Seeking freedom from the dangers and risks of liberty

The Road to Totalitarianism

by Henry Hazlitt

In spite of the obvious ultimate objective of the masters of Russia to communize and conquer the world, and in spite of the frightful power which such weapons as guided missiles and atomic and hydrogen bombs may put in their hands, the greatest threat to American liberty today comes from within. It is the threat of a growing and spreading totalitarian ideology.

Totalitarianism in its final form is the doctrine that the government, the state, must exercise total control over the individual. The American College Dictionary, closely following Webster's Collegiate, defines totalitarianism as "pertaining to a centralized form of government in which those in control grant neither recognition nor tolerance to parties of different opinion."

Now I should describe this failure to grant tolerance to other parties not as the essence of totalitarianism, but rather as one of its consequences or corollaries. The essence of totalitarianism is that the group in power must exercise total control. Its original purpose (as in communism) may be merely to exercise total control over "the economy." But "the state" (the imposing name for the clique in power) can exercise total control over the economy only if it exercises complete control over imports and exports, over prices and interest rates and wages, over production and consumption, over buying and selling, over the earning and spending of income, over jobs, over occupations, over workers — over what they do and what they get and where they go — and finally, over what they say and even what they think.

If total control over the economy must in the end mean total control over what people do, say, and think, then it is only spelling out details or pointing out corollaries to say that totalitarianism suppresses freedom of the press, freedom of religion, freedom of assembly, freedom of immigration and emigration, freedom to form or to keep any political party in opposition, and freedom to vote against the government. These suppressions are merely the end-products of totalitarianism.

All that the totalitarians want is total control. This does not necessarily mean that they want total suppression. They suppress merely the ideas which they don't agree with, or of which they are suspicious, or of which they have never heard before; and they suppress only the actions that they don't like, or of which they cannot see the necessity. They leave the individual perfectly free to agree with them, and perfectly free to act in any way that serves their purposes — or to which they may happen at the moment to be indifferent. Of course, they sometimes also compel actions, such as positive denunciations of people who are against the government (or who the government says are against the government), or groveling adulation of the leader of the moment. That no individual in Russia today gets the constant groveling adulation that Stalin demanded chiefly means that no successor has yet succeeded in securing Stalin's unchallenged power.

Once we understand "total" totalitarianism, we are in a better position to understand degrees of totalitarianism. Or rather — since totalitarianism is by definition total — it would probably be more accurate to say that we are in a better position to understand the steps on the road to totalitarianism.

We can either move, from where we are, toward totalitarianism on the one hand or toward freedom on the other. How do we ascertain just where we now are? How do we tell in what direction we have been moving? In this ideological sphere, what does our map look like? What is our compass? What are the landmarks or constellations to guide us?

It is a little difficult, as nebulous and conflicting usage shows, to agree on precisely what liberty means. But it isn't too difficult to agree on precisely what slavery means. And it isn't too difficult to recognize the totalitarian mind when we meet one. Its outstanding mark is a contempt for liberty. That is, its outstanding mark is a contempt for the liberty of others. As de Tocqueville remarked in the preface to his "France Before the Revolution of 1789,"

Despots themselves do not deny the excellence of freedom, but they wish to keep it all to themselves, and maintain that all other men are utterly unworthy of it. Thus it is not on the opinion which may be entertained of freedom that this difference subsists, but on the greater or the less esteem that we have for mankind; and it may be said with strict accuracy, that the taste a man may show for absolute government bears an exact ratio to the contempt he may profess for his countrymen.

The denial of freedom rests, in other words, on the assumption that the individual is incapable of managing his own affairs.

Three main tendencies or tenets mark the drift toward totalitarianism. The first and most important, because the other two derive from it, is the pressure for a constant increase in governmental powers, for a constant widening of the governmental sphere of intervention. It is the tendency toward more and more regulation of every sphere of economic life, toward more and more restriction of the liberties of the individual. The tendency toward more and more governmental spending is a part of this trend. It means in effect that the individual is able to spend less and less of the income he earns on the things he himself wants, while the government takes more and more of his income from him to spend it in the ways that it thinks wise. One of the basic assumptions of totalitarianism, in brief (and of such steps toward it as socialism, state paternalism, and Keynesianism), is that the citizen cannot be trusted to spend his own money. As government control becomes wider and wider, individual discretion, the individual's control of his own affairs in all directions, necessarily becomes narrower and narrower. In sum, liberty is constantly diminished.

One of the great contributions of Ludwig von Mises has been to show through rigorous reasoning, and a hundred examples, how government intervention in the market economy always finally results in a worse situation than would otherwise have existed, even as judged by the original objectives of the advocates of the intervention.

I assume that other contributors to this symposium will explore this phase of interventionism and statism rather fully; and therefore I should like to devote particular attention here to thepolitical consequences and accompaniments of government intervention in the economic sphere.

