A sin against history and geography

The End of Italy

Why should we be surprised Italy is falling apart? With dozens of languages and a hastily made union, it was barely a real country to begin with.

BY DAVID GILMOUR 

Italy is falling apart, both politically and economically. Faced with a massive debt crisis and defections from his coalition in Parliament, Prime Minister Silvio Berlusconi -- the most dominant political figure in Rome since Benito Mussolini -- tendered his resignation last week. Yet Italy's problems go deeper than Berlusconi's poor political performance and his notorious peccadilloes: Their roots lie in the country's fragile sense of a national identity in whose founding myths few Italians now believe.

Italy's hasty and heavy-handed 19th-century unification, followed in the 20th century by fascism and defeat in World War II, left the country bereft of a sense of nationhood. This might not have mattered if the post-fascist state had been more successful, not just as the overseer of the economy but as an entity with which its citizens could identify and rely on. Yet for the last 60 years, the Italian Republic has failed to provide functioning government, tackle corruption, safeguard the environment, or even protect its citizens from the oppression and violence of the Mafia, the Camorra, and the other criminal gangs. Now, despite the country's intrinsic strengths, the Republic has shown itself incapable of running the economy.

It took four centuries for the seven kingdoms of Anglo-Saxon England to finally become one in the 10th, yet nearly all the territories of the seven states that made up 19th-century Italy were molded together in less than two years, between the summer of 1859 and the spring of 1861. The pope was stripped of most of his dominions, the Bourbon dynasty was exiled from Naples, the dukes of central Italy lost their thrones, and the kings of Piedmont became monarchs of Italy. At the time, the speed of Italian unification was regarded as a kind of miracle, a magnificent example of a patriotic people uniting and rising up to eject foreign oppressors and home-bred tyrants.

However, the patriotic movement that achieved Italian unification was numerically small -- consisting largely of young middle-class men from the north -- and would have had no chance of success without foreign help. A French army expelled the Austrians from Lombardy in 1859; a Prussian victory enabled the new Italian state to acquire Venice in 1866.

In the rest of Italy, the Risorgimento (or Resurgence) wars were not so much struggles of unity and liberation as a succession of civil wars. Giuseppe Garibaldi, who had made his name as a soldier in South America, fought heroically with his red-shirted volunteers in Sicily and Naples in 1860, but their campaigns were in essence a conquest by northern Italians of southern Italians, followed by the imposition of northern laws on the southern state known as the Kingdom of the Two Sicilies. Yet the southern city of Naples did not feel liberated -- only 80 citizens of Italy's largest city volunteered to fight for Garibaldi -- and its people soon became embittered that the city had exchanged its role as the 600-year-old capital of an independent kingdom for the status of a provincial center. Today, its status remains reduced, and southern GDP is barely half what it is in the regions of the north.

United Italy skimmed through the normal painstaking process of nation-building and became a unitary state that made few concessions to local sentiment. Take Germany, by comparison: After the unification of 1871, the new Reich was ruled by a confederation that included four kingdoms and five grand duchies. The Italian peninsula, by contrast, had been conquered in the name of the Piedmontese King Victor Emmanuel II and remained an aggrandized version of the kingdom, boasting the same monarch, the same capital (Turin), and even the same constitution. The application of Piedmontese law over the peninsula made many of the kingdom's new inhabitants feel more like conquered subjects than a liberated people. Violent uprisings throughout the southern regions in the 1860s were savagely repressed.

Italian diversity has an ancient history that could not be suppressed in a few years. In the fifth century B.C., the ancient Greeks spoke the same language and thought of themselves as Greeks; Italy's population at the time spoke about 40 languages and had no common sense of identity. The diversity became even more pronounced after the fall of the Roman Empire, when Italians lived for centuries in medieval communes, city-states, or Renaissance duchies. This communal spirit is still alive today: When you ask citizens of, for example, Pisa how they identify themselves, they are likely to answer first as Pisans, then as Tuscans, and only after as Italians or Europeans. As many Italians cheerfully admit, their sense of belonging to the same nation becomes apparent only during the World Cup, when the Azzurri, the members of the national soccer team, are playing well.

Language is another barometer of Italy's fractiousness. The distinguished Italian linguist Tullio De Mauro has estimated that at the time of unification, just 2.5 percent of the population spoke Italian -- that is, the Florentine vernacular that evolved from the works of Dante and Boccaccio. Even if that is an exaggeration and perhaps 10 percent understood the language, it still means 90 percent of Italy's inhabitants spoke languages or regional dialects incomprehensible to those elsewhere in the country. Even King Victor Emmanuel spoke in the Piedmontese dialect when he wasn't speaking his first language -- French.

