The president sounds more like a Corleone than a Roosevelt.

Obama's Godfather Speech

By DANIEL HENNINGER

Most press accounts of Barack Obama's speech in Osawatomie, Kansas, Tuesday described it as delivered by the "president of the United States." And indeed the person delivering it analogized himself to Presidents Teddy Roosevelt, Franklin Roosevelt, Dwight Eisenhower and Bill Clinton. In fact, the Osawatomie speech was not given by the President of the United States. It was given by the leader of the Democratic Party.

Most of the time, this distinction isn't a problem in the United States because historically people have tended to think that the office of the presidency represents "all the people." This doesn't mean everyone expects to benefit from a president's policies. What it means is that in some informal way no one has to worry that the presidential motorcade, so to speak, will drive off the road so that it can plow into you. That is no longer the case in the U.S.

The Osawatomie speech sounded like what you'd expect to hear in Caracas or Buenos Aires. As in: "The free market has never been a license to take whatever you can from whomever you can." (Applause.) And: "Their philosophy is simple. We are better off when everybody is left to fend for themselves and play by their own rules."

Some will say hearing crude Chavista populism in the Obama speech is an overreaction. That once it's understood the Kansas speech was the work of the party leader, not the president of the United States, it becomes easier to think about it without overreacting to its intense and vivid rhetoric: "Millions of working families in this country . . . are now forced to take their children to food banks for a decent meal."

Mr. Obama, the bloodless political analysis of the speech runs, was just rallying his base. He needs to. Last month, in an election for state offices in Virginia, which Mr. Obama carried in 2008, Democrats turned out poorly, and Republicans won at every level of government, even in "independent" northern Virginia.

Democrats are depressed about the awful economy we've had the past three years. In Mr. Obama's view, this is a coincidence; the bad economy happened during his term because of mistakes someone else made in 2001 and 2003. Lest the base confuse his policies with someone else's, Mr. Obama needs to transform Democratic depression into some form of Democratic energy. This week, and apparently in the election next year, he has chosen a strategy based on fear and loathing of an opposition he identifies simply as, "They." "They argue, even if prosperity doesn't trickle down, well, that's the price of liberty."

About two-thirds through Mr. Obama's Kansas speech, I started to think of "The Godfather." After slapping around the "wealthy" for about a half hour, Mr. Obama said, "This isn't about class warfare." Maybe that's true. In "The Godfather," when awful things are about to be done to people, Michael Corleone or Tom Hagen reassure those about to get hit, "It's not personal; it's strictly business."

But I could be wrong about that. There is that defining moment when Michael Corleone says to Fredo, his brother, "You're nothing to me now." When even as party leader, a president of the United States gives a major speech in which people get singled out repeatedly as basically enemies of "the middle class," one has to wonder if they are nothing to him.

You then have to wonder about the tenor of another Obama term in office. If in fact there are categories of Americans he simply doesn't like, a second Obama term, like the last half of "Godfather II," could be a clinical exercise in hammering the people he singled out in this speech. Metaphorically speaking.

The Kansas speech was built around one concrete policy idea: that the rich and millionaires (officially still defined as families with before-tax income above $250,000) should send him more money so he can "invest" it. This single policy, if we heard correctly, will end high unemployment, raise middle-class incomes, put children through college, make America fair and defeat countries that pollute.

But will it?

Mr. Obama says everyone has to play by his new rules: "Unless you're a financial institution whose business model is built on breaking the law, cheating consumers and making risky bets that could damage the entire economy, you should have nothing to fear from these new rules." Really? Citigroup on Thursday said it will eliminate 4,500 jobs. In the third quarter alone, 2,500 U.S. banks cut 20,332 jobs. Let 'em go. In the coming Obama economy, they can "make wind turbines and . . . high-powered batteries."

What the Democratic base would get out of an Obama re-election is political power, which counts for something. It lets you tell other people what to do. But nothing in that Kansas speech, especially the wealth taxes, will produce real growth in the dry economy America has had for three years. Strong growth is the only solution to the Osawatomie catalog of horrors. If he wins, five years from now, the president's base will be about where it and nearly everyone else is today, trying to stay afloat in Barack Obama's still waters.

A dose of sobriety for every besotted age

The End of the World: H. G. Wells

by  Thomas F. Bertonneau 

The End of the World is an apocalyptic myth that first becomes prominent in religious speculation in the period of Late Antiquity. St. John’s Apocalypse, included as the last book of the New Testament, is the best-known item in the genre, with its elaborate visions of Armageddon and the Last Judgment. Persistently, however, since the French Revolution, the myth of the End of the World has secularized itself, expressing its eschatological anxiety in terms of entirely this-worldly events. In the Twentieth Century, the End of the World became a staple of “scientific romance” or science fiction, where it often concerned the perfection of destructive instrumentality. In England beginning in the 1870s, the foreign invasion story became popular. In George Tomkyns Chesney’s many times reprinted Battle of Dorking (1871), Kaiser Wilhelm I, not content with the defeat of France at Sedan, pushes on through Belgium and the Netherlands, crosses the Channel, and reduces Britain to vassalage. Sometimes the invasion involved the so-called Yellow Peril, an onslaught, in some non-specific near future, by militarized hordes of Chinese or Japanese, who overwhelm Europe.

