Seven reasons to hate your parents: Reason #2

The so-called retirement funds, both private and governmental, are allocated toward sovereign bonds

by Eugen von Böhm-Bawerk 

We could write volumes on the western world’s obsession with their beloved welfare systems and volumes have been written. The reader is obviously familiar with most of this history and the glaringly obvious unsustainability of the systems enacted.

We will therefore only make a couple of observations that are novel to the debate. When the systems were introduced in the 1960s it is true that we did get a boost to savings. Payments into the system were made without large payments out of the system. However, contrary to the old system before public pension funds were introduced, saved capital that were supposed to be allocated to productive business loans were now diverted into the government coffers. What used to be cash strapped politicians now suddenly saw a windfall of wealth flowing into their grip, which consequently could be used to buy votes in the next election. Unsurprisingly ambitious projects within the government sphere were undertaken to “invest” the newfound money.

Consider the Swedish experience during the time of plenty. The Swedish politicians “invested” the capital in low cost housing for the poor often in less well-off municipalities. While the intent may have benign and not a wilful act to bribe the electorate to be re-elected it does not change the conclusions that can be drawn from this story. The government allocated scarce capital to highly unproductive usage and gave it to dependents. Participants paying into the system did so under the pretence of saving for old age while they unknowingly consumed valuable capital. As the government coerced them to “save” people were tricked into reducing their own savings confident they were secure from the government program. Instead of securing a decent yield to secure consumption as dependents, they ended up by bailing out the municipalities that obviously could not pay back. First their taxes went into poor investments, and then they had to bail out the inevitable default from current taxes. All was lost. Twice!

In other words, the Swedes reduced savings through the introduction of a system with the intention to make sure everybody saved. Talk about unintended consequences and perverted incentives through government intervention! We are sure the Swedish experience was not unique as similar programs were introduced all over the western world.

More generally we know that a large part of so-called retirement funds, both private and governmental, are allocated toward sovereign bonds. The system is rigged in several dimensions to make sure that happens. But is this not just a more sophisticated version of the Swedish experiment? Think about it; today’s retirement saving goes into destructive debt (see previous blog post), which reduces the productive potential of the economic system! In other words, the assets held by pension funds are an unwilling promise forced upon our generation to pay taxes in the future. Since the system reduces our productivity we have to pay higher and higher taxes just to keep up. From this we can draw the obvious conclusion that a welfare state will per definition create less and less wealth and prosperity, and this vicious circle of lower and lower growth must continue until insolvency strikes and restructuring is forced upon a bewildered population. The generational fight for resources that we face will undoubtedly be ugly, and until the demographics shift to our favour, we will lose.  

Any way you slice it, Germany wins

Germany holds all the cards in the euro power struggle

By Cyrus Sanati

The faster Europe realizes that Germany holds most, if not all, of the cards when it comes to ending the eurozone debt crisis, the faster a lasting solution can be found. With positive economic growth, low unemployment and fantastically low interest rates, Germany is simply in no rush to implement reforms that have been proposed by its economically weaker neighbors, as they would negatively impact Germany's ability to borrow cheaply and expand exports.

The only way the EU's biggest member can be convinced to take on reforms, like issuing eurobonds, would be if it were granted incentives, such as control over the fiscal policy of the eurozone. Other members of the eurozone, namely France, have been wary about handing more of their economic power over to Brussels and ultimately to Frankfurt. But while solutions like the pooling of eurozone's existing debt is a good first step to diffusing the crisis, they still require incentives for Germany to get on board.

Since the start of the crisis, Germany's chancellor Angela Merkel has been accused of dragging her feet when it comes to ending the eurozone crisis. Headlines like, "Where is Germany?" or "Merkel's failure to lead," have graced newspapers on both sides of the Atlantic.

But unlike nearly every other eurozone leader, Merkel hasn't been thrown out of power since the crisis began more than two year ago. While that is due in part to election rules in Germany, it is also due to Germany's economy, which, while a little wobbly now, has actually improved since the crisis began in 2010. That year, Germany's GDP grew at 3.5% - much faster than its neighbors. In 2011, it grew at 2.7% at the same time most of its neighbors slipped into recession. And while economists had predicted a terrible first quarter for Germany this year, its economy actually grew five times more than expected, at 0.5%.

