The Fog That’s Yet to Lift

QE Must End, But Bernanke's Plan May Be Too Hasty

By William H. Gross

June Gloom, the fog and clouds that often linger here over the Southern California coast this time of year, appears to have spread to the Federal Reserve. At his press conference last week, Fed Chairman Ben Bernanke said the central bank may begin to let up on the gas pedal of monetary stimulus by tapering its asset purchases later this year and ending them in 2014. 

We agree that QE must end. It has distorted incentives and inflated asset prices to artificial levels. But we think the Fed’s plan may be too hasty.

Fog may be obscuring the Fed’s view of the economy – in particular, the structural impediments that will inhibit its ability to achieve higher growth and inflation. Mr. Bernanke said the Fed expects the unemployment rate to fall to about 7% by the middle of next year. However, we think this is a long shot.

Mr. Bernanke’s remarks indicated that the Fed is taking a cyclical view of the economy. He blamed lower growth on fiscal austerity, for example, suggesting that should it be removed from the equation the economy would suddenly be growing at 3%. He similarly attributed rising housing prices to homeowners who simply like or anticipate higher home prices, as opposed to emphasizing the mortgage rate, which is really what provided the lift in the first place. 

Our view of the economy places greater emphasis on structural factors. Wages continue to be dampened by globalization. Demographic trends, notably the aging of our society and the retirement of the Baby Boomers, will lead to a lower level of consumer demand. And then there’s the race against the machine; technology continues to eliminate jobs as opposed to provide them. 

Mr. Bernanke made no mention of these factors, which we think are significant forces that will prevent unemployment from reaching the 7% threshold during the next year. Falling below “NAIRU” (the non-accelerating inflation rate of unemployment – usually estimated between 5% and 6%) is an even more distant goal.

The End of the American Dream

How rising inequality and social stagnation are reshaping us for the worst

At the ages of 4 to 5, children from the poorest fifth of homes in the U.S. are already 21.6 months mathematically behind children from the richest homes.

By Niall Ferguson

“The United States is where great things are possible.” 

Those are the words of Elon Musk, whose astonishing career illustrates that the American dream can still come true.

Musk was born in South Africa but emigrated to the United States via Canada in the 1990s. After completing degrees in economics and physics at the University of Pennsylvania, he moved to Silicon Valley, intent on addressing three of the most “important problems that would most affect the future of humanity”: the Internet, clean energy, and space. Having founded PayPal, Tesla Motors, and SpaceX, he has pulled off an astonishing trifecta. At the age of 42, he is worth an estimated $2.4 billion. Way to go!

But for every Musk, how many talented young people are out there who never get those crucial lucky breaks? Everyone knows that the United States has become more unequal in recent decades. Indeed, the last presidential election campaign was dominated by what turned out to be an unequal contest between “the 1 percent” and the “47 percent” whose votes Mitt Romney notoriously wrote off.

But the real problem may be more insidious than the figures about income and wealth distribution imply. Even more disturbing is the growing evidence that social mobility is also declining in America.

The distinction is an important one. For many years, surveys have revealed a fundamental difference between Americans and Europeans. Americans have a much higher toleration for inequality. But that toleration is implicitly conditional on there being more social mobility in the United States than in Europe.

But what if that tradeoff no longer exists? What if the United States now offers the worst of both worlds: high inequality with low social mobility? And what if this is one of the hidden structural obstacles to economic recovery? Indeed, what if current monetary policy is making the problem of social immobility even worse?

This ought to be grist for the mill for American conservatives. But Republicans have flunked the challenge. By failing to distinguish between inequality and mobility, they have allowed Democrats, in effect, to equate the two, leaving the GOP looking like the party of the 1 percent—hardly an election-winning strategy.

To their cost, American conservatives have forgotten Winston Churchill’s famous distinction between left and right—that the left favors the line, the right the ladder. Democrats do indeed support policies that encourage voters to line up for entitlements—policies that often have the unintended consequence of trapping recipients in dependency on the state. Republicans need to start reminding people that conservatism is about more than just cutting benefits. It’s supposed to be about getting people to climb the ladder of opportunity.

