Like an ancient Greek Tragedy

The Euro Area Is Coming to an End

By Peter Boone and Simon Johnson

Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.

Here’s why. Until 2008, investors assumed that all euro- zone sovereign bonds, as well as bank debt, were risk-free and would never default. This made for a wonderfully profitable trade: European banks could buy government debt, finance it at less expensive rates through funding provided by the European Central Bank, and pocket the spread.

Then credit conditions tightened around the world and some flaws became evident. Greece had too much government borrowing; Ireland had experienced a debt fueled real-estate bubble; and even German banks had become highly leveraged. Investors naturally decided some credit-risk premium was needed, so yields started to rise.

Greece, Ireland, Portugal, Spain and now Italy have large amounts of short term debt that they can’t roll over at low cost. Leading European banks are in the same situation. None of these countries or banks can long bear the burden of their current debt levels at reasonable risk premiums.

Last Resort Technocrats

Many of Europe’s leading politicians, some International Monetary Fund officials, and the technocrats-of-last-resort -- Mario Monti in Italy and Lucas Papademos in Greece -- mistakenly believe that these risk premiums can be quickly reduced. They argue that if they cut budget deficits, carry out structural reforms and modestly recapitalize banks, their countries will soon grow and regain access to markets.

More realistically, none of these countries will be borrowing again soon in the capital markets. Ireland’s finance minister, Michael Noonan, is at odds with reality when he claims that Ireland should return to the markets in 2013. This is a country with 133 percent of gross national product in public debt and about 100 percent GNP in additional contingent liabilities to the banking system. (We use gross national product because gross domestic product is artificially raised by the offshore profits of non-Irish multinational corporations, most of which Ireland doesn’t tax.)

With such enormous debt burdens, even if the Irish or other troubled countries manage to convince the market that there is only a 5 percent to 10 percent annual risk of default, these countries will experience high real interest rates -- plus ensuing low investment and fragile banks -- for decades.

The French, along with U.S. and U.K. officials, are pleading with the European Central Bank to come to the rescue. Their hope is that the ECB can remove credit risk by promising to back all sovereign and bank credits in the euro zone. This is what politicians mean when they say “bring out the bazooka.”

When large amounts of any currency are printed in response to deep structural flaws, it’s hard to trust that money. A massive bond-purchase program by the ECB would reduce credit risk but increase the danger that the euro will decline in value against the dollar and other currencies. And if the ECB needs to continue buying more debt to finance deficits and prevent defaults -- because peripheral countries could stop making painful fiscal adjustments once the ECB starts buying bonds -- wages and prices would increase, as we saw in the U.S. in the 1970s. This is anathema to the Germans.

Inflation Risk

We would soon see German bonds sold off as investors protect themselves from long-term inflation, which erodes the value of such debt. People holding bonds with a high credit risk (such as Italy and Spain) would surely sell many of those to the ECB, or simply cash out when those bonds mature in case the central bank, at some point, stops buying.

An ECB “bazooka” wouldn’t restore competitiveness to Europe’s periphery, so even with this, Europe’s troubled nations would require many more years of tough austerity and budget reform to stabilize debt.

This would all just look like another unsustainable debt profile. Germany would be paying higher interest rates on its debt, while most banks and the periphery would be heavily financed by the ECB -- and both credit and currency risk premiums would remain. Markets would eventually turn against Europe with a vengeance, and with no more plausible solutions, the whole system would come tumbling down amid both inflation and debt restructuring.

Germany’s credit is impeccable, but the country is issuing debt in a currency that is flawed and could soon be worth much less than it is today. If Germany does block the “bazooka” and instead takes on more of the fiscal burden in Europe -- for example, through the obligations inherent in any kind of euro- bond issue -- this would reduce currency risk but undermine the country’s credit rating.

The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

An influx of creativity

Will They Survive?

By Yoani Sánchez

Between the ugly concrete buildings and the mansions with gardens, timid spaces for entertainment are emerging. A neighborhood that for decades was condemned to nocturnal boredom, a slice of the bedroom city, now sees glowing signs and bars offering drinks springing up here and there. Comfortable cafes, bars, gyms, and hairdressers flourish with the rebirth of self-employment. Among today’s entrepreneurs, few were a part of the wave of tiny private businesses that appeared in the mid-nineties. So they have no memory of the trauma of being shut down, of governmental will strangling them with high taxes, absurd restrictions, and excessive inspections.