In the euphoria of 1859 to 1861, few Italian politicians paused to consider the complications of uniting so diverse a collection of people. One who did was the Piedmontese statesman and painter Massimo d'Azeglio, who is reported to have said after unification, "Now we have made Italy, we must learn to make Italians."

Alas, the chief means chosen by the new government to achieve this aim was an effort to turn Italy into a great power -- one that could compete militarily with France, Germany, and Austria-Hungary. This attempt, however, was bound to fail because the new nation was so much poorer than its rivals.

For 90 years, culminating in Mussolini's fall, Italy's leaders were determined to create a sense of nationhood by turning Italians into conquerors and colonialists. Vast sums of money were therefore spent on expeditions to Africa, often with disastrous results; at the Battle of Adowa in 1896, in which an army was wiped out by an Ethiopian force, more Italians were killed in a single day than in all the wars of the Risorgimento put together. Although the country had no enemies in Europe and no need to fight in either of the world wars, Italy joined the fighting in both global conflicts nine months after they had begun when the government thought it had identified the winner and extracted promises of territorial rewards.

Mussolini's miscalculation and subsequent downfall destroyed Italian militarism and at the same time punctured the idea of Italian nationhood. For 50 years after World War II, the country was dominated by the Christian Democrats and the Communists. These parties -- which took their cue from the Vatican and the Kremlin, respectively -- were not interested in instilling a new sense of national identity to replace the old one.

Postwar Italy was in many ways a great success. With one of the highest growth rates in the world, it became an innovator in such peaceful and productive fields as film, fashion, and industrial design. Yet the economic triumphs were uneven, and no administration was able to reduce the disparities between north and south.

The government's political and economic failures are not the only cause of the malaise that now threatens Italy's survival. Some flaws in the national structure were inherent in the circumstances of the country's creation. The Northern League -- Italy's third-largest political party, which suggested that the country's 150th birthday in March should be cause for mourning rather than celebration -- is not simply a bizarre aberration. Its attitude to the south, xenophobic and even racist as it sometimes is, demonstrates the truth that Italy has never felt itself to be a properly united country.

The great liberal politician Giustino Fortunato used to quote his father's view that "the unification of Italy was a sin against history and geography." He believed that the strengths and civilization of the peninsula had always been regional and that a centralized government would never work. Now he looks more prescient by the year. And if Italy has a future as a united nation after this crisis, it must accept the reality of its troubled birth and build a new political model that takes account of its intrinsic, millennial regionalism -- if not as a collection of republican communes, hilltop duchies and principalities once more, then at least as a federal state that reflects the essential features of its past.

Read my lips, no new taxes

Will the GOP Establishment Blow It by Picking Romney?

By Thomas Sowell

Justice Oliver Wendell Holmes said that a good catch phrase could stop thinking for 50 years. One of the often-repeated catch phrases of our time -- "It's the economy, stupid!" -- has already stopped thinking in some quarters for a couple of decades.

There is no question that the state of the economy can affect elections. But there is also no iron law that all elections will be decided by the state of the economy.

President Franklin D. Roosevelt was re-elected for an unprecedented third term after two terms in which unemployment was in double digits for eight consecutive years.

We may lament the number of people who are unemployed or who are on food stamps today. But those who give the Obama administration credit for coming to their rescue when they didn't have a job are likely to greatly outnumber those who blame the administration for their not having a job in the first place.

An expansion of the welfare state in hard times seems to have been the secret of FDR's great political success in the midst of economic disaster. An economic study published in a scholarly journal in 2004 concluded that the Roosevelt administration's policies prolonged the Great Depression by several years. But few people read economic studies.

This economy has been sputtering along through most of the Obama administration, with the unemployment rate hovering around 9 percent. But none of that means that Barack Obama is going to lose the 2012 election.

Even polls which show "any Republican" with more public support than Obama does not mean that Obama will lose.

The president is not going to run against "any Republican." He is going to run against some specific Republican, and that Republican can expect to be attacked, denounced and denigrated for months on end before the November 2012 elections -- not only by the Democrats, but also by the media that is heavily pro-Democrat.

We have already seen how unsubstantiated allegations from women with questionable histories have dropped Herman Cain from front runner to third place in just a couple of weeks.

In short, it takes a candidate to beat a candidate, and everything depends on what kind of candidate that is.