Inequality and social immobility are, of course, related. But they’re not the same, as liberals often claim.

Let’s start with inequality. It’s now well known that in the mid-2000s the share of income going to the top 1 percent of the population returned to where it was in the days of F. Scott Fitzgerald’s Great Gatsby. The average income of the 1 percent was roughly 30 times higher than the average income of everyone else. The financial crisis reduced the gap, but only slightly—and temporarily. That is because the primary (and avowed) aim of the Federal Reserve’s monetary policy since 2008 has been to push up the price of assets. Guess what? The rich own most of these. To be precise, the top 1 percent owns around 35 percent of the total net worth of the United States—and 42 percent of the financial wealth. (Note that in only one other developed economy does the 1 percent own such a large share of wealth: Switzerland.)

By restoring the stock market to where it was back before the crisis, the Fed has not achieved much of an economic recovery. But it has brilliantly succeeded in making the rich richer. And their kids.

The Secret Sauce Of Iceland's Success Story

Debt Liquidation?

by Tyler Durden

That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. What is still not exactly clear is what conditions have allowed success and growth to flourish in a barren wasteland where 60% youth unemployment is increasingly the norm, and where economic "outperformance" is measured in shades of red. As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation.

Of course, instead the powers that be opted for merely masking unsustainable debt with more debt in the hope of preserving the global financial equity tranche, where some $50 trillion, or two-thirds of total, in US household wealth is concentrated, by drowning out hundreds of trillions in global debt through controlled debt inflation - which four years later still has yet to take hold, and which  with every incremental dollar, yen, franc or pound printed threatens to spillover into uncontrolled hyperinflation, i.e., loss of fiat.

Alas, no debt liquidation is possible without making the equity below it worthless: a fact of restructuring known all to well to most which is precisely why it will not happen as long as the status quo is in control. Yet in those places which dared to bite the bullet and do the right thing - namely liquidate untenable debt - growth is back, and the future is truly bright without everyone asking "just how much longer will a few Keynesian voodoo acolytes provide a reprieve from the poverty effect?."

From Bloomberg:

Iceland’s lenders have forgiven household debt equal to about 12.4 percent of gross domestic product since the island’s 2008 financial collapse.

Lenders had written off 212.2 billion kronur ($1.7 billion) in household debt through the end of 2012, the Icelandic Financial Services Association said in a letter to parliament. The group estimated a further 35.3 billion kronur will be forgiven this year after they recalculate loan agreements to meet a Supreme Court ruling.

About 141.2 billion kronur of that follows a ruling from the island’s top court stating that mortgage loans indexed to foreign exchange rates were illegal, it said.

Where Are We Now? - A World View

Entropy never sleeps

by James Howard Kunstler

Wondering why the money world got its knickers in a twist last week? The answer is simple: the global economy is breaking apart and its constituent major players are doing face-plants on the downhill slope of a no-longer-cheap-oil way of life.  Let’s look at them case by case.

     The USA slogs deeper into paralysis and decay in a collective mental fog of disbelief that its own exceptionalism can’t overcome the laws of thermodynamics. This general malaise precipitates into a range of specific quandaries. The so-called economy depends on financialization, since it is no longer based on manufacturing things of value. The financialization depends on housing, that is, a particular kind of housing: suburban sprawl housing (and its commercial accessories, the strip malls, the box stores, the burger shacks, etc.). Gasoline is now too expensive to run the suburban living arrangement. It will remain marginally unaffordable. Even if the price of oil goes down, it will be because citizens of the USA will not have enough money to buy it. Lesson: the suburban project is over, along with the economy it drove in on.