 

Along with the timbiriches — the tiny businesses with few resources — places are also opening that compete in beauty and efficiency with the best hotel on the Island. Works of art on the walls, carved wood furniture, lamps made to order by local artisans, are some of the details this new class of impresarios use to decorate their premises. Word spreads quickly: “They’re opening a Mexican restaurant on that corner”… “A Swedish chef has come to give classes to cooks planning to open sites in Central Havana”… “On that balcony they serve the most exquisite paella in the country.” It would seem that such an influx of creativity is unstoppable and that they will not be able — as they did in the past — to cut off a sector whose quality exceeds the State establishments.

The neighborhood has become a destination for people after they leave 23rd Street or the Malecon in search of recreation. But a certain uneasiness still keeps us from enjoying the impeccable tablecloths and the waiters in ties; some questions wash over us with every spoonful we taste: Will they survive? Will they let them exist, or will they return to eliminate them?

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Quote of the Day

Pro-Market vs. Pro-Business

 

"There is a world of difference between being pro-market and being pro-business. Sometimes, the two positions happen to coincide; often they don’t."

                                                                                   ~Daniel Hannan

Stated differently, many of the criticisms of capitalism are really criticisms of "crony capitalism."  

The short of the century

The bubble in government bonds is finally bursting

by DETLEV SCHLICHTER

“The government can always pay.”

This is a statement that has no basis in fact. Any rational analysis will quickly expose it to be a fallacy. Economic theory, economic history, and plain good old horse sense can demonstrate effortlessly that this statement is an illusion. Yet, it is today a widely held and deeply cherished illusion in the world of finance (and, incidentally, the world of politics). In fact, it has become one of the defining myths of the modern fiat money era. It has for decades provided portfolio managers and bankers with an imaginary refuge from the turbulent world of capitalist “creative destruction”, a ‘safe haven’ where their nerves and capital could rest. The ‘free lunch’ might not have been a feast – only the ‘risk-free rate’ was to be had – but it was better than nothing and anyway a welcome break from capitalism and entrepreneurship. And by the way, if you leverage your government bond portfolio sufficiently with the help of central-bank-provided, zero-cost fiat money, the returns could still be quite handsome.

The fate of myths is that they sooner or later clash with reality. Then they are exposed as myths, which requires a painful giving-up of beloved certainties, a readjustment of paradigms and an abrupt change in behaviour. This is what we have been witnessing in European sovereign bond markets and will soon observe outside Europe as well. To believe that this process would stop with Greece or even Italy, as seemed to be the consensus in the summer of 2011, was naïve. That it would stop with France or even be contained within the European Monetary Union is the present hope of government bond investors and government-bond issuers, i.e. politicians. It is equally naïve and it received a meaningful dent last week in form of the worst auction result for German government debt (Bunds) ever.

When the irrational belief that the major governments – those of the U.S., Germany, U.K., France, Japan – can and will always pay, regardless of the size of their overall obligations, and that their bonds are therefore ‘risk-free’, is finally being questioned, we could witness a momentous change in market behaviour. That this moment will be reached at some point is beyond doubt. I would argue that this moment could be sooner than many think.

Before we look at present events more closely and risk a peek into the future, let us revisit some of the fundamental facts of government bond investing.

Some basic facts about lending to the state

Government bonds are not backed by productive capital and will not be repaid out of capitalist production, at least not directly. Those who lend to the state do so in the expectation that the state, after consuming what it has borrowed right away, will repay its creditors by either taxing the productive section of society (i.e. those who have not put their money into ‘safe’ government bonds but risked it in a competitive enterprise and managed to generate a return by providing something of value to the buying public) or by printing the money and thereby taxing the fiat-money users in society (i.e. everybody) via a declining purchasing power of the monetary unit. Government bonds channel savings back into consumption, and they shift scarce resources away from employment that is directed by markets (and thus ultimately consumers) and into employment that is directed by politics. The rising public debt levels of the modern fiat money era indicate substantial and growing waste of resources and misallocation of capital, and are harbingers of great social and economic upheaval.

That banks and portfolio managers lend so generously to the state is not surprising as the cost of error (over-lending and over-borrowing) is apparently easily socialized across the wider public, either via higher levels of taxation or faster paper money debasement. “The state can always pay.”