The smart money inside the Beltway says that the Republicans need to pick a moderate candidate who can appeal to independent voters, not just to the conservative voters who turn out to vote in Republican primaries. Those who think this way say that you have to "reach out" to Hispanics, the elderly and other constituencies.

What is remarkable is how seldom the smart money folks look at what has actually been happening in presidential elections.

Ronald Reagan won two landslide elections when he ran as Ronald Reagan. Vice President George H.W. Bush then won when he ran as if he were another Ronald Reagan, with his famous statement, "Read my lips, no new taxes."

But after Bush 41 was elected and turned "kinder and gentler" -- to everyone except the taxpayers -- he lost to an unknown governor from a small state.

Other Republican presidential candidates who went the "moderate" route -- Bob Dole and John McCain -- also came across as neither fish nor fowl, and also went down to defeat.

Now the smart money inside the Beltway is saying that Mitt Romney, who is nothing if not versatile in his positions, is the Republicans' best hope for replacing Obama.

If conservative Republicans split their votes among a number of conservative candidates in the primaries, that can mean ending up with a presidential candidate in the Bob Dole-John McCain mold -- and risking a Bob Dole-John McCain result in the next election.

The question now is whether the conservative Republican candidates who have enjoyed their successive and short-lived boomlets -- Michele Bachmann, Rick Perry and Herman Cain -- are prepared to stay in the primary race to the bitter end, or whether their conservative principles will move them to withdraw and throw their support to another conservative candidate.

There has probably never been a time in the history of this country when we more urgently needed to get a president out of the White House, before he ruined the country. But will the conservative Republican candidates let that guide them? 

When they come preaching equality, what they want is power

The Equality Racket

By Patrick J. Buchanan     

Our mainstream media have discovered a new issue: inequality in America. The gap between the wealthiest 1 percent and the rest of the nation is wide and growing wider.

This, we are told, is intolerable. This is a deformation of American democracy that must be corrected through remedial government action.

What action? The rich must pay “their fair share.” Though the top 1 percent pay 40 percent of federal income taxes and the bottom 50 percent have, in some years, paid nothing, the rich must be made to pay more.

That’s an appealing argument to many, but one that would have horrified our founding fathers. For from the beginning, America was never about equality, except of God-given and constitutional rights.

Our revolution was about liberty; it was about freedom.

The word “equality” was not even mentioned in the Constitution, the Bill of Rights or the Federalist Papers. The word “equal” does not make an appearance until the 14th Amendment’s “equal protection of the laws” after the Civil War. The feminists’ Equal Rights Amendment was abandoned and left to die in 1982 after 10 years of national debate.

When Thomas Jefferson wrote that memorable line – “All men are created equal” – he was not talking about an equality of rewards, but of rights with which men are endowed by their Creator. He was talking about an ideal.

For as he wrote John Adams in 1813, Jefferson believed nature had blessed society with a “precious gift,” a “natural aristocracy” of “virtue and talents” to govern it. In his autobiography, a half decade before his death in 1826, he restated this idea of “the aristocracy of virtue and talent which nature has wisely provided for the direction of the interests of society.”

Equality, egalite, was what the French Revolution, the Bolshevik Revolution, Mao’s Revolution of 1949, Castro’s Revolution of 1959 and Pol Pot’s revolution of 1975 claimed to be about.

This was the Big Lie, for all those revolutions that triumphed in the name of equality were marked by mass murders of the old ruling class, the rise of a new ruling class more brutal and tyrannical, and the immiseration of the people in whose name the revolution was supposedly fought.

Invariably, “Power to the people!” winds up as power to the party and the dictator, who then act in the name of the people. The most egalitarian society of the 20th century was Mao’s China. And that regime murdered more of its own than Lenin and Stalin managed to do.

Inequality is the natural concomitant of freedom.

For just as God-given talents are unequally distributed, and the home environments of children are unequal, and individuals differ in the drive to succeed, free societies, where rewards of fame and fortune accrue to the best and brightest, must invariably become unequal societies.

In the 19th and 20th centuries, no nation achieved greater prosperity for working men and women than the United States, where all were born free, but equal only in constitutional rights.

Yet, though inequalities of income and wealth have endured through the history of this republic, each generation lived better and longer than the one that came before.

That was the America we grew up in. As long as life for the working and middle classes was improving, who cared if the rich were getting richer?

Today’s new inequality is due to several factors.