That might seem puzzling given that many of Germany's main trading partners are crippled eurozone members, but the country seems to have benefitted greatly from the weakening of the euro, since it has increased the competitiveness of its exports in non-eurozone countries. Unlike the rest of the eurozone, Germany is an exporting powerhouse, making high-quality goods that are in demand across the world. The eurozone crisis has ironically only increased its export strength, continuing to make it the world's second-largest export economy in the world, behind China.

At the same time, Germany has also benefitted from an increase in investor demand for its debt. Germany has a debt-to-GDP ratio of around 80%, which is higher than troubled Spain at 68%, yet its debt is trading at zero, while Spain's debt is trading near 7%. Demand for German debt was so great this month that at some points it actually traded at a negative yield. Investors buying this debt range from German banks to U.S. pension funds. But the big surge in buying lately has come from Spanish and Greek depositors who are frantically withdrawing their life savings and putting them in German bonds on fear that their respective governments will leave the eurozone and destroy their savings through devaluation.

Sharks, Vampires and Central Planners

Even at low tide you won’t see the shark until it’s upon you

By Moshe Silver

This shark – swallow you whole.

                                     - Quint, “Jaws”

We often hear government economists and policy makers express concern that market turmoil might “spill over and affect the real economy,” an Orwellian locution where the price of oil spiking over $110 is seen as a “market dislocation,” and not as a multi-billion dollar tax on America’s middle class.

There have been measurable benefits from government programs going back to the first responses to the crisis under Treasury Secretary Paulson, though largely of dubious value.  The fact that we spent a trillion dollars to keep a bunch of bankers employed, while technically a win for the nation’s employment statistics, was arguably not the application that would have attained the utilitarian goal of the Greatest Good for the Greatest Number.

Last week saw a convergence of data points that all point to the likelihood that Chairman Bernanke wants to retain Friends in High Places, assuming that his legacy will be set not by those who write history – and especially not by those who live it – but by those who decide what gets published.  (Quoth the Duke of Gloucester, patron of historian Edward Gibbon, upon being presented with the completed Decline and Fall of the Roman Empire, “Another damned thick, square book!  Always scribble, scribble, scribble, eh?”)

We don’t mean to scoff at the very real suffering caused by economic collapse, but Hedgeye holds firm to the view that government meddling in the economy is generally not a good thing, and that a long-term program of persistent government meddling in the economy is a decidedly harmful thing. 

Government intervention has the predictable effect of shortening economic cycles, while also increasing volatility – perhaps two sides of the same coin of time compression.  In consequence, it also has the predictable effect of generally not really fixing anything and of battering the middle class, edging them nearer to the abyss with each new policy nudge.

By the Fed’s own reckoning, each successive round of QE has a diminishing impact on the markets.  Mind you, that impact is measured in basis points – one-hundredths of a percent – and the twenty-five basis point impact looked for from any future round of QE is not predicted to last.  The banks are still not lending, largely because of uncertainty over government policy.  But don’t blame the banks.  People aren’t borrowing, for much the same reason: no one wants to take a loan to expand a business that might be shot execution style by the Fed suddenly reversing its interest rate policy.

So, if the Fed’s easy money policy is not supporting the “real economy,” who is benefitting from it?

Most excess liquidity seems to be supporting the short-term trading of major financial houses – which helps explain the furor over the Volcker Rule, designed with the sole purpose of walling off risk trading from deposit taking (a proposition that a tenth-grader could clearly articulate in a single sentence – do you know a tenth grader who wants to be President?)

Seven reasons to hate your parents! - Reason #1

In order to maintain a high level of consumption, our parents chose fewer children

by Eugen von Böhm-Bawerk 

We will, over the course of the next several days, present seven different reasons for why we should hate our parents. While the headline may seem unduly provocative we believe the following arguments will be more than enough to substantiate such a harsh claim. Some may say our allegation is nothing more than an interesting intellectual exercise with no valid practical implications. What our parents did is water under the bridge; dwelling with bygones helps no one!

We beg to differ. We look at what is happening throughout the world and we see angry, frustrated young people without jobs, without prospects, without useful academic degrees, carrying unsustainable debt burdens protesting FOR status quo! One should think a generation facing so many headwinds of which they are of no responsibility themselves would demand a revolution and overthrow the power that is. Perversely, they rather ask for more of the same. They take to the streets and ask elected and non-elected leaders to continue the policies that brought them into their predicament in the first place.

