Never Has Less Cost More

Dismal economic growth is the flip side of trillion dollar deficits 

By J.T. Young

The official verdict is in: Washington has never paid so much for so little. Last week, the Congressional Budget Office released its final tally on the federal government's "fourth consecutive year with a deficit above $1 trillion." And in return, America finished the fourth year of its worst peacetime economic recovery since the Depression.

If government spending was supposed to equal prosperity, America has not gotten what it's paid for. Not that it hasn't paid a lot.

The federal government spent $3.5 trillion in fiscal year 2012. As CBO observes: "Federal spending has totaled between $3.5 trillion and $3.6 trillion in each of the past four years…" Prior to these four years, government spending had never broken $3 trillion.

Put into perspective, the entire federal debt held by the public did not reach the last four years' levels of annual spending until 1995.

Little surprise then that Washington racked up mind-boggling deficits over these last four years. Before these last four years, Washington's annual deficit had peaked at $459 billion. Last year's deficit? $1.1 trillion -- well more than twice the record high before these last four years' -- and the lowest of the four.

Put into perspective, total federal spending did not equal last year's deficit spending until 1989.

The Care and Breeding of Docile Students

Imposing docility by expelling troublemakers

by Robert Weissberg

The American people have increasingly become docile and reliant on government largess. I see a parallel between this burgeoning dependency and the breeding of dachshunds. 

The dachshund was bred as a killing machine to burrow and eradicate badgers, rabbits and, in the United States, prairie dogs. Its body is muscular with paws adapted to digging, and it has a keen sense of smell. Its large lung capacity allows it to dig underneath its prey to catch it by surprise. Packs of dachshunds were even used to hunt wild boar and wolverines. Thus, in their natural state they are not pets suitable for small children.

But little money is to be made breeding subterranean killing machines no matter how cute or adorable. Professional breeders have therefore wisely bred out the dachshund’s hyper-aggressive traits to arrive at an animal that more closely resembles a submissive toy poodle. It does not take much. Just cull out the snarly ones and voilà—you have a cute, tame wiener dog. 

World Bank Back In Charge Of Global Warming Business

Channeling the cash into the pockets of the bank, broker and trader "community" of climate-conscious finance professionals

By Andrew_McKillop

Following a Group of 20 finance ministers meeting in Mexico City this month, in the wake of superstorm Sandy, Bank of Italy governor Ignazio Visco told reporters: “The World Bank has gone back to being in charge of climate change,” “For a certain period....., it had stopped”.

This followed the report on climate change by the Potsdam Institute for Climate Impact Research, commissioned by the World Bank and released this month, which bluntly says "a 4 degC warmer world must be avoided".

The report was itself a superproduction of gory predictions, a throwback to the days before the ill-fated (for alarmists) Copenhagen conference on climate change of December 2009. It starkly says the world risks “cataclysmic changes” caused by extreme heatwaves, rising seas and depleted food stocks as it heads toward a "probably unstoppable" global warming of 4 degrees Celsius this century.

Gaza crisis has more to come

Τime may be running dangerously short

By Victor Kotsev 
On Sunday night, an Egyptian effort to establish a ceasefire between Israel and the Gaza militant factions reportedly collapsed. An Israeli ground invasion of the Gaza Strip loomed, after missiles landed near Tel Aviv for four days in a row - once near Jerusalem, even farther away. 
Though nobody was hurt in these specific attacks, they came as a slap in the face of the stated goals of the ongoing Israeli operation: stopping the missile fire and restoring deterrence. Rockets had not been aimed at the heart of Israel for over 20 years, since the former Iraqi dictator Saddam Hussein fired Scud missiles during the First Gulf War. Therefore, as tanks and artillery units rolled toward Gaza and reserve soldiers were reporting for duty (75,000 initially, an increase of more than 40% of the army's active personnel), a long and bloody operation appeared to be in store, and only an effective miracle of diplomacy could prevent that. 
Pinning down the beginning of the crisis is almost as difficult as forecasting its end. The Atlantic published an elaborate timeline of its gradual escalation, which involved the targeted assassination of a top Gaza militant, Ahmed al-Jabari, as well as the firing of some 150 rockets into southern Israel during the previous weekend. 

