How Does This End?

The fleecing of the American public continues

by Monty Pelerin

The theft takes different forms, but it all serves one purpose — to transfer wealth from the average Joe to the crony corporatists and their political lackeys. Here are but a few examples of how this has been accomplished:

• Bailouts for the wealthy and well-connected are paid for by the unconnected middle class.

• Subsidies are provided for unworkable schemes submitted by political donors and favorites. These schemes inevitably fail and the tax-payer is left holding an empty bag.

• Laws are routinely ignored when “friends” need help. In identical circumstances, would you receive the same treatment as Jon Corzine?

• Despite the biggest theft in world history, no one was prosecuted. The Savings and Loan crisis in the 1980s was trivial in comparison to the recent financial crisis. More than a thousand S&L executives were prosecuted.

• Ever-increasing sacrifices in the form of higher taxes from the productive sector are demanded to continue the plush living of the ruling class.

Capitalism and free markets depend upon trust, integrity, property rights and the rule of law. Without these, there are no advantages to free markets. Nor are there any incentives to create wealth. Instead, an economy becomes little more than a massive plunder scheme where the powerful exploit the weak. No economic recovery is possible under such circumstances.

When Suckers Revolt

As people recognize what is happening, they alter their behavior. Three reactions are to be expected:

1. Some will become discouraged when they realize the game is stacked against them. They will diminish their efforts to succeed, even perhaps dropping out of the game altogether. Given the enhanced returns to not working, it should not be surprising that this alternative has become popular.

2. Others will adopt the same behavior as the ruling class. They will exploit those lower on the food chain than themselves.  Justice Brandeis warned of the implications of government misbehavior:

In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.

Daniel Patrick Moynihan described the process of declining moral values as “defining deviancy down.”

3. Others may resort to acts of violence. These reactions could be isolated domestic terrorist acts against government and corporations seen as the exploiters. Or the acts might be broader based where the poor see fit to attempt to take from the wealthy. They also could manifest in wide civil unrest against the government if it is seen as the cause of misery or if it is seen as intending to default on promises made. 

All of this behavior is anti-social and it is unproductive. It reduces the output of the economy, further exacerbating the problems. 

We Can't Save Capitalism Unless We Denounce Its False Prophets

The battle we are in is actually a three-sided struggle

By Bill Frezza

A debate is raging among free market advocates regarding the proper posture to take with respect to Too Big to Fail (TBTF) banks. This has become an increasingly important issue as the financial sector has grown to take up an unprecedented share of our economy. While cleaving to tried-and-true libertarian defenses of finance as vital to the economy, some of us fear that the machinations of the crony capitalists running the TBTF banks—in cahoots with their allies in the Treasury Department and the Federal Reserve—will result in not only another global financial collapse, but a populist anti-capitalist backlash that could destroy what’s left of our free enterprise system.

But before we can tackle this problem, we must figure out what is really going on. In all public policy debates, perceptions matter, and public perceptions are often driven by the leading narratives that gain cultural acceptance. Let’s look at what these are.

The prevailing narrative on the left is that we are locked in a two-sided conflict pitting greedy capitalists against the working man. Within this narrative noble legislators and wise regulators must accumulate power unto themselves in order to: 1) rein in the capitalists’ depredations; 2) balance the playing field to offset “market failures;” and 3) “invest in the future” to compensate for the shortsightedness of profit-seeking investors. Success requires waging a permanent campaign against corrupt political opponents doing the dirty work of the wicked 1 percent—who if left to their own devices would accumulate all the wealth leaving the 99 percent destitute.

The prevailing narrative on the right is that we are locked in a two-sided conflict pitting American business against ham-handed legislators and clueless regulators whose well-intentioned but misguided laws, regulations, taxes, and mandates threaten to kill the goose that lays the golden eggs. Within this narrative, free market advocates must fight every attempt by tree-hugging Luddites and their socialist fellow travelers to interfere in the free flow of information, goods, and services that are responsible for driving innovation and creating all the wealth the left is trying to redistribute. Failure will leave the working man unemployed, American businesses crippled, and the global economy in perpetual recession.

