165 Million Americans Are Dependents of the State

Is Tyranny Next?

By Bill Wilson

 Is America descending into a dependency state, where the majority uses its voting power to demand government services from taxpayers?

New research from Ranking Member of the Senate Budget Committee Jeff Sessions (R-AL) reveals that this reality may already be here, with more than 107 million Americans on some form of means-tested government welfare.

Add to that 46 million seniors collecting Medicare (subtracting out about 10 million on Supplemental Security Income, Medicaid, and other senior-eligible programs already included in Sessions’ means-tested chart) and 22 million government employees at the federal, state, and local level — and suddenly, over 165 million people, a clear majority of the 308 million Americans counted by the U.S. Census Bureau in 2010, are at least partially dependents of the state.

Since President Obama took office in 2009, eligibility for Medicaid, food stamps, the earned income tax credit, the making work pay tax credit, and unemployment benefits has increased by roughly 10 million. To add insult to injury, Obama then unilaterally dismantled the work requirements that were the heart of the 1990’s welfare reform via an arbitrary executive order.

But it’s even worse than that. In fact, most voting-age Americans do not pay income taxes — approximately 50.6 percent.

Abundance vs. Scarcity

by Frédéric Bastiat

Which is best for man and for society, abundance or scarcity? What! you exclaim, can that be a question? Has anyone ever asserted, or is it possible to maintain, that at the foundation of human well-being?

Yes, this has been asserted, and is maintained every day; and I do not hesitate to affirm that the theory of scarcity is the most popular by far. It is the life of conversation, of the newspapers, of books, and of political oratory; and, strange as it may seem, it is certain that political economy will have fulfilled its practical mission when it has established beyond question, and widely disseminated, this very simple proposition: "The wealth of men consists in the abundance of commodities."

Do we not hear it said every day: "The foreigner is about to inundate us with his products?" Then we fear abundance.

Did not Mr. Saint-Cricq exclaim: "Production is excessive"? Then he feared abundance.

Do workmen break machines? Then they fear an excess of production, or abundance.

Paul Ryan’s Fairy-Tale Budget Plan

The Wall Street Lawn Chair

By David Stockman

PAUL D. RYAN is the most articulate and intellectually imposing Republican of the moment, but that doesn’t alter the fact that this earnest congressman from Wisconsin is preaching the same empty conservative sermon.

Thirty years of Republican apostasy — a once grand party’s embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state — have crippled the engines of capitalism and buried us in debt. Mr. Ryan’s sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to “job creators” (read: the top 2 percent) will do nothing to reverse the nation’s economic decline and arrest its fiscal collapse.

Two Prisms for Looking at China’s Problems

China’s Solution - Keynes or Mises?

This piece on China comes from the NY Times and is written by George Mason University professor Tyler Cowen. Professor Cowen famously has written why he is not an “Austrian” economist yet he hews closely to its ideas. In this piece he compares the Austrian economic theory analysis of China to Keynesian theory’s analysis. His criticism of Austrian theory, below, is that Austrians have a hard time explaining massive malinvestment during a boom yet at the same time they say markets allocate goods efficiently. This is completely erroneous, of course. Austrians explain well the result of monetary distortions of markets caused by central banks. Austrians don’t say economic actors are perfect, only that the market tends to correct mistakes. Other than that, it’s a good comparative analysis of China’s problems. Mainly, they still have a largely top-down command economy that misallocates capital (malinvestment) on a massive basis. My views are not as optimistic. 

---

Two Prisms for Looking at China’s Problems

By TYLER COWEN

CHINA is confronting some serious economic problems, and how Beijing does — or doesn’t — respond to them could bend the course of the global economy.

First, China’s real estate bubble is deflating. But its economy also seems to be suffering from what we economists call excess capacity — an overinvestment in capital goods, whether in factories, retail stores or infrastructure.

We Are All Muppets Now

It's the muppets who are being milked and skimmed

Every participant in the manipulated, rigged stock market is now a muppet.

by Charles Hugh Smith

Just as President Richard Nixon signaled his embrace of endless fiscal stimulus and bottomless deficits by declaring "We are all Keynesians now," it is now apparent that we are all muppets now, willing participants in a fraudulent, manipulated market in the hopes that we will skim the same outsized gains reaped by the manipulators.