The storm that blew away rationalism

The belief that recent storms were caused by climate change echoes Medieval Europe's superstitions about weather

by Dominic Standish 

After flooding disruption in New York, the Caribbean and Venice over the past few weeks, global warming has acted as a prism through which bad weather events have been interpreted. Now, following his re-election, President Barack Obama has indicated that the US needs to address the threat of global warming.

Hurricane Sandy brought havoc in the Caribbean, especially Haiti, and caused approximately 60 deaths. Then the storm hit the US east coast; New York experienced exceptional floods and at least 40 people lost their lives. Next, Venice in Italy witnessed high flooding on 11 November, when the city’s tide measurements reached their sixth-highest level for 140 years. No one died from these floods in Venice, but - like Haiti and New York - the economic impact was significant.

The Butcher, the Brewer, the Baker, and the Bureaucrat

Or How a Welfare-State Altruist “Cares”

by Robert Tracinski

A long, brutal recession is prompting a certain degree of soul-searching and even philosophical debate in this election year. One example is a piece of honest introspection from a left-leaning commentator who stumbles upon an important truth while still showing us the cultural and philosophical blinders of the mainstream cultural elites.

The honest part is a sort of inadvertent admission of those blinders. In a piece mostly devoted to denouncing Federal Reserve Chairman Ben Bernanke for failing to print more money, Jonathan Chait ends up offering a poignant reflection on the distance between the cultural elites in Washington, DC—including himself—and those who are suffering in this economy.

The political scientist Larry Bartels has found (and measured) that members of Congress respond much more strongly to the preferences of their affluent constituents than their poor ones. And for affluent people, there is essentially no recession. Unemployment for workers with a bachelors degree is 4 percent—boom times. Unemployment is also unusually low in the Washington, D.C., area, owing to our economy’s reliance on federal spending, which has not had to impose the punishing austerity of so many state and local governments.

2013 Looks a Lot Like 1937 in Four Fearsome Ways

When Government Plays God

By Amity Shlaes

Will 2013 be 1937? This is the question many analysts are posing as the stock market has dropped after the U.S. election. On Nov. 16, they noted that industrial production, a crucial figure, dropped as well.

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

The drop wasn’t immediate in that case; it came in the first full year after the election. Industrial production plummeted by 34.5 percent. The Dow Jones Industrial Average dropped by half, from almost 200 in early 1937 to less than 100 at the end of March 1938.

It’s hard to imagine stock indexes dropping by half today, or unemployment rising past 15 percent, as they did in the “depression within the Depression.” But the parallels are visible enough to be worth tracing. They have to do with the danger of big government, and can be captured in a few categories.

The Unadulterated Gold Standard Part Two

Free Market Money

by Keith Weiner

In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard.  It should be underscored that it worked pretty darned well.  Under this standard, the United States produced more wealth at a faster pace than any other country before, or since.  There were problems; such as laws to fix prices, and regulations to force banks to buy government bonds, but they were not an essential property of the gold standard.

The essential was that people had a right to own and trade gold coins.  They had the right to deposit them in a bank, if the bank offered attractive terms (especially the payment of interest).  Banks had a right to take deposits, to buy assets, and to pay interest.  Banks had a right to issue paper notes that were claims against gold.  Banks had a right to lend their deposits (fractional reserves).

Despite some government interference, the Classical Gold Standard enabled a Golden Age of prosperity and full employment that is totally out of reach today (not to be confused with the rapid development of technology).  This is not to say there were not business failures, bank failures and panics – what were later called depressions and now recessions.  A free market does not attempt to guarantee that no one can ever lose money.  It is merely an environment in which no one is forced to subsidize someone else’s risks or losses.

The Unadulterated Gold Standard Part One

Free Market Money

by Keith Weiner

The choice of the word “unadulterated” is not accidental.  There were many different kinds of gold standard, including what we now call the Classical Gold Standard, the Gold Bullion Standard, and the Gold Exchange Standard.  Each contained flaws; each was adulterated.

