed forces, not to mention many other Venezuelan authorities. “In some ministries, such as health and agriculture, Cuban advisers appear to wield more power than Venezuelan officials,” The Economist reported ^[10] last year. “The health ministry is often unable to provide statistics — on primary health-care or epidemiology for instance — because the information is sent back to Havana instead.”

(3). The regime’s senior military allies are complicit in the drug trade.

To date, the U.S. Treasury Department has sanctioned three top Venezuelan generals for having links to drug trafficking: Cliver Alcalá, a prominent army commander; Hugo Carvajal, the military intelligence chief; and Henry Rangel Silva, the defense minister. All three are devoted chavistas, whereas many other Venezuelan military officials have grown estranged from Chávez. When Alcalá was added ^[11] to the Treasury blacklist a few months ago, Univision reporter Casto Ocando noted ^[12] that he stood out as “one of the few military figures that still has the confidence of the Venezuelan president.”

Both Alcalá and Venezuelan intelligence official Ramón Isidro Madriz Moreno — along with two pro-Chávez legislators — were accused of collaborating with Colombian narco-terrorists belonging to the FARC. These charges came on the heels of explosive allegations by imprisoned cocaine kingpin Walid Makled, who has claimed ^[13] that dozens of Venezuelan generals and government officials were involved in his lucrative drug business. The Chávez government is effectively a military regime, and the generals implicated by Makled and Treasury include some of the highest-ranking members of that regime.

(4). The regime has trained thousands of pro-government paramilitary fighters, who represent a serious long-term threat to domestic peace and stability.

Call them the Venezuelan Revolutionary Guards: Chávez has established a militia comparable to the famous Iranian outfit that is sworn to defend theocratic rule. Earlier this year, a presidential decree ^[14] brought these Venezuelan paramilitary fighters under Chávez’s direct command; it also gave them officers who are independent of the army. According to an analysis ^[15] of captured FARC computer files by the International Institute for Strategic Studies in London, the Venezuelan paramilitaries have received direct training from Colombia’s biggest terror group. “FARC communications also discussed providing training in urban terrorism methods for representatives of the Venezuelan Communist Party and several radical cells from 23 de Enero, a Caracas slum that has long been a hive of pro-Chávez activity,” as the New York Times has reported ^[16].

While the exact size ^[17] of the pro-Chávez militia remains disputed, there is no question that it has grown disturbingly large. (There is also no question that Caracas has purchased ^[18] massive amounts of sophisticated Russian weaponry.) The militia represents “a personal army, a Praetorian Guard,” retired Venezuelan Adm. Elias Buchszer told ^[19] the Associated Press last year. Its trueraison d’être, he said, is to perpetuate the Bolivarian revolution. If Chávez died of cancer, or if he were in real danger of losing the 2012 election, the militia could conceivably be called out to squash political unrest. That could lead to bloody street violence, and possibly something much worse.

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Article printed from PJ Media: http://pjmedia.com

URL to article: http://pjmedia.com/blog/four-things-you-need-to-know-about-venezuela/

URLs in this post:

[1] a global murder capital: https://www.osac.gov/pages/ContentReportPDF.aspx?cid=11224

[2] grew: http://www.fas.org/sgp/crs/row/R40938.pdf

[3] rescue: http://www.nytimes.com/2011/11/13/sports/baseball/in-venezuela-gunfight-preceded-rescue-of-ramos.html

[4] wrote: http://www.theoildrum.com/node/6995

[5] pouring money: http://news.bbc.co.uk/2/hi/8260200.stm

[6] report: http://online.wsj.com/article/SB10001424052970203733504577026073413045462.html

[7] estimated: http://www.latinbusinesschronicle.com/app/article.aspx?id=4843

[8] published a letter: http://en.mercopress.com/2010/02/03/chavez-former-closest-loyalists-call-for-his-resignation

[9] persecuting: http://laht.com/article.asp?ArticleId=362562&CategoryId=10717

[10] reported: http://www.economist.com/node/15501911

[11] added: http://articles.cnn.com/2011-09-08/world/venezuela.ofac.list_1_farc-rebels-venezuelan-officials-venezuelan-government?_s=PM:WORLD

