Structural change is, by definition, innovative

Development 3.0

By Justin Yifu Lin

BEIJING – Until the Industrial Revolution, the world was quite flat in terms of per capita income. But then fortunes rapidly diverged, with a few Western industrialized countries quickly achieving political and economic dominance worldwide. In recent years – even before the financial crisis erupted in 2008 – it was clear that the global economic landscape had shifted again. Until 2000, the G-7 accounted for about two-thirds of global GDP. Today, China and a few large developing countries have become the world’s growth leaders.

Yet, despite talk of a rising Asia, only a handful of East Asian economies have moved from low- to high-income status during the past several decades. Moreover, between 1950 and 2008, only 28 economies in the world – and only 12 non-Western economies – were able to narrow their per capita income gap with the United States by ten percentage points or more. Meanwhile, more than 150 countries have been trapped in low- or middle-income status. Narrowing the gap with industrialized high-income countries continues to be the world’s main development challenge.

In the post-colonial period following World War II, the prevailing development paradigm was a form of structuralism: the aim was to change poor countries’ industrial structure to resemble that of high-income countries. Structuralists typically advised governments to adopt import-substitution strategies, using public-sector intervention to overcome “market failures.” Call this “Development Economics 1.0.” Countries that adhered to it experienced initial investment-led success, followed by repeated crises and stagnation.

Global growth killers

Central Planning Going Global

By Terence Corcoran

The supreme political leaders of the world economy keep meeting and meeting and meeting - first the G8, then the G20, now Rio+20, with another round (the 14th) of the expanding Trans-Pacific Partnership trade negotiations set for San Diego on July 2. All this within a few weeks. Meanwhile, the world economy keeps tanking, not helped by other international gatherings of finance ministers, Basel bank regulators, Financial Stability Boards, IMF leaders and central bankers.

It would be too facile to claim that maybe the world economy is tanking because of all these meetings at which nothing happens, little is agreed upon and what is agreed to is often just a dodge of good policy - or, more often, a prescription for bad policy. On the other hand, nobody these days balks at facile analyses or empty slogans. Just read this week's G20 declaration, in which, among scores of other platitudes, leaders said they "are in full agreement that we need to intensify our efforts to reduce both internal and external imbalances."

In brief, the odds are good that these novel and experimental attempts at global governance and economic management are becoming sources of destruction. Instead of focused national policies around the world, we have global conflabs that generate orchestrated chaos for which nobody is responsible.

One destructive product of the internationalist approach to policymaking may well be a breakdown in central bankers' grasp of monetary policy. At least one economist, Steve Hanke at The Johns Hopkins University in Baltimore, says the combination of monetary mistakes and escalating bank regulation is creating a credit crunch in the United States and turmoil elsewhere.

While central banks, especially the U.S. Federal Reserve, have caused an expansion of government-created money, private-sector money growth has disappeared. In the United States and much of Europe, with the exception of Germany, money-supply growth has been non-existent and even negative.

An American Gulag

Descending into Madness at Supermax

A detailed new federal lawsuit alleges chronic abuse and neglect of mentally ill prisoners at America's most famous prison. 

By Andrew Cohen

When Jack Powers arrived at maximum-security federal prison in Atlanta in 1990 after a bank robbery conviction, he had never displayed symptoms of or been treated for mental illness. Still in custody a few years later, he witnessed three inmates, believed to be members of the Aryan Brotherhood gang, kill another inmate. Powers tried to help the victim get medical attention, and was quickly transferred to a segregated unit for his safety, but it didn't stop the gang's members from quickly threatening him.

Not then. And certainly not after Powers testified (not once but twice) for the federal government against the assailants. The threats against him continued and Powers was soon transferred to a federal prison in Pennsylvania, where he was threatened even after he was put into protective custody. By this time, Powers had developed insomnia and anxiety attacks and was diagnosed by a prison psychologist as suffering from Post-Traumatic Stress Disorder.

Instead of giving Powers medicine, or proper mental health therapy, officials transferred him yet again, this time to another federal prison in New Jersey. There, Powers was informed by officials that he would be removed from a witness protection program and transferred back into the prison's general population. Fearing for his life, Powers escaped. When he was recaptured two days later he was sent toADX-Florence, part of a sprawling prison complex near Florence, Colorado often referred to as "ADX" or Supermax," America's most famous and secure federal prison.

