A letter to the indebted nations of Europe

You have spent more than you earned

By Huang Xiangyang

Dear Sirs / Madams

I know you are in trouble and want China to help. I have heard your repeated calls in the media for our leaders to bail you out by buying the debt of European governments. I want to assure you your entreaties have not been in vain.

Last week our premier pledged that China will "get more deeply involved" in resolving your debt crisis. Our central bank governor tried to buoy up market confidence in the euro by vowing to continue holding your sovereign debts. Such comments came even as the international rating agencies - Moody's, Standard & Poor's and Fitch Ratings - cut their ratings for your nations because of the weakening prospects for an overhaul in Europe.

New Push for Reform in China

The Limits of Statism

Influential Report to Warn of Economic Crisis Unless State-Run Firms Are Scaled Back

By BOB DAVIS

BEIJING—An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation's leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

"China 2030," a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's second-largest economy has steadily expanded.

The Discreet Charm of the Never Ending Bailouts

Investors should prepare for Greek ‘bail-out III’

By Sushil Wadhwani

At last the tortuous process leading to agreeing a second Greek bail-out deal has ended. The main significance of the deal is that it was agreed. After all, many market participants had begun to fear that it would not be and that Greece would default. Accordingly, some were worrying about the potential consequences of a euro break-up scenario that they believed might have made the Lehman bankruptcy and its aftermath look trivial.

Of course, the deal does not solve Greece’s problems. Thus, it is widely recognised that we will probably be worrying about Greece again later. The analysis conducted by the International Monetary Fund is said to recognise the risks that the necessary competitiveness adjustment could come about via an even deeper and more protracted recession, which could imply that the debt-to-gross domestic product ratio ends up at 160 per cent of GDP in 2020, rather than the 120 per cent for which the programme is aiming. Besides, the process may be “accident-prone”. For example, it is possible that the Greek government that emerges after elections due in April will ask to renegotiate the deal.

The Lady Vanishes

Our one-night stand with freedom

By George Jonas

I wrote in a recent column that individual liberty diminished during the last half-century while state intrusion into people’s business and private affairs increased. A reader demanded examples. This intrigued me. The growth of the administrative state in the last 50 years has been no less noticeable than, say, advances in medicine. Yet if I had written “medical know-how has advanced since the war” I doubt if any reader would have demanded examples.

I guess that’s because medical advances are welcome, but increased government and decreased liberty aren’t. Many are bothered by decreased liberty, but those who like government — yes, there are such people — worry that it’s not increasing quickly enough. Why, it’s scandalous that anyone can still get a canary without a licence.

We in the West are gung-ho to export democracy, but sometimes it seems we’re keen to ship it overseas mainly because we’ve not much use for it ourselves. We go through these Mao-jacketed phases when we export democracy and import tyranny. Perhaps before exporting democracy wholesale, we should try it at home.

All right, this is just a wisecrack, but what comes next isn’t. We went from pre-democracy directly to post-democracy, leaping over democracy on the way. In 18th-century France, after removing the King’s head from the body politic, the revolutionaries replaced it with their own. Liberty’s children began building their brave new world by turning Reason into a deity. That’s when the state turned into a secular theocracy, worshipping shibboleths of its own making as though they were divine revelations.

Is Something Better than Nothing?

Greek Deal Leaves Europe on the Road to Disaster

By Clive Crook

If Europe’s new plan for Greece succeeds, nobody will be more surprised than the politicians who designed it. At best, the arrangement is a holding action, one that fails yet again to deal with the much larger confidence crisis facing the euro area.

The deal announced on Tuesday starts with private lenders. Their representatives agreed to accept even bigger losses on Greek government bonds than previously discussed. The bonds’ face value will be cut by 53.5 percent, and they’ll pay a low interest rate, starting at 2 percent then rising later. Altogether, this reduces their net present value by about 75 percent, far more than deemed necessary just weeks ago.