Actually, Nixon said, "I am now a Keynesian in economics," but the catchier phrase has entered popular history.

Using the word muppets to describe credulous investors who could be ripped off at will originated with investment banking giant Goldman Sachs, where employee Greg Smith famously wrote:

"It makes me ill how callously people [at Goldman Sachs] talk about ripping their clients off."

"Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets', sometimes over internal email."

Instead of altering our views to fit the facts, we alter the facts to fit our views

Views Vs Facts

by Mark E. Grant

As Industrial Production falls -0.6% in Europe and as the economy shrinks -0.2% there is once again a good reason to pause to consider the ramifications for this going forward. As part of the data release this morning Germany and France did somewhat better than expectations but it was fairly marginal while the rest of the EU-17 continues to be mired in difficulties. Overnight LCH increased the margin requirements for both Spain and Italy as the banks of Spain keep increasing their borrowings at the ECB which is now at an all-time record. More troubling perhaps is the recent release of data from Italy which showed that their sovereign debt had ballooned to $2.437 trillion and the trajectory is more than troublesome. In 2010 and 2011 Italy’s debt was expanding by $7.90 billion per month but in 2012 Italian debt has increased by $11.73 billion per month for a projected $141 billion by the end of this year. In fact the Italian economy is shrinking by about   -2.5% while their debt is growing by 5.8% which is the baseline for an unsustainable situation if these trends continue.

To make matters worse Italy’s Industrial Production is down -8.2% from a year ago and down     -1.4% in the last month. I think Italy must be reassessed in light of the recent data and I would project further downgrades for the country and an increase in their bond yields as people recognize the severity of their problems. To me it looks increasingly likely that both Spain and Italy will soon line up at the feeding trough which is going to strain Europe, in my opinion, past the limits of what France and Germany can bear and then all of the superlatives and all of the great hype are going to come face-to-face with a very tough reality I am afraid.

If the Roman Empire can collapse, yours can too

What the Last Roman Emperor Would Tell President Obama Today

by Keith Fitz-Gerald

Over the course of 700 years, the ancient Roman Empire grew from a small republic to one that stretched from London to Baghdad at its peak.

As one of the world's first true superpowers, the Empire's achievements included the world's first standing professional army, economic prowess, intellectual growth and governance principles that are commonly regarded as the basis for modern society.

But it is also remembered for its spectacular collapse in less than a century under the weight of bad debt, an overextension of the Empire, a collapse of morals that led to a deluded and self-absorbed political elite and reckless public spending that far outweighed collections.

General Motors Is Headed For Bankruptcy

Again

By Louis Woodhill

President Obama is proud of his bailout of General Motors.  That’s good, because, if he wins a second term, he is probably going to have to bail GM out again.  The company is once again losing market share, and it seems unable to develop products that are truly competitive in the U.S. market.

Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company.  It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday.  This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.

Right now, the government’s GM stock is worth about 39% less than it was on November 17, 2010, when the company went public at $33.00/share.  However, during the intervening time, the Dow Jones Industrial Average has risen by almost 20%, so GM shares have lost 49% of their value relative to the Dow.

It’s doubtful that the Obama administration would attempt to sell off the government’s massive position in GM while the stock price is falling.  It would be too embarrassing politically.  Accordingly, if GM shares continue to decline, it is likely that Obama would ride the stock down to zero.

GM is unlikely to hit the wall before the election, but, given current trends, the company could easily do so again before the end of a second Obama term.

In the 1960s, GM averaged a 48.3% share of the U.S. car and truck market.  For the first 7 months of 2012, their market share was 18.0%, down from 20.0% for the same period in 2011.  With a loss of market share comes a loss of relative cost-competitiveness.  There is only so much market share that GM can lose before it would no longer have the resources to attempt to recover.

To help understand why GM keeps losing market share, let’s look at the saga of the Chevy Malibu.