The Consequences Of The Unthinkable

Here Is What Happens When The Euro Breaks Up

As the following image from Spiegel summarizes, three things will happen simultaneously when the unthinkable finally occurs: i) economic output plummets, ii) unemployment rate soars, and iii) consumer prices explode. Of course, this is nothing but merely deferred consequences for Europe partying for over a decade under an unsustainable regime that borrowed from the future (sound familiar?). And now the inevitable hangover. In other words: payback is a bitch.

Forget the PIIGS, the EU as a Whole is Insolvent

Europe is heading into a full-scale disaster

By Graham Summers

You see, the debt problems in Europe are not simply related to Greece. They are SYSTEMIC. The below chart shows the official Debt to GDP ratios for the major players in Europe.

As you can see, even the more “solvent” countries like Germany and France are sporting Debt to GDP ratios of 75% and 84% respectively.

These numbers, while bad, don’t account for unfunded liabilities. And Europe is nothing if not steeped in unfunded liabilities.

Let’s consider Germany. According to Axel Weber, the head of Germany’s Central Bank, Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.

To put the insanity of this into perspective, Weber’s claim is akin to Ben Bernanke going  on national TV and saying that the US actually owes more than $30 trillion and that the debt ceiling is in fact a joke.

What’s truly frightening about this is that Weber is most likely being conservative here. Jagadeesh Gokhale of the Cato Institute published a paper for EuroStat in 2009 claiming Germany’s unfunded liabilities are in fact closer to 418%.

And of course, Germany has yet to recapitalize its banks.

Indeed, by the German Institute for Economic Research’s OWN admission, German banks need 147 billion Euros’ worth of new capital.

To put this number into perspective TOTAL EQUITY at the top three banks in Germany is less than 100 billion Euros.

And this is GERMANY we’re talking about: the supposed rock-solid balance sheet of Europe. How bad do you think the other, less fiscally conservative EU members are?

Think BAD. As in systemic collapse bad.

Should Austrians Embrace the Euro?

Good as Gold?

By Pater Tenebrarum

Introductory Remarks

As we have often pointed out in these pages, to our mind the euro area crisis is not a currency crisis. It is primarily a debt crisis; a crisis of the bloated European welfare states and the fractionally reserved and way overextended   banking systems they harbor. Due to the supra-national status of the central bank it is no longer possible for member nations to simply 'paper over' their economic policy mistakes and so their errors have been revealed for all to see. Instead of being able to surreptitiously impoverish the citizenry by means of inflation and devaluation, the political classes have been forced to face facts.

In this sense, the euro is a great success: it has so far averted an inner-European outbreak of 'beggar-thy neighbor' devaluations. The usual robbing of savers had to be at least partially shelved.

It is entirely mistaken to argue that the monetary union can only work if a so-called 'fiscal union' is established. It is true that the monetary union will work better if its members were to adhere to the rules of the fiscal  pacts they have signed – be it the Maastricht treaty or the latest iteration of the 'fiscal compact'.

However, this is not the main goal of the people pushing for a full fiscal, and presumably political, union. Their aim is to abolish subsidiarity altogether in order to create a European superstate – a giant transfer union in which all tax and regulatory competition is suppressed. Moreover, they want to enable the central bank to do what it currently can not do – namely finance the deficits of governments by means of money printing.

The euro is a medium of exchange. There is no reason whatsoever that  two or more agents using a common medium of exchange need to enter into a 'fiscal union', pooling their debts in order to be able to continue to use a common medium of exchange. The gold standard worked perfectly well for a century before governments deliberately ruined it in order to finance enormous wars. No-one ever suggested at the time that the nations on a gold standard should enter into a 'fiscal union'. It would have been regarded as an utterly absurd demand.

You can review our critique of the various ideas forwarded by the 'centralizers' and our ideas regarding a free market solution to the euro area crisis in a previous article: 'The Euro Area – False Dilemmas and False Choices', where  the above points are discussed in more detail. A further addition to this discussion can be found in 'Growth versus Austerity – A Phony Debate'.

Is There 'Austerity' in Europe?