[12] noted: http://univisionnews.tumblr.com/post/9997949113/obama-after-chavezs-generals

[13] claimed: http://online.wsj.com/article/SB10001424052748704471904576229001472736780.html

[14] presidential decree: http://www.economist.com/node/18529829

[15] analysis: http://www.iiss.org/publications/strategic-dossiers/the-farc-files-venezuela-ecuador-and-the-secret-archive-of-ral-reyes/

[16] reported: http://www.nytimes.com/2011/05/10/world/americas/10venezuela.html?_r=2&pagewanted=print

[17] exact size: http://www.weeklystandard.com/blogs/ch%C3%A1vez-builds-his-own-revolutionary-guards

[18] purchased: http://www.weeklystandard.com/blogs/ch%C3%A1vez-watch-bear-caracas-0

[19] told: http://seattletimes.nwsource.com/html/nationworld/2011760993_apltchavezmilitia.html

The inflation pressures worldwide are barely beginning

Preserving the EU from the Destruction of the Euro

By Pippa Malmgren

The German and French policymakers fhave now realized that they may not be able to preserve the Euro and so they have focused their attention on a different problem – how to preserve the EU even as the Euro fails or members need to temporarily drop out of the Euro. Market events, including the blow out of the Italian bond spreads way over 7.6% (7% being considered walking dead/unsustainable/the game is over level), have caused the policymakers to realize that a temporary exit from the Euro may be the least bad of a many very bad options. This is why even Prime Minister Sarkozy is talking about a “two speed Europe”. There are no good options at this point as Martin Wolf has finally realized and points out in the Financial Times: “Only fear of the consequences of a break-up is now keeping it together”.

All the options are bad and costly. Market forces are increasingly determining what the options are and foreclosing on options policymakers thought they had. One option which is now under discussion involves permitting a country to temporarily leave the Euro, return to its native currency, devalue, commit to returning to the Euro at a better debt to GDP ratio, a better exchange rate and a better growth trajectory and yet not sacrifice its EU membership. I would like to say for the record that this is precisely the thought process that I expected to evolve, but when I proposed this possibility back in 2009, and again in September 2010, I had a 100% response from clients and others that this was “impossible” and many felt it was “ridiculous”. They may be right but this is the current state of the discussion. The Handelsblatt in Germany has reported this conversation, but wrongly assumes that the country that will exit is Germany. I think that Germany will have to exit if the Southern European states do not. Germany’s preference is to stay in the Euro and have the others drop out. The problem has been the Germans could not convince the others to walk away. But, now, market pressures are forcing someone to leave. Germany is pushing for that someone to be Italy. They hope that this would be a one off exception, not to be repeated by any other country. Obviously, though, if Italy leaves the Euro and reverts to Lira then the markets will immediately and forcefully attack Spain, Portugal and even whatever is left  of the already savaged Greeks. These countries will not be able to compete against a devalued Greece or Italy when it comes to tourism or even infrastructure. But, the principal target will be France. The three largest French banks have roughly 450 billion Euros of exposure to Italian debt. So, further sovereign defaults are certainly inevitable, but that is true under any scenario. Growth and austerity will not do the trick, as ZeroHedge rightly points out. Ultimately, I will not be at all surprised to see Europe’s banking system shut for days while the losses and payments issues are worked out. People forget that the term “bank holiday” was invented in the 1930’s when the banks were shut for exactly the same reason.

Different policymakers have different views about the “right” way forward. For Germany the only appropriate solution is one that involves fiscal consolidation and rules that permit the expulsion of any member of the currency that violates the “rules”. The Euro under this approach will be sound and will permit reinforcement of the EU and encourage widening of EU membership and powers. Of course, this idea introduces the teeny tiny problem that it involves handing over the power of the purse, the most fundamental aspect of a democracy to not only the centre of power in Europe, but a centre of power with a Germanic approach to economic policy. Political leaders may, emphasis on may, be able to commit to this. But, I gravely doubt the public anywhere will go along with it.