The Malibu is GM’s entry in the automobile market’s “D-Segment”.  The D-Segment comprises mid-size, popularly priced, family sedans, like the Toyota Camry and the Honda Accord.  The D-Segment accounted for 14.7% of the total U.S. vehicle market in 2011, and 21.3% during the first 7 months of 2012.

Obama's Labor Theory of Value

The Marxian underpinnings of "you didn't build that."

By Ron Ross

Beyond being infuriating and insulting, President Obama's now notorious "you didn't build that" speech probably left many people puzzled. It is so foreign to how most Americans think they might have wondered where such thinking comes from.

Whether or not you think it's accurate to call Obama a Marxist, his perspective on how the economy works is Marxian through and through. More specifically, it is a reflection of what's referred to as Marx's "labor theory of value."

That theory is defined in the Dictionary of Economics as "[t]he worth of a product or service is in proportion to the labor employed to generate it."

Economists not under the spell of Marxism consider the labor theory of value to be a convoluted mess. Marx himself had great difficulty papering over the logical gaps and contradictions of the theory. One obvious problem is that "labor" is not a homogeneous resource. Furthermore, it is not the only scarce resource necessary for the production of practically every product or service.

The question of how relative prices are determined is still a central question in economics. "Price theory" is what comprises most of microeconomics.

Today the mainstream conclusion about what determines relative prices is that they result from the interaction of "supply and demand." In the context of price theory, supply and demand are like file drawers where numerous factors can be organized and analyzed.

The price of any product is affected by the quantity of all the resources necessary to produce it -- labor, energy, land, information, time, for example. Marx's position was that only one of these resources mattered, i.e., labor. Furthermore, he devoted none of his attention to the demand side of price determination. It's as though he tried to design a pair of scissors using a single blade and, in fact, only a small piece of a single blade. I don't think that it's an exaggeration to say that no economist, other than true-believer Marxists, thinks that the labor theory of value makes any economic sense or is useful in understanding how an economy actually works.

"Sense And Nonsense"

 Assorted Thoughts

“Government interference into economic affairs almost never alleviates the problem it set out to solve. The unintended, and perhaps intended, consequences only rally more calls for further intervention. Because of its countless edicts, the majority of people who reside in Western economies have no concept of how and why markets function as they do. They have mistaken crony capitalism or socialism for genuine capitalism. While mistaken, this distrust of the market has been the lifeblood of the parasitic state.”

                                   —James E. Miller, “Learning to Laugh at the State,” 

“We have been living beyond our means. We have been paying ourselves more than our efforts were earning. We sought political leaders who would assure us that the good times would never end and that the centuries of boom and bust were over; and we voted for those who offered that assurance. We sought credit for which we had no security and we gave our business to the banks that advertised it. We wanted higher exam grades for our children and were rewarded with politicians prepared to supply them by lowering exam standards. We wanted free and better health care and demanded chancellors who paid for it without putting up our taxes. We wanted salacious stories in our newspapers and bought the papers that broke the rules to provide them. And now we whimper and snarl at MPs, bankers and journalists. Fair enough, my friends, but, you know, we really are all in this together.”

                                                                      —Matthew Parris

 “Suppose I’m a fund manager worried that if I underperform the market over a twelve-month period I’ll be out of a job. What value would I attach to a boring business with dependable and robust cash flows, and therefore represents an excellent place to allocate preserve and grow my client’s capital over time but which, nevertheless, is unlikely to ‘perform over the next twelve months? The likelihood is that I will value such cash flows less than an investor who considers himself the custodian of his family’s wealth, who attaches great importance to the protection of existing wealth for future generations, values permanence highly, and is largely uninterested in the next twelve months. In other words, an institutional fund manager might apply a ‘higher discount rate’ to those same expected cash flows than the investor of family wealth. They arrive at different answers to the same problem. The same cash flows are being valued subjectively and there is no such thing as an objective or ‘intrinsic value’ embedded in the asset, even though it has cash flows.”

                             —Dylan Grice in SocGen’s Popular Delusions, 17 July 2012.

On GRExit, SPAilout, and Draghi's White Knight

There is no such thing as a free lunch

“There was a free lunch just once. It was when Eve gave the apple to Adam and we all know how that turned out.” 

