Seven reasons to hate your parents: Reason #5

The higher "education" scam 

 

by Eugen von Böhm-Bawerk 
In their quest to avoid reality, our parents tried to re-establish the medieval practice of guilds to protect their own interest from our generation

In medieval time’s workers formed associations or guilds to control the practice of their particular craft. A guild was basically a state granted privilege designed to keep potential new comers from entering and hence competing in the particular line of business. Often these guilds emerged around universities with the blessing from the monarch in return for a fee or taxes. The appearance of protective guilds traces as far back as the 13th century.

However, toward the end of the 18th and through the 19th century outspoken intellectuals such as Adam Smith, David Ricardo, John Stuart Mill and Frederic Bastiat managed to rationally argue against guilds and in favour for free trade. Even left-wing thinkers such as Jean Jacques Rousseau and Karl Marx meant the guilds system was degrading to the worker as it locked in social rank and hampered social mobility. It basically was a caste system. By the time scientific thinking and economics in particular, had matured to the extent witnessed by 19th century, no arguments could maintain the continuation of guilds. Thus, we saw guilds being abandoned one by one all over Western Europe. The abolishment of guilds is mostly forgotten when historians today try to explain the “lift-off” and industrial revolution that led to prosperity for the masses!

So why do our parents insist on re-establishing this medieval practice of protection? There can be few other explanations than that they want to keep the goodies for themselves. By making it much harder for us to enter their domain they can reap the benefits while we pay.

The process of creating guilds today takes many forms, but the most prevalent is through the educational system. In order to secure a job at a big corporation the minimum requirement is always a Bachelor`s degree, and very often a Master’s degree. Truth be told, many seek menial corporate jobs with Ph.Ds. We have witnessed all this first hand. A big corporation does not even bother to look at your application unless you hold a Master`s degree from a relatively well renowned University.

Your humble writer has spent five years obtaining a Master degree and can confirm that 90 per cent of the time spent during those five years is a complete waste of time. The diploma derives its entire value solely by functioning as a ticket where the winning price is the opportunity to apply for a job. In the process almost every student has to go deep into debt!

What is even worse is that our parents taught us it didn’t really mean much what you studied, as long as you could prove to have wasted five years of your life. That is all that is needed to secure a ticket. Most of the education today is not investments, but simply kids spending time on their hobbies. Gender studies, fashion design, theatre, history, photography, art etc. may all be interesting, but are strictly speaking only hobbies.

‘Big History’: The Annihilation of Human Agency

Meet the historians who treat mankind as the passive voyeur of the passing of time

By FRANK FUREDI
Debates about history, especially politicised debates, can give us striking insights into the prevailing cultural view of the human condition. Such debates send us signals - about what should be the focus of our loyalty and solidarity; about what role we think people play in the making of history; and most importantly of all about the legacy of humanity’s historical experiences, and what impact that legacy might have on the future.

Consider today’s constant calls to abolish the national focus of history in school curriculums in Western societies. The criticism of so-called nationalist history-teaching reflects an inability to give meaning to what were, until recently, taken-for-granted loyalties and shared assumptions. The vociferous campaign against the British Tory government’s attempt to reintroduce the ‘story of a nation’ into history-teaching was a success because not even the defenders of such teaching believed in it, never mind its opponents. Even someone like Richard Evans, who sports the title of regius professor of history at the University of Cambridge, now feels so estranged from the ancient traditions of his subject area that he can celebrate the new, non-nationalist history curriculum on the basis that ‘it recognises that children are not empty vessels to be filled with patriotic myths’.

Evans went on to argue that ‘history isn’t a mythmaking discipline, it’s a myth-busting discipline, and it needs to be taught as such in our schools’. Of course, busting myths is an honourable enterprise. But when it becomes the central purpose of a discipline, then the integrity of that discipline is compromised. Moreover, turning myth-busting into a standalone ideal - like its companion metaphor of ‘deconstruction’ - inevitably encourages uncritical criticism and cynicism. Certainly before children are let loose on the field of myth-busting, they would benefit from some familiarity with, and understanding of, the myths they are about to take apart.