The End of the World typically presents itself in a literalist manner, with the physical obliteration of the globe and humanity. The antecedents in this case go as far back as the first half of the Nineteenth Century, especially to the American writer Edgar Allan Poe (1809 – 1849). Best known as the inventor of the detective story, Poe also established the broad outlines the science fiction story. Poe’s “Conversation of Eiros and Charmion” (1839), the earliest tale of a cosmic collision that destroys humanity, climaxes in a planetary conflagration when, the chemistry of the comet’s tail having removed all nitrogen from earth’s airy mixture, the remaining oxygen-rich atmosphere induces all organic matter to burst into flame. Astronomer and science journalist Camille Flammarion (1842 – 1925) expanded on Poe’s innovation in his novel Le fin du monde (1893) where once again a cosmic interloper brings death to the earth, destroying it in a direct collision. Abel Gance loosely adapted Flammarion’s novel to the silver screen in 1931. Both Poe’s short story and Flammarion’s novel include descriptions of future, decadent civilizations, in thrall to which much of human nature has already gone extinct even before the physical cataclysm occurs.

The greatest interest of the End of the World in fiction comes, in fact, not from the cosmic, but rather from the sociological, political, and civilizational variants of the trope. A world-obliterating impact leaves no survivors and ceases to be pathetic in the instant when it occurs; but social, political, and civilizational catastrophes reserve a few survivors, who attest to their experience and add, perhaps, to humanity’s small store of wisdom. None was better at this type of End-of-the-World story than Herbert George Wells (1866 – 1946). He made an early success of such a tale in The Time Machine (1895) and his very last book, The Mind at the End of its Tether(1946), is the oddest and most disturbing End-of-the-World story of all, except that Wells insists that it is the not a story but the apocalyptic truth.

I. Wells wrote two planetary collision stories, borrowing the idea from Poe’s “Conversation.” These are “The Star”(1897) and In the Days of the Comet (1906). In “The Star” – where Wells achieves an impartial, objectively analytical tone that he would refine in his novel-length catastrophe stories – the real disaster is human complacency, as it would be again in many of the same author’s “scientific romances.” Even in the civilized nations, Wells asserts, people rarely develop their awareness beyond the demands of routine and immediacy; while petty worries eat up its quotient of starveling intelligence, the typical modern mind altogether lacks a cosmic sense. When the astronomer Ogilvy calls attention to a “retardation” in the orbital velocity of the eighth planet, “such a piece of news was scarcely calculated to interest a world the greater portion of whose inhabitants were unaware of the existence of Neptune, nor… did the subsequent discovery of a faint, remote speck of light in the region of the perturbed planet cause any very great excitement.” Even after the interloper, in colliding with Neptune, becomes visible in daylight, effulgent and growing, the putatively educated regard the phenomenon blandly as a stellar novelty without implication for their lives. The most backward and superstitious people, by contrast, invest the “fiery signs” with due portentousness. In Europe and America only the perspicacious few grasp the likelihood that, “Man has lived in vain.” Otherwise, as Wells writes, “shops... opened and closed at the proper hours” and “use and wont still ruled the world.”

The celestial body’s inevitable near-encounter with Earth solicits the full range of cataclysm in massivetsunamis, conflagration of the atmosphere, deluge, and seismic tremor, all of which leave a small stunned nucleus of survivors huddling in the wreckage. Wells hints at “a new brotherhood,” emerging from the shock and ruin of an altered geography, which organizes “the saving of laws and books and machines.” This too would become a standard Wellsian trope. “The Star” ends with a sudden, unexpected shift of perspective. Martian astronomers assess the event as “astonishing” in consideration of “what little damage the earth… has sustained.” “The Star” tells objectively of a catastrophe cosmic on the one hand and intellectual on the other. The intellectual debacle interests Wells more than the cosmic one. The Wellsian brand of Darwinism focuses much less on physiological than it does on psychological, ethical, and technical adaptation, as narrowly biological as Wells could nevertheless sometimes be. Stultified minds fail to grasp either the scale or the peril of universal forces.

