Europe is as full of bad ideas as it is of bad debts.

How Bad Ideas Worsen Europe’s Debt Meltdown

By John H. Cochrane 

Conventional wisdom says that sovereign defaults mean the end of the euro: If Greece defaults it has to leave the single currency; German taxpayers have to bail out southern governments to save the union.

This is nonsense. U.S. states and local governments have defaulted on dollar debts, just as companies default. A currency is simply a unit of value, as meters are units of length. If the Greeks had skimped on the olive oil in a liter bottle, that wouldn’t threaten the metric system.

Bailouts are the real threat to the euro. The European Central Bank has been buying Greek, Italian, Portuguese and Spanish debt. It has been lending money to banks that, in turn, buy the debt. There is strong pressure for the ECB to buy or guarantee more. When the debt finally defaults, either the rest of Europe will have to raise trillions of euros in fresh taxes to replenish the central bank, or the euro will inflate away.

Leaving the euro would also be a disaster for Greece, Italy and the others. Reverting to national currencies in a debt crisis means expropriating savings, commerce-destroying capital controls, spiraling inflation and growth-killing isolation. And getting out won’t help these countries avoid default, because their debt promises euros, not drachmas or lira.

Perils of Devaluation

Defenders think that devaluing would fool workers into a bout of “competitiveness,” as if people wouldn’t realize they were being paid in Monopoly money. If devaluing the currency made countries competitive, Zimbabwe would be the richest country on Earth. No Chicago voter would want the governor of Illinois to be able to devalue his way out of his state’s budget and economic troubles. Why do economists think Greek politicians are so much wiser?

The latest plan calls for Europe to be tougher in enforcing deficit rules that are similar to the ones that they blithely ignored for 10 years. Sure, a directive from Brussels is really going to get the Greeks to shape up. Imagine how well it would work if the International Monetary Fund or theUnited Nations tried to veto U.S. budget deficits. (That is, if our Congress passed budgets to begin with.) This plan is mostly a way to let the ECB save face and buy up bad debt with freshly printed euros.

More fiscal union hurts the euro. Think of Poland or Slovakia. Using euros was once a no-brainer: It made sense to use the same currency as all the other small countries around them, just as Illinois wants to use the same currency as Indiana.

Now, it’s not so clear: If using this currency means signing up to bail out Greece and Italy, then maybe adopting the euro isn’t such a good idea. A common currency without a fiscal union could have universal appeal. A currency union with a bailout-based fiscal union will remain a small affair.

Europeans leaders think their job is to stop “contagion,” to “calm markets.” They blame “speculation” for their troubles. They keep looking for the Big Announcement that will soothe markets into rolling over another few hundred billion euros of debt. Alas, the problem is reality, not psychology, and governments are poor psychologists. You just can’t fill a trillion-euro hole with psychology.

President Nicolas Sarkozy of France said Greece is like Lehman Brothers Holdings Inc. and its collapse would bring down the financial system. Greece isn’t Lehman. It doesn’t have trillions of dollars of offsetting derivatives contracts. It isn’t a broker-dealer, whose failure would freeze all sorts of assets. Its creditors don’t have the legal right to seize assets owed to counterparties. Greece is just a plain-vanilla sovereign borrower, like those that have been defaulting since Edward III stiffed the Perruzzi bank in the 1340s.

Banks’ Debt

Sovereign default would damage the financial system, however, for the simple reason that Europe has allowed its banks to load up on debt, kept on the books at face value, and treated as riskless and buffered by no capital.

Indebted governments have been pressuring banks to buy more debt, not less. As banks have been increasing capital, they have loaded up even more on “risk-free” sovereign debt, which they can use as collateral for ECB loans. The big ECB “liquidity operation” that took place yesterday will give banks hundreds of billions of euros to increase their sovereign bets. Bank depositors and creditors have figured this out, and are running for the exits.

By stuffing the banks with sovereign debt, European politicians and regulators are making the inevitable default much more financially dangerous. So much for the faith that regulation will keep banks safe.

The euro’s fatal flaw then wasn’t to unite areas with differing levels and types of development under one currency. After all, Mississippi and Manhattan use the same money. Nor was it to deprive governments of the ephemeral pleasures of devaluation. Nor was it to envision a currency union without fiscal union.

Banking misregulation was the euro’s fatal flaw. Sovereign debt, which can always avoid explicit default when countries print money, doesn’t remain risk-free in a currency union. Yet banking regulators and ECB rules continue to pretend otherwise.