Myth-busters are very selective about what kind of history they target. So whereas national history is denounced as ideological, other forms of history are offered a free pass. Evans wants British schools to put greater emphasis on European history rather than national history. His expansion of the scale of study is relatively modest in comparison with the current trend in history circles, which seeks continually to magnify history’s focus. There are frequent calls these days for global history, cosmopolitan history, Big History. As the Harvard professor David Armitage has argued, ‘Across the historical profession, the telescope rather than the microscope is increasingly the preferred instrument of examination’.

The proponents of the teaching of Big History claim to be driven by humanist sentiments. One, David Christian, says Big History offers a story that transcends the nation state and covers humanity as whole. He says that in his history courses, for example, you will ‘encounter humans not as Americans or Germans or Russians or Nigerians but as members of a single, genetically homogeneous, species, Homo sapiens’. You won’t only encounter humanity, in fact; Christian is proud of the fact that on his Big History course the species Homo sapiens is not even mentioned until halfway through. Is this really humanist? It looks to me more like the reduction of humanity to a biological species, and a sign that we are becoming increasingly estranged from ideas of civilisation, culture and community.

François Hollande: political magician

The French president has a cunning trick up his sleeve: doing nothing.

By Julian Lagnado

The French, generally, don’t go in for self-derision. But as the old joke goes, the French national emblem, the Gallic cock, is the only bird who crows on a pile of dung. Today, he isn’t crowing at all. France is no longer on a pile of merde - it is in it.

Public confidence in politicians is at an all-time low. Pressure from the bottom up, one of the country’s favourite pastimes, has become a caricature. One million people turned up in Paris to demonstrate against gay marriage, yet there was not one banner against unemployment, currently at 10.5 per cent and rising. Voters who put their faith in the Socialist Party last year are now confirmed agnostics. That’s what comes from electing a president on the sole basis of hating the one before.

Living standards and buying power are falling. The middle class is being squeezed; their pips are not squeaking yet, but there is plenty of time. Hollande’s promise to tax the rich at 75 per cent fell flat on its face, thrown out of court for being anti-constitutional. In the meantime, the government is grabbing taxes elsewhere and everywhere in an attempt to bring down the public debt. French state spending is at 57 per cent of GDP, the highest in Europe. For a population of 66million, public-sector employment spending is equivalent to 35 per cent of GDP; in the UK, with roughly the same population, public-sector employment costs 20 per cent of GDP and in Germany, with 82million people, it is 31 per cent.

Private-sector investment is on drip feed. Startups are a no-fly zone. It is as if the state is at war with private enterprise. The French naturally mistrust capitalists, whether they are big corporations or small businesses. The attitude is that a boss is a boss and he’s always raking it in. If you flaunt your wealth, you risk being abused by the press. Last week, the government cut the subsidy for firms employing apprentices by half, from €500,000 to €250,000, and that, under pressure from the employers’ federation, was a volte face; the government had wanted to do away with the lot.

Banks are not lending, even though interest rates are low. Taxes on labour are 100 per cent of net salary. How can you expect them to invest in your project if the state is already poised to pounce on the lion’s share of any profit you make? Former US President George W Bush is credited (probably apochraphally) with the quip: ‘The trouble with the French is that they don’t have a word for entrepreneur.’ Whether Bush’s comment was a joke, a gaffe or a myth, it rings true nonetheless.

The other thing the French have is a phobia about globalisation, which they fear will drown their national culture. Their national angst stems from their fear of competition.

Tell it to the widows

Chris Christie's anti-libertarian populism

by Will Wilkinson

Chris Christie, the Republican governor of New Jersey and possibly the most popular conservative politician in America, yesterday characterised as "dangerous" the "strain of libertarianism that's going through both parties right now", and dismissed concerns about the National Security Agency's controversial spying programmes as "esoteric". When asked about the views of Rand Paul, a Republican senator from Kentucky and a possible competitor for the 2016 GOP presidential nomination, Mr Christie said:

I want them to come to New Jersey and sit across from the widows and the orphans and have that conversation... I'm very nervous about the direction this is moving in.

I think what we as a country have to decide is: Do we have amnesia? Because I don't. ... I remember what we felt like on Sept. 12, 2001.