Both of these narratives are oversimplifications, and both contain elements of truth. How can that be? Because they both miss the key point that the battle we are in is actually a three-sided struggle. Why is this important to realize? Because attempts to defend capitalism strictly within the bounds of a two-sided dialectic can only accelerate the emergence of a populist regime that fuses the centralized economic controls of fascism with the income redistribution of socialism. We are already more than halfway there with today’s “mixed economy”—a pale shadow of the laissez faire system that serves as the libertarian ideal.

So, who are the three constituencies battling over America’s economic soul?

The Untold Story of Antiwar Conservatives

And how the truth about invading Iraq was suppressed by laptop bombardiers

By JON BASIL UTLEY

What’s missing from reminiscences of the War on Iraq is how and why the war propaganda was spread so effectively, particularly among Republicans. In fact, the refusal of most conservative media to publish contrary information was one of the reasons this magazine was founded. The American Conservative provided an outlet for many respected conservatives who couldn’t get antiwar views published.

Over and over we hear that U.S. allies believed that Iraq had WMDs. Well, sure, our CIA and British intelligence fed them misinformation, which they then repeated back to us—especially Eastern Europeans, who wanted to strengthen military relations with Washington. Even so, Germany, France, and the UN Security Council refused to support the war. There was also widespread opposition inside the U.S. military and by former U.N. inspectors, which was given little publicity by major conservative media. The big push for war came from neoconservatives and the Religious Right, evangelical fundamentalists who believed God wanted war to hurry up the second coming of Christ. Indeed, former French President Chirac wrote in his memoirs about the born-again George W. Bush telling him how God wanted war.

Conservatives opposed to empire and war included Pat Buchanan, Scott McConnell, Charley Reese, Paul Craig Roberts, Paul Gottfried, myself, Doug Bandow, Bill Kauffman, Sheldon Richman, Leon Hadar, Allan Brownfeld, Martin Sieff, Phil Giraldi, as well as other respected leaders such as congressmen John Duncan and Ron Paul and future senator James Webb.

Neither Buchanan nor any other anti-war writer could get published by The Washington Times. The Wall Street Journal op-ed would not accept any article opposing the war until one by Brent Scowcroft, who was too big a name to block. National Review, the Heritage Foundation, and the American Enterprise Institute’s publications and conferences would only promote pro-war opinions and propaganda. Fox News was a solid barrage of war promotion and panic-mongering. Human Events, the Cold War bulwark, had lost its great editor, Allan Ryskind, after which it just parroted the Bush administration.

The seeds and theories of American empire-wishers were planted after the collapse of Communism. Well before 9/11, I had tried to get National Review to publish my article “America Is not Rome.” I still remember how Bill Buckley, who was the godfather of my first child, waved my article off with an outstretched arm when I sat with him in the lobby of the Hay Adams in Washington. Later he changed his views and become an early defector over the Iraq War, though by then he had delivered National Review to the neocons. Similarly, when I wrote to the Heritage Foundation’s foreign-policy staff urging that they at least allow an occasional non-empire speaker at their Washington conference, I was told that those ideas could be heard at the Cato Institute. I knew most of the major conservative leaders from my years as an anti-Communist writer and donor to conservative causes and from my 17 years as a commentator on Third World issues for the Voice of America. My mother, Freda Utley, had been one of the earliest anti-Communist writers in America, and many knew her work.

Funding the welfare state by vast borrowing and regulatory taxation hides the costs from the public

What's behind the funding of the welfare state

By George F. Will

The regulatory, administrative state, which progressives champion, is generally a servant of the strong, for two reasons. It responds to financially powerful and politically sophisticated factions. And it encourages rent-seekers to exploit opportunities for concentrated benefits and dispersed costs (e.g., agriculture subsidies confer sums on large agribusinesses by imposing small costs on 316 million Americans).