The game is now up. The accumulated debt load has become too big to be serviced or repaid in any stable manner out of taxation or fiat money creation. If these mechanisms are nevertheless still employed it must lead to chaos.

Fact is this: Around the world government spending, budget deficits and accumulated debt loads are unsustainable in light of real underlying economic strength and the true available pool of private savings. But the modern welfare state cannot shrink. Nobody in the political machinery has any idea how it should be done. The fiat money economy is not built for deleveraging and the welfare democracy not for downsizing.

If you needed any further evidence of this you got it in spades last week. In the U.S. the ‘super-committee’ failed to reach agreement on spending cuts, and in the UK the Prime Minister admitted that the government was failing in its effort to reduce the debt load and announced various subsidies for the housing market, tax-funded bribes for companies to hire unemployed teenagers, and New Deal-style infrastructure projects to ‘kick start’ the economy.

The confused and pointless “Occupy Wall Street” movement seems to have brought to the forefront of public discussion again the notion that all of this could be sorted by taxing the rich. That this is even debated shows how little the public appreciates the sheer mind-boggling extravagance of the modern welfare-warfare state: In 2011 the U.S. government will have spent at least $3,700 billion while taking in about $2,200 billion, thus running an eye-watering $1.5 trillion deficit. It collects less than $1 trillion in income tax. Thus, even if the government doubled its intake from income taxation instantly it could not close the budget gap. The situation is completely out of control, and to those who believe that this is no problem because the U.S. government can always print the money, I can only say: Be careful what you wish for.

Beyond repair

But back to Europe, which continues to get most attention at the moment: As I said, long-held and cherished myths are not abandoned easily. The investment community has for months demanded ever more urgently a policy ‘bazooka’ that would restore the old order. Of course, by this is meant again the established mechanisms for repaying the lenders to the state: tax somebody else or print money. If the taxes needed to repay Greek and Italian debt could not be had from Greeks and Italians, then the Germans should pay as part of ‘fiscal integration’ or communal bond issuance. Or, the bond investors get repaid out of printed money from the ECB. “Unlimited bond-buying” via the printing press was the other bazooka.

Such proposals are unoriginal and illustrate that the gravity of the situation is not fully appreciated. Germany and France simply lack the resources to bailout the others, or even their own banks. As to the ECB’s printing press, as I explained here, ‘unlimited’ bond buying cannot be limited to Italy, which in itself would pose an enormous challenge. The overall size of the operation would soon be such that concerns about inflation must rise, and once real interest rates begin to go up deficits will expand even faster, forcing the ECB to buy ever more bonds. A spiral of ever higher real rates, more central bank bond buying, and in turn rising inflation expectations and even higher real interest rates is the classic fiat money endgame.

(At this point I often get the following comment: But what about Japan? Have they not been conducting QE for many years without a rise in inflation? — No! The Bank of Japan’s balance sheet is roughly the same size today as it was ten years ago. By contrast, since 2008, the balance sheets of the Fed, the Bank of England and the ECB have roughly tripled in size. For numerous reasons, Japan is a gigantic accident waiting to happen but in terms of monetary sanity the Japanese are presently the least mad.)

The political class, the fiat money bureaucracy and their eager creditors in the financial community have collectively checkmated themselves. Dreams of the policy ‘bazooka’ and the helpless babbling about ‘lack of political leadership’ cannot mask that sinking feeling that a lot of the ‘risk-free assets’ that have been carelessly accumulated over recent decades now turn out to be toxic waste that could burn a sizable hole into investment portfolios. Hiking taxes or printing the money is not a sensible solution but that does not mean it won’t be tried – it most certainly will be, and with predictably disastrous results. But here is the funny bit: if these are the potential outcomes of the European debt crisis: defaults, fiscal integration, unlimited helicopter money  – why would anybody buy German Bunds? Did anybody really think that the ECB could print the entire European sovereign bond market to a sustainable 2 percent communal interest rate, or that in a fiscal union everybody converges on Germany’s 2 percent rate? Yet, for months and months now (until last week), the investment community has happily piled into German debt as the alleged ‘safe haven’. Why?