Mr Christie's remarks are illuminating in the context of the ongoing debate over the promise of "libertarian populism" as an electoral strategy for the GOP. Mr Christie's cognition-arresting sentimental appeal to the grief of the "widows and orphans" of 9/11 and his exploitation of irrational, deep-seated fears of further terrorist calamity could hardly be more "populist". And what could be less libertarian than to straightforwardly suggest that "libertarianism", of all things, threatens to enable terrorism and increase the supply of American orphans and widows? Mr Christie, a politician who knows something about charming the public, has probably not committed a blunder. Sadly, his explicitly anti-libertarian fearmongering probably remains the more potent populism.

Of course, on the substance of the matter, Mr Paul's tweet in response to Mr Christie's comments is correct: 

But what about those 9/11 widows? What about the children?

Conor Friedersdorf of the Atlantic gives it a crack in an imaginary address to the victims of our era's defining violent geopolitical event. Mr Friedersdorf would tell the widows and orphans of 9/11 that, by sacrificing our humanitarian values and constitutional liberties for the sake of a specious sense of safety, and charging fecklessly into a war, Americans have handed al-Qaeda a victory it never could have won on its own. However, he goes on, we can yet claim ultimate victory by refusing from here on to be cowed by fear, by refusing henceforth to allow the memories of the 9/11 dead to be exploited as a rhetorical trump, and by reclaiming our constitutional liberties, all the while assuring our safety by "good, old-fashioned police work".

Missionary Creep in Egypt

Never show a fool a half-finished job

By Adam Garfinkle

I promised you yesterday, dear reader, a post arguing that the Manichean pro- and anti-democracy polarity with which most Americans think about the situation in Egypt is deeply and dangerously misguided. I promised, as well, an argument to the effect that this view is an expression of a secularized evangelism anchored in the Western/Christian mythical, salvationist idea of progress, and that its unselfconscious use says a great deal more about what’s wrong with us than about what’s wrong with Egyptians. I will fulfill that promise and more—maybe too much more for some tastes. But first a little scene-setting.

Yesterday morning I went over to Carnegie to listen to Senator Carl Levin talk about Syria on a basis of a recent trip he and Senator Angus King of Maine took to Jordan and Turkey. On Syria, Senator Levin has turned into a liberal hawk a year and a half too late, in my view. To prevent Syria from becoming a failed or a split state that would give aid and comfort and room to plot to terrorist groups, he wants lots of lethal U.S. aid delivered to assist the anti-Assad insurgency in Syria, and he wants the U.S. military, in the context of a wide coalition understanding not yet achieved, to attack Syrian artillery and air bases with standoff weapons (so as to avoid having first to fly approximately 700 sorties to take down Syria’s integrated air-defense system). The purpose of this is to level the battlefield so that diplomacy can arrange an inclusive, post-Assad reconstruction of Syrian politics and society. He assumes that radical sectarianism is foreign to Syria, and that a new compact would rid the country of both Sunni and Shi’a foreign fanatics in the pay of neighboring states. He also assumes that because of this compact, no extensive international peacekeeping force or reconstruction effort will be required—not only no boots on the ground, but not even all that many shoes on the ground. Naturally, he is somewhat vexed that other Senators do not see things his way, and are trying to obstruct the shipment of weapons to the Syrian insurgents. But he a very good-natured and well-intentioned man, and so does not appear nearly as vexed as he actually is.

In my view, Senator Levin’s proposal belies a certain naiveté about Syria. As my more loyal readers would know, I sympathized with some of Senator Levin’s points a year and more ago, before the situation had metastasized within the country and spread toxins without. Then the risks of acting were relatively small, and the benefits prospectively large; now the risks are huge and the benefits deeply uncertain. But never mind that; he’s wrong on the facts.

First, the ability to reliably destroy targets of the kind he identifies with standoff weapons is questionable. Libya is an island from a military point of view. Every target worth hitting can be hit from a naval platform. Syria’s topography and demographic realities are another matter. I’m a big fan of cruise missiles fired from Aegis cruisers, too; I saw a test-firing of one once from the deck of the USS Farragut a few years ago and it was tres cool, believe me. But I am skeptical that standoff weapons can do in Syria what Senator Levin thinks they can do. General Dempsey, can you please enlighten us on this point?

Second, the early 1980s Sunni radicalism that led Bashar al-Assad’s father to level the town of Hama in 1982 was almost entirely homegrown, not foreign. Syrians are more than capable of radical capture, especially in the current dire circumstances. When people’s backs are up against the wall, radicals thrive and moderates melt away.