It has become fashionable among interventionists to take aim at Angela Merkel and the German Bundesbank and accuse them of forcing euro area member states into 'unbearable austerity' by continuing to refuse to bail out all and sundry without preconditions.

Among other things, commentators are lately frequently dragging up the example of Heinrich Brüning's government that was in charge of Germany just prior to the election that brought Hitler to power. A recent example is this article at Bloomberg: “Ghost of Nazi Past Haunts Austerity-Gripped Europe”. The article states: 

“Under Germany’s austerity policies in the 1930s, taxes rose, benefits and wages were reduced and unemployment soared, stoking the popular ire that Hitler harnessed. Extremists are gaining ground now as unemployment in Greece passes the 20 percent mark after five years of recession. The far-right Golden Dawn won 6.9 percent of the vote and 18 seats in the country’s most recent elections. France’s anti-immigrant, anti-euro National Front won two seats in parliamentary elections June 17.

Creditanstalt in 1931, like Spain’s Bankia now, was created by mergers with lenders weakened by toxic loans and capital shortfalls. After Creditanstalt failed, the government stepped in to prop it up, fatally hurting its own credit. A run on Austria’s bonds and the schilling ensued, according to Michael Bordo, national fellow of the Hoover Institution on campus of Stanford University in Palo Alto, California.

“Creditanstalt had been forced into a merger with an insolvent bank, which felled it,” Bordo said. “Really, Austria had a financial system set up to service an empire which was no longer there. The bank was too big.”

Marx Madness

Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 480 BC

By David Galland
Burn the Boats, Kill the Chickens

Although I did manage to squeeze in a few hours in the Portuguese sun chasing a little white ball, the purpose of my just-concluded whirlwind trip – a Sunday-to-Sunday jaunt with stay-overs in four different countries, including two of the PIIGS, Ireland and Portugal, and pending PIIGS member France twice – was mostly business.

As you might expect at this pivotal point in European history, I wasted no opportunity in questioning the locals – from widely followed economists to taxi drivers and everyone in between – about their views on the European Union and the common currency that serves as the glue holding it together, albeit barely.

Now, I am not going to go on at great length on the policy experiments that have brought Europe to its knees, and certainly won't weigh in with a tourist's opinion on how the whole mess will resolve: there are hundreds of media darlings in the wings, clearing their pipes in the hope of being called upon to opine this way or another on just those topics.

Rather, what I would like to do is encapsulate, in as few words as I am capable, the essence of the problems facing Europe, and leave it to you to draw your own conclusions. To assist in that regard, I will use my observations on the ground in Portugal.

For those of you who are unfamiliar with the place, physically and meteorologically, Portugal is about as good as it gets.

The weather is almost identical to Southern California, and the country has a long coastline complete with stunning (and largely empty) beaches. As with Southern California, the land is rich and supports the growing of pretty much any crop.

The people are friendly and well educated, with most speaking three or even four languages (Portuguese, English, German, Spanish are fairly standard). The food is fantastic, especially the fresh seafood, prepared to perfection even when just cooked over coals in a fisherman's shack.

Supplementing the local culture is a robust expat community: in the Algarve, where I stayed, most expats are refugees from the rest of Europe, with what seems to be an extra measure of Brits. Crime is low and, thanks to the crisis, there are bargains aplenty for houses and recently constructed (but now largely empty) apartment buildings, even near the water.

The storied cities of the Old World, Paris, Dublin, Madrid, Rome, Zurich, London are only a short hop by plane, and thanks to the hard-charging Michael O'Leary and his cut-rate Ryan Air, a cheap hop at that.

Which had me wondering, what's the problem? The same thought had come to mind while wandering about the bustling streets of Dublin a couple of days earlier.

Extortion Economics

Boo !!!

By Wolf Richter   

One thing Greek politicians have taught other European leaders: fear mongering for the purpose of extortion is the way to go. It might not work, and it might be counterproductive, and it might destroy confidence in the economy and give investors goose bumps and blow up markets, and it might cause spooked consumers to hold back on purchases and worried businesses to freeze hiring plans, thus exacerbating the situation, but it’s nevertheless the way to go.