Such government inevitably means executive government and the derogation of the legislative branch, both of which produce exploding government debt. By explaining these perverse effects of progressivism, the Hudson Institute’s Christopher DeMuth explains contemporary government’s cascading and reinforcing failures.

Executive growth fuels borrowing growth because of the relationship between what DeMuth, in a recent address at George Mason University, called “regulatory insouciance and freewheeling finance.” Government power is increasingly concentrated in Washington, Washington power is increasingly concentrated in the executive branch, and executive-branch power is increasingly concentrated in agencies that are unconstrained by legislative control. Debt and regulation are, DeMuth discerns, “political kin”: Both are legitimate government functions, but both are now perverted to evade democratic accountability, which is a nuisance, and transparent taxation, which is politically dangerous.

Today’s government uses regulation to achieve policy goals by imposing on the private sector burdens less obvious than taxation would be, burdens that become visible only indirectly, in higher prices. Often the goals government pursues by surreptitious indirection are goals that could not win legislative majorities — e.g., the Environmental Protection Agency’s regulation of greenhouse gases following Congress’s refusal to approve such policies. And deficit spending — borrowing — is, DeMuth says, “a complementary means of taxation evasion”: It enables the political class to provide today’s voters with significantly more government benefits than current taxes can finance, leaving the difference to be paid by voters too young to vote or not yet born.

The European Central Bank Changes Its Spots

The ECB is now a lender of last resort not only to the commercial banks in its club but to governments in its area

By Pedro Schwart

Almost from the start, the single currency was seen as a necessary ingredient of a unified Europe. The Treaty of Rome that launched the Common Market was signed in 1957; the Werner Report outlining the path towards full economic and monetary union was commissioned in 1969 and made official in 1970. Despite this relatively early start, the creation of a solid euro is taking time; from the beginning it was beset with incident. It was not finally launched until the year 2000. The honeymoon lasted until 2007. Since then, progress has become less than smooth, to say the least.

The original euro

The intention was to make the euro a special kind of currency, a sort of European Deutschemark with no need for a government to back it. Monetary sovereignty would reside in a fully independent European Central Bank. Its remit according to the Maastricht Treaty (1992) was strictly reduced to issuing the euro, to managing an area-wide interest rate, and to leading the old national central banks in the oversight of the Eurozone banks. The ECB was to be a rule-bound institution. Its only obligation was to maintain the purchasing power of its currency. Knowing that repeated budget deficits and continuous accumulation of sovereign debt sooner or later lead the issuer of the currency to print excessive amounts of money, a parallel document, the Stability and Growth Pact (1998) put a limit to member states' deficits and debt. This transfer of monetary sovereignty to the ECB and the limiting rules accompanying it meant that neither member states nor the European Union could use the euro as an instrument of discretionary economic management. In practice, no devaluation and no inflation imposed a harsh discipline on the Ministers of Finance of the Euro area—a welcome brake on democratic profligacy.

This well-meaning project had its failings, as experience has shown. Some small instrumental changes, especially regarding the over-lenient interest rate policy, would have given the new currency greater stability. But nobody made clear from the start its possible costs in terms of budgetary discipline, structural reform and reduction of entitlements. A pampered electorate should have been told the price to be paid for the great advantage of a stable currency. In sum, the euro could have been a sort of pale replica of the gold standard, aspiring to the solidity of gold but free of gold's automatic rigidity. Better that than nothing.

An 'American' euro

The current crisis has led the European authorities and the Bank to throw away the monetary ideal of rule-bound action, independence from politics and attention to the long run. The ECB is now a lender of last resort not only to the commercial banks in its club but to governments in its area. Far from being independent of politics, it is in continuous consultation and collaboration with European and national authorities. The current president of the ECB has gone so far as to says that the Bank will "do whatever it takes" to save the euro, which markets have understood as creating all the liquidity necessary to stop speculators. Thus, the ECB is now turning itself into a traditional government banker, ready to aid and abet in counter-cyclical monetary management, protectionist exchange rate policy, and 'controlled' inflationism.

