Can We Get It Back?

Booming economic growth was always the foundation of America

By Peter Ferrara

As Stephen Moore and Julian L. Simon reported in their underappreciated work, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, the American standard of living (real per capita GDP) grew by seven times from 1900 to 2000. That was the foundation of modern America, and the modern world.

Moreover, it was accomplished with Americans staying in school much longer, and retiring earlier, over the course of that century, which means they worked much less over their lives on average. The average work week, in fact, declined by 50% from 1900 to 1950.

The Fundamental Transformation of America
As a result of that booming economic growth, the typical home that most Americans own today is far superior, bigger, less crowded, and stocked with modern conveniences. By 2000, the average new house in America was 50% bigger than even in the 1960s, with 2-3 times as many rooms per person as in 1900. Moore and Simon add:

It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20 percent of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80 and 100 percent of American homes have all of these modern conveniences.

The Forgotten Scandal

True remorse should start with George Zimmerman

By Arnold S. Trebach

Our Attorney General and his boss in the Oval Office have started a combined remorse and charm offensive, which is certainly welcome in light of their numerous scandalous transgressions in recent months. Actually of course those transgressions go back for years. Messrs. Obama and Holder have recently declared that they want to rethink how they can improve their approach to dealing with investigations of reporters who are seeking information from officials. That might help resolve only one of the scandals in which this villainous administration is now involved. Still in the forefront of the public mind are the Benghazi horrors and the IRS depredations.

However, in my mind, the remorse and charm of our leaders ought to be focused on the horrors that they have purposely visited upon one of our decent minority citizens, George Zimmerman. Dealing with his tragic situation will take not only charm and remorse but also guts and courage.

Unlike the other scandals, wherein many of the facts are still unclear, most of the important facts concerning the Zimmerman-Martin tragedy are well known already.

There is no doubt that George Zimmerman killed Trayvon Martin. There is no doubt that Zimmerman claimed he acted out of fear for his life and in self-defense, an issue at the heart of the legal case.

There is no doubt that Zimmerman has persisted in that claim of self-defense. There is also no doubt that the reports of the front-line police officers who responded to the scene of the incident tended to support Zimmerman’s claim of self-defense. There is no doubt that Bill Lee, then the Police Chief of Sanford, reviewed all of the evidence and on the basis of that evidence and extensive experience, concluded that there was insufficient evidence to hold Zimmerman. The same was true of the conclusions of the experienced and competent State Attorney, Norman Wolfinger. Part of the evidence they reviewed included the lie detector test that Zimmerman willingly took while in police custody. He passed that objective test. In other words, these experienced police and prosecutorial officials concluded that the suspect was innocent of any criminal behavior.

Is Democracy in Retreat?

No, but further advances depend on the liberal democracies' getting their houses in order 

by LILIA SHEVTSOVA

The decline of democracy and popular disenchantment with democratic institutions have recently become hot topics in academic and think tank circles. Freedom House, in its annual Freedom in the World report released in January, cites a seventh consecutive year of decline in freedom around the world but cautions that the decline is not a precipitous one and thus shouldn’t be exaggerated. Joshua Kurlantzick’s book, Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline of Representative Government, and essay in Foreign Policy “One Step Forward, Two Steps Back”, by comparison, offer a starker view of a ”consistent” decline of democracy. Kurlantzick identifies the key culprit for the decline: The middle class, contrary to the expectations of Samuel Huntington and Seymour Martin Lipset, isn’t showing all that much of a longing for freedom these days.

Interestingly, the democratic societies of today feel democratic “retreatism” and the absence of a policy vector much more acutely than they did from the 1960s through the early 1970s, the last period of democratic stagnation and crisis. True, at that time, Western civilization could not afford a prolonged spell of depression and pessimism; the existence of the Soviet Union and the world Communist system forced the West to focus intently on the struggle for the preeminence of its principles. The West constantly needed to flex its muscles and look for ways to reassert itself.