I have called these political accompaniments consequences, and to a large extent they are; but they are also, in turn, causes. Once the power of the state has been increased by some economic intervention, this increase in State power permits and encourages further interventions, which further increase State power, and so on.

The most powerful brief statement of this interaction with which I am acquainted occurs in a lecture delivered by the eminent Swedish economist, the late Gustav Cassel. This was published in a pamphlet with the descriptive but rather cumbersome title: From Protectionism Through Planned Economy to Dictatorship.[1] I take the liberty of quoting an extensive passage from it:

The leadership of the state in economic affairs which advocates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of governmental interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always tend to develop into Dictatorship….

The existence of some sort of parliament is no guarantee against planned economy being developed into dictatorship. On the contrary, experience has shown that representative bodies are unable to fulfill all the multitudinous functions connected with economic leadership without becoming more and more involved in the struggle between competing interests, with the consequence of a moral decay ending in party — if not individual — corruption. Examples of such a degrading development are indeed in many countries accumulating at such a speed as must fill every honorable citizen with the gravest apprehensions as to the future of the representative system. But apart from that, this system cannot possibly be preserved, if parliaments are constantly over-worked by having to consider an infinite mass of the most intricate questions relating to private economy. The parliamentary system can be saved only by wise and deliberate restriction of the functions of parliaments….

Economic dictatorship is much more dangerous than people believe. Once authoritative control has been established it will not always be possible to limit it to the economic domain. If we allow economic freedom and self-reliance to be destroyed, the powers standing for Liberty will have lost so much in strength that they will not be able to offer any effective resistance against a progressive extension of such destruction to constitutional and public life generally. And if this resistance is gradually given up — perhaps without people ever realizing what is actually going on — such fundamental values as personal liberty, freedom of thought and speech and independence of science are exposed to imminent danger. What stands to be lost is nothing less than the whole of that civilization that we have inherited from generations which once fought hard to lay its foundations and even gave their life for it.

Cassel has here pointed out very clearly some of the reasons why economic interventionism and government economic planning lead toward dictatorship. Let us now, however, looking at another aspect of the problem, see whether or not we can identify, in an unmistakable way, some of the main landmarks or guideposts that can tell us whether we are moving away from or nearer to totalitarianism.

I said a while back that three main tendencies mark the drift toward totalitarianism, and that the first and most important, because the other two derive from it, is the pressure for a constant increase in governmental intervention, in governmental spending, and in governmental power. Let us now consider the other two tendencies.

The second main tendency that marks the drift toward totalitarianism is that toward greater and greater concentration of power in the central government. This tendency is most easily recognizable here in the United States, because we have ostensibly a Federal form of government and can readily see the growth of power in Washington at the expense of the states.

The Moochers of Zuccotti Park

Good riddance to Occupy Wall Street

by Heather Mac Donald

There’s no more full-throated a defender of property rights than a member of the anticapitalist Left asserting the right to colonize someone else’s property. “Whose park? Our park!” chanted members of the Occupy Wall Street encampment in Zuccotti Park as the New York Police Department belatedly broke up the illegal occupation yesterday morning. “This is our home!” True to form, several of the newly rousted Zuccotti squatters broke into another local park outside Trinity Church after a brief discussion about whether to “liberate another piece of property.”

While the number of people who commandeered Zuccotti Park was pathetically small—several hundred a night—compared with the weight of media attention lavished upon them, their sense of entitlement to take other people’s property, whether public or private, is unfortunately widespread. It is shown by the increasingly vocal and self-righteous members of the graffiti cult and their elite enablers; by the young gutter punks who sprawl across city sidewalks on the West Coast, demanding money for drugs and booze; by the anarchist members of the No Global movement who vandalize businesses and banks; and by squatters, who remain active in Europe, though their presence in New York City virtually evaporated during the law-and-order mayoralty of Rudolph Giuliani. The demand by student participants in the Occupy Wall Street protests that they be allowed to welsh on their student loans simply because they don’t want to pay them displays a similar sense of royal privilege over other people’s property—in this case, the assets of taxpayers who extended the loans.

Zuccotti Park had to be cleared for the sake of the businesses and residents in downtown New York whose livelihoods and lives have been severely burdened by the protesters’ monopolistic takeover. Equally pressing was the need to reassert the rule of law. Yet it’s too bad that some large piece of abandoned land in the middle of nowhere couldn’t be donated to the movement so that it could continue to show the world “what democracy looks like,” as one of the rousted protesters proclaimed.

Actually, we know what the Occupy brand of democracy looks like. In the 1980s, Los Angeles gave an abandoned rail yard to the homeless; crime became so pervasive there that the camp was quickly shut down. In the 1990s and early 2000s, L.A.’s homeless simply took over the sidewalks in Skid Row with tents and tarps. Prostitution, assaults, gang retaliation, predation, drug overdoses, and defecation on the property of struggling local businesses were rampant. No surprise, then, that as the Occupy movement spread, so did lawlessness in the encampments, which had declared their hostility to oppressive police patrols.