We will present seven reasons for why today’s youth should protest AGAINST status quo by showing the reader how our parents made a complete mess of what they once inherited from our grandparents. Hopefully, our little contribution will make a small, but right step in taking today’s protesters in a new direction.

Reason number one: in order to maintain a high level of consumption, our parents chose fewer children

We often hear about the “baby-boom” problem created by our grandparent’s high fertility rate. Those children are now retiring, and thus strain the western world’s welfare system. Before we move on to explore this particular problem, let us just say that our parents have had a tendency to obfuscate our language and terms, making rational conversation much harder to achieve.

They somehow manage to call outright statists for liberal, they call war peacekeeping operations, and they call fascism right-wing extremism and so on. The same is true for the term “baby-boom” as if it is something novel that the new generation is larger the previous one. Our parents blame our grandparents for the dire straits we are heading into due to the baby-boom problem. It is not a baby-boom problem; it is a birth-deficit problem! It is not our grandparents that got a lot of children that causes the problem we now face; it is the fact that our parents got so few.

They did not want the extra responsibility of raising a lot of kids. It cost them money and it took away valuable time which they could rather use to satisfy their own narcissistic tendencies. This choice of course provided them with the best of two worlds with few elderly dependencies and simultaneously very few younger dependencies. Hence they could expand current consumption by imposing a demographic tax on the future. This is often referred to as a demographic dividend. Worryingly, for many troubled countries this dividend is now entering a phase of pay-back!

Let’s explore the demographics in more detail and see what’s going on in the western (and to some extent the emerging-) world. One of the best indicators in terms of economic impact from changing demographics is called dependency ratios. This is the ratio of cohorts in non-working age relative to cohorts in working age. This ratio gives an explicit number on how many dependents there are relative to breadwinners. Contrary to economics in general, demographic trends are relatively certain since generations already born will by law of nature age and develop in a highly predictable manner. As the next two chart clearly points out, dependency ratios will worsen inexorably in the decades that follow. Unfortunately, that is only half the story, because not all within their working age is actually working, but are dependents themselves. This is in itself a product of the welfare state that was built in the post-WWII area, but more on that later. In many countries participation rates, those within working age that is working or is looking for work, is depressingly low. Assuming participation rates will be maintained at their long-term averages, which today are a highly optimistic assumption, we can also get an idea of the real burden expected to be carried by our own generation as we move forward.

Egypt’s Coup Conundrum

The grand hopes of the Arab Spring are withering away

By Doug Bandow

There are many grand failures of U.S. foreign policy. Egypt has joined the pantheon, with Washington seemingly under attack by every faction in Cairo.

Egypt long has been a national wreck. Its recent history featured rule by an indolent king and a leftish Arab nationalist. A couple of authoritarian generals followed. The economy was ruined by dirigisme economic plans, endless bureaucratic incompetence, and pervasive political corruption.

Washington was only too happy to go along in the name of “stability” since Cairo backed U.S. policy and preserved peace with Israel. This ugly Realpolitik persisted even after the Cold War ended and the Bush administration launched a war to end tyranny and promote democracy.

The people of Egypt finally had enough, forcing the Obama administration’s opinion to shift from “Mubarak is our friend” to “Mubarak should leave in an orderly fashion” to “Mubarak should go—now!” However, the end of autocracy loosed Islamist forces.

This was not what Washington desired, but Egyptians weren’t concerned with what Washington desired. Mubarak’s fall led to the election of the Muslim Brotherhood’s Mohamed Morsi and approval of an Islamist-oriented constitution. Both were flawed, but both were approved democratically. Washington had no choice but to accept Morsi’s rule, after spending decades supporting autocrats who had suppressed the Brotherhood.

Alas, President Morsi failed politically. He failed to accept government limits, especially checks on executive authority. He failed to ensure accountability for government. He failed to accommodate religious minorities and political opponents who feared centralization of power. He failed to reassure those who feared the Brotherhood was determined to Islamicize Egyptian society.

He also failed economically. He failed to open and deregulate the economy. He failed to encourage foreign investors. He failed to offer opportunity to impoverished Egyptians.

Why Fight for King and Country?