Today the decline of democracy seems more palpable. At the very least, democracy seems to have lost its energy, or has allowed that energy to flow into populist channels. The excitement following the Arab Awakening in 2011 has been replaced by concern that Islamist movements have hijacked whatever democratic prospects existed in those countries. This is especially true of Egypt, and in Syria, the tragedy unfolding on a daily basis and the impact of that tragedy on Syria’s neighbors have also dampened democratic hopes in the region. With only a few exceptions (Georgia, Moldova, and Kyrgyzstan), Eurasia has become a region known for its rising anti-democratic behavior and policies; Russia has experienced the worst deterioration in human rights since the collapse of the USSR. Repression in China has actually increased in recent years—and China presents its own model as an alternative to Western democracy.

At the same time, Western democracies are consumed with their own challenges, most notably the economic crisis, felt in many countries, but most severely in Greece and Spain.. Despite its Nobel Peace Prize last year, the European Union, Western civilization’s most ambitious project in the 20^th century, is a source of concern and disappointment (with notable exceptions, including the Nordic states in particular). The United States is increasingly turning inward, pulling out of Iraq and Afghanistan and showing great reluctance to get more involved in Syria.

Bonjour Tristesse

The Economic and Political Decline of France

By Mathieu von Rohr

France is in the grip of a crisis. As both its economy and European influence weaken, scandal has hobbled its political elite. The country needs drastic overhaul, but President Hollande does nothing but waver and hesitate.

Judging by the imperial magnificence of the Elysee Palace, France has never ceased to be a world power. Rooms with five-meter (16-foot) ceilings, gilded chandeliers, candelabras and elaborate stucco work are guarded by members of the Republican Guard, who parade in front of the palace gates with their plumes of feathers and bayonets.

The man in charge, on the other hand, seems lonely and small in his palace. He is surrounded by court ushers who make sure that glasses and writing sets are perfectly arranged, and when he enters a conference room, they call out grandly "Monsieur le Président de la République!", to give his attendants time to stand up for him.

François Hollande never intended to become a king, but rather a "normal president," as he put it, and now he has to play one nonetheless. He occasionally seems like an actor who has somehow ended up in the wrong play.

Outside, throughout the country, unemployment reaches new highs each month, factories are shut down daily, hundreds of thousands take to the streets to protest gay marriage, and the French are increasingly outraged over a barrage of new political scandals as the country hovers on the cusp of waning global relevance. Yet this roar of dissatisfaction doesn't permeate the walls of Hollande's world. Here, it is quiet, very quiet.

Shortly after moving into his new official residence, Hollande warned his staff that in a palace it is easy to feel protected, and he insisted that he did not want to be "locked in." But that is precisely what is happening, as evidenced by the documentary film "Le Pouvoir" (The Power), which recently debuted in French theaters and whose creators accompanied Hollande during the brutal first eight months of his presidency.

Elite in a Bubble

They paint an image of a likeable man who seems to spend a lot of time rewriting speeches prepared by his staff. As you watch him in the movie, you start to wonder: Does he do all the important things when no one's watching or does he really spends most of his time on the unimportant? However, the main subject of the film is not the president, but rather the reality bubble in the country's top echelons. Not just Hollande, but also most of his cabinet ministers, still reside in Parisian city palaces that predate the French Revolution, and perhaps that's a problem.

Are central bankers losing control?

In the meantime the debasement of paper money continues

by DETLEV SCHLICHTER

The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. It was the first to have a major housing and banking bubble, the first to see that bubble burst, to respond with years of 1 percent interest rates, then zero rates, then various rounds of quantitative easing. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. This is called Abenomics, after Japan’s new prime minister, Shinzo Abe, the new poster-boy of policy hyper-activism. I expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody?

But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off.

Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?

 ‘Sell in May and go away’

Let’s turn back the clock for a moment, if only just a bit. Let’s revisit April 2013 for a moment. At the time I spoke of central bankers enjoying a kind of ‘policy sweet spot’: they were either pumping a lot of liquidity into markets or promising to do so if needed, and all of them were keeping rates near zero and promising to keep them there. Some started to consider ‘negative policy rates’. Yet, despite all this policy accommodation, official inflation readings remained remarkably tame – indeed, inflation marginally declined in some countries – while all asset markets were on fire: government bonds, junk bonds, equities, almost all traded at or near all-time highs, undeniably helped in large part by super-easy money everywhere. Even real estate in the US was coming back with a vengeance. And then, in early April, central bankers got an extra bonus: Their nemesis, the gold market, was going into a tailspin. I am sure Mr. Bernanke was sleeping well at the time: financial assets were roaring, happily playing to the tune of the monetary bureaucracy, seemingly falling in line with his plan to save the world with new bubbles, while the cynics and heretics in the gold market, the obnoxious nutters who question today’s enlightened policy pragmatism, were cut off at the knees.