     But so is the mega-city project, the giant metroplex of skyscrapers. So, don’t suppose that we can transform the production house-building industry into an apartment-building industry. The end of cheap oil also means we can’t run cities at the 20^th century scale. That includes the scale of the buildings as well as the aggregate scale of the whole urban organism. Nobody gets this. For one thing, there will be far fewer jobs in anything connected to financialization because that “industry” is imploding. The recent action around the Federal Reserve illustrates this. When chairman Bernanke’s lips quivered last week, the financial markets had a grand mal seizure. He floated the notion that his organization might “taper” their purchases of US government issued debt and mortgage-backed securities — the latter being mostly bundled debt originated by government-sponsored entities and agencies. That’s the “money” that supports the suburban sprawl industry.

The banking shenanigans that cost Ireland its sovereignty

Tapes reveal the lies and deception that led to the bank bailout

The Irish people, who sacrificed their sovereignty and billions of Euros, are waking this morning to a stunning revelation that the bailout to save Anglo-Irish was engineered by the Bank's leadership to game as much money as possible from the central bank. The Irish Independent has secret recordings from the period in 2008 - below - that show senior management luring the State into giving it billions as they admit the EUR 7 billion number was "picked out of my arse."

The bottom-line is that the bank knew they were in trouble and so decided to game the Central Bank and their regulators knowing that once the State began the flow of money, it would be unable to stop: 

"If they (Central Bank) saw the enormity of it up front, they might decide they have a choice. You know what I mean? They might say the cost to the taxpayer is too high . . . if it doesn't look too big at the outset... if it looks big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance. So I think it can creep up... [once] they have skin in the game." Will there be an Irish Spring as the conspiracy theory of the banking bailout now become conspiracy fact?

Via The Irish Independent,

Taped telephone recordings (from the bank's own systems) from inside doomed Anglo Irish Bank reveal for the first time how the bank's top executives lied to the Government about the true extent of losses at the institution.

...

Anglo itself was within days of complete meltdown – and in the years ahead would eat up €30bn of taxpayer money. Mr Bowe speaks about how the State had been asked for €7bn to bail out Anglo – but Anglo's negotiators knew all along this was not enough to save the bank.

A Blueprint for the De-Socialization of Western Europe

How and How Not to Desocialize

by Murray N. Rothbard

Introduction

It is generally acknowledged that bureaucrats are obstructing the process, but confusion abounds among free-market proponents themselves. Matters are scarcely helped by the fact that Western economists, to whom the former Eastern bloc is looking for wisdom, have themselves done virtually nothing to study, let alone solve, this problem during the sixty years since Stalin established socialism in the Soviet Union and the half-century since the Soviets imposed it on Eastern Europe.

For ever since the mid-1930s, almost all Western economists have accepted the view that there is no calculation problem under socialism, and most have accepted the subsequent notion that the Soviet economy has been successful and growing, and would shortly overtake that of the United States.[1]

How Not to Desocialize

We may first clear the way on how to desocialize by examining various paths that have become popular, and yet are decidedly not the way to arrive at our presumably common goal.

How not to go about desocialization may be highlighted by the story of a friend of mine, who told me recently about a Soviet colleague in his department, who came to the United States to study diligently the problem of how to create a futures market in the USSR. He has been stymied by the fact that he cannot seem to figure out what laws or edicts the Soviet state should lay down, so as to replicate the futures market in the United States. In short, he cannot find a way to plan a futures market.

Here then is a crucial point: you cannot plan markets. By their very nature, you can only set people free so that they can interact and exchange, and thereby develop markets themselves. Similarly, several of the socialist countries, seeing the importance of the capital markets in the West, have been trying to develop stock exchanges, but with little success. First, again, because stock markets cannot be planned, and, second, because, as we will see further, you cannot have markets in titles to capital if there are still virtually no private owners of capital in existence.

The Pandering And Politics Of The Fed's Punch-Bowl

What’s really driving everything is the American electoral cycle

By Daniel Cloud

People at the Fed are people in politics, who need to promote their allies and maintain their patronage networks. So perhaps it’s significant that the last two times the Fed tightened, it was in a President’s second term. It’s safer to anger an incumbent who is leaving, and dangerous to anger one who may have another six years in office. The party that lost the Presidency after one term, as a result of a crash in financial markets, would never forgive the Fed for its intervention. So if you are in the business of blowing up bubbles to win points with incumbents, and popping them at times when that is less of a concern, of course the President’s second term is when you do the popping.