For example, in the Coinage Act of 1792, the government forced the price of one thing to be fixed in terms of another thing.  The mechanism was in Section 11:

“And be it further enacted, That ”the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one…”

Of course, people respond to such distortions.  When the government fixes the price of something too low, then people will hoard or export it.  If the price is fixed too high, then they will flood the market with it.

According to Craig K. Elwell, in his 2011 Congressional Research Service Report:

“Because world markets valued them [gold and silver] at a 15½ to 1 ratio, much of the gold left the country and silver was the de facto standard.”

Subsequently, the government changed direction.  Elwell notes:

“In 1834, the gold content of the dollar was reduced to make the ratio 16 to 1.  As a result, silver left the country and gold became the de facto standard.”

The whole of the West is falling into the economic black hole of permanent no-growth

We’re heading for economic dictatorship

By Janet Daley

Forget about that dead parrot of a question – should we join the eurozone? The eurozone has officially joined us in a newly emerging international organisation: we are all now members of the Permanent No-growth Club. And the United States has just re-elected a president who seems determined to sign up too. No government in what used to be called “the free world” seems prepared to take the steps that can stop this inexorable decline. They are all busily telling their electorates that austerity is for other people (France), or that the piddling attempts they have made at it will solve the problem (Britain), or that taxing “the rich” will make it unnecessary for government to cut back its own spending (America).

So here we all are. Like us, the member nations of the European single currency have embarked on their very own double (or is it triple?) dip recession. This is the future: the long, meandering “zig-zag” recovery to which the politicians and heads of central banks allude is just a euphemism for the end of economic life as we have known it.

Now there are some people for whom this will not sound like bad news. Many on the Left will finally have got the economy of their dreams – or, rather, the one they have always believed in. At last, we will be living with that fixed, unchanging pie which must be divided up “fairly” if social justice is to be achieved. Instead of a dynamic, growing pot of wealth and ever-increasing resources, which can enable larger and larger proportions of the population to become prosperous without taking anything away from any other group, there will indeed be an absolute limit on the amount of capital circulating within the society.

The Complicated Geopolitics of Decline

Germany & Russia Edition

by WALTER RUSSELL MEAD

The upcoming meeting between Angela Merkel and Vladimir Putin is a meeting of the two most important political leaders in contemporary Europe. The FT has the story:

Angela Merkel will spell out growing German concerns about the clampdown on civil society in Russia when she meets Vladimir Putin on Friday, signalling a sharp cooling of the traditionally close German-Russian partnership.

The German chancellor, who is flying to Moscow for an inter-governmental summit, will be armed with a sweeping resolution passed by the Bundestag expressing alarm at recent political developments in Russia since the return of Mr Putin to the Kremlin.

Merkel’s trip is notable for another reason. Despite Russia’s immense size, its nuclear arsenal and its energy wealth, Germany is clearly the stronger power with more hopeful long-term prospects than Russia. The dust from the end of the Cold War has settled, leaving Germany once again the most important European power and leaving a frustrated Russia on the outside looking in.

Few things are more obvious in geopolitics than the decline of Europe compared to other parts of the world. It’s one of the oldest and most marked trends in world affairs. In 1914 European powers ruled most of the world, and the past hundred years have seen a steady decline: the collapse of the great empires, the eclipse of Europe by the superpowers during the Cold War, and, since the Cold War, the rise of Asia and lately the euro crisis have all marked new stages in Europe’s decline.

Depopulating Russia Could Get Angry

Russia’s Future - Grumpy Petro-Giant Armed-to-the-Teeth with Social Unrest

By Michael Lee

Although Russia’s population has peaked and is now decreasing, this resource-rich Eurasian giant will not go gently into the good night of decline.

Nor will the rich tapestry of Russian history, populated with larger-than-life autocrats such as Ivan the Terrible, Peter the Great, Lenin, Stalin and Putin, and defined by world-shaking events like the Russian Revolution, the Cold War and the collapse of the Soviet Union, become uneventful in the 21st century.