Once more

Central banking is a form of central planning

by Kurt Schuler

I have been busy writing a paper that I will summarize in a later post, so I am only now making a belated reply to comments by David Glasner at his worthwhile blog, Uneasy Money, disputing my claim that central banking is a form of central planning. I will take one last shot at the subject for now because the idea that central banking is a form of central planning is a crucial part of free banking thought, and because I am amazed by Glasner’s view given that he once wrote a book on free banking,

Central planning need not extend to every economic activity. It is enough for the government to control key institutions, which Vladimir Lenin called “the commanding heights” of the economy. The monetary system is obviously one such institution. A monetary system that is not under government control is incompatible with central planning because it gives people a powerful and easy means of making decentralized exchanges that circumvent the plan.

As I wrote in a previous post, centrally planned economies have monobank systems, in which commercial banking is a government monopoly, whereas in more market-oriented economies, commercial banking is competitive. Even if a monetary system has competitive commercial banking, it remains true that central banking injects substantial elements of central planning. The whole point of central banking in the form in which it has existed since about World War I is to monopolize the monetary base; consciously use the monopoly to affect conditions throughout the economy; do so through a centralized, government institution; and prevent challenges to the monopoly that might end its power. None of these elements are present in a free banking system.

Glasner claims that in Hayek’s monograph Denationalisation of Money, “Hayek’s dismissal of central banking was crucially and explicitly dependent on an argument that private competitive banks would issue their own currencies defined in terms of units of their choosing not redeemable in terms of any outside asset not under the control of the issuing bank.” The monetary system Hayek discussed Denationalisation of Money was one of competing, bank-issued fiat currencies, but Hayek was also aware of the existence of competitive banking systems based on gold. Much earlier in his career he supervised Vera Smith’s dissertation, The Rationale of Central Banking, which discussed some historical episodes fitting that description. Hayek, like his teacher Ludwig von Mises, had an extraordinarily wide range of intellectual interests, of which monetary theory was only one. They did much, but left much still to be done by successors who were willing to focus on monetary theory alone. That helps explain why the building blocks of the idea that central banking is a form of central planning are present in Mises and Hayek, but not until Lawrence H. White and George Selgin in the 1980s did Austrian economists use the building blocks to construct a detailed argument.

We can agree that central banks are run by intelligent people who have good intentions. We can debate whether there is some element of natural monopoly in money that means certain tasks are better done by a central planner than by competitive markets. (If it really is a natural monopoly, why does the law need to forbid competitors?) It should be evident, though, that central banking is indeed a kind of central planning.

Europe slides into oblivion

World Shares of GDP

By Mark Perry

The USDA recently updated its international macroeconomic data set with world and country GDP data estimates for 2011.  Here are some observations:

1. The chart above of world GDP shares (data here) from 1969 to 2011 shows America's amazingly stable share of world output, which has remained at about 26% for more than forty years, with only a gradual decline in recent years.  The U.S. share of world GDP in 2011 (26%) was actually higher than in 1982 (25.8%). 

2. It's also interesting to note that: a) the shares of world GDP in 2011 were almost exactly the same for the U.S. (25.9%), the EU-15 (26.2%) and Asia/Oceania (26.9%). For both of the last two years (2010 and 2011), Asia/Oceania's share of world GDP has been slightly higher than both the EU15 and the USA.  The combined GDP of Latin America, Middle East and Africa has also been relatively stable at about 10%, with recent increases to above 12% in the last two years. 

3. The biggest changes over time have been the gradual decline in the EU-15's share of world GDP from almost 36% in 1969 to roughly 26% by 2011, while Asia/Oceania's share has increased from less than 15% in 1969 to almost 27% in 2011. The fact that America's share of world GDP has remained constant over time is a testament to how America's dynamism, resiliency, and culture of innovation and entrepreneurship have enabled us to continue to be productive and competitive in a "tough world."  In contrast, the EU-15's declining share of the world economy demonstrates the failure of anti-growth, European-style socialism with high taxes and excessive regulations that have created a culture of dependency and entitlement.     