The maudlin self-image of the OWS occupiers is perfectly in keeping with the West’s post-sixties romanticization of protest. “We move forward in the grand tradition of the transformative social movements that have defined American history,” one protester wrote on Occupy Wall Street’s website after yesterday’s police action. “We stand on the shoulders of those who have struggled before us, and we pick up where others have left off. We are creating a better society for us all.” A fawning media heard more of the same on Tuesday morning from the shouting protesters: “We are unstoppable; another world is possible”; “We shall overcome”; “We are doing something revolutionary.” A genuinely revolutionary act might have been living for free for two months without the cornucopia of insanely cheap goodies that capitalism and free trade showered upon the OWS protesters, from laptops, iPhones, and abundant electricity for recharging them to mountains of fresh food, warm clothing, and medical supplies.

Yes, some large or politically influential businesses win wholly unjustified government subsidies, as well as exemptions from the high taxes that less connected businesses have to pay to fund the growing welfare state. (The green energy movement, of course, is as voracious a consumer of unfair government favoritism as any failing bank.) But the fact that capitalism can be distorted by politics says nothing about its unmatched power to raise the standard of living almost universally and create the wealth that is the precondition for so many modern rights, such as women’s liberation from arranged marriages. Occupy Wall Street proved incapable of making such distinctions, however. At their core, the protests represented another outbreak of that perennial temptation in bourgeois society: to take for granted the norms and institutions that make Western prosperity and freedom possible.

From pariah to fiscal darling

Lessons for U.S. from Canada's "basket case" moment

By Randall Palmer and Louise Egan

Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today's Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and the Wall Street Journal calling Canada "an honorary member of the Third World," helped the nation's people and politicians understand how scary its budget problem was.

"There would have been a day when we would have been the Greece of today," recalled then-prime minister Jean Chretien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

"I knew we were in a bind and we had to do something," Chretien, 77, told Reuters in a rare interview.

Canada's shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

"Everyone wants to know how we did it," said political economist Brian Lee Crowley, head of the Ottawa-based thinktank Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 percent of gross domestic product in 2008-09, from a peak of 68 percent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle which rescued a currency that had been dubbed the "northern peso." Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower here than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

"We used to thank God that Italy was there because we were the second worst in the G7," said Scott Clark, associate deputy finance minister in the 1990s.

Canada's experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.

"I WILL DO IT"

The turnaround began with Chretien's arrival as prime minister in November 1993, when his Liberal Party - in some ways Canada's equivalent of the Democrats in the U.S. - swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act.

"I said to myself, I will do it. I might be prime minister for only one term, but I will do it," said Chretien.

A shrewd political strategist, Chretien believed Canadians were on board, after they were shocked and embarrassed a year earlier when Standard & Poor's downgraded Canadian foreign currency debt to AA plus from AAA.

He wanted history to remember him as the man who rescued Canada from financial ruin and humiliation.

Chretien sat his skeptical cabinet down and laid down the hard truth. He would get rid of the deficit, it would be painful and unpopular and nobody would be spared. There was no choice, no room for negotiation. It had to be done.

The chill in the room was such that newly appointed junior minister for veterans affairs, Lawrence MacAulay, called his wife afterward to say he would soon be out of a job.

"He said, 'Darling, I will be back home in the next election. I will be defeated, because the prime minister explained to us this morning what he intended to do,'" according to Chretien's recollection.

MacAulay, who represents the Prince Edward Island fishing community of Cardigan, has been reelected six times and sits in the House of Commons today. He couldn't be immediately reached for comment to recall the conversation.

RAISING THE ALARM

Canada's scrape with disaster had been building for a long time.

Over a decade earlier, top finance department bureaucrats had begun raising the alarm about the problem of rising debt, a hangover from the big government era of the 1970s.

The Last Days of the Euro

Why France and Germany are likely to strike a momentous deal on fiscal union sooner than anyone thinks.

 

By Jonathan Wilmot.

We seem to have entered the last days of the euro as we currently know it.

That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.

That may sound overdramatic, but it reflects the inexorable logic of investors realizing that – as things currently stand – they simply cannot be sure what exactly they are holding or buying in the euro zone sovereign bond markets.

In the short run, this cannot be fixed by the ECB or by new governments in Greece, Italy or Spain: it’s about markets needing credible signals on the shape of fiscal and political union long before final treaty changes can take place. We suspect this spells the death of “muddle-through” as market pressures effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible, or than either would like. Then and only then do we think the ECB will agree to provide the bridge finance needed to prevent systemic collapse.

We think the debate on fiscal union will really heat up from this week when the Commission publishes a new paper on three different options for mutually guaranteed “Eurobonds”, continue at the summit on 9 December and through a key speech by President Sarkozy to the French nation scheduled for the 20th anniversary of the Maastricht Treaty (11 December).