The magnificent opening paragraph of The War of the Worlds (1897) enjoys notoriety – from its partial rehearsal in the several, filmed versions of the scenario – to the extent that commenting on it strikes the writer as presumptive. Nevertheless, the same opening paragraph develops motifs from “The Star,” particularly “use and wont,” in such a way as to invite a renewal of consideration. Logicians urge that argument from analogy offends against forensic procedure, but Wells would have it that the main ingredient of complacency, which he again condemns, is the failure to consider analogies. The whole of Wells’ paragraph operates analogically. Wells invokes “intelligences greater than man’s,” mentalities “vast, cool and unsympathetic,” by which men have been “scrutinized and studied almost as narrowly as a man with a microscope might scrutinize the transient creatures that swarm and multiply in a drop of water.” That men “with infinite complacency” felt “assurance” in what Wells calls “their empire over matter,” belongs, as the narrator says, to the class of “mental habits… of departed days.”

From the history of the European empires The War’s discourse draws in various items of unavoidable pertinence. The narrator, writing from a vantage point six years after the Martian attempt, details the onslaught’s effects in Britain, but far from wringing his hands in resentful anger he seems actually to mitigate the enemy’s blameworthiness: “Before we judge [the Martians] too harshly we must remember what ruthless and utter destruction our own species has wrought, not only upon animals, such as the vanished bison and the dodo, but upon its own inferior races.” The Tasmanians come under discussion, who, “in spite of their human likeness, were swept out of existence in a war of extermination waged by European immigrants.” Mars being a world “far gone in its cooling” while the earth “is still teaming with life,” and life being everywhere “an incessant struggle for existence,” the Martians acted logically to avoid “the destruction that generation after generation creeps upon them.” The failure of the Martian attempt to wrest earth and its resources prompts the invaders to turn their attention elsewhere. “Lessing has advanced excellent reasons,” writes the narrator in the Epilogue, “for supposing that the Martians have actually succeeded in effecting a landing on Venus.”

The main interest for most readers in The War of the Worlds consists in Wells’ vivid descriptions of mechanized warfare between a British military that fights with the armaments of the Boer and Spanish-American Wars and an attacking force whose weaponry marks a quantum leap in applied science. The “heat ray” anticipates the beam weapons that modern armories still have not perfected, while the “black smoke” uncannily prefigures the poison gas that belligerents would unleash during the trench-warfare of 1914-1918. The Martians dominate the battlefield. Occasionally, a crack British gun crew or an astute dreadnaught commander scores a tactical victory. The fragility of the British social fabric, however, almost as much as Martian technical superiority, supplies the invader with his most effective instrument of war. Once the Martians emerge from their initial “pit” at Horsell Common near Woking, Surrey, panic spreads infectiously. “The most extraordinary thing to my mind,” writes the narrator, “was the dovetailing of the commonplace habits of our social order with the first beginnings of the series of events that was to topple that order headlong.”


Information becomes a casualty. The sudden paucity of news, disrupting use and wont, in turn exacerbates the rising hysteria, which in its own turn propels the disintegration of social order. In London, with trains gone missing and the railway timetables now useless, a great exodus on foot begins, which quickly degenerates into mob-behavior and lawlessness. The narrator’s brother, a medical student in London, witnesses the rapid descent into chaos. He records “a roaring wave of fear that swept through the greatest city in the world… the stream of flight rising swiftly to a torrent, lashing in a foaming tumult around the railway stations, banked up into a horrible struggle about the shipping in the Thames, and hurrying by every available channel northward and eastward.” In the company of two fleeing women, the brother resorts to a revolver to fight off criminal opportunists. Near the suburb of Edgeware, “the main road was a boiling stream of people”; a bit farther, they encounter “a whole population in movement,” whose constituents wear “fear and pain on their faces.” Martian vulnerability to terrestrial infections stops the attack, a kind of secular Providence.

In the Epilogue, the narrator remarks, “Whether we expect another invasion or not, our views of the human future must be greatly modified by these events,” which “have robbed us of that serene confidence in the future which is the most fruitful source of decadence.” Wells is once again playing with analogies. Self-absorption and unfounded certainty prevented humanity from foreseeing the Martian attack; self-absorption and unfounded certainty prevented the Martians from foreseeing their sanitary incompatibility with the earth’s bacterial environment. Humanity found lucky redemption from the mentality of use and wont – ofcomplacency – that made it prey to the Martians in theMartian complacency that prevented the invaders from imagining untoward conditions on a new world.

II. A good academic parlor game would be to pose the question, what English-language novel of the first quarter of the Twentieth Century innovatively takes its plot from Homer’s Odyssey while updating the action in a modern setting? Or one might ask, also of the professoriate during cocktail hour, what thinker first articulated the principle of escalation, usually attributed to Herman Kahn, and who, before 1910, described an aerial terror-attack on New York City? The bafflement of the literature and political science faculties would likely be complete because today almost no one reads one of the most popular British writers of the first half of the just-completed century. These questions implicate Wells’ prophetic vision of global strategic conflict, The War in the Air (1906). Whereas in The War of the Worlds, the hostile agency, actually inhuman, arrives on earth from another planet, in The War in the Air, dear old humanity rises to the role of its own devil. In particular, haphazard adoptions of new technology put unforeseen strains on social, political, and economic arrangements that reflect the folkways of an earlier age. Old habits, stubbornly maintained, prove inadequate to developing circumstances until a type of cultural schizophrenia occurs. “Things fall apart, the center cannot hold,” as a noteworthy Irish poet with a prophetic turn of mind would later write. Wells was quite as vatic and clairvoyant as any poet.