Mass psychosis

To explain this we have to resort to psychology. As I explained here, amateur psychology has no place in economic theory but it is often useful when trying to make sense of short-term market phenomena. Traders, bankers and investors simply didn’t want to give up the myth of the safe asset. Although the problems are essentially the same almost everywhere, the investment community did not want to believe that government bonds as such were a dodgy investment but only that certain government bonds were dodgy investments. Bizarrely, the realization of acute fiscal predicament in one state thus led to massive inflows into the bonds of other, only slightly less fiscally challenged states, which were then prematurely declared ‘safe havens’ precisely until their predicament was exposed as well. It almost appeared as one only had to wait for the tidal wave of fiscal concern to take one state after another out of the safe-haven basket into the basket of basket cases.

So why not get a step ahead of this train wreck in slow motion and go short Bunds, U.S. Treasuries and UK gilts now? The math on these seems straightforward. If the ECB, the Fed and the Bank of England do not engage in large-scale money-printing (and once again, they certainly should not but the Fed and BoE are already itching to do more) then the underlying disinflationary forces and the fiscal death trap that these nations are already caught up in should make their bonds excellent shorts: the endgame is default. At least this would be an honorable and not entirely unethical outcome. But more likely is the somewhat cowardly ‘solution’ of debt monetization. The many bank economists who are now clamoring for this approach do so against better judgment – one can only assume they do it out of desperation, which gives us some indication of the situation their banks are in.

The problem is way too big for some elegant inflating-away of the debt. As QE in the U.S. and the UK demonstrates, providing a fiat-money-funded backstop to the government does not mean debt-reduction but additional debt-accumulation. Once started, large-scale bond buying will have no endpoint but simply have to continue ad infinitum. This must at some point raise inflation concerns and thus lead to ever more of the remaining private-held government bonds getting dumped onto the central bank. To keep the government in business the central bank will then have to print more money faster and do so at times of rising inflation expectations. This is a recipe for disaster. The endgame is currency collapse and default.

While the math seems to be clear, the desire to believe in the infallibility and omnipotence of the state, which in our secular age has become the new deity, is powerful and may keep those government bonds bid for a while longer. Who knows? But when the ice breaks, this is surely one of the major trading opportunities in this unspeakable financial mess, maybe the short of the century. In this context, the events of last week were meaningful. Reality has finally caught up with German Bunds. The poor price action in Bund futures is indication that German government debt is losing its safe haven status. Fiscal concerns are now engulfing ‘the core’ of Europe. Again, investors desperately hold on to their belief that ‘safe havens’ exist somewhere out there, so they are stupidly piling into Gilts and Treasuries. Soon these will make an excellent short as well.

At this point, I should probably add a disclaimer: The purpose of this site is not to give investment advice but to provide a different and – I like to believe – superior explanation of the present crisis. I am expressing opinions here, and it remains the responsibility of the reader to see if he/she follows my rationale and what conclusions he or she draws for his/her own actions. We are in the endgame of our present – mankind’s latest – experiment with unlimited state paper money. This crisis will continue to unfold and many people will lose money. If we understand this crisis correctly, we may protect our wealth better. For this, I believe, holding substantial positions in physical gold (and probably a few other assets) is crucial. But there could occasionally be other opportunities to make money. This crisis has already exposed the fallacy that our fiat money system in combination with deposit insurance and hyper-regulation has made our banks safe. The next fallacy to get exposed is the belief in safe government bonds. The consequences for financial markets are enormous – and this can offer opportunities. But be careful. Markets are very volatile. Also, at some stage in the future, I expect government interference and a ban on naked shorts. But until that happens, we could be looking at the short of the century.

In the meantime the debasement of paper money continues.

A different kind of battlefield

Secret Bill To Be Voted On Today Would Allow The Military To Sweep Up US Citizens At Home Or Abroad

By Robert Johnson

The ACLU reports even US citizens wouldn't be immune as the legislation aims to declare national territory part of the "battlefield" in the War on Terror.

Termed the National Defense Authorization Act (NDAA) and drafted behind closed doors by Senators Carl Levin (D-Mich.) and John McCain (R-Ariz.) the NDAA would:

1) Explicitly authorize the federal government to indefinitely imprison without charge or trial American citizens and others picked up inside and outside the United States;

(2) Mandate military detention of some civilians who would otherwise be outside of military control, including civilians picked up within the United States itself; and

(3) Transfer to the Department of Defense core prosecutorial, investigative, law enforcement, penal, and custodial authority and responsibility now held by the Department of Justice.