                                                  -The Wizard
By Mark E. Grant

As I stare out at the Maginot Line I will endeavor to predict the upcoming events in Europe for the balance of the year. I called Greece, Ireland and Portugal correctly so I have some standing here and while we all are only as good as our last call; I have my own small pin on which to dance. I think first and foremost that Greece falls by the wayside. I think as a matter of political reality, given the German polls, that Berlin will refuse to adequately fund Greece and that they will be forced back to the Drachma as a matter of Ms. Merkel’s desire for re-election. When this happens it will be a quite messy affair with some $1.3 trillion going into default which will also require the re-capitalization of the ECB and there will be a $90 billion hit in derivative contracts which may well affect certain banks past the point of what is currently recognized. The Greek banks, bankrupt now, will train off into the abyss and will be replaced by other European institutions. The honest truth is that the Greek debts have become so large and so impossible to pay that unless there is absolute debt forgiveness, which I think is politically impossible in Germany and a number of other European countries; the country must roll over as a matter of fiscal reality.

Suddenly A Historic Election?

Not really

by WALTER RUSSELL MEAD

With Governor Romney’s selection of Wisconsin Congressman Paul Ryan as his running mate, the vague contours of the presidential race have suddenly become sharper. Up until now, partly because Romney’s image has been so fuzzy, we were looking at a referendum on President Obama rather than a clear-cut contest between political philosophies. Now, given Ryan’s prominence as a budget hawk and entitlement reformer, the public has a choice to make.

On the one hand, President Obama and Vice President Biden stand foursquare for the growth of what I’ve been calling the blue social model. In terms of government policy, they want to continue to grow the mix of interventions, guarantees, entitlements and programs that FDR launched in the New Deal, that Lyndon Johnson extended in the Great Society, and that various presidents (of both parties — think of Nixon and the EPA and W and the prescription drug benefit) have extended since.

This is a bolder stance than the Clinton approach. Bill “the era of big government is over” Clinton was a small ‘c’ conservative: he aimed to conserve the bulk of the entitlement state by trimming a few of its less popular features like welfare payments not linked to work. President Obama, who succeeded at passing health care where Clinton failed, has bigger ambitions, and intends to press ahead with the characteristic direction of American politics in the last two thirds of the twentieth century — towards a more powerful, more purposeful and more intrusive federal state.

Beyond that, Obama and Biden will be running on the blue social model as a way of life. The mass production, mass consumption society of Fordist America saw stable employment at good wages for most people in the US. For Obama and Biden, that kind of America is what Frank Fukuyama called the end of history: a relatively egalitarian income distribution, a stable employment picture, defined benefit pension programs for more and more workers, a gradually rising standard of living, more kids spending more years in school from generation to generation and a government of Keynesian macro-economists who keep the economy on an even keel.

For the Obamians, this is the ideal form of society. The apparent creaks and strains of the last thirty years — rising income inequality, stagnating real wages, economic volatility — are the result of policy errors rather than historical forces. Bad, selfish people have dismantled the regulations and controls that kept a healthy middle class economy in place and like Toad of Toad Hall in The Wind in the Willows, reckless rich nincompoops have driven the national economy — and the blue social model — into the ditch. President Obama’s goal is to bring back the good old days, and make them better yet. His methods are classic tools of the progressive movement of the twentieth century and he believes that there is much, much more than government can do to make our country richer and our society more just.

China Is Running Out Of Money

No developing country has ever escaped a major financial crisis

By Gordon G. Chang

Last week’s release of disappointing economic and trade data for July has, predictably, renewed calls for additional stimulus.  In May, Beijing ramped up its support for the economy, and observers had expected activity to pick up by last month.

Why has the economy so far failed to respond?  There are various reasons, but perhaps the most important is that the country is running out of money for stimulus.

At first glance, that proposition seems preposterous.  After all, the People’s Bank of China, the central bank, held $3.24 trillion of foreign currency reserves at the end of the first half of this year.  Yet foreign currency, no matter how plentiful, has limited usefulness in a local currency crisis.  In any event, the PBOC’s foreign currency holdings are almost evenly matched with renminbi-denominated liabilities that were incurred to acquire all those dollars, pounds, euros, and yen.  As a result, the central bank cannot use the reserves without driving itself deep—actually, deeper—into insolvency.