The Rich Get Richer and Everyone Else Poorer Under Socialism

Socialism puts power over the lives of the many into the hands of the few

"Some regard private enterprise as if it were a predatory tiger to be shot. Other look upon it as a cow that they can milk. Only a handful sees it for what it really is – the strong horse that pulls the whole cart."

by Benedict D. LaRosa

When President Clinton unveiled his national health care plan in 1993, known as HillaryCare, Republicans opposed the details, but not the concept of a government controlled health care system. The same is true with the Obama health care plan of 2010. The Republican establishment promises to repeal ObamaCare and replace it with something else. Regardless of the details, the very concept of government imposed health care represents a giant step toward socialism.

But don't wait for the President or members of Congress who favor such government intervention in the marketplace to refer to their philosophy of government as socialism, for that would alienate their targeted constituency. Norman Thomas, the head of the Socialist Party of the United States until his death, said:

The American people will never knowingly adopt Socialism, but under the name of Liberalism they will adopt every fragment of the Socialist program until one day America will be a Socialist nation without knowing how it happened.

The well known writer and Fabian socialist, H.G. Wells, predicted in his 1908 book New Worlds for Old:

Socialism would cease to be an open revolution, and would instead become a subtle plot. Functions were to be shifted from the elected representative, to the appointed official; . . . a scientific bureaucracy appointed by representative bodies which would have diminishing activity and importance. . . . The replacement of individual action by a public organization could achieve socialism without public support.

(The much maligned term liberal, when applied to socialists is a misnomer, for classical liberalism holds that the government which governs least governs best, and attempts to maximize freedom.)

Socialists argue that capitalism exacerbates the problems of poverty, environmental degradation, expensive health care, alienating work, racial inequality, inadequate housing, and a host of other ills. They are correct in that our present economic system fosters these ills. Where they go amiss is in calling this system free market capitalism. What we have developed in recent history is not free-market capitalism, but the socialism critics find so attractive.

Americans began flirting with socialism as early as the Civil War when both the U.S. and Confederate governments intervened in the economic lives of their respective citizens to a previously unheard of degree. Well-intended Americans advanced the socialist cause in a populist revolt against the monopolists and crony capitalists of the late 19th century known as Robber Barons. The pace quickened with the passage of the Federal Reserve Act and the income tax in 1913. With America's entry into World War I in 1917 came increased regulation of commerce and industry. Franklin Roosevelt, who promised lower taxes and less government during the 1932 campaign, spent his four terms as President poking the heavy hand of government into everything he could. H.G. Wells was so impressed with Roosevelt's policies that during his 1934 visit to the Soviet Union, he "tried to persuade Stalin that Roosevelt's New Deal was the beginning in America of a movement toward socialism." (H.G. Wells in Russia, Martin Gardner, THE FREEMAN, May 1995, p.287). The pace has quickened since then under both Democrat and Republican administrations.

There are two ways to obtain goods and services: through force (slavery and plunder) or free exchange (cooperation).

The Bitcoin Money Myth

Bitcoin is not money but rather a new way of employing existent money in transactions

by Frank Shostak

Many economists and financial commentators believe that in the unregulated market of the internet economy, new forms of money can be created that bypass central-bank and government supervision. The latest development is the emergence of a new electronic means of exchange, Bitcoin (BTC). Bitcoin was launched on January 3 2009 by its inventor, a programmer called Satoshi Nakamote.

The basic idea behind Bitcoin is to create, by means of a mathematical algorithm, a digital good that is scarce and fungible.

Nakamote devised a software system that enabled people to obtain bitcoins as a reward for solving complex mathematical puzzles. The resulting coins are then used for online trading. Nakamote also arranged that the number of bitcoins can never exceed 21 million.