But why not wait another year or two? The Fed’s mistake, last time, was to believe its own hype, and wait too long. The result was that the crash coincided with the presidential election, and actually decided it in favor of one party, at a time when it was otherwise uncertain who would win. That looked a little too much like direct tampering, and it ended up threatening the Fed’s “independence” (immunity from democratic oversight) by really angering the Republicans, who did little to block an audit they could have stopped if they’d wanted to. The Fed, as an institution, doesn’t really want to do that again. Better to get the crisis out of the way now, while there is still time for people to forget who they are really angry at before the next Presidential election, and sink back into the pointless search for vulnerable scape-goats that is the political parties’ bread and butter.

The FED lacks ‘escape velocity’

End of QE? – I don’t buy it.

by DETLEV SCHLICHTER

A new meme is spreading in financial markets: The Fed is about to turn off the monetary spigot. US Printmaster General Ben Bernanke announced that he might start reducing the monthly debt monetization program, called ‘quantitative easing’ (QE), as early as the autumn of 2013, and maybe stop it entirely by the middle of next year. He reassured markets that the Fed would keep the key policy rate (the Fed Funds rate) at near zero all the way into 2015. Still, the end of QE is seen as the beginning of the end of super-easy policy and potentially the first towards normalization, as if anybody still had any idea of what ‘normal’ was.

Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit and the dummy out of the pram.

So far, so good. There is only one problem: it won’t happen.

Now I am the first to declare that the Fed SHOULD abolish QE, and not only in the autumn of this year or the summer of next, but right now. Pronto. Why? –Because a policy of QE and zero interest rates is complete madness. It distorts markets, sabotages the liquidation of imbalances, prohibits the correct pricing of risk, and encourages renewed debt accumulation. It numbs the market’s healing powers – by enabling more ‘pretend and extend’ in the financial industry – and it adds new imbalances to the old ones that it also helps to maintain.

This policy may have prevented – for now – debt deflation but maybe debt deflation is what is needed.

QE is nothing but heavy-handed market intervention. It is destructive. It doesn’t solve the underlying problems. It creates new ones.

Larry Summer’s getaway car

However, none of these objections even register at the Fed. The Fed has a completely different perspective: This policy was a roaring success and as it has worked so well it can now be faded out. Soon there will be no need for it. Larry Summer’s dreadful phrase captures that thinking probably best: The economy will soon have achieved ‘escape velocity’.

Most analogies are somewhat poor but this one is particularly inept. Ironically, though, the reference to mechanics captures beautifully the logic of Keynesians and other interventionists: the economy is like a physical object moving through space and is occasionally in need of a little push to get moving again at an appropriate speed. Policy provides the push.

How Bureaucrats Captured Government

As always with human affairs, self-interest rules

By John Steele Gordon

Like reforming the spoils system of the 19th century, dealing with today’s incompetent, lazy, and corrupt public employees is a good deal easier said than done.

In government, last year’s reform has a bad habit of causing this year’s problem.

For instance, take the federal civil service, that vast army of government workers (in 2011 there were 2,756,000 employees in the executive branch). It has been much in the news lately, thanks to burgeoning scandals at the IRS and elsewhere.

The civil service has been around since the Constitution took effect in 1789, when there were 40 employees in the Treasury Department and only five in the State Department. But there were no rules regarding the hiring and firing of civil servants at that time. They all served at the pleasure of the president.