One is a shift from manufacturing as the principal source of wealth to banking and finance. A second is the movement of U.S. production abroad.

This has eliminated millions of high-paying jobs while enriching the executives and shareholders of the companies that cut the cost of production by relocating overseas.

With globalization, the interests of corporations – maximizing profit – and the interests of the country – maintaining economic independence – diverged. And the politicians who depend on contributions from executives and investors stuck with the folks that paid their room, board and tuition.

Yet, behind the latest crusade against inequality lie motives other than any love of the poor. They are resentment, envy and greed for what the wealthy have, and an insatiable lust for power.

For the only way to equalize riches and rewards in a free society is to capture the power of government, so as to take from those who have, to give to those who have not.

And here is the unvarying argument of the left since Karl Marx: If you give us power, we will take from the rich who have so much and give it to you who have so little. But before we can do that, you must give us power.

This is the equality racket. As Alexis de Tocqueville wrote:

“The sole condition which is required in order to succeed in centralizing the supreme power in a democratic community is to love equality, or to get men to believe you love it.

Thus the science of despotism, which was once so complex, is simplified, and reduced … to a single principle.”

When they come preaching equality, what they want is power.

The case foe economic prosperity

Things can only get better with economic growth

As a new book shows, human welfare has not improved over the past 200 years in spite of economic growth but because of it.

By Daniel Ben-Ami 

One of the most pervasive of contemporary myths is that the lot of humanity is worsening over the long term. Despite the mass of evidence to the contrary, it is still widely held that the world is becoming poorer, more miserable and facing environmental catastrophe.

Simply for opposing this miserabilist worldview, the new book by Charles Kenny, a senior fellow at the Center for Global Development in Washington DC would be welcome. He marshals a lot of evidence to show that even in relation to the developing world the trend is for the welfare of humanity to increase at an unprecedented rate.

The most dramatic evidence of this improvement is in relation to the human lifespan. Average global life expectancy increased from 31 in 1900 to 66 by 2000. This alone is a huge achievement achieved in a remarkably short space of time by historical standards. A large part of the story is related to the sharp decline in infant mortality: it has become mercifully less common for parents to have to mourn the loss of their children.

Of course, the improving trend in human welfare does not imply that there are no significant problems facing humanity. On the contrary. There are still enormous challenges in relation to poverty, inequality and human well-being. The challenge is to work out how best to tackle them.

Kenny follows the mainstream view in arguing that development should attempt to improve quality of life directly by such measures as basic healthcare and education. In contrast, the consensus until the 1970s was that development needed to focus on transforming the economic structure of society. It meant attempting to turn poor countries into rich ones.

There is room for different sides to debate which is the best path as there is a mass of seemingly contradictory evidence. At a global level, it is clear that the period of modern economic growth – the past two centuries or so – has coincided with huge increases in human welfare. On average we not only live longer, but are healthier, taller, better fed, more intelligent (at least as measured by IQ) and better educated than ever before.

The coincidence of these two sets of factors does not on its own prove that growth has bolstered human welfare. Contemporary critics of economic growth typically attempt to separate economic growth from improvements in human welfare. They often attribute such improvements to technological developments and basic health measures.

It is also fairly uncontentious to argue that the poorest section of humanity clearly benefits from rising incomes. For someone living on, for example, one dollar a day, a small additional rise in income can make a tremendous difference. It can even literally mean the difference between life and death if it allows someone to buy food or much needed medical treatment. In contrast, a small increase in income is highly unlikely to have nearly such a significant impact for a richer person.

The debate gets messier when it goes beyond the poorest of the poor. Above a certain subsistence level, there is often no simple one-to-one relationship between economic growth and indicators of human welfare. For instance, Kenny shows that Costa Rica spends five per cent of what America does on health per person but the average Costa Rican lives two years longer.

He also makes much of the fact that people can buy a lot more today with a given level of income than they could in the past. For instance, average incomes in Vietnam are currently about the same as Britain in the early 1800s. Yet Vietnamese people today can buy vaccines, refrigerated food, light bulbs or telephone calls.

From these premises it follows that simple measures can dramatically improve the lives of poor people. These can include such initiatives as vaccine programmes, oral rehydration therapy and building pit latrines. In contrast, building modern hospitals or water utilities is seen as an expensive waste of scarce resources.

However, there are several reasons to question the conventional wisdom, promoted by Kenny and others, that decouples welfare improvements from economic growth. For a start, as critics of prosperity are all too willing to note, conventional economic measures are deeply flawed. Take GDP as an example. Although it is fairly good at measuring the amount of ‘stuff’ produced in a year, it finds it much harder to measure the quality of that stuff. It systematically underestimates the benefits of growth and innovation.