But then came May and everything sold off.

The Microeconomics of Inflation

... or how I know this ends in tears

By Martin Sibileau

A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered.

In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) I wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. The Bank of Japan is helplessly facing the collapse of the country’s sovereign debt, the European Monetary Union is anything but what its name indicates, with one of its members under capital controls, and China is improvising as its credit bubble bursts.

In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. One example of this, in the corporate credit space was Morgan Stanley’s “Credit Continuum: Debt Cost and the Real Deal” published on May 17^th, 2013. Upon reading it, I was uncomfortable with the notion that inflation is the simple reflection of the change in a price index, which implies the thesis of the neutrality of money. For instance, the said research note discusses how standard financial metrics compare vis-à-vis a rate of inflation.

Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations?

I am not going to comment on others’ views or recommendations, but on the underlying method. A price index is a mental tool that has no relation to reality. In the real world, we trade driven by relative prices. To infer economic behaviour off changes in a price index is a mistake. The impact of inflation is more complex. For this reason and in anticipation of future debates on this topic, I offer you today a microeconomic analysis of such impact, on value.

Framework

I suggest that a good way (but certainly not the only one) to assess the impact of inflation on the valuation of a firm is to think of the same within the typical free-cash flow approach. After all, what matters is not how inflation can affect a certain component of its capital structure, but how the entire value of a firm is impacted, before the same can be shared among the different contributors to the said capital structure (i.e. equity, debt holders, etc.)

Simplifying, as far as I can recall from the times when I worked in the area of Private Equity,  the way to calculate the free cash flow of a firm for a determined period is to obtain its operating margin, add to it depreciation & amortization costs and subtract capital expenditures, changes in net working capital and taxes. I show the formula below:

The old demons are not ancient history

How to Confront Chinese Power Peacefully

By PATRICK J. BUCHANAN

As America grew in the 1800s from a republic of a few millions, whose frontier stopped at the Mississippi, into a world power, there were constant collisions with the world’s greatest empire.

In 1812, we declared war on Britain, tried to invade Canada, and got our Capitol burned. In 1818, Andrew Jackson, on an expedition into Spanish Florida to put down renegade Indians harassing Georgia, hanged two British subjects he had captured, creating a firestorm in Britain.

In 1838, we came close to war over Canada’s border with Maine; in 1846, over Canada’s border with the Oregon Territory.

After the Civil War, Fenians conducted forays into Canada to start a U.S.-British battle that might bring Ireland’s independence.

In 1895, we clashed over the border between Venezuela and British Guiana.

War was avoided on each occasion, save 1812. Yet all carried the possibility of military conflict between the world’s rising power and its reigning power. Observing the pugnacity of 21st-century China, there appear to be parallels with the aggressiveness of 19th-century America.

China is now quarreling with India over borders. Beijing claims as her national territory the entire South and East China seas and all the islands, reefs and resources therein, dismissing the claims of half a dozen neighbors.

Beijing has bullied Japan and the Philippines and told the U.S. Navy to stay out of the Yellow Sea and Taiwan Strait.

In dealing with America, China has begun to exhibit an attitude that is at times contemptuous.

Erdogan's Grip on Power Is Rapidly Weakening

The prime minister is doing all he can to portray the protests as an attack on Turkey

By Özlem Gezer, Maximilian Popp and Oliver Trenkamp

For a decade, Prime Minister Recep Tayyip Erdogan has had a tight grip on power. But it suddenly looks to be weakening. Thousands have taken to the streets across the country and the threats to Erdogan's rule are many. His reaction has revealed him to be hopelessly disconnected.

The rooftops of Istanbul can be seen in the background and next to them is a gigantic image of Recep Tayyip Erdogan. Turkey's powerful prime minister is watching over the city -- and is also monitoring the work of the political party he controls. At least that seems to be the message of the image, which can be found in a conference room at the headquarters of Erdogan's Justice and Development Party (AKP).