When Thomas Jefferson became president in 1801, he discovered that most federal employees, having been appointed by presidents Washington and Adams, were members of the opposition Federalist Party. In the last two weeks of the Adams administration, Congress — still in Federalist hands until Inauguration Day on March 4 — had taken advantage of that fact to pursue Federalist self-interest. It had passed the Judiciary Act of 1801, establishing 10 new district courts, 3 new circuit courts, and 42 new justices of the peace, who were to serve 5-year terms. On March 3, Adams filled the newly created posts and the Senate confirmed them en masse. But the acting Secretary of State John Marshall (who had already been appointed chief justice) was simply unable to issue all the commissions before his power to do so evaporated at noon the next day. This gave rise to one of the most important cases in Supreme Court history.

The Helots Revolt

Brazil's Woes Are The Wages Of Socialism

Brazil's rulers have been taken aback by the millions of countrymen surging up against them, venting their fury. What we have here is a fresh example of why socialism fails.

Up until now, a million Brazilians in the streets usually had something to do with a soccer match or, perhaps, a samba festival.

This time, it wasn't about festivities.

What started as a protest against a 9-cent fare hike on public transport fireballed into a gigantic public protest against political corruption, high taxes and lousy public services — and the government itself.

Protesters stormed state legislatures and set at least one on fire. The capital was stormed as well, and President Dilma Rousseff canceled her trip to Japan to call an emergency meeting with her Cabinet.

The New York Times reported that Brazil's leftist ruling Workers Party — full of 1960s-era guerrillas, community organizers, academics and radicals — "finds itself perplexed by the revolt in its midst."

After all, hadn't they been good socialists, shoveling pork to the poor, protecting local industries from foreign "predators," employing bureaucrats and taxing "the rich"? Yes, they did, and the result is a nation awash in corruption, angry at special interests, poorer from protectionism and beset by high taxes.

Now the people are marching. And the Workers' Party (PT) philosophy of rule by special interests is at least one reason why.

Brazil's rulers have been widely praised by everyone from Bill Clinton to Hugo Chavez for their handouts to the poor, in the name of "social justice." But they have done very little to create opportunity to enable poor people to get off handouts and earn a living.

What's more, they've forced others to pay for it and live with its bad effects, leaving all sides pretty angry.

66 More Ways The U.S. Government Is Blowing Your Hard-Earned Money

The Waste List

by Michael Snyder

Why did the U.S. government spend 2.6 million dollars to train Chinese prostitutes to drink responsibly?  Why did the U.S. government spend $175,587 "to determine if cocaine makes Japanese quail engage in sexually risky behavior"?  Why did the U.S. government spend nearly a million dollars on a new soccer field for detainees being held at Guantanamo Bay?  This week when I saw that the IRS was about to pay out 70 million dollars in bonuses to their employees and that the U.S. government was going to be leaving 7 billion dollars worth of military equipment behind in Afghanistan, it caused me to reflect on all of the other crazy ways that the government has been wasting our money in recent years.  So I decided to go back through my previous articles and put together a list.  I call it "The Waste List". 

Even though our politicians insist that there is very little that can still be cut out of the budget, the truth is that the federal budget is absolutely drowning in pork.  The following are 66 crazy ways that the U.S. government is wasting your hard-earned money...

#1 The IRS is about to pay out 70 million dollars in bonuses to employees even though discretionary bonuses are supposed to be cancelled due to the sequester.

#2 According to the Washington Post, the U.S. government is going to leave 7 billion dollars worth of military equipment behind in Afghanistan.

#3 It is being projected that the trip that the Obamas will be making to Africa will cost U.S. taxpayers $100,000,000.

#4 The NIH plans to spend $509,840 on a study that "will send text messages in 'gay lingo' to methamphetamine addicts to try to persuade them to use fewer drugs and more condoms."

#5 The National Science Foundation has given $384,949 to Yale University to do a study on “Sexual Conflict, Social Behavior and the Evolution of Waterfowl Genitalia”.  Try not to laugh, but much of this research involves examining and measuring the reproductive organs of male ducks.

The Disabling of America

The utopian task of redesigning society to eliminate the disadvantages of disability

By Mario Loyola & Richard A. Epstein

The bucolic town of Julian, California, has had a rough decade. Tucked away in the hills above San Diego, Julian has an historic ambience that has long made it a regional tourist attraction. In 2005, it was still rebuilding from a forest fire that had destroyed 500 homes when tragedy struck again—this time in the form of a San Diego attorney named Theodore Pinnock. 

