If you aren’t the lead dog the scenery never changes

Fiction has to make sense

By Mark Grant

I stated, quite some time ago, that the recession in Europe would proceed to the United States. It was just a matter of time before the austerity demanded on the Continent began to have its affects in America. We are in earnings season and the numbers have not been pretty. China is in a slow-down, you may append what terminology that you like, but the reality of it is staring you in the face. Exports by all of Asia to Europe are not only in decline but the waterfall is a steep cascade as denoted by China whose exports to Italy are off almost thirty-seven percent. France had to inject $9 billion into Peugeot today as VW reported out profits that declined nineteen percent. I project that by the first quarter of next year that America will also be in a recession as the spillover from Europe darkens our shores.

“There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.”        -Douglas Everett

The equity markets went up, bonds compressed, as the never ending printing presses rolled on in Europe, in China, in Britain and in America. Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? The world’s financial markets have lived off of the largesse of the world’s central banks while the financial projections of each nation in Europe and the IMF churned out numbers, relied upon by many, that were absolute fantasies as proven by the subsequent quarters when real numbers appeared to the gasps of those in the various marketplaces that had expected something else entirely.

Moving Beyond Free-Market Minimalism

Trust is a prerequisite for learning

By Sandy Ikeda

The “economic point of view” means, to a lot of people, assuming people are nothing but cost-cutting opportunists—economizers who wouldn’t hesitate to gain at someone else’s expense if they could get away with it. Such bloodless calculators, though perhaps staying within the law, wouldn’t miss a chance to charge the highest price possible, offer the poorest quality acceptable, and on the meanest terms tolerable. “Let the buyer (or the seller) beware!” is their creed. I’m afraid many economists would agree with this characterization—or, more accurately, caricature. Often, it sours general opinion toward advocates of the free market, who after all are the ones always saying how important economics is for understanding how the real world works.

Free-market minimalism wouldn’t work very well and it isn’t realistic to boot

In a free market, “Scrooge-like behavior” is certainly permissible as long as it doesn’t initiate violence or fraud. But where do the high quality, low price, and innovation we associate with the free market come from? Well, as most economists will tell you, much of it comes from the fear of competition. If you cut corners and charge consistently high prices, even though you may be within your rights to do so, many free-market advocates would rightly point out that free entry and hungry entrepreneurs will tend to keep you in line. That’s important, but it’s not the whole story; not by a long shot.

The mother of all trade pacts is in the making

Get Ready For U.S.-Europe Free Trade

The Editor

Europe's Parliament has moved to revitalize the continent's weak economy by clearing the way for a free-trade agreement with the U.S. A baby step, yes, but if it succeeds, it'll be the mother of all trade pacts.

By a vote of 526-94, the European Parliament approved its first resolution calling for talks on a U.S.-European free-trade agreement, starting in the first half of 2013.

"We wanted to send a strong political signal in favor of opening negotiations with the United States in order to create a real trans-Atlantic market with enormous opportunities for growth," said EU's Vital Moreira before the vote.

It was a smart move coming from a continent that has long protected its industries through high tariffs and tangled regulations. It also comes just as a bill urging U.S.-EU free trade, "The Economic Freedom Alliance Act," is gaining support in Congress.

It will take time, but uniting the world's two largest advanced economies will pay huge dividends.

Another Win-Win for the Oligarchs

Obamneycare 

By Robert S. Dotson, M.D.

“Mitt Romney is a wolf in a wolf’s clothing. Barack Obama is a wolf in a sheep’s clothing, but they both essentially have the same agenda.” – Jill Stein

“Bipartisan usually means that a larger-than-usual deception is being carried out.” – George Carlin

“But we have to pass the bill so that you can find out what is in it away from the fog of controversy.” — Speaker of the House Nancy Pelosi, remarks at the 2010 Legislative Conference for the National Association of Counties prior to passage of PPACA

October has brought the mini-series that accompanies our quadrennial exercise in faux democracy, the Presidential Debates. As has been usual for many decades, the public was entertained by carefully vetted corporatist representatives of War Party A and War Party B via the televised game show format that is sold as “serious debate” here at the End of Empire. Nothing illustrated the silliness and irrelevance of such spectacle better than the inane exchanges between Obama and Romney concerning healthcare. The charade was played out yet again when the Vice Presidential candidates, Biden and Ryan, performed in another non debate on October 11th.