Greek politicians learned it from Treasury Secretary Hank Paulson who'd walked into the Capitol in September 2008, threatening that the whole world would collapse if his demands weren’t met. Soon, they expertly issued a series of escalating threats to extort the maximum amount in bailout euros from the Troika. It didn’t work very well as the Greek economy continued to spiral out of control, and as the frustrated Troika halted bailout payments from time to time, and as tempers flared, and as the people in Greece became increasingly edgy. But it was the way to go. Then came Spain. And now Italian Prime Minister Mario Monti.

Austrian Capital Theory

Why It Matters

By Peter Lewin

With the resurgence of Keynesian economic policy as a response to the current crisis, echoes of past debates are being heard—in particular the debate from the 1930s between John Maynard Keynes and Friedrich Hayek. Keynes talked about the “capital stock” of the economy. He argued that by stimulating spending on outputs (consumption goods and services), one can increase productive investment to meet that spending, thus adding to the capital stock and increasing employment.

Hayek accused Keynes of insufficient attention to the nature of capital in production. (By “capital” I mean the physical production structure of the economy, including machinery, buildings, raw materials, and human capital—skills). Hayek pointed out that capital investment does not simply add to production in a general way but rather is embodied in concrete capital items. That is, the productive capital of the economy is not simply an amorphous “stock” of generalized production power; it is an intricate structure of specific interrelated complementary components. Stimulating spending and investment, then, amounts to stimulating specific sections and components of this intricate structure.

Japan and Europe Are Killing Themselves

They are taxing themselves to death

By Jeorge Giddeon

Can the U.S. lead the world back to prosperity? The global economy is lurching toward the cliff. Twice before over the last 75 years Washington took the necessary action, and after November, with a new President and Congress, there will be the opportunity—and imperative—to do so again.

The 1970s were a decade of economic turmoil and stagnation. The 1930s were far worse. And now the world is headed to the brink again.

After the Great Depression and the Second World War the U.S. helped create and nurture the institutions that enabled war-torn Europe and Japan to make rapid recoveries. The gold-based Bretton Woods monetary system provided the currency stability necessary for the resumption of international trade. The General Agreement on Tariffs & Trade (and then its successor, the World Trade Organization) systematically reduced trade barriers. At home we ended wartime controls and rationing, cut taxes and slashed government spending. Almost seamlessly, millions of veterans came home to productive civilian employment. For the next 25 years Japan and Germany repeatedly reduced their tax burdens and became economic global giants.

Greece Asks Troika For Moon

Time Means Money

By MIKE SHEDLOCK

It will be interesting to see how long the coalition in Greece will last after Germany shoots down Bailout Easing Proposals by Greece to ....

       ·         Cut the VAT
·         Freeze layoffs
·         Extend timeline to reduce its deficit by two years
·         Recapitalize lenders
·         Provide more help for the unemployed
·         Accelerate payments to providers of government services.

Bloomberg reports Greece Seeks at Least Two-Year Extension to Bailout Goals noting that: 

"New Democracy, Pasok and the Democratic Left agree that plans to cut 150,000 public-sector jobs should be scrapped."

Loosening of Pledges Unacceptable
The coalition parties (New Democracy, Pasok, Democratic Left) can agree to whatever they want. They may as well agree the moon is made of green cheese while requesting slices on a platter.

Second thoughts of an environmentalist

Global warming smoke dreams 

Fritz Vahrenholt, one of Germany's earliest green energy investors, is not convinced that humanity is causing catastrophic global warming.

By Fritz Vahrenholt

Scientists of the Intergovernmental Panel on Climate Change (IPCC) are quite certain: by using fossil fuels man is currently destroying the climate and our future. We have one last chance, we are told: quickly renounce modern industrial society – painfully but for a good cause.

For many years, I was an active supporter of the IPCC and its CO2 theory. Recent experience with the UN's climate panel, however, forced me to reassess my position. In February 2010, I was invited as a reviewer for the IPCC report on renewable energy. I realised that the drafting of the report was done in anything but a scientific manner. The report was littered with errors and a member of Greenpeace edited the final version. These developments shocked me. I thought, if such things can happen in this report, then they might happen in other IPCC reports too.

Black people will remain poor for ever

The Other Side of Socialism

An eloquent indictment of the primary destructive principle of socialism and social welfare – dependency and the entitlement mindset.