Paraplegic and wheelchair-bound, Pinnock threatened most of the businesses in Julian with lawsuits if they did not quickly install accommodations for the disabled, in compliance with Title III of the 1990 Americans with Disabilities Act (ADA). He also demanded that they reimburse him for certain “research fees” averaging about $2,500 per business. Pinnock had his legal tactics down to a science; by the time he was disbarred last year (for unrelated reasons) he had filed more than 1,000 lawsuits in Federal court and hundreds more in state court. 

Little Julian got busy giving its gold-rush-era storefronts a massive architectural makeover in keeping with Justice Department dictates, spending buckets of money and destroying buckets of quaintness and appeal in the process. Many of Julian’s mom-and-pop storeowners were stunned by Pinnock’s flurry of demand letters. Harry Horner, owner of a pizza parlor who later testified to Congress on the abuses of the ADA, said that Julian’s businesses had long served customers in wheelchairs: “They seem to be accommodated and there’s never even been a complaint.”

Julian is far from alone in its encounter with the ADA. Hundreds of thousands of lawsuits have been filed in state courts under the ADA’s accessibility rules for establishments that serve the public. Under the ADA’s separate employment discrimination provisions, more than 350,000 complaints have been filed with the Equal Employment Opportunity Commission (EEOC), accounting for about 20 percent of its caseload. 

Protesting Everything (and Nothing)

The unrest sweeping across Brazil is about much more than a nine-cent rise in bus fares

By William Waack

For the past few days, thousands of angry Brazilians have been flowing out into the streets of major cities in protest, paralyzing city centers, burning vehicles, looting and vandalizing stores, even attempting to storm government buildings in Rio de Janeiro, São Paulo and Brasilia.

It's quite frightening to watch so many people here in Brazil protesting against everything—i.e., against nothing. Truth be told, there is a long list of possible complaints, each of which is in itself worth taking to the streets. There’s the incompetent government, which is incapable of managing public investments or spending public funds wisely. Then there are Brazil’s crime rates, among the worst in the world. And then there are the abuses committed with public money—and I'm not even talking about corruption as such. Public services in disarray? Bad schools? Wasting money on subsided interest rates for the eternal friends of the government? Creating welfare programs that only make their beneficiaries even more dependent on government handouts? Big construction projects that go nowhere and cost twice what they were supposed to? You name it; we’ve got it. And it’s worth getting upset about.

Yet the current protests originally started as a challenge to rising prices for public transportation in some of Brazil’s biggest cities: a nine-cent rise in bus fares. This is actually an old and very familiar cause: a demand for free rides on public buses, subways and trains. Also familiar, though hardly universal, are calls for no private enterprises—and no profits. Who will pay for services, then? Romantic revolutionaries don’t have to answer that question. They trade in political mysticism, always fairly popular in Brazil.

That is why many of the protesters aren’t angry that inflation has been running persistently at 6.5 percent for year (the government’s management of electricity and fuel prices notwithstanding)—although they should be. No, they’re angry instead that the people should have to pay for anything that is “public.” The original organizers of these demonstrations are radical splinter groups that are notorious, among other things, for forging links with North Korea (in their view, a “democratic” country that is oppressed by the West). They propose a half-Stalinist, half-Maoist way of managing society.

Live Brie or Die

Guns and Cheese

By  Mark Steyn

In the all-seeing security state, nothing gets past their eyes — and everything gets pasteurized. American ports are on an FDA orange alert:

Since March, several hundred pounds of the bright orange cheese [Mimolette] have been held up by US customs because of a warning by the Food and Drug Administration that it contained microscopic cheese mites.

The mites are a critical part of the process to produce mimolette, giving it its distinctive grayish crust…

According to the FDA’s Patricia El-Hinnawy, there’s no official limit, but the target is no more than six mites per square inch. For Mimolette, that’s a near impossible standard.