The Safety Nazis and the Mileage Mussolinis

How Government Just Made Your Next Car Less Safe

By eric peters

An epic bout is in the making – and we’ll all have a ringside seat.

In this corner, the Safety Nazis – who have inadvertently made the average new car several hundred pounds heavier (and much more expensive) than it would otherwise be via the piling on of keep-you-safe government mandates, from air bags to telescoping bumpers to crumple zones. In the far corner, we have the MPG Mussolinis. Their obsession is mileage uber alles, which they try to impose via government “fleet average” fuel economy requirements (CAFE).

Up to lately, these two antagonists have not butted heads, if only because the engineering talent in the car industry has been able to figure out at least partial work-arounds that (temporarily) satisfy both sides.

Sort of.

For example, new cars are reasonably, even remarkably, fuel-efficient – despite their massive and ever-increasing bulk. Kind of a like a strong lineman who, though 30 pounds overweight, is still pretty quick on his feet. Cylinder deactivation technology, variable cam/valve timing, direct-injection, seven and eight-speed transmissions with deep overdrive gearing – they counteract the bulk, at least somewhat. Without these technologies, the average new car of 2012 would be a real gas pig.

A disaster that science brought upon itself

The sad conclusion to the scientific community’s depiction of itself as soothsayer

by Brendan O’Neill 

The jailing of six Italian scientists and a government official for failing to predict an earthquake has caused uproar in the scientific community. The men were convicted of manslaughter on the basis that they failed to give an adequate risk assessment of the 2009 earthquake in the central Italian city of L’Aquila, which killed 300 people. Outraged by the court’s verdict, the CEO of the American Academy for the Advancement of Science wrote to the president of Italy to tell him ‘there is no accepted scientific method for earthquake prediction that can be reliably used to inform citizens of an impending disaster’. The verdict is ‘perverse’ and ‘ludicrous’, says the science journal Nature.

That’s true - the verdict is perverse. It has a strong whiff of the Middle Ages about it, except instead of dunking witches for bringing about a harsh winter and destroying crops, we lock up scientists for failing to foresee a fatal earthquake. But at the same time, isn’t the verdict also the tragically logical conclusion to the scientific community’s feverish adoption in recent years of the role of soothsayer, predictor of the world’s end and proponent of solutions for how to prevent it? Over the past decade, leading scientists have repositioned themselves as modern-day diviners, particularly in the climate-change debate, where they insist that not only can they tell us what the world will look like in 50 years’ time, but also what minute changes all of us must make now if we want that future world to be different. And their predictions are treated as unchallengeable credos, as all those awkward, anti-green question-askers who have been branded ‘deniers’ will know.

In such a climate, is it really surprising that scientists who fail to predict a natural disaster, who do not fulfil the role of saviour of mankind that the science community has carved out for itself, can be demonised? If scientists play God, it’s also possible for them to be treated as the Devil.

A Great Victory For Windmills

Hangover is when you open your eyes in the morning and wish you hadn't

By Mark J. Grant

There are two countries that are going to give you a whopper of a headache in the coming months. I am leaving Greece to the side for a moment because that country could provide a heart attack and necessitate bypass surgery as the Troika fiddles while Athens burns. I am just waiting to see what is agreed to for Greece and then how the citizens of that country respond but the home of Democracy is not the only place that could ratchet out of control; keep your eyes on Spain and France. Yes, France, while no one has paid particular attention to the antics in Paris and Monsieur Hollande scurries about siding with the troubled nations and advocating a 75% tax burden and leaving Berlin to wallow in schemes of their own making; they are on the verge of getting in real trouble.