There is something monstrously out of whack about going to war for a large nation state

By Robert Higgs

I can understand why a man might take up arms in defense of himself, his family, his friends, perhaps even his neighborhood or his town. But once we get past the lived-in milieu, a man’s risking his life, limbs, health, and mental composure to fight for a large politically defined unit makes less and less sense, the larger the unit. Why, for example, should a man from Arizona go to war on behalf of people from New Jersey, people with whom he is not acquainted, people about whom he knows little or nothing. The man from Arizona might well have more in common with and greater concern for a typical “enemy” soldier than he has for the people of New Jersey. He might even dislike people from New Jersey and like the enemy people.

I do not care much for many Americans. I find their apparent values and modes of life offensive or worse, although I am personally acquainted with only a handful of them and so I may be doing a disservice to many of those with whom I am not personally acquainted. But in view of the constraints everyone faces, no one can really know, much less like, more than, say, a few hundred other people. What am I to make of a demand that I bear great personal risks in defense of hundreds of millions of complete strangers—for all I know, these people don’t even exist, and the Census Bureau has perpetrated a gigantic fraud in its declarations that they do.

On the opposite side of the ledger, I do know and like—indeed greatly admire and esteem—scores of people in other countries. I cannot imagine going to war against them; I’d sooner go to prison than harm them. So, if the U.S. government went to war against Guatemala, for example, it would have to count me out; I’ve far too many dear friends there even to consider joining in such violence. I wonder sometimes how many of the U.S. soldiers who went to Iraq to kill people there had ever seen, much less been acquainted with, an Iraqi previously. What impels a man to kill perfect strangers, especially perfect strangers who pose no threat to him or to those he cares about at home? To me, it defies basic elements of humanity. One might say that such killers are responding more to their allegiance to their own government’s leaders, but why should they have such a loyalty in the first place? Not one soldier in a thousand has ever personally encountered a top American political leader. Unless the soldier is extraordinarily dense, he understands vaguely that such people are all liars and crooks. Why should he kill other people and risk being killed himself merely because these political kingpins want him to do so? Does he fail completely to see the government’s propaganda for what it is?

I realize, of course, that the questions I have raised are merely queries about the basic nuts and bolts of the great machine of nationalism, and I am aware that astute philosophers, social scientists, and others have labored long and hard to delineate the configuration and operation of this machine. Nevertheless, I find it worthwhile to step back from the abstractions and highfalutin scholarly talk and to ask questions about national loyalty as if we were encountering it for the first time. When we do so, it strikes me that we are accustomed to taking for granted some things that are, at best, quite counter-intuitive and highly perplexing.  

Mirror, Mirror, on the Wall, Which Nation Is in the Deepest Fiscal Doo-Doo of All?

United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states

By DANIEL J. MITCHELL

According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America . According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States. 

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states. 

Prison Eugenics in the Golden State

No woman should give consent on the operating table

By Carl Close

In 2003, California Governor Gray Davis issued a formal apology for the forced sterilization of inmates in the state’s prisons, a practice officially banned in 1979.

“To the victims and their families of this past injustice, the people of California are deeply sorry for the suffering you endured over the years,” he said in a press release. “It was a sad and regrettable chapter in the state’s history, and it is one that must never be repeated again.”

Given the mountains of bad publicity surrounding the Golden State’s history of forced sterilization—an estimated 20,000 male and female California inmates were sterilized from 1909 to 1964—it’s easy to see why most people might have assumed that such practices were halted long ago. But new evidence suggests that coercion continued well into the twenty-first century.

This week the non-profit Center for Investigative Reporting released a study claiming that from 2006 to 2010 California prison doctors performed tubal ligation surgery on at least 148 female inmates without having obtained the necessary state authorizations. Moreover, an additional one hundred violations may have occurred going back to the late 1990s.

According to Dr. Ricki Barnett, who heads the state committee tasked with authorizing the restricted surgery on a case-by-case basis, prison health administrators, doctors, and nurses seemed unaware that they needed special permission to perform tubal ligation on inmates.

The study supports its claims of unauthorized sterilizations with state documents and interviews with former prison staff and prisoners.

In 2010, Kimberly Jeffrey, 43, was an inmate at Valley State Prison for Women and was sedated for a C-section when a prison doctor pressured her to undergo a sterilization procedure, she told the Center for Investigative Reporting.