Perhaps the most famous example is that of Nathan Rothschild, possibly the richest man in the world when he died in 1836. Rothschild died of what is believed to have been an infected abscess. Today it could be treated by antibiotics which are cheap and widely available; but back then they had not been invented.

From this perspective it is possible to reinterpret Kenny’s arguments about goods becoming cheaper over time. The fact that, say, mobile phones have become widely available to the poor reflects a global process of growth and innovation. A related point is that economic growth and technological innovation are closely linked. It is disingenuous to focus on improvements in technology as if they could have happened without rising prosperity. Economic growth, scientific advance and technological improvements are all bound together in the process of material progress.

Nor should the economic downturn that hit the world in 2008 be forgotten. Although developing countries have generally continued to grow, the developed world has suffered from economic dislocation and squeezed living standards. If anything, this experience should be taken as a negative vindication of the importance of growth. If economic expansion is beneficial, it should be no surprise that economic contraction is so painful.

It should also be noted that growth in the rich countries can benefit those living in poorer nations. Wealthier countries can provide markets for the goods of poorer ones while their innovations can help the poor. Of course, the matching of the two sets of needs is far from perfect; but that does not mean it is not worthwhile striving for growth.

Finally, everyone should in principle have access to the best that the world have to offer. Why should people in poor countries not aspire to be rich rather than making do with technology deemed ‘appropriate’ for them? Limiting the spread of technology and prosperity to the developing world is a form of Western elitism. The aspiration for popular prosperity should be encouraged rather than downplayed or even stigmatized as is so often the case today.

Let’s move on

Social democracy is dead 

Across Europe, labour parties are reinventing themselves to stay relevant, but they’ve been redundant for decades.

by Michael Fitzpatrick 

When I was first invited to do this talk, I thought a more appropriate title for it would have been ‘Did social democracy survive the twentieth century?’ The answer, I’m afraid, is no.

The other response I had was to go up to my loft and dig out a very old pamphlet that I wrote in 1978 called Who Needs the Labour Party? It was written in the moment before the 1979 General Election, in which Margaret Thatcher first came to power. It was actually published in September 1978 because, as people who remember that period know, then prime minister James Callaghan was expected to go to the country six months before he did. His great error was to delay the election; that delay contributed to his defeat.

But the point of that pamphlet was to call for an abstention in the election, an abstention from voting Labour, at a time when voting Labour would have been the traditional response among the constituency to which it was directed. It was about as popular as campaigning in favour of female genital mutilation. It’s hard to recollect just how profound that sense of loyalty, particularly on the left of the Labour Party and in the Labour constituency, was in that era. Certainly that’s something that has long disappeared.

The pamphlet came at the end of a turbulent decade which started around 1968, the annus mirabilis of the postwar period, the year when great eruptions took place. It was the end of the postwar boom, the collapse of consensus politics, the upsurge of trade-union militancy, radical politics across Europe, feminism, black power, national-liberation struggles around the world. It was the great upsurge, the return to significance of the Labour Party in national life after the postwar period when it had been pretty much marginal. Particularly, this time was about the rise of the Labour left.

William Wordsworth famously wrote of the period after the French Revolution, ‘What joy it was in that dawn to be alive, to be young was very heaven’. And that was what it was like in that decade between 1968 and 1978. It was a very dynamic and creative period, and the predominant sense – particularly among the young, the radical, the militant wing of the working class – was of the possibility of transcending capitalism. There was a widespread conviction that this was indeed possible, that it was possible to build an alternative social and economic system to the prevailing one. We were not talking about improving the safer neighbourhood scheme. That was not the objective of the youthful radicals of that period.

The problem that emerged towards the end of the Seventies was that the radical impulse had reached a barrier in the form of the Labour government that had come to power in 1974. It succeeded, through the mediation of its left wing, in containing that radical upsurge, particularly the militant wing of the trade unions, and it succeeded, through the form of the ‘Social Contract’, in making a deal which actually had the effect of containing wage demands, of winning the first round of cuts in public expenditure and generally creating considerable demoralisation on the left. The issue for the left was how to deal with that problem that the Labour Party manifested: that the party would become a vehicle for the containment of the radical movement rather than its advance.