Red Plenty

Inside the Fifties’ Soviet Dream

“The most puzzling development in politics during the last decade is the apparent determination of Western European leaders to re-create the Soviet Union in Western Europe.”

                                                 - by Mikhail Gorbachev

By Francis Spufford

Cultural historian Francis Spufford’s Red Plenty is a novel about the reform of the planned economy in the Soviet Union during the years of the Khrushchev thaw. It is one of the oddest books written about economics—a fictional approach peopled by computer researchers, planning bureaucrats, Communist Party apparatchiks, and factory managers. While fact and fiction in Red Plenty can initially be difficult for the reader to distinguish, the fictional parts breathe life into the economic reasoning. The author provides an extensive set of notes explaining the historical facts and also where his poetic license diverges from them.

The Future of Money and the Death of Banks

The present fiat money economy is ripe for some Schumpeterian ‘creative destruction’.

by DETLEV SCHLICHTER

UK Chancellor George Osborne and Bank of England Governor Mervin King last week announced another round of fiscal and monetary stimulus measures, including steps to ease the funding for banks and allow them to extend more loans.

If these measures were hoped to instil confidence they must be classified as a failure. We have lived through quite a few years of unprecedented and fairly persistent monetary accommodation and occasional rounds of QE by now, and I doubt that yet another dose of the same medicine will cause great excitement. Furthermore, observers must get confused as to what our most pressing problems really are. Have we not had a real banking crisis in the UK in 2008 because banks were over-extended and in desperate need of balance sheet repair? Is a period of deleveraging and a rebuilding of capital ratios not urgently required and unavoidable? Let’s not forget that the government is still a majority-owner of RBS and holds a large chunk of Lloyds-TSB. If banks are still on life-support from the taxpayer and the central bank, is it wise to already prod them to expand their balance sheets again and create more credit to ‘stimulate’ growth?

Europe 1-2-3

The Simplification of Europe

“Paying attention to simple little things that most men neglect makes a few men rich.”

                           -Henry Ford

by Mark Grant

I am under no delusion nor are they my audience; nothing that I write will change much of anything for the public and so I am not passing out knowledge at the supermarket. There are a few of you however that pay attention not to who I am but to what I think. Europe has become so complicated and so riddled with the obtuse and the fractured that I thought I would take some time today to try to simplify the process. All of my life I have listened to economists, who always seem to want to make things more and not less complicated to make themselves sound more intelligent I have always supposed, and I have read research reports that offered forty pages of excuses mostly in an attempt to sell you something. To be perfectly honest; I have never found either of these tacts useful. I would guess that ninety-five percent of what I write is to warn you away from the pitfalls and very occasionally I think something is of interest and might be useful and I point it out. The point of my commentary is to try to keep you out of trouble which is an increasingly difficult task these days as the European Union is the most confusing government on Earth bar none.

An Austrian Defense of the Euro

An Almost Golden Currency

by Jesus Huerta de Soto

1. Introduction: The Ideal Monetary System

Theorists of the Austrian School have focused considerable effort on elucidating the ideal monetary system for a market economy. On a theoretical level, they have developed an entire theory of the business cycle that explains how credit expansion unbacked by real saving and orchestrated by central banks via a fractional-reserve-banking system repetitively generates economic cycles. On a historical level, they have described the spontaneous evolution of money and how coercive state intervention encouraged by powerful interest groups has distanced from the market and corrupted the natural evolution of banking institutions. On an ethical level, they have revealed the general legal requirements and principles of property rights with respect to banking contracts, principles that arise from the market economy itself and that, in turn, are essential to its proper functioning.[1]

All of the above theoretical analysis yields the conclusion that the current monetary and banking system is incompatible with a true free-enterprise economy, that it contains all of the defects identified by the theorem of the impossibility of socialism, and that it is a continual source of financial instability and economic disturbances. Hence, it becomes indispensable to profoundly redesign the world financial and monetary system, to get to the root of the problems that beset us and to solve them. This undertaking should rest on the following three reforms:

1.   the reestablishment of a 100 percent reserve requirement as an essential principle of private-property rights with respect to every demand deposit of money and its equivalents;

2.   the abolition of all central banks (which become unnecessary as lenders of last resort if reform 1 above is implemented, and which as true financial central-planning agencies are a constant source of instability) and the revocation of legal-tender laws and the always-changing tangle of government regulations that derive from them; and

3.   a return to a classic gold standard, as the only world monetary standard that would provide a money supply that public authorities could not manipulate and that could restrict and discipline the inflationary yearnings of the different economic agents.[2]

What’s next…

Nearly every western nation on the planet is insolvent

by Simon Black

One of the things that’s really unique about this part of the world, Esthonia, is having access to so many people with first-hand experience of living under Soviet rule.