While Russian society will age and shrink throughout this century, it will at the same time rise to become an energy superpower. Situated at the crossroads of the world between the shifting geo-political landscapes of Eurasia, I expect a restless, cat-and-mouse Russian foreign policy for the future while the nation manages its growing geopolitical influence as a restored global power spanning an enormous landmass across Europe and Asia.

“With its natural gas and oil pipelines that tie Europe to Russia like an umbilical cord, Russia has unchecked power and influence that in a real sense exceed the military power and influence it had in the Cold War… Russia is in a stronger position relative to Western Europe than it has ever been in its history.” - Marshall I.Goldman, author of Petrostate: Putin, Power and the New Russia

Europe’s New Fascists

Europe must face old ghosts once more

By WILLIAM WHEELER

ONE evening in September 2011, Ali Rahimi, a 27-year-old Afghan asylum seeker, was hanging around with friends outside his building in central Athens when more than a dozen Greeks approached. Several men set upon Mr. Rahimi, one with a knife. Panicked, he fled into his apartment and fought back, managing to push the men out the door. He found blood gushing from just above his heart, one of five stab wounds in his back and chest.

Mr. Rahimi survived and is staying put for now. But his friend, Reza Mohammed, who was also injured in the attack, is considering what was once unthinkable: moving back to Afghanistan, which he feels would be safer than Greece.

Greece is the major entry point for Asian and African migrants and asylum seekers headed into Europe; there are about one million of them in the country today, thanks to the failure of successive Greek governments to establish a functioning migration or asylum policy, and a European Union regulation that allows member states to return asylum seekers to the country where they first entered Europe, which is often Greece.

Parts of Athens feel like a war zone. Racist gangs cruise the streets at night in search of victims. Themis Skordeli, a member of the group that is accused of stabbing Mr. Rahimi, ran unsuccessfully for Parliament on the ticket of Golden Dawn, a fascist group that is currently the third most popular party in Greece.

Golden Dawn was founded in 1985 under the order of the imprisoned leader of the Greek junta. The party entered the international spotlight after some of its members reportedly participated in the 1995 Srebrenica massacre of Bosnian Muslims. Its publication praises the Third Reich and often features photographs of Hitler and other Nazis.

Understanding the "Exorbitant Privilege" of the U.S. Dollar

Scarcity and demand

The dollar rises for the same reason gold and grain rise

by Charles Hugh Smith

Which is easier to export: manufactured goods that require shipping ore and oil halfway around the world, smelting the ore into steel and turning the oil into plastics, laboriously fabricating real products and then shipping the finished manufactured goods to the U.S. where fierce pricing competition strips away much of the premium/profit?

Or electronically printing money and exchanging it for real products, steel, oil, etc.?

I think we can safely say that creating money out of thin air and "exporting" that is much easier than actually mining, extracting or manufacturing real goods. This astonishing exchange of conjured money for real goods is the heart of the "exorbitant privilege" that accrues to the issuer of the global reserve currency (U.S. dollar).

To understand the reserve currency, we must understand Triffin's Paradox, a topic I discussed in What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012) and Is There Any Correlation Between the U.S. Dollar and Gold (Or Anything Else?)
(November 14, 2012).

It seems very few grasp the implications of the Paradox, and even fewer relate it to global trade. I recently discussed Triffin's Paradox and The Rule of Law in a video program with Gordon T. Long, who noted that the U.S. Council on Foreign Relations (CFR) described the conditions in which Triffin's Paradox becomes unsustainable:

"To supply the world's risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk-free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened."

Goat Economics

Why the Laffer Curve Is No Joke

By Charlie Musick

Goat herding is one of the world's oldest economic professions.  It is because goats are excellent at reproduction, and easy to feed and raise. A female goat will on average birth around 2 kids per year. Simple math would suggest that if you start with 2 goats, you can double your herd each year. Thus in 10 years you will be quite wealthy with over 1000 goats (2^10 = 1024).