“It is better to open your eyes and say you don't understand, than to close your eyes and say you don't believe.”     -The Wizard

 Spain-The Fighting with the Windmills Continues

They have announced that they are going to build their “bad bank” based upon the findings of Oliver Wyman’s stress tests. What we find here is garbage in---garbage out---and a bad bank built upon the garbage dump they have created. Oliver Wyman verified nothing, audited nothing and was paid to sit idly by and accept the data provided by the Spanish banks and the government of Spain. It is good work if you can get it. Then they took the rubbish and constructed complicated economic models based upon them and presented them to the world as factual. What we actually have here is a fairy tale created by the Hermanos Grimm; and the end of the fairytale will be grim indeed if you rely upon their findings. I recall Prime Minister Rajoy’s “A great victory for Europe speech” and I state that the last time Europe had such a victory it was at Waterloo!

Subjective Value and Government Intervention

Acting as if value were objective is a dangerous practice

By Arnold Kling

Since the 1870s, economists have agreed that value is subjective, but, following Alfred Marshall, many argued that the cost side of the equation is determined by objective conditions. Marshall insisted that just as both blades of a scissors cut a piece of paper, so subjective value and objective costs determine price...But Marshall failed to appreciate that costs are also subjective because they are themselves determined by the value of alternative uses of scarce resources.

               —Peter J. Boettke, "Austrian School of Economics", Concise Encyclopedia of Economics.

The doctrine that all value is subjective raises some important issues. It appears to create a bias against government intervention. Therefore it may explain the correlation between the methodological outlook of Austrian economists and their typically libertarian policy orientation. Put another way, do non-Austrian economists believe that value can be calculated objectively, and are such calculations important for interventionist policies?

The Animal Kingdom of South Africa

The on going genocide that nobody cares about

by  Alex Newman

Along a highway on a grassy hill, thousands of white crosses — each one representing an individual victim of brutal farm murders, or plaasmoorde in Afrikaans — are a stark reminder of the reality facing European-descent farmers in the new South Africa. One of the iron crosses was planted last year in memory of two-year-old Willemien Potgieter, who was executed on a farm and left in a pool of her own blood. Her parents were murdered, too — the father hacked to death with a machete. Before leaving, the half-dozen killers tied a note to the gate: “We killed them. We’re coming back.”
The Potgieter family massacre is just one of the tens of thousands of farm attacks to have plagued South Africa since 1994. Like little Willemien’s cross, many of those now-iconic emblems represent innocent children, even babies, who have been savagely murdered, oftentimes after being tortured in ways so gruesome, horrifying, and barbaric, that mere words could never adequately describe it. The death toll is still rising.

Protectionism In France

Shooting From The Hip And Hitting Consumers

By Wolf Richter  

That France’s economy is hurting is an understatement. Today’s manufacturing index tested depths not seen since 2009 during the trough of the financial crisis. Orders plunged and employment was morose. The service sector index dove to the lowest level since January 2009. Cited reasons: “unfavorable business climate and lack of visibility.” It confirmed yesterday’s Insee business climate index, which, at the lowest level since mid-2009, was mired in pessimism.

So the government deployed its big gun: Industry Minister Arnaud Montebourg. He’d turn around the economy by revitalizing industry; and he has been on the forefront with his vision.

From Kuriles with love

The expansion of Russian-Japanese cooperation can only add to Russia's influence in the Asia-Pacific region

By M K Bhadrakumar 

The geopolitics of the Asia-Pacific region is getting set for a significant makeover, with Russia and Japan embarking on a fresh dialogue at the diplomatic and political level. Japanese Prime Minister Yoshihiko Noda is scheduled to visit Russia in December and preparatory working-level consultations were held in Tokyo this past weekend between Russian Deputy Foreign Minister Igor Morgulov and his Japanese counterpart Akitaka Saiki. 

The consultations have been followed up by an unannounced visit by Russian Security Council chief Nikolai Patrushev to Tokyo on Tuesday to meet with Japanese Foreign Minister Koichiro Genba. The weekend's working-level meeting itself signaled the mutual interest to kick-start another attempt to resolve the long-standing dispute between the two countries over the Kurile Islands. 

Key to magical garden
Significantly, the weekend talks converged on the importance of the so-called 2001 Irkutsk Statement (which reiterated the 1956 joint declaration between the former Soviet Union and Japan whereby Moscow had agreed to return two of the four disputed islands to Japan). 