So, by artful application of bad ideas, Europe has taken a plain-vanilla sovereign restructuring and turned it into a banking crisis, a currency crisis, a fiscal crisis, and now a political crisis.

When the era of wishful thinking ends, Europe will face a stark choice. It can have a monetary union without sovereign defaults. That option means fiscal union, accepting real German control of Greek and Italian (and maybe French) budgets. Nobody wants that, with good reason.

Or Europe can have a monetary union without fiscal union. That would work well, but it needs to be based on two central ideas: Sovereigns must be able to default just like companies, and banks, including the central bank, must treat sovereign debt just like company debt.

The final option is a breakup, probably after a crisis and inflation.

The euro, like the meter, is a great idea. Throwing it away would be a real and needless tragedy

Once a Trotskyist always a Trotskyist

Exporting Revolution and Reaping Blowback

By Patrick J. Buchanan 

Friday’s lead stories in The Washington Post and The Wall Street Journal dealt with what both viewed as a national affront and outrage.

Egyptian soldiers, said the Post, “stormed the offices” of three U.S. “democracy-building organizations … in a dramatic escalation of a crackdown by the military-led government that could imperil its relations with the United States.”

The organizations: Freedom House, the International Republican Institute and the National Democratic Institute.

Cairo contends that $65 million in “pro-democracy” funding that IRI, NDI and Freedom House received for use in Egypt constitutes “illegal foreign funding” to influence their elections.

“A Provocation in Egypt,” raged the Post.

An incensed Freedom House President David Kramer said the raids reveal that Egypt’s military “has no intention of allowing the establishment of genuine democracy.”

Leon Panetta phoned the head of the military regime. With $1.3 billion in U.S. military aid on the line, Field Marshal Mohamed Hussein Tantawi backed down. The raids will stop.

Yet this is not the first time U.S. “pro-democracy” groups have been charged with subverting regimes that fail to toe the Washington line.

In December, Vladimir Putin claimed that hundreds of millions of dollars, mostly from U.S. sources, was funneled into his country to influence the recent election, and that Hillary Clinton’s denunciation of the results was a signal for anti-Putin demonstrators to take to Moscow’s streets.

In December also, a top Chinese official charged U.S. Consul General Stephen Young in Hong Kong with trying to spread disorder. “Wherever (Young) goes, there is trouble and so-called color revolutions,” said the pro-Communist Party Hong Kong newspaper Wen Wei Po.

Beijing, added the Post, has been “jittery following this year’s Arab Spring and calls on the Internet for the Chinese to follow suit with a ‘jasmine revolution.’” The Jasmine Revolution was the uprising that forced Tunisia’s dictator to flee at the outset of the Arab Spring.

Yet one need not be an acolyte of the Egyptian, Chinese or Russian regimes to wonder if, perhaps, based on history, they do not have a point.

Does the United States interfere in the internal affairs of nations to subvert regimes by using NGOs to funnel cash to the opposition to foment uprisings or affect elections? Are we using Cold War methods on countries with which we are not at war — to advance our New World Order?

So it would seem. For, repeatedly, Freedom House, IRI and NDI have been identified as instigators of color-coded revolutions to replace autocrats with pro-American “democrats.”

Ukraine’s Orange Revolution was marked by mass demonstrations in Kiev to overturn the election of a pro-Russian leader and bring about his replacement by a pro-Western politician who sought to move his country into NATO. The Orange Revolution first succeeded, but then failed.

A U.S.-engineered Rose Revolution in 2002 overthrew President Eduard Shevardnadze of Georgia and brought about his replacement by Mikheil Saakashvili, who then invaded South Ossetia, to be expelled by the Russian Army.

Following the assassination of ex-Prime Minister Rafik Hariri, a Cedar Revolution, featuring massive demonstrations in Beirut against Syria, effected the withdrawal of its occupation army from Lebanon.

In Belarus, however, marches on parliament failed to overturn an election that returned Alexander Lukashenko to power.

The Tulip Revolution brought about the overthrow of President Askar Akayev in Kyrgyzstan. But that, too, did not turn out as well as we hoped.

When one considers the long record of U.S. intervention in nations far from our borders, that an ex-chairman of Freedom House is the former CIA Director James Woolsey, that the longtime chairman of IRI is the compulsive interventionist John McCain, who has been trading insults with Putin, and that Kenneth Wollack, president of NDI, was once director of legislative affairs for the Israeli lobby AIPAC, it is hard to believe we are clean as a hound’s tooth of the charges being leveled against us, no matter how suspect the source.