While these discussions may give some short-term relief to markets, it seems likely that the process of reaching agreement will involve some high stakes brinkmanship and market turmoil in subsequent weeks. (Not unlike the US debt ceiling debate this summer, or the messy passage of TARP in 2008.)

One paradox is that pressure on Italian and Spanish bond yields may get quite a lot worse even as their new governments start to deliver reforms – 10-year yields spiking above 9% for a short period is not something one could rule out. For that matter, it’s quite possible that we will see French yields above 5%, and even Bund yields rise during this critical fiscal union debate.

Moreover, this could happen even as the ECB moves more aggressively to lower rates and introduce extra measures to provide banks with longer-term funding. And US bond yields may fall – or at least not rise – despite improving US growth data through end-year. Equally, global equity markets and world wealth could follow a more muted version of their early Q1:2009 sell-off until the political brinkmanship is resolved – see exhibits below.

In short, the fate of the euro is about to be decided. And the pressure for the necessary political breakthroughs will likely come from investors seeking to protect themselves from the utterly catastrophic consequences of a break-up – a scenario that their own fears should ultimately help to prevent.

The culture of defeat

Germany’s Collective Self-Debasement

by Paul Gottfried

German historian Wolfgang Schivelbusch published a far-ranging 2003 study on the culture of defeated nations that focuses on three cases: the American South after the Civil War, the French after their defeat in the Franco-Prussian War in 1871, and Germany after WWI. According to Schivelbusch, defeated nations (Verlierernationen) as typified by the three cases he investigates stress myths that mitigate their defeat and create a favorable view of those who fought for their “lost cause.” Before its recent conversion to PC, the American South was paradigmatic for the way nations handle defeat, and there is little to be found in Germans’ attitudes after 1918 that does not mirror how the South saw itself after 1865.

Defeated powers, according to Schivelbusch, insist they were overwhelmed rather than really defeated, and they tend to pin the blame on their triumphant enemy’s unfair advantage or dishonorable tactics or on some internal foe who betrayed their side. The German legend of being knifed in the back in 1918 has its counterpart in the French view of the treacherous, cowardly government of Louis Napoleon that tricked them into war and then sued for peace against the Prussians; or the perfidy of General Longstreet, who supposedly showed his defeatist attitudes by joining the Reconstruction government after the Late Unpleasantness.

The only significant exception to the “culture of defeat” that Schivelbusch describes is his own country after 1945. In the introduction he suggests that the enormity and extravagance of the German exception may have driven him into writing his study. Unlike other societies he analyzes, including the Germans after WWI, contemporary Germans seem to luxuriate in “collective self-debasement.” Germans not only claim no honor for their soldiers in WWII but glorify their enemies who inflicted fire-bombing on their hapless civilians, or in the Soviet case, cut a swath across Central Europe murdering and raping. This ethic of self-rejection has gone so far that German historians and journalists delight in accepting blame for their wretched country in earlier European conflicts, and they typically view all of German history before 1933 as a lead-in to the Third Reich.

Such a mindset is evident in how German politicians present the decision to save the Greeks from their self-inflicted bankruptcy. Serious arguments could be cited for Angela Merkel and her Christian Democratic government’s decision to help out the profligate Greeks; for example, German creditors’ entanglement in the Greek debacle, Germany’s centrality as the EU’s economic force, and the German economy’s present dependence on the euro. Nonetheless, German politicians and intellectuals have appealed to the image of Germany as a moral leper in order to justify further loans to Greece and other “scapegrace” EU members. A leading German economic historian and a direct descendant of Germany’s renowned nineteenth-century classicist and theologian Albrecht Ritschl has insisted that such payments be viewed as the reparation debts that Germans never fully paid for starting WWI. Ritschl is upset that his countrymen were never sufficiently fined for the Great War’s horrendous crime, which has turned them “into the greatest debtor nation in world history.” Paying off the Greeks should be only a modest beginning in compensating the world for the sins of Kaiser Bill.

Other politicians, such as Gregor Gysi of the Party of Democratic Socialists (read: retread communists) and the chancellor (who represents something that substitutes for Germany’s center-right), argue that if the Greeks do not receive German economic aid, all hell might break loose. The EU could be endangered, with Germany thereafter propelled toward a national resurgence that could threaten peace in Europe. The Krauts, it seems, aren’t quite ready for political prime time. All the wars they’ve unleashed (supposedly with zero help from the other side) show that they have to be imprisoned in some international structure lest they feel tempted to act out. From reading such descriptions, one gets the impression that the EU must be kept intact as a loony bin for a psychotic country.

Perhaps the most comical argument for bailing out Greece has come from Merkel’s CDU Labor Minister and outspoken feminist Ursula von der Leyen, who has been vocal in her support for “helping the Greeks get back on their feet.” In a recent appearance on a weekend talk show hosted by TV celebrity Günther Jauch, Ms. von der Leyen went after those who criticize Greece’s spending habits and bloated state bureaucracy. According to van der Leyen, such a captious judgment does not take into account the close resemblance between the “Greeks at the present hour and the Germans in 1945, when we were a battered people.” To the Labor Minister, assisting the Greeks seems the proper thing to do. It is “like the CARE-packages that the Americans sent us after the War.”