One person who personified that problem in that period and after was Ralph Miliband, a man who has acquired some posthumous celebrity as the father of New Labour high flyers, Ed and Dave. At that time Ralph Miliband was well-known as a left-wing figure, an intellectual in the Labour movement. In 1961 he wrote a famous book called Parliamentary Socialism – Studies in the Politics of Labour. I notice there’s a lecture, if people are interested in this, commemorating the fiftieth anniversary of the book next month at the London School of Economics, where Miliband was a lecturer.

The point of Parliamentary Socialism was to draw out the problem that the Labour Party had become a vehicle for containing the radical movement and the possibility of the transcendence of capitalism. How could the left deal with this? Ralph Miliband resigned from the Labour Party in the mid-Sixties and was part of a whole series of intellectual and organisational movements over the next 20 years to try construct some sort of alternative to the Labour Party.

One of the ironies of Miliband’s book is that it was republished in different forms every few years with a different introduction or a different foreword or a different afterword, all of which hedged around this problem of how the left could deal with the Labour Party. In 1976, he famously wrote that the ‘most crippling of all illusions’ was the idea that the Labour Party could be transformed into a socialist party. This was an illusion to which Ralph ended up being a victim. Because what happened in the succession of episodes through this period was that every time the Labour Party was perceived as a negative force, as betraying the forward-movement of labour, the attempt to create an alternative would emerge, and then an election would come along and the whole thing would be forgotten, which is what happened in the 1978-79 period.

The whole of the left argued that the Labour Party had all these negative characteristics, but still it was the lesser evil to the Conservative Party and so everyone should succumb and vote for Labour. That was what my pamphlet Who Needs the Labour Party? was a challenge to. It provoked a very negative response because it posed very directly a political challenge to Labourism, beyond the challenge of Miliband, in terms of its understanding of the whole Labour Party but particularly organisationally. It said, look, what’s really important here is that we need to build an alternative to the Labour Party rather than endlessly try to exist within it. The entire rest of the left, and there were different factions and fragments and movements of the left, all supported the Labour Party in the election.

The endgame is fast approaching.

Infinite Stupidity

By Detlev Schlichter 

“The unlimited resources” of the European Central Bank (ECB) are quickly becoming the new magic mantra in political commentary and financial market analysis, now that the bigger euro-dominos are beginning to wobble, and everybody realizes that nobody has the firepower to bail out Italy or to “recapitalize” (i.e., bail out again) all the banks that lent to the country. So the chorus that demands that the printing press finally be put to good use is getting louder by the day.

Robert Preston, the BBC economics expert, last week claimed that the solution now lies with the ECB, and he spoke confidently of the ECB’s “unlimited resources.” Yesterday, Vince Cable demanded “unlimited powers” for the central bank. He also shamelessly regurgitated the well-worn politician’s excuse for Europe’s problems, namely, that these countries are under “speculative attack.” The advocates of large-scale ECB intervention now include many pundits and commentators, plus, a sizable group of financial market economists and strategists, whom decency obliges me to leave nameless. “It is important to keep the ECB engaged,” as one economist put it, “as only the ECB has unlimited resources.”

Such proclamations immediately invoke Albert Einstein’s famous dictum: “Only two things are infinite, the universe and human stupidity, and I am not sure about the universe.”

Everything Is Going According to Script.

None of what is going on surprises me. It is perfectly in line with what I predicted in my book. However, I am ready to admit that I am a bit baffled by the quick willingness by so many people to embrace what is, ultimately, a sure road to complete economic destruction. In Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, I explain why systems of elastic money are always suboptimal, unstable and, ultimately, unsustainable. A monetary system like ours must, over time, accumulate dislocations and imbalances that will, finally, become so big that their liquidation through market forces is deemed politically unacceptable. Then, out of desperation, an unwinnable war against economic reality will be fought by means of the printing press. Ever more money will be created ever faster in a futile attempt to outrun the market’s urge to liquidate.

In Chapter 10 of my book, I describe the two final stages of a paper money system as monetization of debt and inflationary meltdown. We are now firmly in the monetization of debt phase. This process will accelerate in coming months and quarters. Not only in the eurozone, but also in the United States and in the U.K. All of these central banks will continue to expand their balance sheets aggressively and use their ability to print money — without limit — to support banks, governments and a wide range of asset classes.

Bernanke (Fed) and Draghi (ECB) pointed out, in their respective press conferences, recently that monetary policy is not a panacea for all economic ills. It doesn’t matter. Policy has no other tools left to postpone the inevitable or to make the status quo appear sustainable again. By the way, it is entirely immaterial what Bernanke or Draghi thinks and says. Their press conferences keep Wall Street and City of London economists busy. But these gentlemen are quickly becoming mere extras in a bigger political game, in which desperation rules, and in which they will simply perform their roles of fiat money producers.