4. For the first time ever, real world GDP (in 2005 dollars) exceeded $50 trillion in 2011, a new record high level of world output, and 2.7% above last year.  At the global level, there's been a complete recovery from the worldwide slowdown in 2008 and 2009 with world output now at an all-time high.    

Our betters know best

Is there no limit to Congress’s power?

By George F. Will

Shortly before the Supreme Court agreed to rule on the constitutionality of Obamacare’s individual mandate, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit affirmed its constitutionality. Writing for the majority, Judge Laurence H. Silberman, a Reagan appointee, brusquely acknowledged that upholding the mandate means there is no limit to Congress’s powers under the Commerce Clause. Fortunately, Silberman’s stark assertion may strengthen the counterargument. Silberman forces the Supreme Court’s five conservatives to face the sobering implications of affirming the power asserted with the mandate.

Does Congress’s enumerated power to regulate interstate commerce empower it to compel individuals, as a condition of living in the United States, to engage in a commercial activity? If any activity, or inactivity, can be said to have economic consequences, can it be regulated — or required — by Congress? Can Congress forbid the inactivity of not purchasing a product (health insurance) from a private provider? Silberman says yes:

“We acknowledge some discomfort with the government’s failure to advance any clear doctrinal principles limiting congressional mandates that any American purchase any product or service in interstate commerce. But to tell the truth, those limits are not apparent to us, either because the power to require the entry into commerce is symmetrical with the power to prohibit or condition commercial behavior, or because we have not yet perceived a qualitative limitation. That difficulty is troubling, but not fatal, not least because we are interpreting the scope of a long-established constitutional power, not recognizing a new constitutional right.”

Some discomfort about saying limited government is essentially a fiction? Silberman’s distinction between interpreting the scope of a government power and recognizing a right is spurious because rights begin where powers end.

So argues Florida International University’s Elizabeth Price Foley, constitutional litigator for the Institute for Justice. She is amazed by Silberman’s disregard of “the inherently symbiotic relationship between the scope of government powers and individual rights.”

She says Silberman has two false assumptions. One is that Congress compelling acts of commerce is “symmetrical” with prohibiting or regulating commerce. The other is that the lack of any principle to limit Congress when purporting to regulate interstate commerce is unimportant because it concerns only government power, not an important liberty interest of individuals.

Silberman’s supposed symmetry between compulsion and regulation ignores the momentous invasion of liberty by the former. If compulsion is authorized whenever Congress touches anything affecting commerce, this Leviathan power dwarfs all other enumerated powers.

Seventy-five years ago, the Supreme Court stopped defending many liberty interests it decided were unimportant. Since the New Deal, Foley says, the court has, without “textual or even contextual basis,” distinguished between economic and non-economic liberty. The latter has received robust judicial support. But economic liberty — freedom of individuals to engage in, or not engage in, consensual commercial transactions — has received scant protection against circumscription or elimination by government. This denial of judicial protection has served the progressive agenda of government supervision of economic life.

Judge Brett Kavanaugh, dissenting on the D.C. circuit court, dryly praised Silberman’s “candor” in “admitting that there is no real limiting principle” to the Commerce Clause jurisprudence embraced by the court’s majority. Kavanaugh, like Foley, emphasizes the asymmetry between, on the one hand, regulating or prohibiting commercial activity and, on the other hand, compelling such activity.

He says the limitlessness means “a law replacing Social Security with a system of mandatory private retirement accounts would be constitutional. So would a law mandating that parents purchase private college savings accounts.” Kavanaugh rejects the majority’s (Silberman’s) attempt “to mitigate the dramatic implications of its no-limiting-principle holding” by noting that “Congress is subject to a political check”:

“As the Supreme Court has told us time and again, the structural principles of the Constitution . . . protect individual liberty. And the courts historically have played an important role in enforcing those structural principles. . . . That Congress is subject to a political check does not absolve the judiciary of its duty to safeguard the constitutional structure and individual liberty.”

There is an abdication of judicial duty in Silberman’s complacent conclusion, which is: We can articulate no limit on Congress’s power flowing from the Commerce Clause; get over it. This might galvanize a Supreme Court majority to say “Enough!” and begin protecting individual liberty from a Commerce Clause that the court itself has transmogrified into an anti-constitutional gift to Congress of a virtually unlimited police power. This case can begin restoring Madison’s constitutional architecture for a government limited by the enumeration of its powers.