One recalls that, in 1960, when the United States said a weather plane had strayed off course, and Nikita Khrushchev said it was a U.S. spy plane they had shot down, the Butcher of Budapest turned out to be telling the truth.

Instead, why is the U.S. government funding Freedom House, IRI and IDI, if not to bring about change in countries whose institutions or policies do not conform to our own?

As Leon Trotsky believed in advancing world communist revolution, neocons and democratists believe we have some inherent right to intervene in nations that fail to share our views and values.

But where did we acquire this right?

And if we are intervening in Egypt to bring about the defeat of the Muslim Brotherhood and Salafis, and the Islamists win as they are winning today, what do we expect the blowback to be? Would we want foreigners funneling hundreds of millions of dollars into our election of 2012?

How would Andrew Jackson have reacted if he caught British agents doing here what we do all over the world?

Cui Bono ?

Due North: Canada’s Marvelous Mortgage and Banking System

What about the Canadian banking system allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking?

By Mark J. Perry

There were some significant differences between Canada and the United States during the recent financial crisis. In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses. Taking a closer look at these differences might tell us how the United States got into the mess it is in, and illuminate some ideas for future reforms.

Consider, for example, some of the following facts, illustrated with charts.

Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:

 

Canada has had nowhere near the problems with mortgage delinquencies and home foreclosures as the United States:

Yet Canadian banks remained profitable and reported positive return on equity even in the worst year of the meltdown, 2008, when U.S. banks (and banks in the United Kingdom and Europe) lost money and had negative returns on equity.

These were some of the more interesting banking statistics present recently at the American Enterprise Institute’s seminar, “Canadian versus U.S. Housing Finance: Comparison and Implications,” organized by AEI resident fellow Alex Pollock.

And this recent financial crisis isn’t the first time that Canada’s banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great Depression, not a single bank in Canada failed. When almost 3,000 American banks failed during the Savings and Loan (S&L) Crisis, only two small Canadian banks failed in 1985, and those were the first bank failures in Canada since 1923. And while almost 200 U.S. banks have failed since the start of the global recession in early 2008, Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

What about the Canadian banking system allowed it to survive the recent worldwide slowdown, and even the Great Depression, without a single bank failure, and what can the United States learn from Canada about sound banking? Below is a summary of some of the distinctly different features of Canada’s banks and mortgage markets discussed at the AEI seminar, which help explain the greater financial stress resiliency of Canadian banks compared to American banks.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. (Addendum: Except that any capital gains from the sale of a principal residence in Canada are not taxed). There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with home ownership.

Canada’s banks are generally ranked as the safest and soundest in the world, and their non-politicized banking system could provide a model for banking reform in the United States. Moving towards the Canadian banking system could go a long way towards stabilizing our mortgage, credit, and housing markets and make us less vulnerable to financial shocks in the future.

A pebble in the river of U.S. history

Apocalypse postponed

By George Will

In 2011, for the first time in 62 years, America was a net exporter of petroleum products. For the indefinite future, a specter is haunting progressivism, the specter of abundance. Because progressivism exists to justify a few people bossing around most people and because progressives believe that only government’s energy should flow unimpeded, they crave energy scarcities as an excuse for rationing — by them — that produces ever-more-minute government supervision of Americans’ behavior.

Imagine what a horror 2011 was for progressives as Americans began to comprehend their stunning abundance of fossil fuels — beyond their two centuries’ supply of coal. Progressives responded with attempts to impede development of the vast, proven reserves of natural gas and oil here and in Canada. They bent the willowy Obama to delay approval of the Keystone XL pipeline to carry oil from Canadian tar sands; they raised environmental objections to new techniques for extracting gas and “tight” oil from shale formations.

An all-purpose rationale for rationing in its many permutations has been the progressives’ preferred apocalypse, the fear of climate change. But environmentalism as the thin end of an enormous wedge of regulation and redistribution is a spent force. How many Americans noticed that the latest United Nations climate change confabulation occurred in December in Durban, South Africa?

The futility of this nullity signaled the end — probably for decades, if not forever — of a trivial pursuit that began 14 years ago with the Kyoto Protocol, which the U.S. Senate would not even bring to a vote. The pursuit was for a 194-nation consensus obligating a few nations to transfer enormous wealth to many other nations’ governments, to be politically distributed by them, with the supposed effect of ending global warming, if such proves to be.

Meanwhile, back in the nation that probably would have ponied up the largest portion of this money, sales of the electric-powered Chevrolet Volt were falling short of General Motors’ goals even before reports about fire hazards in crash tests. And a Wall Street Journal headline proclaimed: “Americans Embrace SUVs Again.”