From the ACLU's website:

In support of this harmful bill, Sen. Lindsey Graham (R-S.C.) explained that the bill will “basically say in law for the first time that the homeland is part of the battlefield” and people can be imprisoned without charge or trial “American citizen or not.” Another supporter, Sen. Kelly Ayotte (R-N.H.) also declared that the bill is needed because “America is part of the battlefield.”

In an effort to stop the bill, Sen. Mark Udall (D-Colo.) is floating the Udall Amendment, which according to the ACLU is:

"A way for the Senate to say no to indefinite detention without charge or trial anywhere in the world where any president decides to use the military. Instead of simply going along with a bill that was drafted in secret and is being jammed through the Senate, the Udall Amendment deletes the provisions and sets up an orderly review of detention power. It tries to take the politics out and put American values back in."

Check out the ACLU's detailed account here >

Endgame

The eurozone really has only days to avoid collapse

By Wolfgang Münchau

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

This massive erosion of trust has also destroyed the main plank of the rescue strategy. TheEuropean Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges.

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression. So even if the European Council was able to agree on such an improbably ambitious agenda, its leaders would have to continue to outdo themselves for months and years to come.

How likely is such a grand deal? With each week that passes, the political and financial cost of crisis resolution becomes higher. Even last week, Angela Merkel was still ruling out eurobonds. She was furious when the European Commission produced its owns proposals last week. She had planned to separate the discussion about the crisis from that of the future architecture of the eurozone. The economic advice she has received throughout the crisis has been appalling.

Her own very public opposition to eurobonds has now become a real obstacle to a deal. I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints. If she had been more circumspect, she could have travelled to the summit with the proposal of the German Council of Economic Advisers, who produced a clever, albeit limited and not yet fully worked-out-plan. They are a proposing a “debt redemption” bond – another candidate for this year’s top euphemism award. The idea is to have a strictly temporary eurobond, which member states would pay off over an agreed time period. At least this proposal would be in line with the more restrictive interpretation of German constitutional law.

Ms Merkel’s hostility to eurobonds certainly resonates with the public. Newspapers expressed outrage at the commission’s proposal. I thought both the proposal itself and its timing were rather clever. The Commission managed to change the nature of the debate. Ms Merkel can get her fiscal union, but in return she will now have to accept a eurobond. If both can be agreed, the problem is solved. It is the first intelligent official proposal I have seen in the entire crisis.

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Will Germans submit to tyranny ?

The Roads to War and Economic Collapse

by Paul Craig Roberts

The day before the Thanksgiving holiday brought three extraordinary news items. One was the report on the Republican presidential campaign debate. One was the Russian President’s statement about his country’s response to Washington’s missile bases surrounding his country. And one was the failure of a German government bond auction.

As the presstitute media will not inform us of what any of this means, let me try.

With the exception of Ron Paul, the only candidate in either party qualified to be the president of the US, the rest of the Republican candidates are even worst than Obama, a president who had the country behind him but sold out the American people to the special interests.

No newly elected president in memory, neither John F. Kennedy nor Ronald Reagan, had the extraordinary response to his election as Barack Obama. A record-breaking number of people braved the cold to witness his swearing in ceremony. The mall was filled for miles distant from the Capitol with Americans who could not see the ceremony except as televised on giant screens.

Obama had convinced the electorate that he would end the wars, stop the violation of law by the US government, end the regime of illegal torture, close the torture prison of Guantanamo, and attend to the real needs of the American people rather than stuff the pockets of the military/security complex with taxpayers’ money.

Once in office, Obama renewed and extended the Bush/Cheney/neoconservative wars.

He validated the Bush regime’s assaults on the US Constitution. He left Wall Street in charge of US economic policy, he absolved the Bush regime of its crimes, and he assigned to the American people the financial cost necessary to preserve the economic welfare of the mega-rich.

One would think such a totally failed president would be easy to defeat. Given an historic opportunity, the Republican Party has put before the electorate the most amazingly stupid and vile collection of prospects, with the exception of Ron Paul who does not have the party’s support, that Americans have ever seen.

In the November 22 presidential “debate,” the candidates, with the exception of Ron Paul, revealed themselves as a collection of ignorant warmongers who support the police state. Gingrich and Cain said that Muslims “want to kill us all” and that “all of us will be in danger for the rest of out lives.”