The Libertarian Paradox

Violence is the tool of the state. Knowledge and the mind are the tools of free people.

by Llewellyn H. Rockwell Jr.

As libertarians attempt to persuade others of their position, they encounter an interesting paradox. On the one hand, the libertarian message is simple. It involves moral premises and intuitions that in principle are shared by virtually everyone, including children. Do not hurt anyone. Do not steal from anyone. Mind your own business.

A child will say, “I had it first.” There is an intuitive sense according to which the first user of a previously unowned good holds moral priority over latecomers. This, too, is a central aspect of libertarian theory.

Following Locke, Murray Rothbard, and other libertarian philosophers sought to establish a morally and philosophically defensible account of how property comes to be owned. Locke held the goods of the earth to have been owned in common at the beginning, while Rothbard more plausibly held all goods to have been initially unowned, but this difference does not affect their analysis. Locke is looking to justify how someone may remove a good from common ownership for his individual use, and Rothbard is interested in how someone may take an unowned good and claim it for his individual use.

Locke’s answer will be familiar. He noted, first of all, that “every man has a property in his own person.” By extension, everyone justly holds as his own property those goods with which he has mixed his labor. Cultivating land, picking an apple — whatever the case may be, we say that the first person to homestead property that had previously sat in the state of nature without an individual owner could call himself its owner.

Once a good that was previously in the state of nature has been homesteaded, its owner need not continue to work on or transform it in order to maintain his ownership title. Once the initial homesteading process has taken place, future owners can acquire the property not by mixing their labor with it — which at this point would be trespassing — but by purchasing it or receiving it as a gift from the legitimate owner.

As I’ve said, we sense intuitively the justice at the heart of this rule. If the individual does not own himself, then what other human being does? If the individual who transforms some good that previously lacked specific ownership title does not have a right to that good, then what other person should?

In addition to being just, this rule also minimizes conflict. It is a rule everyone can understand, based on a principle that applies to all people equally. It does not say that only members of a particular race or level of intelligence may own property. And it is a rule that definitively stakes out ownership claims in ways that anyone can grasp, and which will keep disputes to a minimum.

Alternatives to this first user, first homesteader principle are few and unhelpful. If not the first user, then who? The fourth user? The twelfth user? But if only the fourth or twelfth user is the rightful owner, then only the fourth or twelfth user has the right to do anything with the good. That is what ownership is: the ability to dispose of a good however one wishes, provided that in doing so the owner does not harm anyone else. Assigning property title through a method like verbal declaration, say, would do nothing to minimize conflict; people would shout vainly at each other, each claiming ownership of the good in question, and peaceful resolution of the resulting conflict seems impossible.

These principles are easy to grasp, and as I’ve said, they involve moral insights which practically everyone claims to share.

And here is the libertarian paradox. Libertarians begin with these basic, commonly shared principles, and seek only to apply them consistently and equally to all people. But even though people claim to support these principles, and even though most people claim to believe in equality — which is what the libertarian is upholding by applying moral principles to everyone without exception — the libertarian message suddenly becomes extreme, unreasonable, and unacceptable.

Why is it so difficult to persuade people of what they implicitly believe already?

The reason is not difficult to find. Most people inherit an intellectual schizophrenia from the state that educates them, the media that amuses them, and the intellectuals who propagandize them.

This is what Murray Rothbard was driving at when he described the relationship between the state and the intellectuals. “The ruling elite,” he wrote,

whether it be the monarchs of yore or the Communist parties of today, are in desperate need of intellectual elites to weave apologias for state power. The state rules by divine edict; the state insures the common good or the general welfare; the state protects us from the bad guys over the mountain; the state guarantees full employment; the state activates the multiplier effect; the state insures social justice, and on and on. The apologias differ over the centuries; the effect is always the same.