Some experts maintain that Bitcoin will displace the existent fiat money and will usher in a new era of free banking, which will finally put to rest the menace of inflation.

Unfortunately, this is a pipe dream. Electronic money will not replace fiat paper money. The belief that it can stems from a failure to understand the nature and function of money and how it emerges on the market.

To see where this view goes wrong, let's first see how money comes about. Money emerges out of barter conditions that permit more complex forms of trade and economic calculation. The distinguishing characteristic of money is that it is the general medium of exchange, evolved from private enterprise from the most marketable commodity. On this Mises wrote,

There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. (The Theory of Money and Credit,pp. 32-33)

In short, money is the thing for which all other goods and services are traded. Furthermore, money must emerge as a commodity. An object cannot be used as money unless it already possesses an exchange value based on some other use. The object must have a pre-existing price for it to be accepted as money.

Why? Demand for a good arises from its perceived benefit. For instance people demand food because of the nourishment it offers. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services.

The benefit money offers is its purchasing power, i.e. its price in terms of goods and services. Consequently for something to be accepted as money, it must have a pre-existing purchasing power: a price. This price could have only emerged if it had an exchange value established in barter.

Once a thing becomes accepted as the medium of exchange, it will continue to be accepted even if its non-monetary usefulness disappears. The reason for this acceptance is that people now possess previous information about its purchasing power. This in turn enables them to form the demand for money.

How Empires Fall

How Rome Fell: Death of a Superpower

The imperial tree falls not because the challenges are too great but because the core of the tree has been weakened by the gradual loss of surplus, purpose, institutional effectiveness, intellectual vigor and productive investment.

by Charles Hugh-Smith

Comparing the American Empire with the Roman Empire in its terminal decline is a popular intellectual parlor game. The comparison is inexact on a number of fronts, starting with the nature of empire: Rome ruled a territorial empire, while the U.S. is a hegemony that doesn't need to hold territory (other than key overseas military bases); its dominance is based on the global projection of hard and soft power, diplomacy, finance and the monetary regime of the reserve currency.

Despite the apparent difference, the two empires share the key characteristic of all enduring empires: they extract the cost of maintaining the empire from client states and/or allies.

The mechanisms differ, but the results are the same: the empire's cost is distributed to those who benefit from its secure trade routes.

Two of the key characteristics of an empire in terminal decline are complacency and intellectual sclerosis, what I have termed a failure of imagination.

Michael Grant described these causes of decline in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.

This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

In other words, if our idea of intellectual rigor and honesty is Paul Krugman dancing around the Neo-Keynesian Cargo Cult campfire waving dead chickens and mumbling nonsensical claims of grand success, we are well and truly doomed.

The Islamic Emirate of Syriastan

Τhe next stage is set for a civil war, Syria-style, in Iraq

By Pepe Escobar 

And now some breaking news coming from the Islamic Emirate of Syriastan. This program is brought to you by the NATOGCC corporation. Please also tune in for a word from our individual sponsors, the United States government, Britain, France, Turkey, the House of Saud and the Emir of Qatar. 

It all started early this week, with a proclamation by the elusive leader of al-Qaeda Central, Ayman "The Doctor" al-Zawahiri, hidden somewhere in the Pakistani tribal areas; how come Double O Bama with his license to kill (list) and prime drone fleet cannot find him? 

Al-Zawahiri called for all the Islamist brigades in the Jihad Inc business fighting the government of Syrian President Bashar al- Assad to found an Islamic emirate, the passport du jour leading to an Islamic caliphate.

Two days later, the Islamic State of Iraq - for all practical purposes al-Qaeda in Iraq - announced, via a video starring its leader Abu Bakr al-Husseini al-Qurashi al-Baghdadi, a mergers and acquisition spectacular; from now on, it would be united with the Syrian jihadist group Jabhat al-Nusra, and be referred to as the Islamic State of Iraq and the Levant. 