These days, though, Istanbul is producing images that carry a distinctly different meaning -- images of violent protests against the vagaries of Erdogan's rule. And it is beginning to look as though the prime minister, the most powerful leader Turkey has seen since the days of modern Turkey's founder Mustafa Kemal Atatürk, might be losing control.

As recently as mid-May, Erdogan boasted during an appearance at the Brookings Institute in Washington D.C. of the $29 billion airport his government was planning to build in Istanbul. "Turkey no longer talks about the world," he said. "The world talks about Turkey."

Just two weeks later, he appears to have been right -- just not quite in the way he had anticipated. The world is looking at Turkey and speaking of the violence with which Turkish police are assaulting demonstrators at dozens of marches across the country. Increasingly, Erdogan is looking like an autocratic ruler whose people are no longer willing to tolerate him.

Gold, money and everything else

More Than Meets the Eye

by Aristotle

Part 1 --- Stormclouds Gather...

The estimable economist Milton Friedman stated his forgettable opinion in 1974 that OPEC would collapse and oil would never get up to $10 per barrel. In all fairness to Professor Friedman, we must recognize his position as coming from a staunch monetarist, emphasizing money supply as the "true religion" for the Federal Reserve to keep the US Dollar as good as Gold. At times, he half-seriously argued for the abolition of the Federal Reserve in light of the simple monetary policy guidelines that could serve in its stead, with the economy returning to a state of self-regulation. (In the past sound-money days, economic hardships were far from unnatural, and they were not necessarily attributable to acts of government. However, modern attempts to centrally manage the economy ensures that any blame for systemic difficulties today may be clearly laid at government's feet.)

Milton's mistake was two-fold. First was his knowledge that Arabian oil could be produced for one dime of real money, and that inevitable competition among OPEC members would surely keep the price close to cost of production. Second, and most importantly, Milton failed to account for the possibility that the government would abandon such reasonable monetary management to keep the dollar nearly as good as Gold. This fact was NOT lost, however, on the oil producing countries. Ask yourself, what would YOU do if your business or trading partners suddenly started offering you payment with Monopoly money instead of "real" money? Would you shun real money as though it were the plague, and embrace Monopoly money as the greatest thing since sliced bread? If you would, then I have got a job for you!! Bring your shovel and some work-clothes, you have been hired for life...

Upon the 1971 declaration by the United States that redemption of dollars for Gold would be terminated, the entities in receipt of dollars for balance of trade settlements had no difficulty recognizing this as an outright default on payment contracts. The scramble was on to make sense of this new payment system in which the dollar was no longer a THING of value (a small amount of Gold), but was now reduced to a CONCEPT of value; an undefined unit with which the world would denominate the amount of value in contracts for goods and services. The problem ever since has been in coming to terms with the meaning of value for this shifting and undefined unit, and its vulnerability for mismanagement and abuse.

Jelle Zijlstra, who became head of the Bank for International Settlements, said while with the Bank of the Netherlands in regard to the 1971 severing of Gold from the dollar, "When we left the pound, we could go to the dollar. But where could we go from the dollar? To the moon?"

As I continue this tale, I hope it becomes clear that not only have we gone to the moon, but that Gold is going there also.

Part 2 --- A Transition: Things Are what they Are...

Do you see the world as it is? Or, do you see the world as you are? A tough obstacle, to be sure, as our experiences weigh heavily on our perceptions, and many people have no practical earthly experience with real money. There is hope..."the Truth is out there!" as a popular show is quick to proclaim. Albert Einstein puts an interesting slant on this theme: "My religion consists of a humble admiration of the illimitable superior spirit who reveals himself in the slight details we are able to perceive with our frail and feeble mind."

Resentment against Erdogan explodes

Mr Erdogan may well be wondering whether he is the victim of his own success

The Economist 

It all began with a grove of sycamores. For months a tight band of environmentalists had been protesting against a government-backed project to chop the trees down in order to make room for a mall and residential complex in Istanbul’s Taksim Square. Last week they organised a peaceful sit in, camping, singing and dancing by the threatened trees. 