Bachmann said that the American puppet state, Pakistan, is “more than an existential threat.” The moron Bachmann has no idea what is “more than an existential threat.”

However, it sounded heavy, like an intellectual thing to say for the candidate who previously declared the long-defunct Soviet Union to be today’s threat to the US.

Unfortunately for Americans and the world, the US electorate lacks the intelligence and the awareness of their plight as denizens of a police state to elect Ron Paul, the last defender together with Rep. Dennis Kucinich of the US Constitution. Nevertheless, there would be a silver lining in one of the Republican morons being elected president of the “world’s only superpower.” Once the rest of the world realized that a war-crazed idiot had his or her finger on the nuclear button, the rest of the world would organize and close down the Washington horror before it destroys life on earth.

Any sentient American who watched or read about the Republican presidential debate must wonder what there is to be thankful for as the national holiday approaches.

The Russian government, which prefers to use its resources for the economy rather than for the military, has decided that it has been taking too many risks in the name of peace. The day before Thanksgiving, Russian President Dmitry Medvedev said, in a televised address to the Russian people, that if Washington goes ahead with its planned missile bases surrounding Russia, Russia will respond with new nuclear missiles of its own, which will target the Amerikan bases and European capital cities.

The President of Russia said that the Russian government has asked Washington for legally binding guarantees that the American missile bases are not intended as a threat to Russia, but that Washington has refused to give such guarantees.

Medvedev’s statement is perplexing. What does he mean “if Washington goes ahead?” The American missile and radar bases are already in place. Russia is already surrounded. Is Medvedev just now aware of what is already in place?

Russia’s and China’s slow response to Washington’s aggression can only be understood in the context of the two countries experience with communism. The sufferings of Russians and Chinese under communism was extreme, and the thinking part of those populations saw America as the ideal of political life. This delusion still controls the mentality of progressive thinkers in Russia and China. It might prove to be a disaster for Russia and China that the countries have citizens who are aligned with the US.

Belief in Washington’s trustworthiness even pervades the Russian government, which apparently, according to Medvedev’s statement, would be reassured by a “legally binding guarantee” from Washington. After the massive lies told by Washington in the 21st century--”weapons of mass destruction,” “al Qaeda connections,” “Iranian nukes”--why would anyone put any credence in “a legally binding guarantee” from Washington. The guarantee would mean nothing. How could it be enforced? Such a guarantee would simply be another deceit in Washington’s pursuit of world hegemony.

The day prior to Thanksgiving also brought another extraordinary development--the failure of a German government bond auction, an unparalleled event.

Why would Germany, the only member of the EU with financial rectitude, not be able to sell 35% of its offerings of 10-year bonds? Germany has no debt problems, and its economy is expected by EU and US authorities to bear the lion’s share of the bailout of the EU member countries that do lack financial rectitude.

I suspect that the answer to this question is that the failure of the German government’s bond auction was orchestrated by the US, by EU authorities, especially the European Central Bank, and private banks in order to punish Germany for obstructing the purchase of EU member countries’ sovereign debt by the European Central Bank.

The German government has been trying to defend the terms on which Germany gave up control over its own currency and joined the EU. By insisting on the legality of the agreements, Germany has been standing in the way of the ECB behaving as the US Federal Reserve and monetizing the debt of member governments.

From the beginning the EU was a conspiracy against Germany. If Germany remains in the EU, Germany will be destroyed. It will lose its political and economic sovereignty, and its economy will be bled in behalf of the fiscally irresponsible members of the EU.

If Greeks will not submit to the tyranny, why should Germans?

Talking about "specifics"

REVEALED: More Details On The Fed's Breathtaking $7.7 Trillion In Loans To Large Banks

By Julia La Roche

While most people know about Congress' $700 billion TARP program, the Fed's secret emergency loans to banks during the financial crisis remains shrouded in mystery.. 

A new Bloomberg Markets report shines more light on this lending.

After adding up all the guarantees and loans, the Fed committed $7.77 trillion to rescuing the financial system as of March 2009, the report said. 

Notably, while the banks were taking these huge loans, they maintained that they were fine

From Bloomberg:

     "The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

‘Change Their Votes’

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma -- investors and counterparties would shun firms that used the central bank as lender of last resort -- and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then - Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

‘Motivate Others’

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.