But as one can imagine, it turns out that goat herding is a little more complicated than that. First, the normal life expectancy of a goat is around 10 years.  This means you will lose about 10% of a herd to old age annually. Additionally, while goats may birth two kids per year, the viability rate is around 75% such that each female will only net an average of 1.5. Still, if you do the calculations, starting with 10 female goats you will have around 1496 female goats after 10 years.

Since raising goats is a rather simple economic activity, it is easy to model the impact of taxation on goat farming. Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes, one can easily calculate the impact of the size of the herd, and ultimately how much total revenue the government would receive over 10 years at various tax rates. It turns out that the optimum tax rate is in the 20-30% range to maximize total 10 year revenue.

Few things about health care in US

Inconvenient Truths 

By Scott Atlas

Like the Olympic tribute to Britain’s NHS, countries wear nationalized health systems as badges of pride.  In those same countries, assertions like “fifty million Americans have no access to care” and “US health care is scandalous” are widespread. Despite their frequency, these denunciations are wholly contradicted by facts.

No charge is repeated more often than this statistic: 16%, almost 50 million Americans, lack health insurance. But ten million were not even US citizens; millions more claimed to have no health insurance but were using insurance; and 13 million adults and 5 million children were already eligible for government insurance, but had not enrolled. Claims about uninsured Americans have been greatly exaggerated.

The truth is that health insurance does not equate with health care access. Statistics Canada stated “waiting time has been identified as a key measure of access.” Affirming 2005’s Chaoulli v. Quebec, in which Supreme Court justices famously concluded “access to a waiting list is not access to health care,” countless studies document grave consequences from prolonged waits. A growing list of European countries, including Denmark, England, Finland, Ireland, Italy, the Netherlands, Norway, Spain, and Sweden, have been forced by public outcry and laws to address unacceptable waits for care.

Meanwhile, it is understood that “waiting lists are not a feature in the United States,” as stated in a 2007 study and separately underscored by the OECD (“[the US is] a country where waiting time is not a policy concern”).  Indeed, Americans would be stunned to hear the reality of nationalized insurance:

• In its latest “care guarantee,” Sweden found it necessary to stipulate that patients must be able to see a doctor within seven days; patients should not wait more than 90 days to see a specialist; and treatment should be scheduled within 90 days…six months from presentation;

Putin and Merkel Tango in Moscow

Gazprom Stirs Up Old Ghosts, But Deals Are Signed

By Wolf Richter   

Last week, the German Parliament passed a resolution that asked Chancellor Angela Merkel to needle Russian President Vladimir Putin about the resurgence of repressive, antidemocratic tendencies in Russia. It did not go unnoticed at the Kremlin. And it paved the way, so to speak, for her trip to Moscow on Friday—to re-cement their “strategic partnership.”

Complaints about the resolution filtered back to the point where Foreign Minister Guido Westerwelle, just before departing for Moscow, warned his countrymen not to overdo their criticism of Russia. It’s in the interests of Germany, he mused, to expand the “strategic partnership”; Russia was needed as a geopolitical and economic partner.

Indeed. Merkel arrived in Moscow with her entourage that included eight ministers and corporate chieftains by the planeload—she doesn’t leave home without them. With Merkel and Putin looking on, these chieftains and their Russian counterparts signed contracts for billions of euros, a ritual that German chancellors have to perform when abroad. It’s part of Germany’s mercantilist foreign policy. Siemens CEO Peter Löscher bagged perhaps the biggest deal, a declaration of intent to deliver 695 electric locomotives for €2.5 billion ($3.2 billion) to Russian Railways (RZD), an elephantine state-owned company with 950,000 employees.

That’s what really mattered. Criticism of Russia—carefully calibrated and range-bound—would be for consumption at home, where anti-Russian sentiment has been rising. With elections coming up next year, Merkel, the consummate political animal, is treading a fine line: deliver a bland rebuke that would barely satisfy voters in Germany and help arrange deals that would fully satisfy German industry.