A giant hangover

Why E.U. collapse is more likely than the fall of the euro

By Niall Ferguson

European politics has become a giant Jenga game. Since June 2010 governments have fallen in the Netherlands, Slovakia, Belgium, Ireland, Finland, Portugal, Slovenia, Greece and Italy.

The question is not: Who will be next? That’s easy. (Spain’s Socialist government will be pulverized in this weekend’s elections.) The real question is: When will the Jenga tower topple?

Many people assume that the tipping point will come when one country — most likely Greece — leaves or is ejected from Europe’s monetary union. But the scenario that worries Eurocrats is different. They fear that a country could leave the European Union itself.

This is by no means an irrational anxiety. Under E.U. law, it would be much easier for Britain to leave the European Union than for Greece to leave the euro zone.

Thus the process of European integration has reached a richly ironic point: The breakdown of the European Union is now more likely than the collapse of the single currency that was supposed to bind it together.

This is not surprising. In March 2000, Larry Kotlikoff and I wrote in Foreign Affairs, “History offers few examples of successful adjustments on the scale necessary in certain European countries today. What it does offer are several examples of monetary unions disintegrating when fiscal strains became incompatible with the unpleasant arithmetic of a single currency.” The euro, we predicted, “could degenerate — not overnight, but within the next decade.”

Our timing was not bad. The degeneration of the single currency began in 2010, though the crisis has certainly intensified in recent months.

We specified “degeneration” to highlight the generational imbalances arising from Europe’s combination of aging populations and over-generous welfare systems. Even if there had been no financial crisis emanating from the U.S. subprime mortgage crisis that began in 2007, the European monetary system would still have degenerated as public debts soared.

But we also struggled to see how, once assembled, the euro zone could be dismantled. The costs of exit would be prohibitive for a small peripheral country such as Greece, which would overnight lose access to any source of external credit. And a Greek departure would raise the probability of others leaving, causing contagion throughout Southern Europe.

Finally, if all the weaker brethren were to leave the monetary union except Germany, Austria, the Netherlands and Finland, the strengthening of the euro would cause significant pain to the exporters of those countries. In short, almost nobody would gain from a breakup of the euro zone.

This is why I am not among the growing throng of pundits predicting the degeneration of the euro — a number of whom argued with equal self-confidence a dozen years ago that the euro would be a great success.

Anyone who closely followed events of the 1990s had a clear idea of what a monetary union with the Federal Republic of Germany would entail: short-term spending power but long-term unemployment mitigated by handouts.

Some doubt that German taxpayers will be as ready to pay doles to Lesbos and Livorno as they were to pay doles to Leipzig. But if the alternative is a breakup of the euro zone, they will do it. Chancellor Angela Merkel made that clear Monday when she urged her Christian Democrats to accept “not less Europe but more. . . . That means creating a Europe that ensures that the euro has a future. Our responsibility no longer stops at our countries’ borders.”

Those betting on a euro breakup believe that the inflation-phobic Germans will never permit large-scale bond purchases by the European Central Bank — the policy known in the United States as quantitative easing. But this needs to happen to bail out not only the Mediterranean governments but also insolvent banks — including German banks — throughout the euro zone.

In short, the European monetary union survives, albeit with a gloomy future of higher unemployment for southern Europe and higher taxes for the North.

But the fate of the European Union itself will be very different. The creation of the single currency — obeying the law of unintended consequences — set in motion a powerful process of European disintegration. The fact that not all 27 E.U. members joined the monetary union was its first manifestation. Today we have a two-tier system, with 17 member-states sharing the euro, but 10 other states — notably Britain — retaining their own currencies.

The result is that key decisions today — particularly those about the scale of transfers from core nations to the periphery — are being made by the 17, not the 27. But the 10 non-euro members may still find themselves on the hook to help fund whatever combination of bailout, haircut and bank recapitalization the 17 decide on. They may also face more stringent financial regulation or a financial transaction tax, ideas that are much more popular in Berlin than in London.