On May 31st, in a predawn raid, riot police moved in. They set fire to the demonstrators’ tents and doused them with pressurised water and tear gas. Images depicting police brutality spread like wildfire across social media. Within hours thousands of outraged citizens began streaming towards Taksim Square. Backed by armoured personnel carriers and water cannons, police retaliated with even more brutish force. Tidal waves of pepper spray sent protestors reeling and gasping for air. Hundreds of demonstrators were arrested, and scores of others injured, in the clashes that ensued. Copycat demonstrations erupted in Ankara, the Turkish capital, and elsewhere across the country. Turkey’s “Tree Revolution” had begun. 

In fact the mass protests that are sweeping the country are not just about the trees, nor do they constitute a revolution. They are the expression of the long-stifled resentment felt by nearly half of the electorate who did not vote for the ruling Justice and Development (AK) party in the June 2011 parliamentary elections. These swept Recep Tayyip Erdogan, the prime minster, to power for a third consecutive term. 

The wave of unrest was completely unexpected. The protestors cut across ideological, religious and class lines. Many are strikingly young. But there are plenty of older Turks, many of them secular-minded, some overtly pious. There are gays, Armenians, anarchists and atheists. There are also members of Turkey’s Alevi Muslim minority. What joins them is the common sentiment that an increasingly autocratic Mr Erdogan is determined to impose his worldview. The secularists point to a raft of restrictions on booze; liberals to the number of journalists in jail (there are more journalists in prison than in any other country in the world). Thousands of activists of varying stripes (mainly Kurds), convicted under Turkey’s vaguely worded anti-terror laws, are also behind bars. Then there are those incensed by mega urban-development projects, including a third bridge over the Bosphorus, which will entail felling thousands of trees. Scenting the public mood, retailers announced that they had pulled out of the planned arcade in Taksim Square. “This is not about secularists versus Islamists—it’s about pluralism versus authoritarianism,” commented a foreign diplomat. 

Mr Erdogan wants to be elected president when the post comes free in August 2014. And he has made no secret of his desire to boost the powers of the presidency “a la Turca” as he put it, spurring accusations that what Erdogan really wants is to become a “Sultan”.

“Tayyip [Erdogan] istifa”, a call for the prime minister to resign, was the slogan most commonly chanted by the protestors. Not that most Turks would have known. Media bosses fearful of jeopardising their other business interests shunned coverage of the protests for nearly two days, opting instead to screen programmes about breast-reduction surgery and gourmet cooking. Faced with a public outcry, the main news channels began broadcasting live from Taksim Square. But pro-government papers continue to point the finger of blame at provocateurs and “foreign powers” bent on undermining Turkey. It seems an odd description of the thousands of housewives leaning over their balconies clanging their pots. 

What is economic growth?

... and why we won’t have any

As we are in the final stage of the global bubble, I realize that we often fail to ask the most obvious questions. In this case, as every central banker tells us that his policies are directed to obtain growth, the obvious question is…how do we define economic growth? What is economic growth?

by Martin Sibileau

As we are in the final stage of the global bubble, I realize that we often fail to ask the most obvious questions. In this case, as every central banker tells us that his policies are directed to obtain growth, the obvious question is... how do we define economic growth? What is economic growth? Yes, yes, I know that what they do is simply monetize deficits and enable the transfer of wealth between sectors and generations, but there is also an intellectual battlefield, which we should be aware of.

In the next sections, I will (extremely) briefly walk through the history of the idea of economic growth to this day. Obviously, I cannot be exhaustive and I encourage you to do further research on the works mentioned below. At the end, I examine what view policy makers have on economic growth, if any…

When did this all begin?

When did the idea of economic growth first appear? Up to the 18^th century, economic thinking was predominantly concerned with comparative statics, intellectual exercises designed to establish causes and consequences of policy making.