The recent slight decline in the value of the renminbi versus the dollar has decreased the amount of the PBOC’s liabilities in relations to its assets and has therefore marginally strengthened its balance sheet, but the central bank still does not have the flexibility to use its reserves as it pleases.  Therefore, a massive foreign currency injection into the economy, even if it would work, is not in the cards.

Nonetheless, the central bank could, as it did beginning in 2003, inject a limited amount of reserves into the country’s state banks to permit them to lend more money.  The last stimulus program, announced at the end of 2008, created growth primarily because the state banks, at Beijing’s direction, embarked on an extraordinary lending spree.  In 2009, for instance, new local currency lending reached a record 9.59 trillion yuan, just about double that of 2008.  The loan-a-thon continued in 2010 and 2011 as the economy got hooked on easy credit.

Moral Relativism And Patriotism As Weapons Of The State

Using reason to discover absolute truths is an essential part of how one should live their life

By James E. Miller

Over the weekend, a suicide bomber suspected of being a member of Al Qaeda struck a funeral in Yemen, killing forty five individuals.  The funeral was attended predominantly by members of a militia which aided the Yemeni Army in recapturing a town held by Al Qaeda.  The attack was rightfully condemned by major media outlets.  Viciously killing mourners at a funeral is the very definition of terrorism as it sends a message that no time or place is off limits from a surprise attack.  It shows a complete lack of respect for the sanctity of life.  Al Qaeda has become known for these attacks in recent years.  American national security officials and politicians have reacted by denouncing such attacks as a sign of the utter savagery of the terrorist group.

Yet Al Qaeda is not alone in this tactic.  The CIA’s not-so-secret drone campaign is also guilty of targeting funerals attended by civilians.  According to the Bureau of Investigative Journalism, drone attacks have been responsible for the deaths of “dozens of civilians who had gone to help rescue victims or were attending funerals.”  As of February of this year, at least 535 civilians have been killed by drone strikes since President Obama took office; 20 of which were killed while attending funerals.  Last June, a gathering of mourners was targeted for a strike in Pakistan.  The 10 people killed in that attack had come together to grieve over the death of a “brother of a militant commander” killed just a day before in another drone strike.

There is little denouncement of the civilian casualties that are a product of the U.S.’s foreign policy.  The narrative presented by Washington lawmakers and the press is that of a struggle between the forces of good and evil.  The terrorists of the Middle East are ruthless barbarians while the troops and Pentagon officials are goodhearted protagonists trying to liberate an oppressed people.  The blood of innocent women and children on the hands of Al Qaeda is damming evidence of their depravity.  That same blood on the hands of the U.S. defense establishment is a sign of triumph.  It is moral relativism on a national scale; slaying of the innocent is terrible on one hand while honorable on the other.  As LRC columnist Laurence Vance notes in regard to how atrocities committed by private individuals are perceived differently than those committed by the military:

I don’t know if there are theaters in Afghanistan, but if U.S. soldiers enter a building in Afghanistan and kill twelve and wound fifty-eight – like James Holmes allegedly did in Colorado – they are lauded as heroes.

Our Money Is Dying

Spinning in the Water

by Chris Martenson

As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.

(Source)

Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s).

This report explores what the dimensions of that risk are. It draws upon both historical and modern examples to try to shed some light on how the currency collapse process will likely unfold this time around. Plus, we'll address how best to avoid its pernicious wealth destroying effects. 

When Money Dies

In the book When Money Dies by Adam Fergusson, which details Weimar Germany's inflation over the period from 1918 to 1923, the most riveting parts for me were the first-hand accounts from the people caught in the storm. 

So many people left their wealth in the system only to watch it get eroded and utterly destroyed over time.  The reasons were many: patriotism, inertia, disbelief, and denial cruelly fed by hope every time prices moderated or even retreated momentarily.

The simple observation is that many people had a blind belief in the money system. They lost their wealth because they were unable or unwilling to allow reality to challenge their beliefs. It's not that there weren't numerous warning signs to heed -- in fact, they could be seen everywhere -- but most willfully ignored them.