This is an unsustainable imbalance. If the euro countries are intent on going down the road to federalism — and they don’t have a better alternative — the non-euro countries will face a stark choice: giving up monetary sovereignty or accepting the role of second-class citizens within the E.U.

Under these circumstances, the logic of continued British membership in the E.U. looks less and less persuasive. British public opinion has long been deeply Euro-skeptic. If it came to a referendum, as many Conservatives would like, Britons might well vote to leave the E.U. And under Article 50 of the Treaty of European Union, withdrawal would simply need to be approved by a qualified majority of E.U. members.

In the great game of European Jenga, most people expect the French government of Nicolas Sarkozy will fall next year. But the thing that could cause the European Union to topple, or at least shrink in size, would be the outright withdrawal of Britain. And that has started to look quite possible.

Mark Steyn at his best

No Man’s Land

Penn State’s moral adolescents

By Mark Steyn

There is a famous if apocryphal tale of a Fleet Street theater critic covering the first night of a new play in the West End of London. At the end of the evening, he went to a public telephone and dictated his review. The following morning, a furious editor called him and demanded to know why he had neglected to mention that, midway through the third act, the theater had caught fire and burned to the ground. The critic sniffily replied that it was not his business to report fires, but that, if the editor had read more carefully, he would have observed that the review included a passage noting discreetly that the critic had been unable to remain for the final scenes.

That, more or less, is the position of those Americans defending the behavior of the Penn State establishment: It would be unreasonable to expect the college-football elite to show facility with an entirely separate discipline such as pedophilia-reporting procedures, and, besides, many of those officials who were aware of Jerry Sandusky’s child-sex activities did mention it to other officials who promised to look into mentioning it to someone else.

From the grand-jury indictment:

On March 1, 2002, a Penn State graduate assistant (“graduate assistant”) who was then 28 years old, entered the locker room at the Lasch Football Building on the University Park Campus on a Friday night. . . . He saw a naked boy, Victim 2, whose age he estimated to be ten years old, with his hands up against the wall, being subjected to anal intercourse by a naked Sandusky. The graduate assistant was shocked but noticed that both Victim 2 and Sandusky saw him. The graduate assistant left immediately, distraught.

The graduate assistant went to his office and called his father, reporting to him what he had seen. His father told the graduate assistant to leave the building and come to his home. The graduate assistant and his father decided that the graduate assistant had to promptly report what he had seen to Coach Joe Paterno (“Paterno”), head football coach of Penn State. The next morning, a Saturday, the graduate assistant telephoned Paterno . . .

Hold it right there. “The next morning”?

Here surely is an almost too perfect snapshot of a culture that simultaneously destroys childhood and infantilizes adulthood. The “child” in this vignette ought to be the ten-year-old boy, “hands up against the wall,” but instead the “man” appropriates the child role for himself: Why, the graduate assistant is so “distraught” that he has to leave and telephone his father. He is pushing 30, an age when previous generations would have had little boys of their own. But today, confronted by a grade-schooler being sodomized before his eyes, the poor distraught child-man approaching early middle-age seeks out some fatherly advice, like one of Fred MacMurray’s “My Three Sons” might have done had he seen the boy next door swiping a can of soda pop from the lunch counter.

The graduate assistant, Mike McQueary, is now pushing 40, and is sufficiently grown up to realize that the portrait of him that emerges from the indictment is not to his credit and to attempt, privately, to modify it. “No one can imagine my thoughts or wants to be in my shoes for those 30–45 seconds,” he e-mailed a friend a few days ago. “Trust me.”

“Trust me”? Maybe the ten-year-old boy did. And then watched Mr. McQueary leave the building. Perhaps the child-man should try “imagining” the ten-year-old’s thoughts or being in his shoes. Oh, wait. He wasn’t wearing any.