I dare to suggest that the concern on economic growth grew before the French Revolution, when the distribution of income was first examined. My suggestion contradicts Nicholas Kaldor, who finds David Ricardo pioneering the theory of distribution. Although David Ricardo explicitly says in the preface to his “Principles of Political Economy and Taxation” that: “…To determine the laws which regulate this distribution, is the principal problem in Political Economy…”, my view is that this perspective had already been adopted by Francois Quesnay, in 1759, and was the foundation of the Physiocracy. If agriculture was the basis of economic growth, a distribution of income favouring this sector was thought to be advisable. I copied below the very same Tableau Economique, probably the first economic model (designed by Quesnay):

The idea that there was an “optimal” distribution of income triggered the investigation of what determines the same. Simultaneously and brewed by Malthus, there was another idea: Full employment requires a growing income. Perhaps this idea, which we are reminded of every two months by the minutes of the Federal Open Market Committee meeting at 2:15pm, goes all the way back to Karl Marx.

It was on these two pillars (i.e. distribution of income and the relation between employment and output) that the modern theory of economic growth was born, with the additional analysis of how capital is created.

Roy F. Harrod

The first “modern” discussion on economic growth is probably that of R. F. Harrod, titled “An Essay in Dynamic Theory”, published in 1939.

IMF Board Attacks Euro Crisis Management

Call to Speed Up Creation of Banking Union

By Markus Dettmer and Christian Reiermann

The EU's bailout of Cyprus has elicited unusually frank and vehement criticism from the finance experts grouped in the IMF's Executive Board. Their damning indictment at an IMF meeting in May reflects global skepticism, especially in emerging economies, about the euro zone's crisis management. 

Paulo Nogueira Batista, 58, is a fan of classical music, a connoisseur of German literature and an advocate of straight talking. As executive director for his native Brazil and 10 smaller countries, he is a member of the Executve Board, the highest-ranking operational decision-making body of the International Monetary Fund (IMF).

His counterparts from the United States and Europe have often witnessed the combative personality of this economist with wavy, salt-and-pepper hair, who attended a high school in Bonn for two years in his youth. Batista is one of the most persistent critics of Western dominance in the IMF.

He often derides the Washington-based organization, headed by French politician Christine Lagarde, as a "North Atlantic monetary fund," because, as he argues, Americans and Europeans are primarily interested in defending their interests and preventing emerging economies like Brazil from exerting their rightful influence in the fund. He resents the Europeans for increasingly availing themselves of the fund's assets to combat their euro crisis, even though they have enough money of their own. "The euro countries abuse their power within the IMF," Batista is fond of saying.

In mid-May, the Brazilian had yet another opportunity to sharply criticize the Europeans' behavior. The bailout package for Cyprus was up for a vote in the IMF Executive Board, a package that includes €1 billion ($1.3 billion) in IMF funds. As it turned out, there were others who shared the Brazilian's critical position.

As evidenced by written position statements and the speaking notes of participants, the event turned into a critical review of Europe's bailout policy. The IMF found itself in the dock along with the European Commission and the European Central Bank (ECB), the two other members of the so-called troika, as well as the countries of the euro zone.

Anti-Primark posing helps nobody

Blaming Western shoppers for the tragic collapse of the Rana Plaza building will make life worse for Bangladeshis

by Rania Hafez 

The collapse of the Rana Plaza building in Dhaka, Bangladesh on 24 April was a terrible tragedy. Over 1,100 workers lost their lives that day – and most were making clothes for Western retailers. But, here’s the thing: despite buying clothes here in the West, I am not responsible for what happened to the Rana Plaza building.

It may sound like a strange statement, but it’s one that has to be made. Like countless others, I shop at Primark, one of the retailers which used labourers housed at the Rana Plaza. And ever since the tragic incident in Bangladesh, I have been made to feel guilty for doing so. In a cringing act of opportunism, assorted NGOs and campaign groups,  carpet-baggers of self-righteousness one and all, are using the terrible incident in Dhaka to re-assert their moral superiority and condemn us plebeian shoppers, not only as contemptible for our cheap tastes, but also as criminal for buying affordable clothes. Ordinary British consumers have been branded culpable for the death of the garment workers in Bangladesh. It is as if we have colluded in the very destruction of the Rana Plaza. The act of buying a Primark t-shirt is enough to turn us into an accessory to murder.