The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

‘Core Function’

“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

Big Six

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The economic and moral equivalent of the Titanic

The Welfare State Neutralizes Potential Opponents by Making Them Dependent on Government Benefits

By Robert Higgs  

From time immemorial—from Etienne de la Boitie to David Hume to Ludwig von Mises—political analysts have noted that because the number of those in the ruling elite amounts to only a small fraction of the number in the ruled masses, every regime lives or dies in accordance with “public opinion.” Unless the mass of the people, no matter how objectively abused and plundered they may appear to be, believe that the existing rulers are legitimate, the masses will not tolerate the regime’s continuation in power. Nor need they tolerate it, because they greatly outnumber the rulers, and hence whenever they become subjectively fed up, they have the power—which is to say, the overwhelming advantage of superior numbers—to oust the regime. Even if the regime possesses a great advantage of coercive power, its employment avails the rulers nothing if they must kill or imprison 90 percent of the population, because such massive violence would reduce them to the status of parasites without hosts.

This consideration long seemed to make sense as a critical element of political analysis, and even today one often encounters it. Something akin to it seems to motivate the current Occupy Wall Street movement and its spin-offs in other venues when they represent themselves as members of the (exploited) 99 percent, in opposition to the (exploiting) 1 percent.

Certain long-established trends in the welfare state, however, have progressively weakened the force of this analysis. The main element of these trends is the tremendous growth in the number of people (and in their proportion in the population) who are directly dependent on government benefits to a substantial degree. Researchers at the Heritage Foundation have been tracking this development for several years and have pushed their analysis back for several decades. An index of dependency based on this research increases from 19 in fiscal year 1962 to 272 in fiscal year 2009.

The Heritage index uses information on almost three dozen important federal programs on which Americans depend for cash income and other support—including housing assistance, Medicaid, Medicare, Social Security, unemployment insurance benefits, educational benefits, and farm-income supports—but it is scarcely a comprehensive measure, inasmuch as the total number of federal programs with dependents is gigantic at present. Of course, each such program has government employees and contractors who run it and hence depend on it to earn much, if not all, of their income. Government civilian and military retirees add millions more to the ranks.

The Heritage researchers found that in 1962, 21.7 million persons depended on the programs they included in their index for benefits. By 2009, the corresponding number of dependents had grown to 64.3 million. Adding dependents not included in the Heritage study might easily increase the number to more than 100 million, or to more than a third of the entire population. Thus, the parasites verge ever closer to outnumbering their hosts.

It would be a mistake, of course, to lump all of these dependents into the ruling (exploiting) class. The elderly recipients of old-age pensions, the recipients of unemployment insurance benefits, and the beneficiaries of temporary assistance for needy families are, as a rule, as far from the ruling class as one can get. However, to the extent that those who depend on government programs for substantial parts of their income enter the calculus of ruling and being ruled, they are likely to become, in effect, cyphers. They have approximately zero influence on the real rulers, yet they exert virtually no weight in opposition to those rulers, either. Fear of losing their government benefits effectively neutralizes them in regard to opposing the regime on whose seeming beneficence they rely for significant elements of their real income. Of course, for whatever voting may be worth, they vote directly or indirectly in overwhelming proportion for the continuation and budgetary enlargement of the government programs on which they depend. Hence, they help to produce seeming legitimacy for those at the top of the ruling hierarchy—a token of their appreciation for the crumbs their political masters drop on them.

As the ranks of those dependent on the welfare state continue to grow, the need for the rulers to pay attention to the ruled population diminishes. The masters know full well that the sheep will not bolt the enclosure in which the shepherds are making it possible  for them to survive. Every person who becomes dependent on the state simultaneously becomes one less person who might act in some way to oppose the existing regime. Thus have modern governments gone greatly beyond the bread and circuses with which the Roman Caesars purchased the common people’s allegiance. In these circumstances, it is hardly surprising that the only changes that occur in the makeup of the ruling elite resemble a shuffling of the occupants in the first-class cabins of a luxury liner. Never mind that this liner is the economic and moral equivalent of the Titanic and that its ultimate fate is no more propitious than was that of the “unsinkable” ship that went to the bottom a century ago.

All individual freedoms are part of an inseparable whole

Literature and the Search for Liberty

By Mario Vargas Llosa

The blessings of freedom and the perils of its opposite can be seen the world over. It is why I have so passionately adhered to advancing the idea of individual freedom in my work.