Most mysterious is the fact that in Austria and Germany, where the inflation struck most severely, there were numerous borders and currencies into which people could have dodged to protect their wealth. That is, protecting one's wealth was a relatively straightforward and simple manner.  And yet…it did not happen.

The Many Types of Inflation

As always, the landscape of inflation needs to be carefully mapped before we can begin to hope to have a conversation with a destination.  Where the symptom of inflation is rising prices – in fact, rising prices are the only things tracked by the Consumer Price Index, or CPI – the causes of rising prices are many, but they always boil down to the overexpansion of money and/or credit.  Knowing the cause is essential to knowing what to do next.

Here are the main flavors of rising prices that we need to keep in mind:

Non-inflationary price increases – These are caused by demand exceeding supply.  It happens all the time.  A poor harvest driving up the price of corn is not inflationary, but it will show up in the Consumer Price Index (CPI).  These sorts of price movements reverse themselves as markets respond by chasing the price and delivering more of whatever was in short supply.  The only exception is when there is some essential, non-renewable natural resource in sustained depletion -- which means that demand will always exceed supply and prices will rise and then rise some more.  Excessive speculation can also lead to price rises and, as long as the speculation centers on the item(s) involved and not on excessive money/credit expansion, it, too, can be (and eventually will be) reversed.

Europe is faced with two disastrous choices

And Then There Is Disaster #3

They say that breaking up is hard to do.
Now I know, I know that it's true
Don't say that this is the end.
Instead of breaking up
I wish that we were making up again.
                    – Neil Sedaka, 1962

By John Mauldin

I have contended for some time that Europe is faced with two choices: Disaster A, which is the break-up of the eurozone, or Disaster B, which is the creation of a fiscal union, which keeps the euro more or less intact. Over the last few months I have come to realize that there is indeed a third option, which now looks increasingly possible. This is rather sad, as the third option is just an even worse Disaster C. Each choice carries with it its own unique set of problems, but the outcome of any of the choices will be that the people of Europe face a serious recession, if not a depression. This will impact global growth for more than a short time and, depending on the choice, could plunge the world into a crisis as bad as or worse than the recent credit crisis. In today’s letter we look at all three choices, meanwhile musing on how we arrived at the bottom of such a deep hole, shovels flailing.

Breaking Up Is Hard to Do

“Breaking Up is Hard to Do” was written and sung by Neil Sedaka. It was a #1 hit exactly 50 years ago this week. And while that song was written for a different era, it could be the theme song for much of Europe today.

“Don't say that this is the end. Instead of breaking up, I wish that we were making up again.”

And indeed Europe is quite the dysfunctional family, seemingly always on the verge of breaking up, but somehow managing to patch up the differences. We all have a family member (or two or three) who cause that sort of trouble. We watch the incessant squabbling with unease, wishing they would just settle things and move on. They never deal with the real issues, as that would mean facing too much personal angst and maybe even lead to an admission that the problem is not just with the other party. The euphoria of the initial relationship has been lost in the reality of day-to-day existence. Now, they either sort it out or break up.

These sorts of relationships devolve into co-dependency, where no one is happy. And the rest of us are liable to get sucked in. Even though it’s uncomfortable to be around these people, we still have to interact. But don’t you wish they would get some serious therapy?

And Europe was again acting out this week. First, Italian Prime Minister Mario Monti gave an interview to Der Spiegel, in which he warned of the disintegration of Europe if the European Union allows the euro to fail: “The tension which sprang up in the eurozone in recent years is beginning to look like Europe’s psychological disintegration.”

Remember, Monti was a compromise prime minister, brought in by a parliament wracked by chaos, in the wake of Berlusconi’s withdrawal. But alas, the latter party refuses to slink off quietly into the night with his billions and personal peccadilloes. Monti was appointed rather than elected and is a “technocrat” prime minister. Given the nature of Italian politics, he has done about as well as could be expected. He has an outstanding resumé and is part of the Europhile elite that defends the vision of a united Europe.