Because of the Energy Department’s myriad scandals and other misadventures as a venture capital firm (Solyndra,Beacon Power Corp., etc.), it is probable that 2011 will be remembered as the high-water mark of industrial policy. This is another way in which events are draining the Obama presidency of some of its power for mischief. If in November Republicans capture the Senate, which must confirm many senior officials of the executive branch and agencies, only weakness of Republican will can prevent, for example, the Environmental Protection Agency and the National Labor Relations Board from being unconstrained instruments of presidential decrees.

Political logic suggests that this year Obama will try to rekindle the love of young voters with some forgiveness of student debts. But one-third of students do not borrow to pay college tuition. The average debt for those who do borrow to attend a four-year public institution is $22,000, and the average difference between the per-year earnings of college graduates and those with only a high school diploma is . . . $22,000.

It will be interesting to see how such a bailout of young and privileged borrowers will appeal to voters, who will begin to be heard from in Iowa. Before this year is many months old, discerning conservatives may decide that Obama probably has been rescued by the Republican nominating electorate and hence it is time to begin focusing on two things other than the 2012 presidential election. One is capturing the Senate. The other is preparing the ground for a better presidential nomination competition in 2016.

In any case, nothing that happens this November will bring an apocalypse. America had 43 presidencies before the current one and will have many more than that after the end of this one in 2013 or 2017. Decades hence, it will look like most others, a pebble in the river of U.S. history

It is never enough

There’s No Such Thing as a Stable State

By Jeffrey Tucker       

Twenty years ago, and much to the shock of just about everyone, the mighty Soviet Union, the very embodiment of Hegel’s view of the state as the divine on Earth, dissolved and disappeared. The malicious foe of the U.S., the deadly grizzly that was said to wander the world seeking whom it would devour, just rolled over. .

What’s more, the satellite states became independent nations. The empire on its borders devolved into a series of secessions. The map looked totally different one day to the next.

The central power — said to be ruthless and all controlling — lacked the will to fight it out and just gave up, completely unable to control events. The pretense of communism in all these places was dropped, industry was privatized, the countries adopted their old names and their populations were rolled into the global division of labor after 50-plus years of being shut out.

The central plan stopped working, and not only in Moscow. The U.S.’ central plan also excluded the possibility that something this dramatic could happen. A decade of foreign and economic policy had been based on the Kirkpatrick Doctrine that totalitarian states were invulnerable and could only be contained or destroyed from the outside. It was on that basis that the U.S. chose its friends and enemies in the world.

Once the Iron Curtain was pulled back, we found societies ridiculously behind in the march toward material progress. The workers’ paradise had never materialized. And everyone wondered what we had really been afraid of all those years.

There’s no question that the Soviet state was an incredible threat to its own citizens — between 60-100 million deaths at government hands over 72 years — but was it really a threat to you and me? Far from being a superpower, it became clear that the Soviet Union had been decaying from within for a very long time.

I was raised at the tail end of the Cold War, but I find it nearly impossible to describe to younger people what it was like to be surrounded by the great Manichean conflict of those days. It consumed all political thinking from 1948-1991. Hundreds of thousands of experts devoted their lives to strategizing about it, writing about it and making a living off it in many different ways. It was the whole reason behind the gargantuan military empire that the U.S. put together over half a century. It was all done in the name of keeping us safe.

And then one day, it was gone.

Americans feared the communist menace for most of the 20th century. Russia was the embodiment of all evil but for those few years when, implausibly, Russia was oddly deemed an ally in World War II’s even mightier struggle against the horrors of Japan and Germany. Then in 1948, the status quo ante was restored again, and the Red Scare returned with a vengeance — from threat to ally to threat again in a matter of a few short years. It was a turnabout satirized in Orwell’s 1984 (flip the last two numbers and you see the point)…

The great debate of my early political experience concerned whether Russia should be treated as a unique evil in the world or just another country with whom the U.S. should have diplomatic relations. The thinker and intellectual who won the day was Jeane Kirkpatrick. Long before she became secretary of state, she wrote a famous essay, “Dictatorships and Double Standards.” This 1979 classic became a blueprint for the foreign policy of the next decade.

This powerful piece of writing excoriates the Carter administration for its alleged wimpiness on foreign policy, particularly with regard to its unwillingness to support authoritarian, noncommunist governments against the leftist rebels. The idea here is that we can live with authoritarian regimes and eventually democratize them, whereas once a state falls to communism, it is gone forever.