Immigration, the IRS, cheese . . . it’s all about “targets,” isn’t it? And the great thing about targets, as opposed to laws, is there’s nowhere to go to vote them down.

Benoit de Vitton is the North American representative for Isigny, one of the largest producers of Mimolette. In March, de Vitton began receiving letters from each of the dozen importers he works with, saying that their Mimolette shipments had been detained.

De Vitton estimates that he now has about a ton of cheese sitting in FDA warehouses in New Jersey.

This rang a wearily familiar bell with me. From my book America Alone, page 182:

In America, unpasteurized un-aged raw cheese that would be standard in any Continental fromagerie is banned. Americans, so zealous in defense of their liberties when it comes to guns, are happy to roll over for the nanny state when it comes to the cheese board . . . The French may be surrender monkeys on the battlefield, but they don’t throw their hands up and flee in terror just because the Brie’s a bit ripe. It’s the Americans who are the cheese-surrendering eating-monkeys — who insist, oh, no, the only way to deal with this sliver of Roquefort is to set up a rigorous ongoing Hans Blix-type inspections regime.

Has the FDA with its insistence on over-processed, homogenized, one-size-fits-all food done anything for the health of the American people? Well, you can’t help noticing the one size is now the largest in the developed world. But let’s stick to principles here:

The federalization of food may seem peripheral to national security issues, and the taste of American milk – compared with its French or English or even Québécois equivalents – may seem a small loss. But take almost any area of American life: what’s the more common approach nowadays? The excessive government regulation exemplified by American cheese or the spirit of self-reliance embodied in the Second Amendment? On a whole raft of issues from health care to education the United States is trending in an alarmingly fromage-like direction.

China discovers the Mediterranean

"The Mediterranean is not a border, but a place for trade"

By Pietro Longo 

Fernand Braudel, maybe the most important historian of the Mediterranean region, wrote that "the Mediterranean is not a border, but a place for trade". 

This sentence is true for all the METR countries (Middle East, Europe, Turkey, Russia) but also for those far countries, like China, which have strong interests in the Mediterranean. The so-called Arab Springs and the Chinese penetration in the region challenge the position of those analysts who theorized the shift of the fulcrum of trade routes toward the "East". As the United States, the unique long-standing superpower of the post-Cold War era, has gradually withdrawn from the Mediterranean, according to these readings, it follows a loss of centrality of the whole region. 

Doing business across the Mediterranean is still relevant for some of the "rising powers", such as China. The pride of China's fluvial trade and exchanges started centuries before Western kingdoms sought to explore and exploit the world. Still, the rise of Westernized warships and sea power was made possible because of Chinese navigational innovations. 

Even today, China's economic power lies in maritime trade and, then, in Chinese long projection eastward and westward. Maritime trade secures China with everything the country needs for its economic growth, especially oil and energy sources. But maritime trade is also important for trading goods, acquiring new markets. China and the Mediterranean are linked by two reasons: oil and markets. Keeping stability in the region and in its fluvial corridors are, then, crucial points for the Chinese strategy towards the Middle-East. 

Coming Soon: A Dramatic Downshift In Company Size, Plus Hours Worked

Lawyers and Bureaucrats expected to thrive

By Bill Frezza
The regulatory state never sleeps, relentlessly working day and night to tilt the economic playing field in favor of the politically connected. The regulations it imposes on the rest of us may or may not provide wider public benefits commensurate with their costs. But one thing is for certain: They reduce economic growth in two significant ways.

First and foremost, they inflict compliance costs on businesses. According to the most recent edition of the Ten Thousand Commandments, the Competitive Enterprise Institute’s (CEI) annual snapshot of the federal regulatory state, these costs amounted to $1.8 trillion in 2012—a staggering sum that exceeds 10 percent of the total size of our barely growing economy. One way or another these costs are either passed on to consumers via higher prices, taken out of the hide of workers through lower wages, or extracted from savers and investors as a result of lower profits.