Having abandoned the Marxist myths that took in so many of my generation, I soon came to genuinely believe that I had found a truth that had to be shared in the best way I knew—through the art of letters. Critics on the left and right have often praised my novels only to distance themselves from the ideas I’ve expressed. I do not believe my work can be separated from its ideals.

It is the function of the novelist to tell timeless and universal truths through the device of a fashioned narrative. A story’s significance as a piece of art cannot be divorced from its message, any more than a society’s prospects for freedom and prosperity can be divorced from its underlying principles. The writer and the man are one and the same, as are the culture and its common beliefs. In my writing and in my life I have pursued a vision not only to inspire my readers but also to share my dream of what we can aspire to build here in our world.

Those who love liberty are often ridiculed for their idealism. And at times we can feel alone, as there appear to be very few dedicated to the ideals of true “liberalism.”

In the United States, the term “liberal” has come to be associated with leftism, socialism, and an ambitious role for government in the economy. Many who describe their politics as “liberal” emphatically favor measures which desire to push aside free enterprise. Some who call themselves liberal show even greater hostility toward business, loudly protesting the very idea of economic freedom and promoting a vision of society not so different from the failed utopian experiments of history’s socialist and fascist regimes.

In Latin America and Spain, where the word “liberal” originated to mean an advocate of liberty, the left now uses the label as an invective. It carries connotations of “conservative” or reactionary politics, and especially a failure to care for the world’s poor. I have been maligned in this way.

Ironically enough, part of the confusion can be pinned on some who champion the market economy in the name of old liberalism. They have at times done even more damage to freedom than the Marxists and other socialists.

There are those who in the name of the free market have supported Latin American dictatorships whose iron hand of repression was said to be necessary to allow business to function, betraying the very principles of human rights that free economies rest upon. Then there are those who have coldly reduced all questions of humanity to a matter of economics and see the market as a panacea. In doing so they ignore the role of ideas and culture, the true foundation of civilization. Without customs and shared beliefs to breathe life into democracy and the market, we are reduced to the Darwinian struggle of atomistic and selfish actors that many on the left rightfully see as inhuman.

What is lost on the collectivists, on the other hand, is the prime importance of individual freedom for societies to flourish and economies to thrive. This is the core insight of true liberalism: All individual freedoms are part of an inseparable whole. Political and economic liberties cannot be bifurcated. Mankind has inherited this wisdom from millennia of experience, and our understanding has been enriched further by the great liberal thinkers, some of my favorites being Isaiah Berlin, Karl Popper, F.A. Hayek and Ludwig von Mises. They have described the path out of darkness and toward a brighter future of freedom and universal appreciation for the values of human dignity.

When the liberal truth is forgotten, we see the horrors of nationalist dictatorship, fascism, communism, cult fanaticism, terrorism and the many savageries that have defined all too much in the modern era. The problem is less pronounced in the United States, but here there still remain problems resulting from the abandonment of these key principles.

Many cling to hopes that the economy can be centrally planned. Education, health care, housing, money and banking, crime control, transportation, energy and far more follow the failed command-and-control model that has been repeatedly discredited. Some look to nationalist and statist solutions to trade imbalances and migration problems, instead of toward greater freedom.

Yet there is reason for hope here and elsewhere. The American system still allows for open dissent, the hallmark of a free society, and in a healthy fashion both left and right practice this cherished freedom. Throughout the world, anti-Americanism and anticapitalism are in decline. In Latin America, outside of Venezuela and Cuba, dictatorship of the old socialist and fascist varieties is dead, with market reforms sweeping even nominally leftist regimes.

The search for liberty is simply part of the greater search for a world where respect for the rule of law and human rights is universal—a world free of dictators, terrorists, warmongers and fanatics, where men and women of all nationalities, races, traditions and creeds can coexist in the culture of freedom, where borders give way to bridges that people cross to reach their goals limited only by free will and respect for one another’s rights. It is a search to which I’ve dedicated my writing, and so many have taken notice. But is it not a search to which we should all devote our very lives? The answer is clear when we see what is at stake.

Too little, too late

What If Freedom's Greatest Hour of Danger Is Now?

Judge Napolitano comments on the current state of the Constitution. 

This commentary is worthy of being placed next to the writings of our Founding Fathers.