But then, the next day, the head of Jabhat al-Nusra, the shady Abu Muhammad al-Joulani, said that yes, we do pledge our allegiance to al-Qaeda Sheikh, Doctor al-Zawahiri; but there has been no M&A business whatsoever with al-Qaeda in Iraq. 

Puzzled infidels from Washington to Beijing may be entitled to believe this is straight from Monty Python - but it's actually deadly serious; especially as the House of Saud, the Emir of Qatar, the neo-Ottoman Erdogan in Turkey and King Playstation from Jordan - vastly supported by Washington - continue to weaponize the Syrian "rebels" to Kingdom Come. And one of the top beneficiaries of this weaponizing orgy has been - who else - the M&A gang now known as the Islamic State of the Iraq and Levant.

Every grain of sand in the Syrian-Iraqi desert knows that the "rebels" who really matter in fighting terms in Syria are from Jabhat al-Nusra - hundreds of transnationals fond of beheading and suicide bombings. 

They control, for instance, a few important suburbs of Aleppo. They've perpetrated scores of kidnappings, torture and summary executions. Crucially, they killed a lot of civilians. And they want to impose no-compromise, hardcore Sharia law. No wonder middle-class, educated Syrians fear them more than anything lethal the government might resort to. 

Al-Baghdadi admitted the obvious: Syrian jihadis are an annex to Iraqi jihadis, from whom, crucially, they have been receiving on-the-ground battle experience. After all, it was these hardcore Iraqis who fought the Americans, especially from 2004 to 2007. The plum tomato in the kebab is that al-Nusra itself was founded by Sunni Syrians fighting alongside Sunni Iraqis in Iraq. 

Then there's what the House of Saud is up to. The Saudis are competing in a regional marathon against al-Qaeda to see who enrolls more Sunni fanatics to fight those apostate Iranians, both in Iraq and the northern Levant. The House of Saud loves any jihadi, local or transnational, as long as he does not raise hell inside Saudi Arabia.

The New Old Fascism?

Egan-Jones Downgrades Germany From A+ To A, Outlook Negative

by Stephen Green

Now that Europe’s decades-long experiment with socialism is unraveling, what keeps me up at night is when the people will get upset enough that they’ll start demanding (and getting) a little nationalism to go with their socialism. It’s kind of the national sport over there, once they eventually run out of other people’s money. Not that EU governments have given up looking under the sofa cushions, which they apparently also hope to use as floatation devices:

Senior advisers to Chancellor Angela Merkel are pushing for better-off households to pay towards the cost of any future bail-outs for the weaker members of the single currency.

The proposals, from members of Germany’s council of economic experts, raise the prospect of taxes being imposed on property in a country like Spain if its government was forced to seek a bail-out.

The council, known as the “Five Wise Men”, is often used to test new policies that are later adopted officially.

Might as well call them the Five Wise Guys, as in, “F— you, pay me.” Government by goodfellas is the inescapable consequence of government by best intentions. The Beast must be fed.

And notice please that this “wealth tax” proposal would fall on “better-off households” in Germany. Which, compared to Spain or Greece, is pretty much all of them. Or at least, pretty much all of them in the former West part of Germany. Keep in mind that Germans have been paying a 5.5% income tax surcharge since reunification, to pay for bringing the former East up to the standards and wealth of the former West. It’s expected to remain in play until at least 2019. That’s a lot of spreading the wealth around already, but at least the Deutschmarks — excuse me, euros — have all stayed inside the family, so to speak.

How much is it going to cost mittelklasse Germans to bring up 47 million Spaniards, when 20-plus years of subsidies still haven’t brought up 17 million Ossies?

That’s a good question. Another good question is: What the hell is Merkel thinking?

This kind of proposal doesn’t just give pause to German taxpayers. It also gives a leg up to German nationalist groups. So far, the skinheads and whatnot have been mostly confined to frustrated young men in the former East. What happens when similar (and more reasonable) grievances become commonplace among middle-aged Germans along the Rhine?