Therefore, the U.S. should back noncommunist thugs of any variety, whether in or out of power. That’s how the U.S. ended up supporting the Islamic fundamentalists in the mujahideen in Afghanistan, for example, that later became the Taliban and later the terror network that the U.S. now says is the mortal enemy.

Kirkpatrick couches in her claims in history, noting, “there is no instance of a revolutionary ‘socialist’ or communist society being democratized.” From there, the forecast is implied: It could never happen, ever. “There are no grounds,” she writes, “for expecting that radical totalitarian regimes will transform themselves.”

A little more than 10 years later, she was not only proven wrong, but history conspired to shred her entire analytical model to bits and toss it in the air like so much confetti. Not only has the Soviet Union vanished, but China is completely transformed. Cuba is privatizing. North Korea is probably the toughest nut to crack, but it too will relent in time.

Now, one might say that it was precisely the military buildup she inspired that brought about this result. The problem with that claim is that the military buildup was not designed to bring about that result, but rather to permanently “contain” the global Soviet reach and prevent it from spreading. In the mid-1980s, not a soul — and certainly not Kirkpatrick herself — anticipated that the next decade would open without the existence of the Soviet state at all.

What had been her mistake? She attempted to forge a law of politics based on recent history projected into the future. Her law blew up because there are no laws of politics of the sort she imagined. There are no permanent regimes. There is no impenetrable system of rules. States are created by elites and uncreated by everyone else. They are all more vulnerable than they appear, because they all consist of the few tricking the many into coughing up their property and giving up their lives on grounds that are ultimately revealed to be lies. When people catch on, the states get shaky and eventually crumble, sometimes when we least expect it.

This is a fact to celebrate, for if any state could create permanent rule, human freedom wouldn’t stand a chance. This is because every state is a conspiracy against liberty. No state is satisfied with just a bit of power and no more, just a bit of your money and no more. There is never enough. We must give and give until our freedom is completely suffocated. In the end, the people don’t like this and will not stand for it forever. This is true everywhere in all times.

Today, our own theorists say that the United States has figured out the key to permanent rule. Madeline Albright called the U.S. the one “indispensable nation.” Mitt Romney said that the U.S. is “the greatest nation in the history of the Earth.” Surely, the current configuration of the United States will last forever. Surely, it is destined to be the one stable and eternal global hegemon. It is the U.S. now that embodies Hegel’s divine will on Earth.

The lesson of the Soviet collapse is not just that socialism doesn’t work. It is that all-embracing statism cannot last, regardless of whether this comes about under one-party tyranny or the illusion of democracy. This experience of 20 years ago ought to instill some humility. In the same way that the Soviet experience was upended, the future history of the last superpower could change just as quickly.

Short-term pain but medium-term gain

On The German Triple-C Issue: Culture, Clausewitz And Clausius

by Brandywine Global Investment Management,

“It does seem to be true that the Germans, more readily than other peoples, can withdraw themselves from the exigencies and contingencies of life into a region of Innerlichkeit.” -John Dewey, Columbia University Professor of Philosophy

The issue of Germany and its approach to ameliorating the over leveraged balance sheets of its southern neighbors will dictate the direction of sovereign spreads in 2012. The direction of sovereign spreads will also determine the direction of risk premium spreads in the leveraged finance markets— both bonds and loans. Defaults in the leveraged finance market will and should be an after thought to the systemic risk factors inherent in sovereign and next-of-kin bank credit spreads. Therefore, forecasting default rates should take a back seat to a better understanding of German Kultur and thought that will shape the euro-zone sovereign finance structure in 2012 and beyond.

[ this is why we are so loathsome to take any notice of the rear-view mirror defaults as well as forecast default expectations as liquidity is much more critical than any macro or micro data]

John Dewey assessed German culture and thought in a 1915 book titled German Philosophy and Politics. His essential point was that “the chief mark of distinctively German culture is its self-conscious idealism with unsurpassed technical efficiency and organization.”

While these words were published nearly 100 years ago, they still ring true. In fact, they are very relevant to better understanding the German psyche and their approach to restructuring the debt of their most troubled southern neighbors, Greece and Portugal.

[short-term pain but medium-term gain on devaluations]

The most recent European Union summit highlighted that we are left with some of the same issues that confronted the great empires prior to World War I—the battle between “English liberalism with its emphasis on individual freedom and self-determination and Prussian socialism with its emphasis on order and authority.”

Events in 2012 will establish the path we will pursue. With this uncertain backdrop, investors should assess credit risk premiums with caution, but remain opportunistic to any changes in the macro background.

For the full article, go to:

Global High Yield Perspectives - 4Q 2011-1