The first sentence of The War in the Air is, “This here progress… it keeps on.” Tom Smallways, the protagonist’s elder brother, mutters the thought, a bit of non-committal, vaguely skeptical commentary from a bewildered soul representing a vestige of feudal mentality that has not, and perhaps cannot, keep up with changes in the mode of life. Bert Smallways, Wells’ working-class substitute for a Homeric hero, grasps his brother’s limitation dimly.

Correlation is not causation

The Accelerator and Say's Law

by William H. Peterson

Economists, like women, are not immune to the dictates of fashion. One such dictate in vogue among post-Keynesians is the accelerator, which enjoyed similar popularity in the early 1920s. At least a partial reason for the renewed popularity of the accelerator is that it forms an integral part of the General Theory.[1]

The acceleration doctrine holds that a temporary increase in consumer demand sets in motion an accelerated "derived demand" for capital goods. This action, according to adherents of the doctrine, explains at least part of the causation of the business cycle. As evidence supporting this theory, accelerationists point to boom-and-bust, feast-and-famine conditions prevalent in capital-goods industries.

A typical illustration of the acceleration principle follows. Assume a "normal" annual demand for a certain consumer good at 500,000 units. Production is accomplished through 1,000 durable units of capital goods; capacity of each capital unit: 500 consumer units per year; life of each unit: 10 years. Then assume a 10 percent increase in consumer demand. Thus:

Annual Consumer	Demand	Capital Goods	Annual Capital-Goods Demand ("derived")
"normal year"	500,000	1000	100 (replacements)
next yr. + 10%	550,000	1100	200 (replacements plus new)
3rd yr.-new "nor."	550,000	1100	100 (replacements)

Conclusion: 10 percent increase in consumer demand led to 100 percent increase in capital demand in same year but to 50 percent decrease in capital demand in following year.

The argument against the acceleration doctrine simply shows so many unreal assumptions and a vital non sequitur as to nullify any validity in the doctrine whatsoever. An analysis of these objections follows.

1. Rigid Specialization in Capital-Goods Industries

Accelerationists pose their doctrine on the basis of a given capital-goods industry supplying equipment for a given consumer-goods industry and no other. Thus a decrease in consumer demand or even a falling-off in its rate of growth immediately cuts off part of the capital-goods market, and the "famine" phase of the capital-goods industry begins.

Yet where is the capital-goods industry so rigidly specialized as to preclude its serving other markets, with or without some conversion of its facilities? Are we to presume that businessmen under the pressure of overhead and profit maximization will twiddle their thumbs waiting for their consumer demand to "reaccelerate"? It is clear that accelerationists deny or ignore convertibility of facilities and substitutability of markets.

Within many capital-goods industries, trends of diversification and complementarity are evident. Examples: A machine tool manufacturer that has undertaken lines of construction and textile equipment; a basic chemical producer that has engaged in the manufacture of home clotheswasher and dishwasher detergents. These trends break down the "industry" classifications, on which the accelerator is based.

2. No Unutilized Capacity in the Consumer-Goods Industry

Holders of the acceleration doctrine assume the consumer-goods industry is operating at the extensive margin of production and no intensive possibilities for greater production exist.

But very few consumer-goods industries, typically, operate at constant peak capacity. To do so is generally to operate beyond the point of optimum efficiency as well as beyond the point of maximum profit. The usual case then, other than during wartime, is that an industry operates with some unutilized capacity, some "slack." Normally this unutilized capacity is to be found among the marginal and submarginal producers, and it is these producers which could and probably would absorb any increase in consumer demand — without, of course, the purchase of new equipment.

Yet even the successful and efficient producer would likely consider other means of absorbing higher consumer demand before committing himself to more equipment and greater overhead. For example, he could expand the existing labor force, resort to overtime, add one or two additional shifts, subcontract work in overloaded departments, and so on. That such alternatives are feasible without more equipment is evidenced by the experience of even the most efficient firms in the utilization of their capital equipment. Examples: A West Coast airplane manufacturer found his gear-cutting equipment in use only 16 percent of the time; a New York newspaper plant utilized its presses only 11 percent of the time. The concept of 100 percent utilization of all capital equipment is not tenable.

3. Automaton Role for Entrepreneurs

Accelerationists share the danger common to all holistic and macro approaches to economic problems — namely, the submergence of individual and entrepreneurial decisions (human action) to a constant factor within a pat formula. Such treatment implies on the part of entrepreneurs irrationality or sheer impulsiveness. Boulding described this situation thusly:

The picture of the firm on which much of our analysis is built is crude in the extreme, and in spite of recent refinements there remains a vast gap between the elegant curves of the economist and the daily problems of a flesh-and-blood executive.[2]

Accelerationists argue that a temporary rise in consumer demand automatically calls into being additional capital goods. If this were true, it follows that entrepreneurs in capital-goods industries witlessly expand their capacity and thereby commit themselves to greater overhead without regard to future capital-goods demand.