Japan Circles A Black Hole

... while All Eyes Are On Europe

While all eyes are on the absurdist tragicomedy playing out in Europe, Japan is quietly circling a financial black hole as its export economy is destroyed by its strong currency and the global recession.

by Charles Hugh-Smith

There is a terrible irony in export-dependent nations being viewed as "safe havens." Their safe haven status pushes their currencies higher, which then crushes their export sector, which then weakens their entire economy and stability, undermining the very factors that created their safe haven status.

As long as Germany stays within the Eurozone, Japan is the primary example of this dynamic. Should Germany leave the euro and return to its own currency, it too will begin orbiting the financial black hole of declining exports driven by a strengthening currency in a global recession.

Economies that are less reliant on exports are much less exposed to the consequences of a strengthening currency.

We can lay out the dynamic of Japan's currency and export-dependent economy thusly:

1. Export-dependent economies such as Japan, China and Germany rely on strong exports to sustain their employment and growth.

2. This means they must maintain positive current accounts (trade surpluses).

3. As their currencies strengthen, their exports become less competitive globally.

4. Export-dependent economies must pursue strategies to keep their currencies aligned with their buyers, the importing nations.

5. Germany has done so via the eurozone, which aligned its largest import market, Europe, with its own currency.

6. China has done so by pegging the renminbi (yuan) to the U.S. dollar and restricting foreign exchange (i.e. not allowing a free-floating renminbi).

7. Japan has neither of these advantages, and must intervene in the FX markets by buying and selling yen and dollars.

8. Despite its well-known debt problems (see chart below), Japan retains a massive and diverse industrial base, a current-account surplus (or modest deficit with its nuclear power plants largely offline) and large overseas assets.

9. These assets, plus its homogeneous culture, makes Japan an island of stability in an increasingly unstable global economy.

10. For these reasons, the yen is considered a "safe haven" currency and yen-denominated bonds as "safe haven" liquid investments.

11. As demand for yen rises, the currency strengthens, weakening the competitiveness of Japanese exports.

12. The "safe haven" status of the yen ends up hurting the Japanese economy's primary engine, exports.

13. The stronger yen ends up weakening the very attributes that make the yen and Japanese bonds "safe havens."

14. As the global economy slides into recession, exports decline sharply under the double-whammy of falling demand and a rising currency.

Ironic, to say the least. 

Good Fascists and Bad Fascists

Fascism by any other name …

by John T. Flynn, excerpted from chapter 10 of As We Go Marching (1944).

First let us state our definition of fascism. It is, put briefly, a system of social organization in which the political state is a dictatorship supported by a political elite and in which the economic society is an autarchic capitalism, enclosed and planned, in which the government assumes responsibility for creating adequate purchasing power through the instrumentality of national debt and in which militarism is adopted as a great economic project for creating work as well as a great romantic project in the service of the imperialist state.

Broken down, it includes these devices:

1.    A government whose powers are unrestrained.

2.    A leader who is a dictator, absolute in power but responsible to the party which is a preferred elite.

3.    An economic system in which production and distribution are carried on by private owners but in accordance with plans made by the state directly or under its immediate supervision.

4.    These plans involve control of all the instruments of production and distribution through great government bureaus which have the power to make regulations or directives with the force of law.

5.    They involve also the comprehensive integration of government and private finances, under which investment is directed and regimented by the government, so that while ownership is private and production is carried on by private owners there is a type of socialization of investment, of the financial aspects of production. By this means the state, which by law and by regulation can exercise a powerful control over industry, can enormously expand and complete that control by assuming the role of banker and partner.

6.    They involve also the device of creating streams of purchasing power by federal government borrowing and spending as a permanent institution.

7.    As a necessary consequence of all this, militarism becomes an inevitable part of the system since it provides the easiest means of draining great numbers annually from the labor market and of creating a tremendous industry for the production of arms for defense, which industry is supported wholly by government borrowing and spending.

8.    Imperialism becomes an essential element of such a system where that is possible — particularly in the strong states, since the whole fascist system, despite its promises of abundance, necessitates great financial and personal sacrifices, which people cannot be induced to make in the interest of the ordinary objectives of civil life and which they will submit to only when they are presented with some national crusade or adventure on the heroic model touching deeply the springs of chauvinistic pride, interest, and feeling.