This last comparison borders on the lunatic, except when a German politician is trying to be “nice.” Then it simply reflects the dominant national culture. Perhaps the Germans should insist on a fundamental right which the Americans once exercised: to carpet with bombs an enemy country and then hang its leaders as war criminals. Once having done this, the Germans could get on with the good stuff, such as providing those they’ve mercilessly “battered” with chocolate bars and sewing kits. Like other German politicians, von der Leyen is accustomed to the double kowtow (der doppelte Kotau), which involves simultaneously sucking up to the Yankees and non-German Europeans. Whereas Germans were once feared for lunging at their neighbors’ necks, now they’re delighted to be at everyone’s feet.

Presumably the banks, which made loans to the Greeks at the German government’s urging, will have to be saved as a first step to dealing with Greek insolvency. An article in the relatively right-wing Preußische Allgemeine Zeitung explains a ridiculous situation: The Germans have the same representation in the EU Council as Cyprus and Malta combined, yet they contribute 28% of the organization’s available capital as opposed to the 0.3% given by Cyprus and Malta. Germans are watching their earnings decline while paying for other countries’ insolvency, yet they seem determined to make their problem even worse. Although Germans gripe about the bailout, the vast majority support leftist parties that will give away even more of their money to foreign governments. German voters snub and even despise parties such as the Republikaner which oppose the bailouts.

The Republikaner, who have been critical of Muslim immigration and bailouts and whose members favor a freer market economy, had been under the surveillance of the Verfassungsschutz, a German agency set up to monitor “extremist” parties thought to threaten the German constitutional order. The surveillance soon ended because there is nothing about the party that could possibly threaten the German constitution. The major “democratic” parties, including the former communist party, had a hand in influencing the decision to investigate their opponents’ “extremism,” and the cloud under which they arranged to place the Republikaner with the partisan Verfassungsschutz worked well. Their incipient opposition received no more than 0.4 percent of the votes cast in the 2009 general elections. By contrast, the antinational, antifascist, socialist bloc is expected to run the next German government.

Given the systematically instilled distrust of themselves and their history, one must assume that German voters will follow their antifascist chancellor, who in the face of collapsing EU economies has called for a “far more unified Europe.” Merkel hopes to strengthen the EU prison house created for her country of would-be juvenile delinquents.

The Arab Spring will end with no winners, only losers

Egypt, Syria and Turkey: The Lepers with the Fewest Fingers

By David P. Goldman

With the financial news focused on the unraveling of Europe’s state finances, the mounting economic catastrophe in the Muslim world has barely merited a mention. Egypt and Syria are about to go over a cliff, while Turkey, supposedly the poster boy for Islamic success, faces a nasty economic reversal — not a catastrophe of Egyptian proportions, but sufficient to destroy Tayyip Erdogan’s reputation as an economic wizard and make his fractious country hard to govern. The so-called Arab Spring will end with no winners, only losers.

Egypt: Two Months Import Coverage, and Falling

Egypt’s foreign exchange reserves stood at $36 billion before the February uprising. The central bank claims that it still has $22 billion on hand, but an analysis by the Royal Bank of Scotland reported by the Financial Times puts the true number at just $13 billion, or two months’ import coverage for a country that imports half its caloric consumption. The central bank has lost $23 billion of the $36 billion in the past ten months, the RBS analysis concludes. Adds the FT:

Even that’s not the end of the story. First half 2011 balance of payments figures showed a deficit of $10.3bn in a period when the central bank actually lost $17.6 bn in liquid and other foreign currency assets, says Agha.

So hard currency is going into capital flight and into the proverbial mattress. Egyptians are even hoarding Egyptian currency, with the level of currency in circulation growing dramatically this year at an annual rate of 25 per cent, compared with 13 per cent previously.

By early 2012, expect to find the members of the Supreme Command of the Armed Forces moving into just-purchased mansions in South Kensington or Cannes, and bare cupboards in state warehouses. The military’s only response to the crisis was to fire all the independent directors of Egypt’s central bank, as I reported last month. That implies that they want a free hand to embezzle. By the end of next year, I predict, Egypt will become Somalia-on-the-Nile.

Assad Goes for Broke, Literally

Syria, meanwhile, plans to raise government spending by 60 percent, mainly in the form of salary hikes for state workers, while tax revenues plunged by 40 percent, Bloomberg News reported today. By my back-of-the-envelope calculation, that would put Syria’s government deficit about a third of GDP. Syrians were hungry before the uprising against Assad, which began with a protest over food prices. The Assad regime is betting the Syrian treasury on its survival, and the likeliest outcome is a collapse of the currency and chaos. It is hard to measure the economic misery of a country in civil war, particularly since the government has restricted food, energy and water provisions to areas of opposition strength. If the civil war continues, of course, the body count will take everyone’s mind off the economy.