“He said, ‘So we’re going to be doing this tubal ligation, right?’ ” Jeffrey said. “I’m like, ‘Tubal ligation? What are you talking about? I don’t want any procedure. I just want to have my baby.’ I went straight into a panic.”

The China-US 'Brotherhood'

"Fragile"? You wish.

By Pepe Escobar 

The fifth round of the US-China Strategic and Economic Dialogue began this Thursday in Washington. This China-US "Brotherhood" does involve a lot of talk - with no perceptible action. US Think Tankland is trying to convey the impression that Beijing is now in a more fragile position relative to Washington compared with the post-financial crisis environment in 2009. Nonsense. 

It's as if the ongoing NSA (global) scandal never happened; Edward Snowden exposed how the US government has turned against its own citizens even while it keeps spying on virtually the whole planet. Then there's the meme of the Chinese economy being "in trouble", when in fact Beijing is launching a long-reaching, complex strategy to calibrate the effects of a relative economic slowdown. 

Finally, the supposed "aggressive Chinese behavior" in terms of Asian security is just spin. Beijing is building up its navy, of course - yet at the same time both China and selected members of the Association of Southeast Asian Nations are fine-tuning their tactics ahead of multilateral talks about a code of conduct for any serious problems in the South China Sea. Beijing would be foolish to go for diplomacy of the gunboat variety - which would certainly attract a US countercoup. 

Bogged down, all over
Beijing has clearly interpreted the North Atlantic Treaty Organization's "liberation" of Libya - now reverted into failed state status; US support for the destruction of Syria; and the "pivoting" to Asia as all interlinked, targeting China's ascension and devised to rattle the complex Chinese strategy of an Eurasian energy corridor. 

Yet it does not seem to be working. As Asia Times Online reported, the Iran-Pakistan (IP) pipeline may well end up as IPC, "C" being an extension to Xinjiang in western China. Beijing also knows very well how the proposed Iran-Iraq-Syria gas pipeline has been a key reason for the emphatic attack on Syria orchestrated by actors such as Qatar, Saudi Arabia and Turkey. Beijing calculates that if Bashar al-Assad stays and the US$10 billion pipeline ever gets completed (certainly with Chinese and Russian financial help) the top client may end up being Beijing itself, and not Western Europe. 

Germany’s Energiewende Is Not Just Unworkable, It Might be Illegal

The implications for the already struggling continent are enormous

By Walter Russell Mead

Germany’s Energiewende, or “energy revolution,” has been heralded by greens as a shining example of the kind of true commitment to renewable energy that our planet requires, but in practice it’s been a flop. As the country phased out its nuclear reactors in the wake of the Fukushima disaster, it heavily subsidized wind and solar farms, passing the costs of these subsidies to consumers in the form of higher electricity prices. In a bid to keep them competitive—and, well, to keep them in Germany—Berlin decided to exempt many of its energy-intensive industries from these high energy prices.

But now the EU is stepping in. The European Commission, concerned that these exemptions violate competitions laws within the trading bloc, will open up an investigation on the matter this Wednesday, Spiegel reports:

[EU Energy Commissioner Günther Oettinger] said many provisions in the law appeared to be in breach of EU single market rules and competition law. For example, he said, it wasn’t acceptable that Germay subsidizes its own wind power but makes no subsidies available to operators from Denmark and Norway that deliver windpower to Germany. [...]

The Commission plans to launch proceedings aimed not only at banning such exemptions in the future, but also requiring companies to repay the charges they were exempted from in the past.

GOP Hypocrisy and the Farm Bill

Any Republican who voted for this bill and then claims to care about the debt or deficits should be laughed off the stage

By Michael D. Tanner

Whenever Republicans attempt to cut spending for some social welfare program or another, Democrats are quick to claim that it is not unaffordable spending that the Republicans dislike, but poor people. By passing the farm bill this week — after stripping out spending for the food stamp program — House Republicans showed that that stereotype is largely true.

Make no mistake, the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps, is out of control, and should be cut. Since 2000, spending on SNAP increased from just $17 billion per year to more than $78 billion in 2012, while the number of recipients rose from 17 million in 2000 to more than 48 million today. Nearly one out of every six Americans receives SNAP.

In the previous iteration of the farm bill, Republicans had attempted to cut SNAP spending by $20.5 billion over 10 years, paring the program back to 2010 levels of spending. Democrats opposed those cuts, while some Republicans didn’t believe the cuts were deep enough. As a result, the farm bill went down to well-deserved defeat.