What You Can't Say

The origins of slavery

by Walter E. Williams

Jon Hubbard, a Republican member of the Arkansas House of Representatives, has a book, titled Letters to the Editor: Confessions of a Frustrated Conservative. Among its statements for which Hubbard has been criticized and disavowed by the Republican Party is, "The institution of slavery that the black race has long believed to be an abomination upon its people may actually have been a blessing in disguise. The blacks who could endure those conditions and circumstances would someday be rewarded with citizenship in the greatest nation ever established upon the face of the Earth."

Hubbard's observation reminded me of my 1972 job interview at the University of Massachusetts. During a reception, one of the Marxist professors asked me what I thought about the relationship between capitalism and slavery. My response was that slavery has existed everywhere in the world, under every political and economic system, and was by no means unique to capitalism or the United States. Perturbed by my response, he asked me what my feelings were about the enslavement of my ancestors. I answered that slavery is a despicable violation of human rights but that the enslavement of my ancestors is history, and one of the immutable facts of history is that nothing can be done to change it.

Debt Black Hole Event Horizon

Economic Singularity and the Minsky Moment

"The alternative 'demand support view' also recognizes the need to contain debt accumulation and avoid high inflation, but it pushes for steps to increase demand in the short run as a means of jump-starting economic growth and setting off a virtuous circle in which income growth, job creation and financial strengthening are mutually reinforcing. International economic dialogue has vacillated between these two viewpoints in recent years."

– Lawrence Summers, The Financial Times, October 14, 2012

By John Mauldin

There is indeed considerable disagreement throughout the world on what policies to pursue in the face of rising deficits and economies that are barely growing or at stall speed. Both sides look at the same set of realities and yet draw drastically different conclusions. Both sides marshal arguments based on rigorous mathematical models "proving" the correctness of their favorite solution, and both sides can point to counter factual that show the other side to be insincere or just plain wrong.

Spain and Greece are both examples of what happens when there is too much debt and austerity is applied to deal with the problem. One side argues that the cure for too much debt is yet more debt, while the other side seemingly argues that the cure for a lack of growth is to shrink the economy. It is as if one side argues that the cure for a night of drunken revelry is a fifth of whiskey while the other side prescribes a very-low-calorie diet of fiber and veggies.

Advanced democracies have lost upward mobility

Once upward mobility is lost, "social recession" sets in and the social contract frays

by Charles Hugh-Smith

Both capitalism and democracy promise the opportunity for upward mobility. Capitalism offers upward mobility to anyone with a profitable idea or productive skillset and work ethic. Democracy implicitly promises a "level playing field" of meritocracy, where talent, drive and hard work open opportunities for advancement.

Crony capitalism offers wealth to the class that already possesses it. Feudalism bestows "rights" to wealth to a favored few. In a way, upward mobility is a real-world test of a nation's economic and social order: if upward mobility exits in name only, then that nation is neither capitalist nor democratic. Stripped of propaganda and misleading labels, it is a feudal society or a crony-capitalist economy masquerading as a capitalist democracy.

Japan is an interesting case study. Some readers of last week's series on Japan noted that Japan was still very wealthy and life was good there. Indeed, some commentators have made the case that Japan has purposefully indebted itself to mask the wealth generated by its export machine: The Myth That Japan is Broke. (via Mike H.)

Ben Bernanke's Secret Philanthropy

Our ‘free society’ has awarded a tiny elite the supreme power to control the price of money

by Simon Black

Legendary oilman T. Boone Pickens famously calls America’s oil imports ‘the greatest transfer of wealth in the history of the world.’

Pickens is referring to the money that is paid each year to oil exporting nations, particularly those in the Persian Gulf which raked in around $100 billion last year.

No doubt, this is an enormous transfer of wealth. But it’s a drop in the bucket compared to the TRILLIONS that Ben Bernanke gives the world’s elite.

Over the past few years, central banks have created trillions of dollars, most of which they loaned to commercial banks at 0%. The commercial banks then loaned this money to their best customers (and governments) at a slightly higher rate.

The end result is that a huge chunk of those trillions ended up in the pockets of a small handful of people. The banks and their best customers get sweetheart deals to make even more money, while the vast majority of people get screwed with inflation.

Can Europe prevent Asia's rise?