Erdogan to Turks: “Let Them Eat Baklava”

The Turkish government seems to be losing its grip on reality.

Turkey, hailed as an Islamic economic miracle by credulous observers, is sitting on the the world’s biggest bubble. It imports twice as much as it exports, and the difference (the trade deficit) is greater than 10% of GDP, about the same level as bankrupt Greece. To aid his re-election efforts in the leadup to last June’s national elections, President Recep Tayyip Erdogan encouraged Turkish banks to increase loans to consumers at a 40% annual rate. Turks bought consumer goods on credit at high interest and Turkey borrowed heavily in the short-term money markets to finance the binge, as I reported some months ago in the Asia Times. Turkey’s central bank assured the world that the deficit would shrink; instead, it’s gotten worse, shredding the central bank’s credibility.

A vicious cycle is underway: Turkey has to borrow in the short-term markets to finance its deficit, which makes foreign depositors reluctant to keep their money parked in the weakening Turkish currency, so Turkey has to pay higher rates. Short-term deposits in Turkish lira now pay over 10%, against a quarter of a percent for dollars. High domestic rates squeeze over-leveraged Turkish debtors.

Erdogan’s response is to insist that “real” (that is, inflation-adjusted) interest rates should be at zero, citing Koranic injunctions against collecting interest. Bloomberg News reports that anyone who disagrees with Erdogan’s “vision” of zero interest rates winds up on an “enemies list”:

As Prime Minister Recep Tayyip Erdogan pursues his vision of an economy with real interest rates at zero, critics of Turkey’s monetary policies are increasingly being portrayed as enemies.

Trade Minister Zafer Caglayan says analysts who find fault with the initiative belong to an “interest-rate lobby” that wants to force Turkey to raise rates to help create higher returns. Erdogan says interest rates should be close to zero after inflation. He said during a speech in May to the Islamic business association Tuskon in Istanbul that Turks should earn their money “through work, not interest.”

The skeptics are seeking to “suck Turkey’s blood,” stop its growth and keep the country indebted to foreigners, Caglayan was quoted by state-run Anatolia news agency as saying in July. In a written response to Bloomberg questions on Nov. 3, Caglayan said the government’s view hasn’t changed. He declined further comment.

Erdogan probably is not as stupid as he appears: with the bubble about to burst, he is spinning a story about a conspiracy against the Turkish economy (just as he spun a story about a supposed military coup plot against his Islamist government). But the outcome will be no less messy for the spin.

The global murder capital

Four Things You Need to Know about Venezuela

By Jaime Daremblum 

Amid the many depredations of Hugo Chávez, it is easy to forget that Venezuela has turned into the most violent country in South America, and that Caracas has become a global murder capital^[1]. According to the independent Venezuelan Observatory of Violence, the annual number of homicides nationwide grew ^[2] from 5,974 in 1999 (when Chávez took power) to 17,600 in 2010. Venezuela today is a haven for international terrorist groups (including the Colombian FARC, the Iranian-backed Hezbollah, and the Spanish ETA), and it is also a veritable gangster’s paradise of narco-trafficking, kidnapping, and armed robbery, with brutal crime syndicates running drugs, transforming prisons into battlefields, and driving up the body count. The recent kidnapping and rescue ^[3] of Major League Baseball star Wilson Ramos highlighted these problems in spectacular fashion, thereby drawing global attention to a frequently overlooked aspect of the Chávez legacy.

Indeed, to truly appreciate what the Bolivarian socialist has done to a once-prosperous country awash in oil, we must go beyond his vitriolic anti-U.S. rants, his attacks on democracy, and his disastrous economic policies. Here are four things you must know to understand (a) how the Chávez regime has survived this long and (b) where Venezuela might be headed:

(1). The regime is financially dependent on China.

The combination of a ruined private economy and profligate government spending has utterly wrecked Venezuelan public finances. While the country still collects sizable oil revenues, Chávez has badly mismanaged Petróleos de Venezuela (PDVSA), the state-owned energy giant, which is slowly crumbling. “Hugo Chávez is putting on a clinic,” energy expert Robert Rapier wrote ^[4] last year. “The theme is ‘How to Destroy a Domestic Oil Industry.’” Thanks to his calamitous oil policies and fiscal recklessness, Chávez needs generous outside support to continue funding his expensive social programs. In other words, he needs a foreign sugar daddy.