When do we enter the final stage of inflationary meltdown? Difficult to say. It all depends on when the public loses faith in a form of paper money that is being printed in evermore bizarre quantities, only to keep states and banks alive and to project some resemblance of normalcy to the masses.

I do not disagree with the mainstream economists on whether paper money central banks can create, essentially, unlimited amounts of money. Of course, they can. That is precisely why gold and silver as monetary assets were replaced with entirely flexible state money under central bank control in the first place. And I do not disagree that we will soon see more debt monetization by the ECB and other central banks around the world.

What is sheer lunacy, however, is to advocate such a policy as a solution, or part of a solution, to our problems. This is where I draw the line. It is simply beyond me how people who call themselves economic experts, and who must have at least a basic understanding of monetary theory and some knowledge of economic history, can seriously advocate debt monetization as a sensible policy tool.

Dr. Strangelove — Or How I Learned to Love the Printing Press

Our financial market economists now cling to anything that promises to buy them time and some stability, even if logic tells them that what they are advocating is exactly the opposite of what should be done. They are not unlike the gambler who knows he should quit, but out of sheer desperation, is rolling the dice one more time.

Of course, there are always those who are imbued in Keynesian economics and other sorts of interventionist myth to such a degree that they honestly think that there is no problem that cannot be fixed with government stimulus. If the medication hasn’t worked, just keep increasing the dose. Paul Krugman (Nobel laureate) and Christina Romer come to mind. But I don’t quite believe that all economists are in this camp.

Whatever their reasons and motivations, it is quite clear that all these economists are now mouthpieces for the establishment. They are all defenders of the status quo, or of what has passed for the status quo for the past 30 years.

Government bonds should again be considered “risk free” assets, and banks should again be considered “too big to fail” and “too important to fail.” This is so the symbiotic relationship between states and banks that fiat money system fosters, and that has been so mutually beneficial to the political class and the banks, can finally be restored. It is a sad spectacle to see people who call themselves economists — and often, even free-market economists — come up with evermore extreme recommendations of how we can fund Big Government.

To the broader public and the economy as a whole, the collapse of this system would be painful first, but ultimately, hugely advantageous. It would allow a renaissance of real capitalism, rather than the continuation of this system of monetary interventionism that has allowed the state to assume control over such vast resources and the financial sector to enjoy uninterrupted fiat-money-fuelled growth for decades.

What good do these economists expect to come out of ECB debt monetization? Do they really believe that once the ECB has committed itself to buying hundreds of billions worth of Italian government bonds, in order to manipulate the yield on these bonds — against market forces — down to what the political class deems sustainable (let’s say 5%), that then Italian politicians will reform public finances in the country? That they will quickly bring down deficits and the debt load to sustainable levels, at which point, Italy can borrow from the market again, the ECB can safely sell its bonds and reduce its balance sheet and everybody lives happily ever after? Does anybody seriously suggest that this scenario is likely, probable or even possible?

The fact is that none of these governments can be trusted to bring their finances under control, as long as they have access to cheap credit, i.e., to funds at “sustainable” interest rates. Germany forced through the Stability and Growth Pact at the start of EMU (does anybody remember Theo Waigel?) that should have limited debt-to-GDP ratios to 60%, only to violate it herself. Germany’s ratio is now, officially, at 83%. The government is already on the hook for another €211 billion under its EFSF commitments, which are now all but guaranteed to come due, as the bailout fund is supposed to cover first losses on bonds in order to maximize its “firepower,” meaning Germany is already set for more than 90% of debt to GDP. And that is supposed to be Europe’s “stability anchor.”

All rules and guidelines that were designed to guarantee the fiscal and monetary stability of EMU and were implemented at its start have, by now, been broken — without exception. Do you think that this will change once the politicians have obtained the unlimited support of the printing press?

“Quantitative easing” in Japan, the United States and the United Kingdom goes hand in hand with growing debt, not debt reduction. Providing a lender of last resort and easy money and cheap credit to governments does not lead to deleveraging, but to the opposite.

Only default and cutting off a government from additional borrowing will reform the government. That is why I say: Embrace default!