Despite what the vile progs would have you believe, Evil Fascist Heavy Industry did not sweep Hitler into power. Nazism was largely a middle class phenomenon, with big business eventually coming along for the only ride in town.

So, yeah, I worry about what might happen to German domestic politics, if all of southern Europe is eventually yoked to the back of the German taxpayer. Merkel, an Ossie herself, ought to realize this.

And, no, I don’t think Panzer divisions will be breaking out of the Ardennes on their way to occupying Paris — as much farcical fun as that might be to watch on CNN.

But we are watching Merkel destroy her CDU party in a vain effort to save a doomed currency. The left-wing (lefter-wing?) SPD might be the beneficiary, but fringe parties could very well become Germany’s new power brokers. And given that the SPD is no more likely to succeed at saving this fiction called “Europe,” both major mainstream German parties could see major erosion in their support.

Then the German fringes would become less fringey, which didn’t exactly work out very well for the Continent the last time around. 

Don’t Worry About the Yuan

Since 1995 the Chinese currency has either stayed the same or strengthened against the dollar

by ROBERT P. MURPHY

Especially during dismal economic times, many Americans—goaded by media figures and politicians—look with suspicion on foreigners. This tendency is most obvious in anti-immigrant sentiment, but also manifests itself in a drive for protective tariffs and other trade restrictions.

Over the past few years China’s “currency manipulation” has been a particularly hot-button issue. Pundits claim the Chinese government, by artificially suppressing the value of its currency, unfairly subsidizes Chinese exporters while destroying American jobs. Although there is truth to this claim it overlooks the benefits to American consumers from the Chinese policy. Americans should stop fretting about the Chinese currency.

To get a sense of the accusations leveled at the Chinese, we don’t need to scour letters to the editor written by economic illiterates. We can turn to Paul Krugman, who won a Nobel Prize for his work on international trade theory. Krugman has been leading the charge for punitive action against China—including retaliatory tariffs unless its government changes its ways. In a particularly bellicose column last year, “Taking on China,” Krugman wrote:

China’s policy of keeping its currency undervalued has become a significant drag on global economic recovery. Something must be done. . . . This is the most distortionary exchange rate policy any major nation has ever followed. . . . [I]f sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action—except that this time the surcharge would have to be much larger, say 25 percent.

Before continuing we should clarify Krugman’s charges: The Chinese government uses some of its revenues in its own currency (collected from taxation, State-owned enterprises, and so on) to augment its stockpile of foreign currency reserves. In other words, in addition to spending its (yuan-denominated) revenues on tanks, bombers, and infrastructure, the Chinese government also spends some on acquiring more dollars, euros, and other currencies.

Just as the Chinese government’s purchases of, say, gasoline for its military equipment would tend to push up the yuan-price of gasoline, its efforts to buy dollars with yuan will push up the yuan-price of a dollar. By having more yuan chase U.S. dollars in the foreign-exchange market, the Chinese government’s purchases tend to make the dollar appreciate against the yuan.

Because China’s currency is weaker than it otherwise would be, Chinese exports are cheaper: The stronger dollar allows Americans to buy more Chinese goods, and so they will favor Chinese over domestic producers. On the other hand, Chinese consumers will view American goods as more expensive because they ultimately are priced in dollars and it takes more yuan to buy one dollar at the (allegedly) distorted exchange rate.

China’s Dream World

This time the honeymoon will be short

By Minxin Pei

Ruling elites almost everywhere – whether in democracies or in authoritarian regimes – believe that clever sloganeering can inspire their people and legitimize their power. There are, of course, crucial differences. In functioning democracies, government leaders can be held accountable for their promises: the press can scrutinize their policies, opposition parties are motivated to show that the party in power lies and cheats. As a result, incumbents are frequently forced to carry out at least some of their promises.