Enter China, which has been pouring money ^[5] into the Venezuelan oil sector. Moreover, under various “oil for credit” deals signed with Beijing, Chávez has secured a whopping $32 billion of low-interest Chinese loans. According to a Wall Street Journal report ^[6] last week, the Chinese government had loaned Venezuela $20.8 billion through mid-April, and daily Venezuelan oil shipments to China under the agreements now total roughly 400,000 barrels. “This is a win-win for China and the Chávez government, but not for Venezuela or PDVSA,” former PDVSA board member Pedro Burelli told the Journal. Earlier this year, BCP Securities analyst Walter Molano estimated ^[7] that the oil-for-credit deals were causing Venezuela to lose “almost half of the oil revenue that was being generated to service its external debt obligations.” But as far as Chávez is concerned, the Chinese loans are enabling him to shower his constituents with politically popular goodies in advance of the 2012 Venezuelan presidential election. As the Journal put it, he is using the loans to fund projects “that are likely to help him at the ballot box.”

(2). The regime is run partly by Cubans.

In early 2010, several former Chávez loyalists published a letter ^[8] denouncing the “incursion of outside elements” into key Venezuelan institutions, including the armed forces. As if to demonstrate their point, Cuban Gen. Ramiro Valdés, founder of the notorious G2 intelligence service, arrived in Venezuela to help Chávez consolidate his burgeoning autocracy. (Valdés was supposedly visiting the South American country as an energy consultant, but the real purpose of his trip was easy to discern.) The cash-strapped Castro government desperately needs Venezuelan oil subsidies, so it is desperate to keep Chávez in power. Hence the influx of Cuban “advisers” working to strengthen his Bolivarian revolution. Caracas is now persecuting ^[9] retired Gen. Antonio Rivero for decrying the Cubanization of the Venezuelan military.

By giving Cuban officials such important roles in Venezuela’s security apparatus, Chávez has done two things: First, he has brought in trained Communists with a wealth of experience running a dictatorship. Second, he has given Havana significant influence over Venezuelan government operations — as long as he remains in power. A non-Chávez government, whether democratic or not, might well seek to reverse the process of Cubanization, which has inflamed nationalist passions and angered senior members of the Venezuelan armed forces, not to mention many other Venezuelan authorities. “In some ministries, such as health and agriculture, Cuban advisers appear to wield more power than Venezuelan officials,” The Economist reported ^[10] last year. “The health ministry is often unable to provide statistics — on primary health-care or epidemiology for instance — because the information is sent back to Havana instead.”

(3). The regime’s senior military allies are complicit in the drug trade.

To date, the U.S. Treasury Department has sanctioned three top Venezuelan generals for having links to drug trafficking: Cliver Alcalá, a prominent army commander; Hugo Carvajal, the military intelligence chief; and Henry Rangel Silva, the defense minister. All three are devoted chavistas, whereas many other Venezuelan military officials have grown estranged from Chávez. When Alcalá was added ^[11] to the Treasury blacklist a few months ago, Univision reporter Casto Ocando noted ^[12] that he stood out as “one of the few military figures that still has the confidence of the Venezuelan president.”

Both Alcalá and Venezuelan intelligence official Ramón Isidro Madriz Moreno — along with two pro-Chávez legislators — were accused of collaborating with Colombian narco-terrorists belonging to the FARC. These charges came on the heels of explosive allegations by imprisoned cocaine kingpin Walid Makled, who has claimed ^[13] that dozens of Venezuelan generals and government officials were involved in his lucrative drug business. The Chávez government is effectively a military regime, and the generals implicated by Makled and Treasury include some of the highest-ranking members of that regime.

(4). The regime has trained thousands of pro-government paramilitary fighters, who represent a serious long-term threat to domestic peace and stability.

Call them the Venezuelan Revolutionary Guards: Chávez has established a militia comparable to the famous Iranian outfit that is sworn to defend theocratic rule. Earlier this year, a presidential decree ^[14] brought these Venezuelan paramilitary fighters under Chávez’s direct command; it also gave them officers who are independent of the army. According to an analysis ^[15] of captured FARC computer files by the International Institute for Strategic Studies in London, the Venezuelan paramilitaries have received direct training from Colombia’s biggest terror group. “FARC communications also discussed providing training in urban terrorism methods for representatives of the Venezuelan Communist Party and several radical cells from 23 de Enero, a Caracas slum that has long been a hive of pro-Chávez activity,” as the New York Times has reported ^[16].

While the exact size ^[17] of the pro-Chávez militia remains disputed, there is no question that it has grown disturbingly large. (There is also no question that Caracas has purchased ^[18] massive amounts of sophisticated Russian weaponry.) The militia represents “a personal army, a Praetorian Guard,” retired Venezuelan Adm. Elias Buchszer told ^[19] the Associated Press last year. Its trueraison d’être, he said, is to perpetuate the Bolivarian revolution. If Chávez died of cancer, or if he were in real danger of losing the 2012 election, the militia could conceivably be called out to squash political unrest. That could lead to bloody street violence, and possibly something much worse.