The Future of the Euro

Footing the bill for malinvestments will shape the future of the euro

by Philipp Bagus

The problems of the eurozone are ultimately malinvestments. In Greece these days the struggle continues about who will ultimately foot the bill for these investments. During the early 2000s an expansionary monetary policy lowered interest rates artificially. Entrepreneurs financed investment projects that only looked profitable due to the low interest rates but were not sustained by real savings. Housing bubbles and consumption booms developed in the periphery.

Watching the Monetary Politbureau

The Age of Kremlinology

Ben Bernanke, chief of the monetary politbureau, praying for his theories to work.

By Pater Tenebrarum

As long time readers know, we have often compared the parsing of the statements issued by the Federal Reserve to the now defunct job of 'Kremlinology'. This was a quite similar exercise during the cold war era, when knowledgeable journalists and observers of geopolitics used to parse every phrase emanating from the Moscow politbureau in the Kremlin to discover the hidden meaning in its often obscure statements.

Were reformers gaining ground? Was the old guard getting ready to alter course? Were the hawks or the doves prevailing? These seemed all highly important questions in an age of 'mutually assured destruction', with tens of thousands of nuclear armed warheads ready to rub out civilization at the push of a button.

Beliefs matter. A lot.

Dangerous Ideas

by chris martenson

We are at a key turning moment in history. The actions that we will soon decide to take will be determined by the beliefs we hold. At a time like this, holding the wrong set of beliefs can destroy your wealth, sap your joy, and even prove to be life-shortening.

Knowing the 'right' sets of beliefs to hold is never easy, but it is especially difficult at large turning points because, by definition, most people are holding onto old beliefs. Running against the crowd is difficult for everyone and impossible for many.

“If you think you can or think you cannot, you are correct.” 

~ Henry Ford

Beliefs matter. A lot. 

One’s experiences in life and one’s beliefs are closely connected. For instance, simply believing in the likelihood of success vastly improves the chances of good things happening to us and our accomplishing difficult tasks. 

Economic Lessons in the News

50p tax rate 'failing to boost revenues’

The U.K. government is learning about the economic lesson that "if you tax something, you get less of it."  Following an increase in the top marginal income tax rate to 50%, tax revenues from high-income taxpayers are falling, and are not going up, as the Treasury somehow expected by ignoring the economic lesson that "people respond to incentives." A U.K. Treasury official explained the disappointing drop in tax revenues by saying it "was partly due to highly-paid individuals arranging their affairs to avoid paying the 50% rate."

By Robert Winnett, and James Kirkup

The amount of income tax paid fell sharply last month in the first formal indication that the new 50p higher rate is not raising the expected amount of revenue.

Liberty, Economy and Ecology

Government must be the moderator, not the manager

By John A. Baden and Robert Ethie

Prosperity and Ecology

For years environmentalists ignored or discounted the strong correlation between economic prosperity and environmental concern. But when prosperity is at risk, people willingly trade environmental quality for economic gain. This occurs even in wealthy nations. In our political campaigns environmental themes are crowded out by economic issues. As Michael R. Deland, former chairman of the President’s Council on Environmental Quality, observed: "in a recession there is an increased sensitivity to the job side of the equation."

This is because wealth fosters both environmental concern and the capacity to exercise that concern in a concrete way, e.g., with sewage treatment plants. The 1992 World Bank World Development Report shows that less than two percent of sewage in Latin America is treated. Worldwide more than one billion people have no safe water. In China, two-thirds of rivers near large cities are too polluted for fish. These are problems that require capital, not promises and Green pretenses.

How to implode a supernova star

When Risk Is Disconnected From Consequence, the System Itself Is at Risk   

If we understand risk cannot be eliminated, it can only be transferred, then we will understand why the current financial trickery in Europe and elsewhere is doomed to fail.

by Charles Hugh Smith

The entire global economy's fundamental financial instability can be traced back to one simple rule of Nature: risk cannot be eliminated, it can only be transferred to others or masked. And when it is transferred to others or masked, then the causal feedback between risk and consequence is severed.