It’s a bizarre thing to say, but the stories they have to tell are extraordinary.

Last night I had dinner with some friends, including one woman who was just a child at the end of World War II.

She explained to me that her family had been wealthy landowners near the capital city… until the Soviet-controlled government came in, confiscated all of their property, and shipped the adults off to Siberia.

“There were so many opportunities to leave beforehand,” she explained, ”but they just never thought things would ever get that bad here. Everyone saw what happened in other countries, but my family never expected that it would happen to them.”

While most people probably aren’t going to end up in Siberia anytime soon, the lesson is still valuable.

It’s easy to look around the world and think “It can’t happen here. It won’t happen here.” But this is really foolish thinking.

Governments steal, then spend, other people’s money with reckless abandon. They conjure paper currency out of thin air, rob the future earnings of generations which have not even been born, and create mind-numbing barriers to real growth.

These are not people who can be trusted to do the right thing.

Here in Europe, the Greek government is helping itself to its citizens’ bank accounts; the Italian government is working with banks to freeze customers out of their accounts without warning.

Europe Still Doesn’t Get It

The Continent’s latest solution points back to the problem—the euro itself.

βυ NICOLE GELINAS

Europe faces withered economies and double-digit unemployment rates from Ireland to Italy. Now, after yet another summit, Europe’s wise men and women have hit upon yet another fix. This time, they’re pushing universal deposit insurance across the Eurozone, in which the people of any nation in trouble would be bailed out by people in other euro nations: Spanish bank depositors, for example, would pay for rescues of Greek bank depositors if Greek banks failed, and vice versa. The new idea, like many before it, ignores the problem at the root of the European crisis: the euro itself.

Greece, Spain, and others are in trouble because they—and their banks—borrowed so much money so recklessly during the boom years. Global money managers thought these nations’ euro membership made investment in their debt a sure thing. Strong countries like Germany, the thinking went, would never countenance defaults on government or big-bank debt issued in the common currency. Easy money, in turn, allowed much of Europe to avoid hard questions on unaffordable retirement benefits and inflexible labor markets.

When the bust came, the euro fetters compounded the problem. Fifty years ago, a country like Greece would have dealt with a debt burden by printing up more money to pay off bonds in cheaper drachmas. The subsequent fall in the value of the Greek currency would have encouraged foreigners to buy Greek products and to visit Greece, ameliorating the country’s economic contraction. Of course, such a solution wouldn’t have been good for Greek savers, and it would present tremendous risks if carried too far.

We’re mortgaging the future of the younger generation'

If young Americans knew what was good for them, they would all be in the Tea Party

Just say no: the young can unwittingly argue against their own long-term economic interest.
 If young Americans knew what was good for them, they would all be in the Tea Party. 

Uncontrolled public debt threatens to rupture society as the older generation thrives at the expense of the young.

By Niall Ferguson

Critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptom of the malaise is the huge debts we have managed to accumulate in recent decades, which (unlike in the past) cannot largely be blamed on wars.

According to the International Monetary Fund, the gross government debt of Greece this year will reach 153 per cent of GDP. For Italy the figure is 123, for Ireland 113, for Portugal 112 and for the United States 107.

Britain’s debt is approaching 88 per cent. Japan – a special case as the first non-Western country to adopt Western institutions – is the world leader, with a mountain of government debt approaching 236 per cent of GDP, more than triple what it was 20 years ago.

Often these debts get discussed as if they themselves were the problem, and the result is a rather sterile argument between proponents of “austerity” and “stimulus”. I want to suggest that they are a consequence of a more profound malaise.

The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn. In this regard, the statistics commonly cited as government debt are themselves deeply misleading, for they encompass only the sums owed by governments in the form of bonds.