Autocratic rulers, by contrast, face no such pressures. Press censorship, repression of dissent, and the absence of organized opposition allow rulers the luxury of promising whatever they want, with no political consequences for failing to deliver. The result is government of the sloganeers, by the sloganeers, and for the sloganeers.

China appears to have perfected this form of government over the last decade. The ruling Chinese Communist Party (CCP), in response to rising public demand for social justice, has devised numerous slogans, such as “governing for the people,” “building a harmonious society,” “balanced development,” “scientific development,” and so on.

Whenever the top leadership in Beijing uttered such slogans, they became the rallying cry of the bureaucracy. The party’s massive propaganda machine went into overdrive and blanketed the country with a publicity blitz that would make the most extravagant Madison Avenue advertising campaign look like child’s play.

But government by slogan, whether in China or in other autocracies, seldom achieves its declared goals. In the last decade, GDP growth soared, but most indices of social justice, governance performance, and public welfare deteriorated. Macroeconomic imbalances worsened as economic growth became excessively dependent on investment and exports. Inequality worsened. Official corruption escalated. Social mobility declined. Environmental degradation reached a crisis point.

Today, it is the responsibility of China’s new leadership, headed by President Xi Jinping, to avert another decade of missed opportunities. Without missing a beat, Xi, like his predecessors, rolled out a new slogan to inspire popular confidence in his leadership. As a catchphrase for his administration’s objective, “the great renaissance of the Chinese nation” is bit long, but it has lately morphed into the simpler “China Dream.”

The substance of the China Dream remains difficult to determine. When Xi first unveiled his slogan after being selected as the CCP’s new general secretary, he defined it in simple, accessible, but nonetheless generic terms: The “Chinese people dream of living the same good life as all other people in the world.”

The economics of American militarism

The Great Deformation

by Justin Raimondo

David Stockman rocketed to fame as Ronald Reagan’s chief of the Office of Management and Budget (OMB), his name loosely associated with the "trickle down economics" of the supply-siders, but his recent book, The Great Deformation: The Corruption of Capitalism in America, will correct the record: Stockman is not only a libertarian critic of the Milton Friedman school of monetarism and supply side economics, he is also a principled opponent of American militarism. His new book is a massive 700 pages-plus, but don’t let that deter you: inside you will find a scintillating analysis of where, why, and how America went wrong, starting with the New Deal and ending with the Great Recession of ’08 and the subsequent Obama-Bernanke attempts to re-inflate the bubble of America’s debt-driven "prosperity."

His basic thesis is that the Federal Reserve, starting with Richard Nixon’s decouplingof the dollar from gold, has acted as the central planner of the American economy, blowing up the bubble of a false prosperity. This mostly served to fatten the wallets of the One Percent, giving Wall Street a blank check while looting the savings and aspirations of Main Street.

His is a complex argument, and it assumes a knowledge of economic theory that I fear many – including myself – do not possess, but his analysis is clear and forthright: the Fed, instead of acting as a neutral arbiter and manager of the money supply, has engaged in "prosperity management," as he terms it, implanting a "borrow, spend, gamble, and get-rich-quick regimen" that poisoned and deformed the economy and the culture. The decoupling of gold from the value of money led to the financialization – and bifurcation – of the American economy, so that the financial manipulations of Wall Street increasingly had little to do with the production of actual things, and the real performance and value of the financial "assets" they were dealing in, but instead were based on the "free" money being printed hand over heels by the all-powerful Federal Reserve. The hedge funds, the wild speculations of Wall Street’s most distended-from-reality "assets" – like those sliced-and-diced toxic mortgages that led to the housing bust – are all products of the Fed’s central planning: "They consume," says Stockman, "vast resources without adding to society’s output or wealth, and flush income and net worth to the very top rungs of the economic ladder." Although the free market is getting the blame for this, the reality, says Stockman, is that these deformations of capitalism were made possible by massive State intervention via the Fed, which enabled politicians to spend without taxing – and the militarism of the alleged "conservatives" was a key factor in all this.