True, entrepreneurs can and do err in gauging future demand. But the concept of automatic response to any rise in demand, on the order of the conditioned-reflex salivation of Pavlov's dogs, is not warranted. Increased capacity is less of a calculated risk in response to increased current demand than it is to anticipated future demand. This anticipation, in turn, is likely to be based on market research, price comparison, population studies, cost analysis, political stability, etc., rather than on impulse.

4. Static Technology

It is not surprising that the accelerator perhaps reached the zenith of its popularity when professional journals were replete with terms like "secular stagnation" and "technological frontier." (Nowadays the term is "automation." Apparently we have moved from the one extreme of too little technology to the opposite extreme of too much.) Such heavy-handed treatment of technology does not coincide with experience. Science and invention do not hibernate during depressions. Du Pont introduced both Nylon and Cellophane during the 1930s.

The desperate quest for real money

Banks Prep for Life After Euro

Countries Study Printing Their Own Notes in Case Monetary Union Unravels

By DAVID ENRICH, DEBORAH BALL and ALISTAIR MACDONALD

Some central banks in Europe have started weighing contingency plans to prepare for the possibility that countries leave the euro zone or the currency union breaks apart entirely, according to people familiar with the matter.

The first signs are surfacing that central banks are thinking about how to resuscitate currencies based on bank notes that haven't been printed since the first euros went into circulation in January 2002.

At least one—the Central Bank of Ireland—is evaluating whether it needs to secure additional access to printing presses in case it has to churn out new bank notes to support a reborn national currency, according to people familiar with the matter.

Outside the 17-country euro zone, numerous European central banks are eyeing defensive measures to protect against the possible fallout if the euro zone were to unravel, other people said. Several, including Switzerland, are considering possible replacements for the euro as the external reference point, or peg, they use to try to keep their currencies' values stable.

The central banks' planning is preliminary, according to the people familiar with the matter. It doesn't represent an expectation that the euro zone is headed for dissolution.

But the fact central bankers are even studying the possibility, which until this fall was considered unthinkable, underscores how swiftly conditions have deteriorated. Policy makers, central bankers and investors around the world have pinned their hopes on this week's Brussels summit to forge a long-awaited solution to the Continent's two-year financial crisis, which was ignited by doubts over countries' abilities to pay their debts.

The stakes are high. A failure of Europe's leaders to defuse the crisis would fuel already growing doubts about the viability of the euro zone. Many policy makers, bankers and other experts fear the monetary union's unraveling would not only reverse a decade of economic integration but also would trigger financial chaos.

All eyes are now on the European Central Bank and its rate decision today ahead of a crucial meeting of European Union leaders in Brussels. Dow Jones's Martin Essex discusses market expectations and institutional faultlines.

J.P. Morgan Chase & Co. put out a report Wednesday that advised investors and companies to hedge against a collapse of the euro zone—though the bank said the likelihood of that happening was just 20%. It said many corporate clients were buying currency derivatives to place bets against the euro.

Before the formal launch of the euro in January 2002, an army of planners spent years choreographing the logistics of the currency's debut, including the minting of billions of bank notes and coins and the distribution of the new currency to banks and businesses across the Continent. Disassembling the bloc would be messy at best. Among the many challenges, loans and deposits currently denominated in euros would have to be switched to new currencies. And individual countries would need to decide whether to dust off their old currencies and, if so, how to quickly produce large quantities of paper money.

In Montenegro, which used Germany's Deutsche mark as legal tender before it adopted the euro in 2002, central bank officials are weighing their options for life after the euro. The Balkan country would have "a wide range of possibilities, from using another foreign currency to the introduction of a domestic currency," said Nikola Fabris, chief economist at Montenegro's central bank. One problem with the latter option: Montenegro doesn't have the capacity to print its own money, he said.

Most euro-zone central banks maintain at least limited capacities to print bank notes. While the European Central Bank is responsible for determining the euro zone's supply of bank notes, it doesn't actually print them. The ECB outsources the work to central banks of euro-zone countries. Each year, groups of countries are assigned the task of printing millions of bank notes in specific denominations.

The countries have different arrangements for printing their shares of the notes. Some, like Greece and Ireland, own their printing presses. Others outsource to private companies.

The assignments vary from year to year. Last year, Ireland printed 127.5 million €10 notes, and nothing else, according to its annual report. This year, it was among 11 countries assigned to print a total of 1.71 billion €5 notes.