Defenders of McQueary and the broader Penn State protection racket argue that “nobody knows” what he would do in similar circumstances. In a New York Times piece headlined “Let’s All Feel Superior,” David Brooks turned in an eerily perfect parody of a David Brooks column and pointed out, with much reference to Kitty Genovese et al., how “studies show” that in extreme circumstances the human brain is prone to lapse into “normalcy bias.” To be sure, many of the Internet toughs bragging that they’d have punched Sandusky’s lights out would have done no such thing. As my e-mail correspondents always put it whenever such questions arise: “Yeah, right, Steyn. Like you’d be taking a bullet. We all know you’d be wetting your little girly panties,” etc.

For the sake of argument, let us so stipulate. Nevertheless, as the Canadian blogger Kathy Shaidle wrote some years ago: “When we say ‘we don’t know what we’d do under the same circumstances,’ we make cowardice the default position.”

I quote that line in my current book, in a section on the “no man’s land” of contemporary culture. It contrasts the behavior of the men on the Titanic who (notwithstanding James Cameron’s wretched movie) went down with the ship and those of the École Polytechnique in Montreal decades later who, ordered to leave the classroom by a lone gunman, meekly did as they were told and stood passively in the corridor as he shot all the women. Even if I’m wetting my panties, it’s better to have the social norm of the Titanic and fail to live up to it than to have the social norm of the Polytechnique and sink with it.

That’s the issue at the heart of Penn State’s institutional wickedness and its many deluded defenders. In my book, I also quote the writer George Jonas back when the Royal Canadian Mounted Police were revealed to be burning down the barns of Quebec separatists: With his characteristic insouciance, the prime minister Pierre Trudeau responded that, if people were so bothered by illegal barn burning by the Mounties, perhaps he would make it legal. Jonas pointed out that burning barns isn’t wrong because it’s illegal, it’s illegal because it’s wrong. A society that no longer understands that distinction is in deep trouble. To argue that a man witnessing child sex in progress has no responsibility other than to comply with procedures and report it to a colleague further up the chain of command represents a near-suicidal loss of that distinction.

A land of hyper-legalisms is not the same as a land of law. I’ve written recently about the insane proliferation of signage on America’s highways — the “Stop” sign, the “Stop Sign Ahead” sign, the red light, the sign before the red light instructing you that when the light is red you should stop here, accompanied by a smaller sign underneath with an arrow pointing to the precise point where “here” is . . . One assumes this expensive clutter is there to protect against potential liability issues. It certainly doesn’t do anything for American road safety, which is the worst in the developed world. We have three times the automobile fatality rate of the Netherlands, and at 62 in the global rankings we’re just ahead of Tajikistan and Papua New Guinea.

But that’s the least of it: When people get used to complying with micro-regulation, it’s but a small step to confusing regulatory compliance with the right thing to do — and then arguing that, in the absence of regulatory guidelines, there is no “right thing to do.”

In a hyper-legalistic culture, Penn State’s collaborators may have the law on their side. But there is no moral-liability waiver. You could hardly ask for a more poignant emblem of the hollow braggadocio of the West at twilight than the big, beefy, bulked-up shoulder pads and helmets of Penn State football, and the small stunted figures inside.

The great untouchable topic

The Self-Expropriation of the Patriotic Millionaires

By Jeffrey Tucker 

Do you want higher taxes? There is an easy answer. Pay more. No one is stopping you. You can overpay to the tax authorities. There is even a check box on the form, as I recall. Give to this charity you find worthy! No government in the history of the world has turned down money that its most “patriotic citizens” want to donate of their own free will.

Alas, that is not what the “Patriotic Millionaires for Fiscal Strength” — this is actually the name of a new organization — are calling for. A tax is not a voluntary contribution. Otherwise, it would be called a donation. A tax is a forcible extraction of private property by the state for the state to use for its own purposes. If it doesn’t involve force, it is not a tax. The use of force defines the tax. That even goes for excise taxes said to be voluntary: Try buying gas or cigarettes without paying the tax and see how far you get.

These many signatories of the Patriotic Millionaires are not just calling for their own taxes to be raised. They are calling for your taxes to be raised. The patriotic among us have ways of making the unpatriotic pay, and it is called lobbying government to loot the population even more than it does now.

The point is that this is not an act of self-sacrifice on their part. They are free to make a sacrifice anytime they want to. No, they are plotting to enlist you in their cause, whether you like it or not.