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Article printed from PJ Media: http://pjmedia.com

URL to article: http://pjmedia.com/blog/four-things-you-need-to-know-about-venezuela/

URLs in this post:

[1] a global murder capital: https://www.osac.gov/pages/ContentReportPDF.aspx?cid=11224

[2] grew: http://www.fas.org/sgp/crs/row/R40938.pdf

[3] rescue: http://www.nytimes.com/2011/11/13/sports/baseball/in-venezuela-gunfight-preceded-rescue-of-ramos.html

[4] wrote: http://www.theoildrum.com/node/6995

[5] pouring money: http://news.bbc.co.uk/2/hi/8260200.stm

[6] report: http://online.wsj.com/article/SB10001424052970203733504577026073413045462.html

[7] estimated: http://www.latinbusinesschronicle.com/app/article.aspx?id=4843

[8] published a letter: http://en.mercopress.com/2010/02/03/chavez-former-closest-loyalists-call-for-his-resignation

[9] persecuting: http://laht.com/article.asp?ArticleId=362562&CategoryId=10717

[10] reported: http://www.economist.com/node/15501911

[11] added: http://articles.cnn.com/2011-09-08/world/venezuela.ofac.list_1_farc-rebels-venezuelan-officials-venezuelan-government?_s=PM:WORLD

[12] noted: http://univisionnews.tumblr.com/post/9997949113/obama-after-chavezs-generals

[13] claimed: http://online.wsj.com/article/SB10001424052748704471904576229001472736780.html

[14] presidential decree: http://www.economist.com/node/18529829

[15] analysis: http://www.iiss.org/publications/strategic-dossiers/the-farc-files-venezuela-ecuador-and-the-secret-archive-of-ral-reyes/

[16] reported: http://www.nytimes.com/2011/05/10/world/americas/10venezuela.html?_r=2&pagewanted=print

[17] exact size: http://www.weeklystandard.com/blogs/ch%C3%A1vez-builds-his-own-revolutionary-guards

[18] purchased: http://www.weeklystandard.com/blogs/ch%C3%A1vez-watch-bear-caracas-0

[19] told: http://seattletimes.nwsource.com/html/nationworld/2011760993_apltchavezmilitia.html

The inflation pressures worldwide are barely beginning

Preserving the EU from the Destruction of the Euro

By Pippa Malmgren

The German and French policymakers fhave now realized that they may not be able to preserve the Euro and so they have focused their attention on a different problem – how to preserve the EU even as the Euro fails or members need to temporarily drop out of the Euro. Market events, including the blow out of the Italian bond spreads way over 7.6% (7% being considered walking dead/unsustainable/the game is over level), have caused the policymakers to realize that a temporary exit from the Euro may be the least bad of a many very bad options. This is why even Prime Minister Sarkozy is talking about a “two speed Europe”. There are no good options at this point as Martin Wolf has finally realized and points out in the Financial Times: “Only fear of the consequences of a break-up is now keeping it together”.

All the options are bad and costly. Market forces are increasingly determining what the options are and foreclosing on options policymakers thought they had. One option which is now under discussion involves permitting a country to temporarily leave the Euro, return to its native currency, devalue, commit to returning to the Euro at a better debt to GDP ratio, a better exchange rate and a better growth trajectory and yet not sacrifice its EU membership. I would like to say for the record that this is precisely the thought process that I expected to evolve, but when I proposed this possibility back in 2009, and again in September 2010, I had a 100% response from clients and others that this was “impossible” and many felt it was “ridiculous”. They may be right but this is the current state of the discussion. The Handelsblatt in Germany has reported this conversation, but wrongly assumes that the country that will exit is Germany. I think that Germany will have to exit if the Southern European states do not. Germany’s preference is to stay in the Euro and have the others drop out. The problem has been the Germans could not convince the others to walk away. But, now, market pressures are forcing someone to leave. Germany is pushing for that someone to be Italy. They hope that this would be a one off exception, not to be repeated by any other country. Obviously, though, if Italy leaves the Euro and reverts to Lira then the markets will immediately and forcefully attack Spain, Portugal and even whatever is left  of the already savaged Greeks. These countries will not be able to compete against a devalued Greece or Italy when it comes to tourism or even infrastructure. But, the principal target will be France. The three largest French banks have roughly 450 billion Euros of exposure to Italian debt. So, further sovereign defaults are certainly inevitable, but that is true under any scenario. Growth and austerity will not do the trick, as ZeroHedge rightly points out. Ultimately, I will not be at all surprised to see Europe’s banking system shut for days while the losses and payments issues are worked out. People forget that the term “bank holiday” was invented in the 1930’s when the banks were shut for exactly the same reason.

Different policymakers have different views about the “right” way forward. For Germany the only appropriate solution is one that involves fiscal consolidation and rules that permit the expulsion of any member of the currency that violates the “rules”. The Euro under this approach will be sound and will permit reinforcement of the EU and encourage widening of EU membership and powers. Of course, this idea introduces the teeny tiny problem that it involves handing over the power of the purse, the most fundamental aspect of a democracy to not only the centre of power in Europe, but a centre of power with a Germanic approach to economic policy. Political leaders may, emphasis on may, be able to commit to this. But, I gravely doubt the public anywhere will go along with it.