Yet the tragedy in Dhaka was not caused by the British predilection for cheap clothing; the garment factories involved in this incident were not sweat shops; and the workers, although poorly paid in comparison to workers in the UK, received reasonable wages relative with Bangladeshi standards. In fact, the building itself was a large complex of shops and apartments - it even housed a bank. By many accounts, it was a combination of shoddy workmanship, the flouting of building regulations and sheer corruption that led to the building’s collapse. British shoppers were not to blame.

Why Suppressing Feedback Leads To Financial Crashes

If you eliminate feedback from the markets, you get asset bubbles and huge deficits

Central-planning manipulation "works" by closing all the safety valves of market feedback, creating a dangerous but politically appealing illusion of stability and "growth."

by Charles Hugh-Smith

If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates.

The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets.

Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.

Removing or suppressing feedback seems to work wonders because the systemic risks generated by this suppression are pushed out of sight. The euro is an excellent example of this dynamic.

The system of national currencies is in essence a gigantic feedback mechanism, as the relative value of a nation's currency reflects its cost structure, trade deficits or surpluses, fiscal deficits, interest rates, central bank policies and a host of other inputs.

A currency that is allowed to fluctuate acts as a "safety valve" feedback when an economy become imbalanced. If the costs of production in one nation are relatively high, its exports will decline and its imports will rise. This leads to large trade deficits, which (except in the case of the reserve currency, the U.S. dollar) lead to lower currency valuations, which feeds back into imports and exports: imports become relatively more expensive as the currency loses buying power internationally, and exports rise as the nations' goods and services become relatively less expensive to other nations.

The net result of this currency feedback loop is to lower imports and increase exports, bringing the trade deficit back into relative balance.

The euro effectively removed this complex feedback from all the economies that accepted the euro. This is the root cause of the European debt crisis: credit was allowed to reach insane levels of fragility and excess because the feedback that was once provided by national currencies and central bank/fiscal policies was removed from the system.

The Wounded Heart

Bill Gross To Ben Bernanke: "Your Policies Are Now Part Of The Problem Rather Than The Solution"

by Bill Gross

Joseph Schumpeter, the originator of the phrase “creative destruction,” authored a less well-known corollary at some point in the 1930s. “Profit,” he wrote, “is temporary by nature: It will vanish in the subsequent process of competition and adaptation.” And so it has, certainly at the micro level for which his remark was obviously intended. Once proud, seemingly indestructible capitalistic giants have seen their profits fall short of “everlasting” and exhibited a far more ephemeral character. Kodak, Sears, Barnes & Noble, AOL and countless others have been “competed” to near oblivion by advancing technology, more focused management, or evolving business models that had better ideas more “adaptable” to a new age.

Yet capitalism at a macro level must inherently be different than the micro individual businesses which comprise it. Profits in total cannot be temporary or competed away if capitalism as we know it is to survive. Granted, the profit share of annual GDP can increase or decrease over time in its ongoing battle with labor and government for market share. But capitalism without profits is like a beating heart without blood. Not only is it profit’s role to stimulate and rationally distribute new investment (blood) to the economic body, but the profit heart in turn must be fed in order to survive.

And just as profits are critical to the longevity of our capitalistic real economy so too is return or “carry” critical to our financial markets. Without the assumption of “carry,” or return over and above the fixed, if mercurial, yield on an economy’s policy rate (fed funds), then investors would be unwilling to risk financial capital and a capitalistic economy would die for lack of oxygen. The carry or return I speak to is most commonly assumed to be a credit or an equity risk “premium” involving some potential amount of gain or loss to an investor’s principal. Corporate and high yield bonds, stocks, private equity and emerging market investments are financial assets that immediately come to mind. If the “carry” or potential return on these asset classes were no more than the 25 basis points offered by today’s fed funds rate, then who would take the chance? Additionally, however, “carry” on an investor’s bond portfolio can be earned by extending duration and holding longer maturities. It can be collected by selling volatility via an asset’s optionality, or it can be earned by sacrificing liquidity and earning what is known as a liquidity premium. There are numerous ways then to earn “carry,” the combination of which for an entire market of investable assets constitutes a good portion of its “beta” or return relative to the “risk free” rate, all of which may be at risk due to artificial pricing.

EU bans claim that water can prevent dehydration

A New High for Brussels bureaucrats 

By Victoria Ward and Nick Collins

EU officials concluded that, following a three-year investigation, there was no evidence to prove the previously undisputed fact.