The Cult of the Colossal

The rare courage to be simple and natural

By WILHELM RÖPKE, june 1948

The cult of the colossal means kowtowing before the merely “big”–which is thus adequately legitimized as the better and more valuable–it means contempt for what is outwardly small but inwardly great, it is the cult of power and unity, the predilection for the superlative in all spheres of cultural life, yes, even in language. It is only since Napoleon’s time that the adjective “great” or “grand” begins to make its telling appearance in expressions such as “Grand Army,” “Grand Dukes,” “Great General Staff,” “Great Powers,” and begins to demand from men the proper respect, and Europe is actually just as much intoxicated as America by expressions such as “unique,” “the world’s biggest,” “the greatest of all times,” “unprecedented.” To this style of the time correspond, in equal degree, the unexampled increase in population, imperialism, socialism, mammoth industries, monopolism, statism, monumental architecture, technical dynamism, mass armies, the concentration of governmental powers, giant cities, spiritual collectivization, yes, even Wagner’s operas.

Since the cult of the colossal reduces qualitative greatness to mere quantity, to nothing but numbers, and since quantity can only be topped by ever greater quantity, the intoxication with size will in the end exceed all bounds and will finally lead to absurdities which have to be stopped. Since, moreover, different quantities of different species can only be reduced to a common denominator by means of money in order to render them comparable in the race of outdoing each other, the result is a tendency to measure size by money pure and simple–as, for instance, in the American seaside resort, Atlantic City, where in 1926 I found a gigantic pier simply being christened “Million Dollar Pier.” Thus we find very close bonds of kinship between the cult of the colossal and commercialism.

While this time the world was gained, the soul suffered considerable damage in the process. The abrupt change from the concerns of the spirit to material affairs was bound to result in the withering of the soul. By abandoning humanism one lost the capacity for making man the measure of things and thus finally lost every kind of orientation. Life becomes de-humanized and man becomes the plaything of inhuman, pitiless forces. This results in “the abuse of greatness … when it disjoins remorse from power” (Julius Caesar II, I), hence the increasing indifference to all matters of collective ethics, hence scientific positivism and relativism, which represent such a radical departure from the certain sense of values possessed by the eighteenth century. It further leads to a fanatical belief in a mechanical causality even outside the processes of nature; to the love of mathematics (which the eighteenth century, in contrast to the seventeenth, did not favor, at least not during its latter part); to social laws such as Malthus’ “law of population,” or Lassalle’s “immutable law of wages”; to the oriental-baroque flirtation with fate; in brief to determinism which not only is raised anew to a philosophic dogma, but also dominates sociology, be it in the garb of Marx’s materialist view of history, be it in that of geographical determinism, as first developed by Ritter and Ratzel and finally raised in geopolitics to a veritable geographic romanticism, or be it finally as biological or even merely zoological determinism, the final degradation that could be reached along that path.

A Lost Generation

We may be seeing a new underclass develop, which has disastrous implications for the country

By John Mauldin

It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept. As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

Last week, I noted that an unintended consequence of Obamacare is a rather dramatic rise in the number of temporary versus full-time jobs. This trend results from employers having to pay for the health insurance of employees who work more than 29 hours a week.

I quoted Mort Zuckerman, who wrote in the Wall Street Journal:

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

As it turns out, the unintended consequences of Obamacare are not the only problem. Charles Gave wrote a withering indictment of quantitative easing this week (which we will look at in a few pages) and included the following chart, which caught my eye. Note that the relative increase in part-time jobs began prior to Obama's even assuming office. The redefinition of part-time as less than 29 hours a week and the new costs associated with full-time employment due to Obamacare simply accelerated a trend already set into motion.

An Ugly Secular Trend in Part-Time Work

Look closely at this graph. It turns out the trend toward part-time employment started in the recession of the early 2000s, paused only briefly, and then really took off in the recent Great Recession. This is clearly a secular trend that was in place well before 2008.

Seven reasons to hate your parents: Reason #4

A two tier labour market

by Eugen von Böhm-Bawerk 

Ludwig von Mises allegedly said that 

“government interventions create unintended consequences that lead to calls for further intervention, and so on into a destructive spiral of more and more government control” 

We agree with von Mises as this is exactly what has happened in labour markets.

Our parents felt it was their right, given by God or Nature, to have a job. And it was not only that they felt other people owed them a job; they also felt they were entitled to these jobs for life. Any change in their professional life should be a decision made solely by themselves, and no one else. Never should the actual job provider have any say when it came to decisions regarding his own capital in its relation with labour.

So our parents went forth with revolutionary zeal to impose their will through political coercion. The reason for their eagerness was of course heightened job insecurity brought upon them by their insistence on overconsumption. In the process of increasing inflation and debt, capital consumption made it harder and harder for business to keep up and living standards were destined to fall.