In recent weeks, officials at Ireland's central bank have held preliminary discussions about whether they might need to acquire additional printing capacity in case the euro zone ruptures or Ireland exits in order to return to its prior currency, the Irish pound, according to people familiar with the matter. Officials have discussed reactivating old printers or enlisting a private company, the people said. "All kinds of things are being looked at that weren't being looked at two months ago," according to a person at one meeting. A spokeswoman for the Irish Central Bank declined to comment.

In Greece, widely regarded as the country most likely to leave the euro zone because of its fiscal problems, the central bank has a bank-note printing facility called IETA. Built in 1941, the Attica plant today is outfitted with "state-of-the-art machinery," according to the Bank of Greece's website. But IETA's printing in recent years has been limited. It has been one of five or six countries responsible for printing batches of €10 notes, according to the ECB.

Athens has buzzed with rumors over the past year that the Bank of Greece was secretly printing drachmas, Greece's pre-euro currency. Widely circulated joke emails featured drachma bank notes bearing the image of then-Prime Minister George Papandreou. The rumors at times have been blamed for triggering waves of withdrawals from Greek retail banks.

A Bank of Greece spokesman said the bank isn't looking for ways to boost its printing capacity. "There has been no talk regarding this issue," he said.

Some euros are currently produced outside the euro zone. In the northern England city of Gateshead, for example, a De La Rue PLC plant prints bank notes on behalf of several euro-zone countries, according to people familiar with the matter.

The Gateshead facility also serves as a backup plant for the Bank of England, which has a separate contract with De La Rue to print British pounds, according to a Bank of England spokesman.

The situation has worried some Bank of England officials, according to a person familiar with the matter. The concern is that if the euro zone unraveled, the Gateshead facility could be overwhelmed with requests from former euro-zone countries to print their national currencies, the person said.

That has prompted the Bank of England to consider steps to ensure that its ability to print British pounds isn't compromised, the person said.

The Bank of England spokesman said the bank isn't looking to "gain additional access to De La Rue's facility in Gateshead." A De La Rue spokeswoman declined to comment.

While some euro-zone countries have their own printing presses, "there might be other opportunities arising from any possible breakup of the euro as many of the smaller countries don't have state printing works," said Tim Cobbold, De La Rue's chief executive, in a statement. He noted that it usually takes about six months to develop a new currency with the necessary security features.

In Switzerland, which like the U.K. isn't part of the euro zone, the central bank has used the euro as its external reference point in its efforts to keep the Swiss franc's value stable.

Now, officials at the Swiss National Bank are considering what currency or basket of currencies would replace the euro as its reference point for the currency ceiling, according to a person familiar with the situation.

Before the advent of the euro, Germany's mark was Switzerland's main point of reference—including a period in the 1970s when the Swiss National Bank pegged the franc against the mark to rein in a surge in the Swiss currency. Today, as in the 1970s, Germany is Switzerland's largest trading partner, so a new Deutsche mark could in theory substitute for the euro, according to this person, although the bank is considering other scenarios, such as the formation of more than one currency bloc within Europe.

Central bank officials in Bosnia and Herzegovina, whose convertible mark is currently pegged to the euro, could switch to whatever hard currency emerges in the case of a breakup of the euro, a spokeswoman said. Before Bosnian officials fixed the national currency against the euro in 2002, they used the Deutsche mark as the peg.

Latvia's currency, the lat, is also pegged to the euro. The country's central bank doesn't expect the euro's demise but "could be expected" to look for a potential new peg among other European countries with "prudent fiscal policies" and with which Latvia already trades heavily, said a spokesman for Latvijas Banka.

The Bundesbank wants slowly and quietly out.

Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?

by Tyler Durden

While much has been said about the vagaries in the European repo market elsewhere, the truth is that the intraday variations of assorted daily metrics thereof indicate three simple things: a scarcity of quality assets that can be pledged at various monetary institutions in exchange for cash or synthetic cash equivalents, a resulting lock up in interbank liquidity, and above all, a gradual freeze of the shadow banking system. As we have been demonstrating on a daily basis, we have experienced all three over the past several months, as the liquidity situation in Europe has gotten worse, morphing to lock ups in both repo and money markets. As a reminder, both repo and money markets (for a full list see here), are among the swing variables in shadow banking. And shadow banking is nothing more than a way to expand credit money while undergoing the three traditional banking "transformations" - those of maturity, liquidity and credit risk, although unlike traditional liabilities, these occur in the "shadow" or unregulated area of finance, interlocked between various institutions, which is why the Fed has historically expressed so much caution when it comes to discussing the latent threats in it.

Indicatively, of the $15.5 trillion in shadow US liabilities (by far the biggest such system in the world), $2.6 trillion are liabilities with money market mutual funds and just $1.2 trillion are repos. Indicatively, traditional plain vanilla bank liabilities amounted to $13.4 trillion as of Q2 (an updated for Q3 is imminent). As such, the focus on repo while useful, misses the forest for the trees, which is that not the repo market, but the entire shadow banking system in Europe is becoming unglued.