The Future

When the ECB will have implemented its backstop for Italian government bonds, it will end up buying vast amounts of these securities at above-market prices. Draining equal amounts of liquidity from somewhere else in the system, in order to minimize the inflationary impact, will be illusionary. Inflation will creep higher. Concerns about sovereign solvency are, of course, not restricted to Italy. These concerns, plus rising inflation, will put upward pressure on the yields of other bond markets, in particular, Spanish and French bonds. The ECB will have to expand its support program in order to stabilize these bond markets as well. Why should unlimited ECB support be limited to Italy? What is good in the case of Italy must be equally good for Spain and France!

The notion that the ECB could ever change course now and tighten policy, in order to fight rising inflation pressure, will appear increasingly fantastical. Market participants and the wider public that uses the euro will simply not believe it. Inflation expectations will rise rapidly. Money will become a hot potato. When money demand falls, inflation will shoot up quickly, which would require the central bank to establish markedly positive real interest rates in order to restore confidence in paper money. But this would mean allowing several governments that are now reliant on cheap central bank funding to go bankrupt. This will not be allowed to happen, which will undermine confidence in paper money further. We will have reached the inflationary meltdown phase.

All complete paper money systems in history were established to fund the state. Our system is no exception, as becomes increasingly clear. All paper money systems in history failed. Ours will be no exception, either. Our system is the most ambitious. We had a global system of unrestricted fiat money production for 40 years. 

Putting India back to the Stone Age

India’s “Democratic Capitalism”

By Jeff Harding

I think I’ve figured out why India has problems and why economic growth is stagnating. I’ve been getting material from the World Economic Forum which is a kind of leftist kumbayah think tank that sponsors a lot of forums dealing with emerging economies. Their latest forum is on India, India Economic Summit 2011. 

Here are some of the highlights of the Summit. I think you will find it astonishing:

India Can Become a Model for a New “Democratic Capitalism”

·         India should deepen its democracy and strive to create a new model of “democratic capitalism”

·         While India should focus on pushing reforms, the government should remember that growth is critical

·         Technology can be used to enhance talent development, financial inclusion, transparency and good governance

Mumbai, India, 14 November 2011 – As India strives to achieve the vision of sustainable and equitable growth, it must deepen its democracy, Arun Maira, a member of India’s Planning Commission, the Cabinet-level agency that drafts the country’s Five-Year Plans, told participants in the closing session of the World Economic Forum’s India Economic Summit 2011. “We must have much faster inclusion along with growth,” Maira said. “We celebrate India as a democracy. What Indians are saying is that we want to participate in the decisions that affect our lives. We want to have a more democratic market and democratic capitalism – business by the people, of the people and for the people.” Noting the demonstrations around the world against what protesters regard as the unfairness of capitalism, Maira concluded: “India needs much more democratic capitalism. India could be an emerging model of what can be done.”

In China, every 1% growth in GDP has reduced poverty by 0.8%, explained Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila, whereas in India 1% growth has reduced poverty by only 0.3%. “This is because our growth driver has only been services, not manufacturing,” said Nag, adding that India’s manufacturing needs to shift from a capital-intensive to a labour-intensive model. 

Turning the policy into reality will need investment in infrastructure, good governance and skills development. “If we can’t move a box from A to B, nothing will happen,” cautioned Rudolf W. Hug, Chairman of the Board of Directors, Panalpina World Transport Holding, Switzerland. Hug complained that India’s logistics infrastructure is “overstretched and stalled by high bureaucracy”. A truck taking goods from Gurgaon to Mumbai has to pass through 36 checkpoints and takes up to 10 days to arrive. While 57% of goods in India are transported by road – the most inefficient, expensive and emissions-intensive mode of transport – the figure in China is 22%.

This is all pretty sad stuff. Any country that is still drafting five-year plans is doomed. When you hear the words “democratic capitalism” it means that a bunch of socialists want to gain more control over the economy and dictate policy from the top down. When they say they “want to participate in the decisions that affect our lives” they mean that the government should control the economy. Unfortunately India tried that for 50 years and was mired in poverty. The modest liberalization of the Soviet central planning economic model enacted by the Nehru family (Congress Party) has finally allowed India to experience some of the power of capitalism to raise the standard of living.

The call to shift from capital intensive models to labor intensive models would put India back to to Stone Age. For millennia it was the lack of capital in India and China, as well as all other poor countries, that held back economic growth and social welfare. The very suggestion is shocking and demonstrates an appalling lack of economic understanding.

With the remnants of the socialist bureaucracy still politically very strong, India’s economic “miracle” could be jeopardized by “democratizing” capitalism.