As Asian states become more influential, international institutions will be molded in an Asian image

By Barry Desker 

Attending conferences in Europe and the United States over the past three years, I have been struck by the increasing Western preoccupation with Asia's rise, the growing influence of the rising powers of Asia, and the challenge they pose to Western values and norms governing international institutions. There is resistance to the idea that the rise of these powers will lead to changes in the decision-making practices of institutions such as the United Nations Security Council, the International Monetary Fund, the World Bank, and the World Trade Organization. 

Although it is recognized that China, for example, should have a greater stake in international decision-making, the approach has been to ask whether China will abide by the rules set by the US and Europe after World War II. Europeans are particularly concerned about the decline of their influence and the norms and values that are espoused by them in global diplomacy as Asian powers seek a larger role in global affairs and assert their values. 

Malign neglect vs aggressive indifference

Plus ca change, plus c'est la meme chose

By Chan Akya 

The last of the US presidential debates confirmed what has been perfectly clear for a while - whether the incumbent or the challenger is in the White House next year, US policies aren't going to change on the economy or foreign policy. 

There is no fresh thinking in politics in general; when it comes to geopolitical matters this trend has simply become that much more apparent in recent months. Iran will be bombed, Pakistan ignored and Russia incensed over the next four years whoever becomes president. China has been tickled pink with all the commentaries over the past few months, secure in the knowledge that nothing will change. 

As I watched in Europe the various political debates over the summer up to Monday evening, a couple of quotations ran through my mind: "Politics is the art of achieving power and prestige with the complete absence of merit", and "The purpose of psychoanalysis is to go from hysterical misery to ordinary unhappiness". 

If elections in democratic countries were a form of mass psychotherapy by putting the misery of past years up for popular opinion with a perspective of setting a new course, or else accepting the same old course of the incumbent, then the question begs - does the democratic process also deliver a number of alternatives that allow people the benefit of real choice?

What Austerity Looks Like

Bankrupt San Bernardino’s new, skeletal government

BY JEREMY ROZANSKY

Three interconnected forces brought the working-class, inland Southern California city of San Bernardino to insolvency: a burst housing bubble and lethargic economic growth; high police and firefighter salaries mandated by the city’s charter; and compounding pension obligations. Bankruptcy should give San Bernardino leverage to deal with the last two, but the big, structural changes required will not be easy or pleasant. Absent such changes, though, salaries and pensions will continue to grow faster than the city’s revenues, crowding out most other government functions and services. San Bernardino offers a telling illustration of austerity’s causes and effects: a tragic failure to think beyond the short term eventually necessitates painful reforms.

We already know something of what San Bernardino’s government will look like in the age of austerity. The city, with a poverty rate equivalent to Detroit’s and a homicide rate that has quietly surpassed Chicago’s, declared a fiscal emergency in early July and officially filed for bankruptcy on August 1. Deferring payments to bondholders just to make payroll, the city has been forced to trim its budget radically.

Three Meaningless Political Debates

The winner cannot be predicted, but we know for sure who the loser will be

By Ben Tanosborn

Holy debates, Obatman!  For all the personal dislike for each other said to exist between these two ordained priests of American capitalism – often misidentified as Free Market Enterprise – Mitt Romney and Barack Obama have shown to be equally adept at dealing with trivia and secondary issues… and equally inept at dealing with every substantive issue. 

Their polemical theatrics have not tackled head on any of the significant issues affecting the nation’s direction – assuming there is a charted course we’re navigating – by way of any specific domestic or foreign policy.  And that unequivocally affects the nation’s viability in the short, medium and long term.

Perhaps substantive matters are not meant to be debated, lest debaters be found out in either deceit or ignorance. Montaigne said it best when he wrote, “Men only debate and question of the branch, not of the tree.”  [Essays II.xii.] And all three debates have been about the branches and foliage… and not once about the tree (our nation) and our need to diagnose its health, and if found to be diseased, propose a plan of cure.  But the duopoly has chosen for us two arborists who either lack mastery in the field or, the most likely reason, lie to the public for motives which are personally or politically expeditious.  That’s the price Americans must pay for their corrupt two-party system.