What explains this? Two simple words, which form the foundation of modern finance - "risk" and "confidence", and in Europe both are virtually nil. Seen in this light, the unwind of the shadow system explains much: the inability of Germany to place bunds, the parking of cash with the ECB, the freezing of repo, the plunge in the currency basis swaps, the withdrawal of money markets, the blow out of various secured-unsecured lending indicators, etc. All of these fundamentally say the same thing: there is too much risk and not enough confidence, to rely on the abstraction that is shadow risk/maturity/and liquidity transformation. All this is easily comprehended. What is slightly more nuanced, is the activity of the ECB and especially the Bundesbank in the last few weeks, whereby as Perry Mehrling of Ineteconomics demonstrates, we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it.

So just what is happening? Mehrling first explains the European funding status quo:

Apparently everybody, borrowers and lenders, public and private, wants the ECB as their counterparty.  Reluctant though the ECB may be to step into that role, and vocal as the ECB has been about that reluctance, what we are seeing in practice is that it has no choice, literally. Clearing imbalances within the Eurozone that cannot be resolved in the interbank market show up mechanically as imbalances between national central banks on the books of the ECB (see here  for details).  The ECB lends to the central bank of the deficit country and borrows from the central bank of the surplus country, so expanding its own balance sheet on both sides.   (Think Greece on the asset side, and Germany on the liability side.)
Something quite similar happens when private banks settle private clearing imbalances not by shifting reserves from deficit to surplus but rather by the deficit bank borrowing from the ECB and the surplus bank lending.  Again, the ECB balance sheet expands on both sides.Why is this happening? The underlying problem is that deficit central banks and deficit private banks increasingly have nothing to sell (or to pledge) that surplus central banks and surplus private banks want to buy (or accept as collateral for a loan).   The ECB is also reluctant to buy--it is serving as pawnbroker of last resort , not dealer of last resort.
The consequence is that the ECB  is more or less forced to lend, against more or less whatever collateral is offered; even bad collateral is better than no collateral.  (The famous Bagehot Principle offers an out, since it urges valuation of collateral at non-stress prices.) 

So far so good: this is the system that as noted above is slowly crumbling. So what is happening next? One read is the following:

Now comes the latest deal over eurozone fiscal rules , presumably the deal that ECB President Draghi asked for last week .  It is a deal about sovereign budget discipline.  But if I read Draghi's speech right, we should not expect him to be buying sovereign debt.  (That will be the IMF's job, if anyone's, and with strict conditionality; details to be sorted later.)
Instead, he'll be buying bank debt, specifically the debt of the banks that hold the sovereign debt.  Banks currently borrowing from their own national central banks will therefore be able to repay, and consequently the national central banks will be able to repay the ECB.  This takes national central banks out of the picture on the asset side.What about the liability side?  Here, perhaps in a longer time frame, I think the logical move is again to take the national central bank out of the equation, by replacing liabilities to the Bundesbank with deposits to the credit of private banks.    Freed from the responsibility to fund ECB loans to other central banks, the Bundesbank will be able to return to its preferred asset holding, German sovereign bonds.

One conclusion that is possible is that one proposed by Mehrling: "we're not going to be using the payment system to hide imbalances any more.  The ECB is going to serve as a proper lender of last resort to the banking system, affirmatively and up front rather than mechanically and through the back door.  But it will be doing so only to the banking system, not to sovereign debtors." It would be expected that some combination of EFSF/IMF funding would sourced the balance. In effect the ECB would intermediate itself directly in the national bank bailout scheme, allowing it to be more like the Fed, which has been the primary complaint against the ECB all along.

There is also one other explanation: the Bundesbank wants slowly and quietly out.

As a reminder, while the Fed is the one central bank in the world which supposedly has the biggest amount of gold in possession with 8.1 thousand tonnes, Buba is #2  with 3,401 tonnes. In other words, it has a solid backing to its fiat asset representation. However, unlike the Fed, the Bundesbank is part of a nation that has a natural trade surplus and thus is cash flow positive from a current account perspective. One may say that Germany, far more than the US and the UK, is the world's truly AAA-rated nation. All this means that the Bundesbank, if disambiguated from the ECB, where it currently is accountable for funding a major portion of deficit nations' funding deficiency, would regain its status as the world highest quality monetary institution. And going back to the beginning, it is the Bundesbank which is effectively depleting "good money" in exchange for "bad" either in the form of undervalued collateral through the repo markets, or soon to be devalued fiat.

Here one has to keep in mind the primary prerogative of the Buba - keep inflation low. If that means detaching from a failing currency, or halting asset-liability matching in which it hands out good money in exchange for worthless assets, so be it.