Once risk has been disconnected from consequence, then it is impossible to discover the price of capital and risk. Once capital and risk have been mispriced, then the inevitable result is misallocation of capital and a positive feedback loop of self-referential, self-reinforcing risk.

Once the causal negative feedback of the real world--consequence--is no longer available to those taking on risk, then only positive feedback remains. Positive feedback inevitably leads to runaway reactions that self-destruct.

Moral Cover and Business Opportunities

Green Bootleggers and Baptists
By Bjørn Lomborg

In May, the United Nations’ International Panel on Climate Change made media waves with a new report on renewable energy. As in the past, the IPCC first issued a short summary; only later would it reveal all of the data. So it was left up to the IPCC’s spin-doctors to present the take-home message for journalists.

The first line of the IPCC’s press release declared, “Close to 80% of the world‘s energy supply could be met by renewables by mid-century if backed by the right enabling public policies.” That story was repeated by media organizations worldwide.

Last month, the IPCC released the full report, together with the data behind this startlingly optimistic claim. Only then did it emerge that it was based solely on the most optimistic of 164 modeling scenarios that researchers investigated. And this single scenario stemmed from a single study that was traced back to a report by the environmental organization Greenpeace. The author of that report – a Greenpeace staff member – was one of the IPCC’s lead authors.

Fast-talking political scam artists

The Ongoing Recovery from the Folly of Intellectuals

By Patrick Cox   

I’ve often referred to a theory of business cycles that was first described by the Austrian Joseph Schumpeter, but amplified by contemporary American Thomas Sowell. Both are brilliant economists who have described in mathematical detail how free markets produce the most wealth and well-being for society, including for those at the lower end of the financial spectrum.

It is their explanation for why things go wrong, however, that I find most illuminating. Both Schumpeter and Sowell write about “intellectuals” who have academic credentials of some sort but are lacking in knowledge that would make them particularly valuable to the market. Incapable of commanding significant wealth and status through voluntary market mechanisms, these intellectuals resent the wealth of more-successful people. As a result, they envy and resent the entire market system that has failed to reward them as they believe they deserve to be rewarded.

Others have also explored this theme. Another Austrian, Helmut Schoeck, wrote the book that is widely considered a masterpiece of sociology, Envy: A Theory of Social Behavior (Der Neid: Eine Theorie der Gesellschaft). You can go back even further, if you like, to the Tenth Commandment’s proscription on “coveting.”

The Strength of Human Materials

The New Generation

The posthumous tale of a Russian professor’s nightmarish encounter with a former student

By Aleksandr Solzhenitsyn

They were writing the Strength of Materials exam.

Anatoly Pavlovich Vozdvizhensky, an engineer and associate professor in the Faculty of Civil Engineering, could see that his student Konoplyov’s face was very flushed.  He had broken into a sweat and had missed his turn to come up to the examiner’s desk. Then, with a heavy gait, he approached and quietly asked for a different set of questions. Anatoly Pavlovich gazed at the sweaty face beneath a low forehead and met the desperate, imploring look in his bright eyes—and he gave him some new questions.

From First Principles

What is the correct size and proper function of the state?

by DETLEV SCHLICHTER

For a long time I considered myself a classical liberal – as did Ludwig von Mises who inspired much of my work. I do no longer think that this position is logically consistent. The classical liberal position, although advocating a much smaller state than today’s political consensus, still assigns too many powers to the state. Nevertheless, it offers a good starting point for the discussion. So let us start here.

Utilitarian arguments for the strictly limited state

The classical liberal position on the role of the state can approximately be described as follows: The state should stay completely out of the economy. There is no role for the state in industry, banking or money. Money is gold, or any other commodity chosen by the trading public. The supply of money is thus outside of political control, and banking and finance are entirely free market businesses with no state support, no guarantee nor any explicit or implicit backstops. 