It would have been helpful if there had been meaningful questions asked of the candidates to the presidency by either the moderator or a select panel of experts; or if the candidates had exhibited vision and/or courage to bring to the debate – something totally absent in all three debates; questions not just for the candidates to answer, but for the voter to better understand what is at stake in this election. Why do we maintain this political taboo that forces us not to look at ourselves, our institutions or our imperial, undemocratic form of government? Is it our Americentricity?

Why The Nobel Peace Prize For The EU Is So Flawed

EU has grown into a bloated, blind, colossal and very dangerous failure

By Raul Ilargi Meijer

While everybody was asleep in a grandiose globalization and unification dream, a dream whose benefits and desirability were - and still are - hardly ever questioned if at all, separate languages and cultures simply remained what they were: separate. Now that globalization starts to show its dark and ugly flipside of economic depression, a repeal of many unifications and a split-up of larger entities, created for economic and political reasons only, into their smaller components, is inevitable.

Unfortunately, the architects who designed and built the larger entities are still in power. And they - which is probably also inevitable - go for double or nothing. That is a real and present danger for Europe, where Europeanization or even Germanification are the prescription du jour for the poor southern Club Med countries and everyone else, but the ultimate diagnosis will be the Club-medification (or Club-medication?!) of the people in the richer north. And that will lead to trouble. Lots of it.

Japan Is Not A Good Example Of How Deflation Typically Plays Out

The coming giant black hole of credit destruction

By Nicole Foss

Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world's largest creditor when their bubble burst in 1989. This is clearly not our situation.

No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc.

We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses 'moneyness' and credit instruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated.

The looming shortfall in public pension costs

It is not likely that we can grow our way out of this problem

By Robert Novy-Marx and Josh Rauh

How much will the underfunded pension benefits of government employees cost taxpayers? The answer is usually given in trillions of dollars, and the implications of such figures are difficult for most people to comprehend. These calculations also generally reflect only legacy liabilities — what would be owed if pensions were frozen today. Yet with each passing day, the problem grows as states fail to set aside sufficient funds to cover the benefits public employees are earning.

In a recent paper, we bring the problem closer to home. We studied how much additional money would have to be devoted annually to state and local pension systems to achieve full funding in 30 years, a standard period over which governments target fully funded pensions. Or, to put a finer point on it, we researched: How much will your taxes have to increase?

We found that, on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector. An alternative would be public-sector budget cuts of a similar magnitude, or a combination of tax increases and cuts adding up to this amount.

For some states these numbers are much higher. New York taxpayers would need to contribute more than $2,250 per household per year over the next 30 years. In Oregon, the amount is $2,140; in Ohio, it is $2,051; in New Jersey, $2,000. California ($1,994), Minnesota ($1,928) and Illinois ($1,907) are not far behind.

The captain's fallacy

Kids: Smarter Than Adults

by J. Tucker 

It's happened yet again: I found another movie presumably made for kids that easily beats many of this season's predictable box-office yawners. The movie this time is The Pirates! Band of Misfits. It is the story of a socially complex group of failed pirates -- people doing their best to make a life for themselves outside official channels -- and their captain's search for fame in the "Pirate of the Year" pageant. 

This supposed kids movie is packed with subtleties, ironic humor, more struggles, and passing references to pop culture. It deals with big and important themes like friendship, betrayal, fame, and the love of money. It deftly handles politics, with an evil Queen Victoria and her loot. 

It asks fundamental questions such as is it really stealing if you take it away from the government? It touches on hard questions of vocation and personality, and the difficulties of balancing the love for one's work and the need for material provision. 

The humor even deals with a some sophisticated understanding of probability theory, such as when the captain says concerning the pageant:

"Every time I've entered, I've failed to win. So I must have a really good chance this time!" 

Kids seem understand the captain's fallacy. Do adults? 

Welcome to Berlin - Europe’s cool new capital

The struggles of Greece or Spain seem a very long way away

BY GIDEON RACHMAN

BERLIN does not feel like an imperial city. The new government buildings — the chancellor’s office, the Bundestag and the foreign ministry — have all been designed with plenty of glass and natural light, to emphasise transparency and democracy. The finance ministry is, admittedly, housed in the old headquarters of the Luftwaffe. But most of the grandest architecture is a legacy of the Prussian kings. Modern Berlin presents a more welcoming face, and has become a magnet for tourists and teenagers.