In response the Republican leadership split the bill into two pieces, allowing Republicans to vote for agricultural subsidies without having to vote for any funding for food stamps at all. With the Republican leadership whipping the vote, including threatening wayward committee chairmen, the welfare-for-farmers-only version passed 216-208, entirely on the strength of Republican votes. In fact, only 12 Republicans voted against it.

But in passing the farm bill, Republicans demonstrated that they are just fine with bloated welfare programs as long as those welfare payments go to well-healed special interests.

In 2011, the last year for which full data is available, the average farm household had an income of $87,289, 25 % higher than the average for all U.S. households. And about a third of the farm subsidies go to the largest four percent of farm operators. If you want to see real “welfare queens,” look no further than Pilgrim’s Pride, Tyler Farms, and Riceland Foods.

How John Locke Should Have Saved The Lone Ranger

Yet another action movie rooted in the myth of the Wild West

By Sam Staley

I had a glimmer of hope for the 2013 film The Lone Ranger when I read that young U.S. attorney John Reid, aka The Lone Ranger, arrives in untamed west Texas with a copy of John Locke’s Two Treatises of Government. After watching the otherwise entertaining summer action film, I left the theater wondering if the screenwriters, or even the director, had even read the book, let alone the CliffsNotes version.

Riding into town at the near end of a rail line 1869, John Reid proclaims his desire to bring the “rule of law” to the wild, uncivilized western territories. So far so good, and this is an intriguing although hardly original beginning to the film (although economic research challenges the conventional wisdom that the West was in fact “lawless”). John Locke’s Second Treatise is widely recognized for launching the Enlightenment theory of the “social contract” between free citizens and their government into the mainstream of political discussion. The role of government, the 17th century political philosopher argued, is to protect personal liberty and freedom through the protection of life and property. Moreover, this freedom is inherent in life itself. To the extent governments (or more relevantly for the period, monarchs) violate this social contract, citizens even have the right to revolt.

Alas, despite the reference to the Locke, the “Rule of Law as Justice” theme is unhinged, and the story, plot and characters suffer as a result. The first clue is evident in one of the first scenes. John Reid is on the train with a group of Presbyterian missionaries. One of the missionaries offers up his Bible and asks Reid if he would pray with him. Instead, the supposedly well-schooled attorney declines saying that, in effect, his “bible” is Locke’s Two Treatises. What’s missing in this exchange is that Locke’s concept of social contract, and the arguments for liberty and even the right to revolution, are embedded in Natural Rights, the idea that men are born free and their natural state is liberty. These rights are granted by God, not men. Hence, the Rule of Law is an objective standard that cannot be abrogated by men. Thus, the proper biblical understanding of free will and personal freedom as a Natural Right is foundational, not just complimentary to the notion of Locke’s social contract.

It is never, ever different this time

We Must Not Forget The Lesson Of The Cyprus 'Bang! Moment' Shock

By JOHN MAULDIN,

"Future shock is the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time."

                                       – Alvin Toffler

What is it about humans that we fail to see a crisis in advance, yet when we look back, its likelihood or inevitability so often seems blindingly obvious? Rather than a flaw, our under- reliance on foresight as opposed to hindsight is perhaps a necessary evolutionary design feature that has allowed us to make rapid progress as a species (especially over the last few thousand years), but in a complex modern society it can really create quite the crisis for individuals. This week we resume our musings about Cyprus, to see what that tiny island can teach us about our own personal need to engage in ongoing critical analysis of our lives and investment portfolios. Cyprus is not Greece or France or Spain or Japan or the US or ... (pick a country). I get that. No two situations are the same, but there may be a rhyme or two here that is instructive.

This Country Is Different

In 1974, Turkey invaded Cyprus. Eventually the island was divided into two zones, and Greeks in the Turkish zone, like Turks in the Greek zone, were forced to leave with only the clothes on their backs and little else. That was a defining moment for Cyprus, and the aftershock is still evident when you get past the normal polite conversation. Plus, the wall dividing the two countries is always there when you are in the capital city of Nicosia, although lately there are a few places where you can cross into the other zone. The first night I was in Nicosia, we ate dinner outside at a Greek taverna (what else?) that stands almost in the shadow of the wall.