How to get fired in under 5 mins

Judge Napolitanos last tv appearance

Flags, Penns and Tiny Minds

The Penn is mightier than the sword

Argentina's use of Sean Penn to goad Britain over the Falklands confirms the terrifying power of celebrity today.

by Brendan O’Neill 

Easily the most extraordinary thing about Sean Penn’s recent comments on the Falkland Islands is the impact that they made. The tidal wave of furious commentary has tended to focus on Penn’s undoubted combination of daftness and arrogance, with enraged British hacks asking ‘where does Mr Madonna get off holding a press conference to pontificate about the serious affairs of the South Atlantic?’. That is indeed a good question. But a better and more pressing one is this: how on earth did the musings of one muppet make such a massive impact, intensifying the stand-off between Argentina and Britain, generating acres of newsprint, and even provoking a huge protest in the Falkland Islands themselves under the banner ‘Falk You, Sean’?

Nothing is inevitable

Europe’s ‘proud empire’ is entering a cul de sac of history

By Andrew Roberts

Nothing is inevitable. It was the first truth I was taught as a Cambridge undergraduate in the 1980s, and it has been italicised and underlined for me by everything I have learnt since. (I even use spellcheck to excise the word “inevitable” from my books, lest it’s crept in at a lazy moment.) The whole of human history is testament to the fact that vast sections of mankind can seem to be progressing towards what looks like an established goal, only to get sidetracked into cul-de-sacs, sometimes for decades, occasionally for centuries. So why do we still assume that an eventual return to any significant economic growth in the European Union is inevitable?

The news that Greece’s economy shrank by 7 per cent last quarter, and that for all his valiant efforts even George Osborne, the UK chancellor has been slapped with a downgrading threat by Moody’s, ought to focus us upon the thoughts of Jeremy Bentham, John Stuart Mill, Karl Marx and Antonio Gramsci. For it was the leading thinkers of the Whig and Marxist historical determinist school who infected mankind with the concept that we were “progressing” somewhere, moving towards a fixed, positive future point. In economics, that idea is encapsulated in the assumption of economic growth as a kind of manifest destiny, almost the birthright of the species. All too often we see growth as something to be taken for granted as a natural part of the human condition; the rule rather than the exception. If Thomas Macaulay, Friedrich Engels and the other historical determinists had been right, and mankind was on a train track towards either the inevitability of universal liberty or a workers’ paradise, would we have wound up with a 20th century as scourged as it was?

The past two-thirds of a century have been atypical for the globe, and peculiarly conducive for growth. Never before had there been so prolonged a period when no two great powers went to war, if one counts Korea as a UN operation and discounts the Indochinese border incidents of the 1960s and 1970s. America was a powerhouse of innovation and leadership, in competition with a resurgent, confident Japan. Exchange rates went largely unmassaged. China was quiescent and unable to price European economies out of raw materials. Food and energy were cheap by historical standards. Trade and markets were generally freer (in the west) than ever before. Populations were rising, but controllably so. Interest rates encouraged lending, and competition between and within European countries was producing what Adam Smith had promised it would.

Strictly confidential

Greek debt nightmare laid bare
By Peter Spiegel

A “strictly confidential” report on Greece’s debt projections prepared for eurozone finance ministers reveals Athens’ rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue – set to be agreed on Monday night – runs out.

The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out.

It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.

The Perennial Myth

Overpopulation

By David Osterfeld

“What most frequently meets our view (and occasions complaint) is our teeming population. Our numbers are burdensome to the world, which can hardly support us . . . . In very deed, pestilence, and famine, and wars, and earthquakes have to be regarded as a remedy for nations, as the means of pruning the luxuriance of the human race.”

This was not written by professional doomsayer Paul Ehrlich (The Population Bomb, 1968). It is not found in the catastrophist works of Donella and Dennis Meadows (The Limits to Growth, 1972; Beyond the Limits, 1992). Nor did it come from the Council on Environmental Quality and the Department of State’s pessimistic assessment of the world situation, The Global 2000 Report to the President (1980).

It did not even come from Thomas Malthus, whose Essay on Population (1798) in the late eighteenth century is the seminal work to which much of the modern concern about overpopulation can be traced. And it did not come from Botero, a sixteenth-century Italian whose work anticipated many of the arguments advanced by Malthus two centuries later.