Producers of bottled water are now forbidden by law from making the claim and will face a two-year jail sentence if they defy the edict, which comes into force in the UK next month.

Last night, critics claimed the EU was at odds with both science and common sense. Conservative MEP Roger Helmer said: “This is stupidity writ large.

“The euro is burning, the EU is falling apart and yet here they are: highly-paid, highly-pensioned officials worrying about the obvious qualities of water and trying to deny us the right to say what is patently true.

“If ever there were an episode which demonstrates the folly of the great European project then this is it.”

NHS health guidelines state clearly that drinking water helps avoid dehydration, and that Britons should drink at least 1.2 litres per day.

The Department for Health disputed the wisdom of the new law. A spokesman said: “Of course water hydrates. While we support the EU in preventing false claims about products, we need to exercise common sense as far as possible."

German professors Dr Andreas Hahn and Dr Moritz Hagenmeyer, who advise food manufacturers on how to advertise their products, asked the European Commission if the claim could be made on labels.

They compiled what they assumed was an uncontroversial statement in order to test new laws which allow products to claim they can reduce the risk of disease, subject to EU approval.

There’s nothing puzzling about Britain’s stagnation Part A

Economists are perplexed to find that today, in a first in any postwar recession, productivity is not recovering

British economists are tearing their hair out over the so-called ‘productivity puzzle’ - the fact that, for the first time in any postwar recession, productivity in Britain has not recovered reasonably quickly after the initial downturn. But it isn’t a puzzle at all, and in truth points to deep structural problems in the British economy, argues Phil Mullan in this important new essay 

by Phil Mullan

The productivity puzzle

Productivity growth is the best guide to a country’s future prosperity. As a measure of economic output relative to employed labour time, productivity gives an indication of how much wealth can be created for society to live on. Productivity’s capacity to grow, therefore, underpins durably improving living standards. In Britain especially, though not uniquely within Europe, productivity growth since the financial crisis of 2008 has been extremely weak – in fact, in Britain’s case, it has remained a couple of per cent below its pre-recession peak.

This has caught many economists by surprise, prompting a significant amount of debate over why this has happened and how long it might endure. While the initial fall of productivity during the recession was in line with everyone’s expectations, there hasn’t been a subsequent recovery in productivity. Instead, productivity has remained low and pretty static. This has become known as the British productivity puzzle (1).

It is perceived as a ‘puzzle’ because normally after a recession, productivity recovers reasonably quickly. Economists traditionally attribute recovery to ‘cyclical’ reasons. Another way of viewing the ‘cyclical’ behaviour of productivity is that it is the statistical expression of two real-economy measures – output and employment. These two tend to move at different speeds during the different stages of the business cycle. Output in a recession usually declines much faster than businesses reduce their headcount, and the measure of productivity therefore falls: less output relative to workers.

Then, when the recession ends and output begins to grow again, the reverse effect is supposed to kick in: the output recovery makes better use of under-used employees before employment picks up again, creating a cyclical boost to productivity: more output relative to workers. This effect is reinforced as output often expands more quickly than employers recruit.

An important point about such ‘cyclical’ shifts is that they do not reflect the impact of the long-term driver of productivity growth: namely, productive capital investment. It is such investment that generates and spreads the innovation and the advances in technology and techniques that make people at work more productive. In contrast to ‘cyclical’ changes, we can call this type of investment ‘structural’ in its impact on productivity.

The big problem with the productivity puzzle discussion is that it assumes that what we are experiencing is primarily some form of business cycle (even if some highlight more than others its unusual and distinct origins in the West’s financial crash from 2007). But in fact, we should be looking deeper into our economic troubles rather than presuming that they are cyclical. Britain’s economic problems – and those of the rest of the Western world – are structural, and this accounts for the poor state of British productivity we see today. A long period of underinvestment in innovation, technology, capital equipment and infrastructure manifest themselves in low productivity. There is no ‘puzzle’ about the absence of a productivity recovery, because there is not a high productivity level to which the economy can recover. Structural British productivity is low. The only ‘puzzle’ is why productivity seemed to be so strong in the pre-2008 period.