The Central Bankers Potemkin Village

War is Inevitable and the Sheep will be lead to Slaughter

Below are some of the key highlights from Kyle Bass' latest, and as usual, must read letter:

On central banks and the final round of global monetary debasement:

Central bankers are feverishly attempting to create their own new world: a utopia in which debts are never restructured, and there are no consequences for fiscal profligacy, i.e. no atonement for prior sins. They have created Potemkin villages on a Jurassic scale. The sum total of the volatility they are attempting to suppress will be less than the eventual volatility encountered when their schemes stop working. Most refer to comments like this as heresy against the orthodoxy of economic thought. We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation or both.

In the Keynesian bible (The General Theory of Employment, Interest and Money), there is a very interesting tidbit of Keynes’ conscience in the last chapter titled “Concluding Notes” from page 376:

[I]t would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.

. . .

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus[.] (emphasis added)

This is nothing more than a chilling prescription for the destruction of wealth through the dilution of capital by monetary authorities.

Central banks have become the great enablers of fiscal profligacy. They have removed the proverbial policemen from the bond market highway. If central banks purchase the entirety of incremental bond issuance used to finance fiscal deficits, the checks and balances of “normal” market interest rates are obscured or even eliminated altogether. This market phenomenon does nothing to encourage the body politic to take their foot off the spending accelerator. It is both our primary fear and unfortunately our prediction that this quixotic path of spending and printing will continue ad-infinitum until real cost-push inflation manifests itself. We won’t get into the MV=PQ argument here as the reality of the situation is the fact that the V is the “solve-for” variable, which is at best a concurrent or lagging indicator. Given the enormity of the existing government debt stock, it will not be possible to control the very inflation that the market is currently hoping for. As each 100 basis points in cost of capital costs the US federal government over $150 billion, the US simply cannot afford for another Paul Volcker to raise rates and contain inflation once it begins.

Global warming stopped 16 years ago, reveals last Met Office report

So what ?

By David Rose

The world stopped getting warmer almost 16 years ago, according to new data released last week. 

The figures, which have triggered debate among climate scientists, reveal that from the beginning of 1997 until August 2012, there was no discernible rise in aggregate global temperatures.

This means that the ‘plateau’ or ‘pause’ in global warming has now lasted for about the same time as the previous period when temperatures rose, 1980 to 1996. Before that, temperatures had been stable or declining for about 40 years. 

The new data, compiled from more than 3,000 measuring points on land and sea, was issued  quietly on the internet, without any media fanfare, and, until today, it has not been reported. 

This stands in sharp contrast  to the release of the previous  figures six months ago, which went only to the end of 2010 – a very warm year. 

Ending the data then means it is possible to show a slight warming trend since 1997, but 2011 and the first eight months of 2012 were much cooler, and thus this trend is erased. 

Some climate scientists, such as Professor Phil Jones, director of the Climatic Research Unit at the University of East Anglia, last week dismissed the significance of the plateau, saying that 15 or 16 years is too short a period from which to draw conclusions.

Others disagreed. Professor Judith Curry, who is the head of the climate science department at America’s prestigious Georgia Tech university, told The Mail on Sunday that it was clear that the computer models used to predict future warming were ‘deeply flawed’. 

End Game in Middle East

Update on the Israel-Gaza Conflict

By Stratfor

Summary

New intelligence indicates forces in Gaza may be manufacturing long-range rockets locally. If this is the case, a significant ground force offers the Israelis the best chance of finding and neutralizing the factories making these weapons. Meanwhile, Israel continues its airstrikes on Gaza, and Gaza continues its long-range rocket attacks on major Israeli population centers, though Israel claims its Iron Dome defense system has intercepted most of the rockets.

Analysis

Israel appears to be positioning itself for a ground operation, perhaps as early as the night of Nov. 17. The Israeli Cabinet on Nov. 16 approved Defense Minister Ehud Barak's request to call up 75,000 reservists, significantly more than during Operation Cast Lead in 2008-2009. The Israeli army meanwhile has also sought to strengthen its presence on the borders with Gaza. Primary roads leading to Gaza and running parallel to Sinai have been declared closed military zones. Tanks, armored personnel carriers, self-propelled artillery and troops continue to stream to the border, and many units already appear to be in position.