Which is why another interpretation of the ECB's proposal is not to bring the ECB as a lender of only resort closer to the peripheral, deficit nations, but to commence proceedings for severing the umbilical cord of the Bundesbank with a Eurozone which is doomed in all but the most optimistic eyes. Bringing us to our question: for anyone wondering what the future of the Eurozone is, should they merely observe what steps  the German central bank is stealthily starting to take. Because if indeed the Buba wants to have as little as possible with Europe, what does that mean for the EUR, and for Europe itself?

Imperial presidents

Did FDR Provoke Pearl Harbor?

By Patrick J. Buchanan

On Dec. 8, 1941, Franklin Roosevelt took the rostrum before a joint session of Congress to ask for a declaration of war on Japan.

A day earlier, at dawn, carrier-based Japanese aircraft had launched a sneak attack devastating the U.S. battle fleet at Pearl Harbor.

Said ex-President Herbert Hoover, Republican statesman of the day, “We have only one job to do now, and that is to defeat Japan.”

But to friends, “the Chief” sent another message: “You and I know that this continuous putting pins in rattlesnakes finally got this country bit.”

Today, 70 years after Pearl Harbor, a remarkable secret history, written from 1943 to 1963, has come to light. It is Hoover’s explanation of what happened before, during and after the world war that may prove yet the death knell of the West.

Edited by historian George Nash, Freedom Betrayed: Herbert Hoover’s History of the Second World War and Its Aftermath, is a searing indictment of FDR and the men around him as politicians who lied prodigiously about their desire to keep America out of war, even as they took one deliberate step after another to take us into war.

Yet the book is no polemic. The 50-page run-up to the war in the Pacific uses memoirs and documents from all sides to prove Hoover’s indictment. And perhaps the best way to show the power of this book is the way Hoover does it — chronologically, painstakingly, week by week.

Consider Japan’s situation in the summer of 1941. Bogged down in a four year war in China she could neither win nor end, having moved into French Indochina, Japan saw herself as near the end of her tether.

Inside the government was a powerful faction led by Prime Minister Prince Fumimaro Konoye that desperately did not want a war with the United States.

The “pro-Anglo-Saxon” camp included the navy, whose officers had fought alongside the U.S. and Royal navies in World War I, while the war party was centered on the army, Gen. Hideki Tojo and Foreign Minister Yosuke Matsuoka, a bitter anti-American.

On July 18, 1941, Konoye ousted Matsuoka, replacing him with the “pro-Anglo-Saxon” Adm. Teijiro Toyoda.

The U.S. response: On July 25, we froze all Japanese assets in the United States, ending all exports and imports, and denying Japan the oil upon which the nation and empire depended.

Stunned, Konoye still pursued his peace policy by winning secret support from the navy and army to meet FDR on the U.S. side of the Pacific to hear and respond to U.S. demands.

U.S. Ambassador Joseph Grew implored Washington not to ignore Konoye’s offer, that the prince had convinced him an agreement could be reached on Japanese withdrawal from Indochina and South and Central China. Out of fear of Mao’s armies and Stalin’s Russia, Tokyo wanted to hold a buffer in North China.

On Aug. 28, Japan’s ambassador in Washington presented FDR a personal letter from Konoye imploring him to meet.

Tokyo begged us to keep Konoye’s offer secret, as the revelation of a Japanese prime minister’s offering to cross the Pacific to talk to an American president could imperil his government.

On Sept. 3, the Konoye letter was leaked to the Herald-Tribune.

On Sept. 6, Konoye met again at a three-hour dinner with Grew to tell him Japan now agreed with the four principles the Americans were demanding as the basis for peace. No response.

On Sept. 29, Grew sent what Hoover describes as a “prayer” to the president not to let this chance for peace pass by.

On Sept. 30, Grew wrote Washington, “Konoye’s warship is ready waiting to take him to Honolulu, Alaska or anyplace designated by the president.”

No response. On Oct. 16, Konoye’s cabinet fell.

In November, the U.S. intercepted two new offers from Tokyo: a Plan A for an end to the China war and occupation of Indochina and, if that were rejected, a Plan B, a modus vivendi where neither side would make any new move. When presented, these, too, were rejected out of hand.

At a Nov. 25 meeting of FDR’s war council, Secretary of War Henry Stimson’s notes speak of the prevailing consensus: “The question was how we should maneuver them (the Japanese) into … firing the first shot without allowing too much danger to ourselves.”

“We can wipe the Japanese off the map in three months,” wrote Navy Secretary Frank Knox.

As Grew had predicted, Japan, a “hara-kiri nation,” proved more likely to fling herself into national suicide for honor than to allow herself to be humiliated.

Out of the war that arose from the refusal to meet Prince Konoye came scores of thousands of U.S. dead, Hiroshima, Nagasaki, the fall of China to Mao Zedong, U.S. wars in Korea and Vietnam, and the rise of a new arrogant China that shows little respect for the great superpower of yesterday.

If you would know the history that made our world, spend a week with Mr. Hoover’s book.