One hundred years after the Civil War, the South of my childhood was still mixed up with the aftereffects of that war. The war in Cyprus was less than 40 years ago. Another evening we went to a local club where the members were Greeks who had been expelled from a particular neighborhood in the Turkish-occupied area. Many looked young enough that they could not have been alive during the war, but the memory of the "old neighborhood" was still strong among them.

These people lost homes and businesses, jobs – everything. They had to start over. (I am sure it was that way for the Turks who had to relocate as well.) But for the next 40 years there was very steady economic growth, 4% or so a year over time. The people took advantage of what they had.

There was no university, so children went abroad to study and work and then came back, generally with skills. The legal and accounting professions grew particularly strong. Like two other former British island colonies, Singapore and Hong Kong, Cyprus became a financial center. Fifty double tax treaties later, the island had become a place to domicile companies, handle taxes and accounting, etc.

And then they branched out into banking. After the creation of the euro, the deposit base of Cypriot banks went through the roof, until it was up to six times the size of local GDP (depending on whom you believe – official sources make it closer to five times). By some measures, Cyprus had the second wealthiest population in Europe and certainly one of the best educated. Twenty-five percent of the world's ships were operated under the flag of Cyprus. Because the country had been a member of the nonaligned movement in the '80s (remember that?), it had good ties (and double tax treaties) with Eastern Europe and the USSR. Some of the kids went to university in Russia and developed contacts there. After the collapse of the Soviet Union, it was natural for Russians to use Cyprus as a conduit to the West.

Cyprus has, by some accounts, the best beaches in the Mediterranean, and so more and more people came and built vacation homes. They brought their money with them and deposited it in the local banks and took out loans to build their homes. Real estate prices climbed and climbed. Below are Cypriot bank deposits and loans from 2009 through April of this year (data from the central bank).

Unemployment was quite low, less than 4% in 2008, although the global credit crisis led to a gradual rise (though nothing like that seen in the rest of Europe). Much of the new unemployment was in the construction industry, which fell into a slump along with the rest of Europe during the crisis.

 Banking soon became the biggest industry. There were more banking branches per capita in Cyprus than anywhere else in the world, more than double the European average. And there were over 40% more employees per branch than in the average eurozone country. Money was easy to get, so debt exploded by over 50% in both businesses and households in just six years, from 2005– 2011.

The country had always run a current account deficit, but by 2008 that deficit had topped 15%, keeping pace with Greece's and Portugal's. However, earnings and productivity had more than kept up. Cypriots worked hard and offered good value for their services. They saw themselves as different from the other Southern European countries. But, as in much of the rest of Europe, public-sector employment doubled from 1990, with the second-highest government wage bill (behind Denmark's) and a monstrous 50% growth in social benefits in the last 10 year

Still, starting in 2003, public debt-to-GDP actually fell. Why ring the alarm bell when things are getting better?

There were in fact no alarms bells ringing as 2012 opened. But there should have been. Cyrpiot banks were flush with cash. They bought foreign banks in Greece and Russia. They made ever more loans and then looked around and decided that Greek sovereign debt was something they needed more of. And then came the Greek sovereign debt crisis, and the capital base of the Cypriot banks was essentially wiped out. But the ECB and the EU had bailed out Irish and Spanish banks; and so depositors in Cyprus, many of them Russian, decided, along with the local citizens, to leave their money in the banks.

The country had been under the parliamentary control of the Communist Party since 2008. Seriously. Supported by the Orthodox Church. (Note that public debt began its serious rise after the communists came to power). No one reined in the banks, and they grew ever fatter and more exposed until the crisis hit. Then Cyprus could no longer fund its debt and needed EU help. Further, the Central Bank of Cyprus (not to be confused with the commercial Bank of Cyprus) had to make emergency liquidity loans to Cypriot banks that had to meet demands for withdrawals and could no longer raise capital. There was not a bank run, but there was a fast-paced walk.

The ECB balked, as the quality of the collateral offered did not come close to the standards of the Emergency Lending Assistance (ELA) program. The government of Cyprus needed money to fund its basic needs as well as to "roll over" its debt as it came due. The EU basically declined to negotiate, as there was a Cypriot election scheduled for late February, and the EU preferred to wait to see the results before acting. There was talk of a "bail-in" (where depositors would shoulder some of the loss), but as usual that proposal came from the Germans, and the rest of Europe would surely not agree.