There is a long history of the rich getting together to call for higher taxes. Andrew Carnegie wrote passionately for a tax that would loot people at their deaths so that they could not pass on the wealth to others. In our own time, Bill Gates and Warren Buffett have earned the respect and admiration of the left-liberal elite by calling on the state to take more of their money.

Why would these people do this? Well, for one thing, it is a nice thing to earn the respect and admiration of the left-liberal elite, who are inclined to forgive any amount of wealth accumulation, provided that the accumulated is willing to sign up to support left-liberal causes. You can a pass this way, a badge of honor to cover what some people otherwise consider your ill-gotten wealth.

There are a myriad of psychological reasons that have been bandied about, too. Maybe these rich people are self-hating and filled with guilt. They need public policy to expiate their sins or otherwise vacuum clean their consciences.

Another theory is that the already rich are perfectly happy to lock in their gains with a policy that will prevent others from joining their ranks. A tax, then, becomes a method by which the wealthy elite fight back competition and entrench their monopoly position.

Or perhaps we should just take them at their word, that they really do believe in reducing the deficit. The truth is that all their wealth wouldn’t make a dent in the deficit. A 100% expropriation of everything that people who make over $10 million per year would barely cover the a few weeks of government spending. A progressive tax up to 70% on incomes over $1 million would barely cover 10% of the deficit. In fact, doubling the taxes of everyone today would not even balance the budget (all else equal).

The problem is not that taxes are too low for everyone; the problem is that government has no institutional mechanism that encourages any spending restraint.

In any case, this whole thing is bizarre. Why would anyone expect that the government would suddenly start restraining itself if it suddenly enjoyed a temporary windfall of revenue? There is absolutely no evidence to support this supposition. What does government do with more money? It spends it, if possible.

There is a much faster and much more sure way of imposing fiscal discipline. The government itself needs to face a market test of some sort. The best way to make sure that there is some sort of penalty for bad financial habits is to subject government debt to the same discipline faced by private debt. The Treasury bond needs a market-based default premium attached to it.

But that cannot happen so long as the Federal Reserve is there to be the lender of last resort for anything that the politicians do. No matter how bad the finance, how high the debt, how egregious the deficit is, the Fed is there with the promise that the money will be there. Funding it might require hyperinflation, but the money will be there. It might, eventually, be worth less than the linen it is printed on, but the money will be there.

The central bank is the real source of fiscal irresponsibility. But the millionaires won’t talk about that. It is the great untouchable topic, the one sacrosanct institution. Our own bank accounts are vulnerable to their lobbying pressure, but the Fed is perfectly safe. That’s what they called “patriotic.”

A quiet coup

HOT MUST SEE NIGEL FARAGE VIDEO--You Have Never Seen a Political Leader Say Anything Like This Before

This is awesome. Farage is calls out the banksters and their scheming to use the eurozone crisis as cover to create a  centrally planned Europe.

Some producers are more equal than others

Big Farm Raked in Record Profits This Yr. As Farm Land Soars, But They Harvested $10B in Handouts

 

By Mark Perry

According to the USDA, net income from U.S. farms is expected to set a new record this year of $103.6 billion on record cash receipts of $370.4 billion.  The record farm income this year is 31% above last year's income, and marks the first time in history that the combined income of U.S. farms has exceeded $100 billion.      

The USDA also estimates that the total value of farm real estate will approach $2 trillion this year, an increase of 7.12% from last year.  Separately, CNN is reporting record farmland prices based on Federal Reserve data, with 25% increases in Midwest farmland (and 31% in Iowa), the largest annual gains in three decades.

Even with record-level income, revenues and farm land values, farmers "harvested" more than $10 billion in direct government (taxpayer) payments (subsidies) this year. 

Whenever oil prices and "Big Oil" profits are high, politicians call for imposing "windfall profits taxes" and ending oil subsidies (even though oil companies don't actually get any direct government payments and only get the same tax deductions and cost recovery allowances that are available to all U.S. manufacturers), so maybe it's time for equal treatment of Big Farm?