But the damage doesn’t end there. The heavy burden of regulatory compliance can more easily be borne by large companies than small ones, which gives established firms protection from emerging competitors. For that reason, many federal mandates and regulations do not come into effect until corporations reach a certain size. Labor regulations, for example, often kick in when a company reaches a certain number of employees. This creates a tremendous disincentive to growth.

A recent study on the impact on business growth of regulatory thresholds built into Italian labor laws is quite instructive of how this works.  In “The Unintended Consequences of Italy’s Labour Laws,” published by the Institute of Economic Affairs in London, Matthew Melchiorre of CEI and Emilio Rocca of Italy’s Istituto Bruno Leoni explain how one of the most restrictive labor regimes in the European Union has led to persistent unemployment, a wholesale shift to temporary workers, an explosion of under-the-table and “informal” market dealings, and stagnant economic growth.

Wages in Italy are set across entire industries and work categories through a series of mandatory national collective bargaining agreements covering 70 percent of the country’s labor force. This is done without regard to regional differences in cost of living or worker productivity. Potential efficiencies are homogenized out of the market through the elimination of competitive advantages. Service guild labor cartels originally set up by Mussolini remain intact to this day, stifling competition and limiting market entry through restrictive licensing and regulatory schemes.

The Party Is Over

It has been a great party. Enjoy the memories!

by Mark J. Grant

I watched the business channels yesterday and winced. I cannot tell you how many times I heard that, "This was a great opportunity to buy." It is a great opportunity to buy I suppose if you are a masochist and enjoy people using a scalpel on your face.  Maybe if you enjoy the pain it is a "great opportunity to buy" equities but that would be about it. For the rest of you I would suggest moving quickly to cash and maybe buying some debt where the cash flows at 6.00%-8.00% overcome the price of the securities. Bonds will eventually bounce back as the flight to safety intensifies but the timing of this is quite uncertain.

I was also astounded with the number of people saying that the Fed didn't say anything new. These people must be living in Borneo and far out into the jungle. The Fed came out and said as clearly as any Fed has ever said; "We are going to unwind the trade." Yes, sure, there was the usual huff and puff about a change in market conditions could change our viewpoint but that is not relevant. What was relevant is that the Fed stated and quite clearly that, "The party is over."

At every party there are two kinds of people. There are those that want to go home and those that don't. The trouble is that the ones that don't want to leave will lose money if they do so they try and extend the entertainment.

Now it has been a four year celebration and the last guests might leave at midnight or 1:00 A.M. so none of us are quite sure when they will stumble out but the host has made the announcement. Now it is time for everyone to get ready to go home. The latest announcement by the Fed was one hundred percent different than Bernanke's Congressional testimony and to not understand what was said will cost institutions billions of dollars and some people their jobs.

The Fallacy At The Heart Of The New E.U.-U.S. Trade Talks

The public sees trade as a zero sum game between Us and Them

By Dan Ikenson,

Has the intellectual debate about free trade been won? The close-to-consensus answer among several scholars discussing that question at Cato last week is “yes.” The better answer is “wrong question.” After all, how much does it really matter that free traders have won the intellectual debate when, in practice, trade policy is distinctly anti-intellectual and free trade is the rare exception, not the rule, around the world?

Consider the just-launched Transatlantic Trade and Investment Partnership negotiations. If the free trade consensus were meaningful outside the ivory tower, these negotiations would not take place. At the heart of the talks rests the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by “negotiators” on the other side of the table. But if free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on consumers and businesses. It really is that simple. 

But the TTIP is shaping up to be the mother of all negotiations: an interminable feast of mercantilist horse-trading, self-serving press conferences, and ever-premature, congratulatory pronouncements all intended to aggrandize negotiators and politicians who thirst to be seen doing something to restore economic hope without having to shake their respective vested interests from their protected perches. It’s all quite nauseating, really, but at least it serves to remind us that free trade is the rare exception, and when all else fails…