The new president assumed office and saw immediately that the country was in trouble. He tapped Michael Sarris, a "technocrat," to be his finance minister. Sarris was the man who had helped bring Cyprus into the euro and who oversaw the reduction in Cypriot debt. While he was not a member of the winning political party, he had been at the World Bank and had relationships with many of the finance heads of Europe.

Sarris went to Brussels, only to find no friends of Cyprus there. The Germans privately told him they would approve no bailout of Russian depositors (rumored to account for over half of the base of some of the banks) prior to the German elections this fall. Cyprus was seen as a money haven and a place for rather loose tax accounting. I have to admit that many of the Cypriots I talked to knew that money laundering was going on. It was a very open secret. Cyprus had very strict rules, but it seems there were ways to engineer exceptions.

In the end, Cyprus makes no difference – that was the perception in Europe, and while they were just talking a few billion euros here and there, a fraction of what Ireland or Spain needed, there was just no sympathy for Cyprus. Many of the European finance ministers wanted to establish the questionable principle that bank deposits were no longer sacrosanct, and Cyprus was just not seen as a systemic risk. The best deal Sarris could get was a 6.75% "tax" on deposits of less than €100,000 and 9.9% above that, with the aim of raising €5.8 billion. That was on a weekend, and by Monday, when Sarris returned, the indignation in Cyprus had grown to the point that not one politician voted to accept the deal.

A bank holiday was declared and Laiki Bank was put into receivership and closed as a "bad bank," but within a week the EU decided to insure all deposits up to €100,000, the number that "everyone" had understood to be the safe deposit amount. The banks eventually reopened, but Cyprus placed capital controls on deposits and limited withdrawals. A euro in a Cypriot bank was no longer the same as a euro in an Irish bank. 

The Economist wrote shortly thereafter:

The Criminals Have Seized Power

Coup d’etat

How do you change the direction of the country when power has been seized by the ultra-wealthy criminal class? When the financial, economic, political, military, judicial, and media organizations have been taken over by criminals who are looking out only for their financial interests, the few citizens who have the courage to speak the truth become enemies of the state. There is no non-violent solution to this state of affairs. This is what Fourth Turnings are all about.  

Coup d’etat  —  Paul Craig Roberts

The American people have suffered a coup d’etat, but they are hesitant to acknowledge  it. The regime ruling in Washington today lacks constitutional and legal legitimacy.  Americans are ruled by usurpers who claim that the executive branch is above the law and that the US Constitution is a mere “scrap of paper.”

An unconstitutional government is an illegitimate government. The oath of allegiance requires defense of the Constitution “against all enemies, foreign and domestic.” As the Founding Fathers made clear, the main enemy of the Constitution is the government itself.  Power does not like to be bound and tied down and constantly works to free itself from constraints.

The basis of the regime in Washington is nothing but usurped power. The Obama Regime, like the Bush/Cheney Regime, has no legitimacy.  Americans are oppressed by an illegitimate government ruling, not by law and the Constitution, but by lies and naked force. Those in government see the US Constitution as a “chain that binds our hands.”

The South African apartheid regime was more legitimate than the regime in Washington. The apartheid Israeli regime in Palestine is more legitimate.  The Taliban are more legitimate. Muammar Gaddafi and Saddam Hussein were more legitimate.

The only constitutional protection that the Bush/Obama regime has left standing is the Second Amendment, a meaningless amendment considering the disparity in arms between Washington and what is permitted to the citizenry. No citizen standing with a rifle can protect himself and his family from one of the Department of Homeland Security’s 2,700 tanks, or from a drone, or from a heavily armed SWAT force in body armor.

Like serfs in the dark ages, American citizens can be picked up on the authority of some unknown person in the executive branch and thrown in a dungeon, subject to torture, without any evidence ever being presented to a court or any information to the person’s relatives of his/her whereabouts.  Or they can be placed on a list without explanation that curtails their right to travel by air.  Every communication of every American, except  face-to-face conversation in non-bugged environments, is intercepted and recorded by the National Stasi Agency from which phrases can be strung together to produce a “domestic extremist.”

If throwing an American citizen in a dungeon is too much trouble, the citizen can simply be blown up with a hellfire missile launched from a drone.  No explanation is necessary. For the Obama tyrant, the exterminated human being was just a name on a list.