Yet while the German capital has deliberately eschewed the trappings of imperial power, Berlin is increasingly the de facto capital of the European Union (EU). Of course the EU’s main institutions — the commission and the council — are still based in Brussels. But the key decisions are increasingly made in Berlin.

Will Greece have to leave the euro? Ultimately, it will be Germany’s call. Will politicians support further bail-outs for southern Europe? The vital debates will take place in the Bundestag in Berlin, not in the European parliament. Who does the International Monetary Fund call about the euro crisis? The most important conversations take place with the German government and the European Central Bank in Frankfurt — not with the European Commission.

This shift in power from Brussels to Berlin has been accelerated by the euro crisis. Naturally, German Chancellor Angela Merkel still has to go to summits in Brussels and strike deals. But the euro crisis means Merkel is now incomparably the most important leader at the table.

The Battle for Britain

Will David Cameron be the prime minister who lost the United Kingdom as we know it?

BY ALEX MASSIE

"Stands Scotland where it did?" This is the question, asked by Macduff in Shakespeare's Macbeth that now concentrates minds in Edinburgh and London alike. The battle for Scotland is also a battle for Britain in which the stakes could scarcely be higher. In two years' time, Scots will vote in a referendum to decide the future course of their country. The future of Great Britain (established in 1707 by the union between Scotland and England, each previously independent countries and awkward, frequently warring neighbors) is at stake. The choice is stark: reconfirming the country's commitment to the United Kingdom or setting out on a new course as Europe's newest independent country.

For Alex Salmond, the 57-year old leader of the Scottish National Party (SNP), these are giddy times, pregnant with promise and possibility. This is the moment -- the chance for which he has been campaigning his entire political life. It has been a long journey to reach this day.

Last week, Salmond, the leader of Scotland's devolved government, welcomed British Prime Minister David Cameron to Edinburgh, where, after months of public squabbling and quiet backstage negotiation, the pair signed an agreement setting the terms and conditions for Scotland's referendum. The plebiscite will be held in 2014 and will -- though the precise wording of the question has yet to be determined -- ask a simple query: Should Scotland be an independent country?

A Golden Opportunity

Germany Should Seize the Moment!

by Patrick Barron and Godfrey Bloom

The euro debt crisis in Europe has presented Germany with a unique opportunity to lead the world away from monetary destruction and its consequences of economic chaos, social unrest, and unfathomable human suffering. The cause of the euro debt crisis is the misconstruction of the euro that allows all members of the European Monetary Union (EMU), currently 17 sovereign nations, to print euros and force them on all other members. Dr. Philipp Bagus of King Juan Carlos University in Madrid has diagnosed this situation as a tragedy of the commons in his aptly named book The Tragedy of the Euro. Germany is on the verge of seeing its capital base plundered from the inevitable dynamics of this tragedy of the commons. It should leave the EMU, reinstate the deutsche mark (DM), and anchor it to gold.

The Structure of the European Monetary Union

The European System of Central Banks (ESCB) consists of one central bank, the European Central Bank (ECB), and the national central banks of the EMU, all of which are still extant within their own sovereign nations. Although the ECB is prohibited by treaty from monetizing the debt of its sovereign members via outright purchases of their debt, it has interpreted this limitation on its power not to include lending euros to the national central banks taking the very same sovereign debt as collateral. Of course this is simply a backdoor method to circumvent the very limitation that was insisted on when the more responsible members such as Germany joined the European Monetary Union.

Corruption of the European Central Bank into an Engine of Inflation

When the ECB was first formed around the turn of the new millennium, the bond markets assumed that it would be operated along the lines of the German central bank, the Bundesbank, which ran probably the least inflationary monetary system in the developed world. However, they also assumed that the EMU would not allow one of its members to default on its sovereign debt. Therefore, the interest rate for many members of the EMU fell to German levels. Unfortunately, many nations in the EMU did not use this lower interest rate as an opportunity to reduce their budgets; rather, many simply borrowed more. Thus was born the euro debt crisis, when it became clear to the bond market that debt repayment by many members of the EMU was questionable. Interest rates for these nations soared.