In order to maintain profit margins, demand on labour became more onerous. To avoid such pains, our parents used the coercive power of the state to force business into compliance. They introduced all sorts of schemes to “spread the work around” under the fallacious belief that there are a fixed amount of work to be done. Obviously, there cannot be any shortage of work so long any human need goes unsatisfied, but rational thought were never a strength possessed by our parents. No one tells the story of the absurdities our unionized parents have been up to better than Henry Hazlitt;

“This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. Bricklayers are not allowed to use stones for a chimney, that is the special work of stonemasons. An electrician cannot rip-out a board to fix a connection and put it back in again, that is the special job, no matter how simple it may be of the carpenters…”

“Economics in One Lesson” page 45

In addition to such incongruous demands, they have lowered retirement ages, insisted on additional pay for “overtime”, made it fiendishly difficult to lay-off workers and even harder to shut down factories and so on. Every step toward our highly inflexible labour market has been rationalized in the name of solidarity with the proletariat in its fight against capital.

Business unsurprisingly moved from the “Western World” to more friendly jurisdictions, hence the current fight against globalization.

Seven reasons to hate your parents: Reason #3

Establishing a Pure Fiat Money System

by Eugen von Böhm-Bawerk 

Inflation is another word that has become completely confused in everyday conversation. Inflation used to mean an undue expansion of the money supply. By undue, one would refer to an increase in the money supply over the supply of gold. Today, on the other hand, our parents refer to a general increase in consumer prices when they speak of inflation. In reality, it is simply an increase in an arbitrary compiled index. The change of the very meaning of the word inflation is of immense importance, because the conclusions and policy implications that will be resorted to under the two different definitions can be diametrically opposites.

If inflation is defined as an undue expansion of the money supply, then it is easy to know when the banking system inflates. By comparing outstanding money notes with gold in reserves one can immediately determine if there has been inflation or not. Under the second definition things becomes far more obscure because there will be a considerable lag between the change in the money supply and its effects on prices. Inflation with our parent’s definition does not occur before the retailer changes his prices announced to his customer. In other words, the causal connection between inflation and money expansion appears broken, and replaced by a new causality between the whims of a store clerk and his idea of what prices should be. Please observe; the reason and hence blame for increasing prices can no longer be put on the government, but the evil capitalist. For whom, other than the capitalist, does the actual act of increasing prices?

With our parent’s definition of inflation also follows a depraved definition of deflation. Nowadays deflation is defined as falling consumer prices. Deflation through modern history has often been highly correlated with economic depressions, and today’s economists believe falling prices causes depressions. Think about that for a minute. Can falling prices actually be the reason for lower economic activity? Say we were on strict commodity based money standard with outstanding notes 100 per cent backed by said commodity. In this world, we could reasonably assume economic output of consumer goods to exceed output of commodity money. In that case consumer goods prices will most surely fall. However, there is no depression in this economic constellation as prosperity increases through higher purchasing power for everyone. The policy response when equating falling prices with hardship and poverty would be to damage this healthy development through inflating the money supply. Such is the world created by our parents, where good is bad and bad is good. No wonder we tend to be confused.

The guillotine returns after September 22, 2013

Two Months Until The German Elections And The Return Of Reality

by Mark J. Grant, author of Out of the Box,

“For what we regard as reality is conditioned by the theory to which we subscribe.”

                                      -Stephen Hawking

Europe has denigrated into a strange place where fantasy replaces reality as necessitated by their governments and the Union that governs them. It is a world where anything but direct liabilities are not counted, where securitizations worth 50 cents on the Dollar are held at par and where both data and numbers are manipulated for the preservation of the State.

Dreams are born of imagination, fed upon illusions, and put to death by reality. The guillotine returns after September 22, 2013.

You cannot believe anything that you are told by the Europeans. You cannot accept any of their financials, both sovereigns and banks, at face value. The actuality of the financial condition of the European Central Bank is not only shrouded in secrecy but it is shrouded in make believe. It is a Grimm fairytale.

Familiarity, the first myth of reality: What you know the best, you observe the least.

Devotion, the second myth of reality: The faithful are most hurt by the objects of their faith.

Conviction, the third myth of reality: Only those who seek the truth can be deceived.

Fellowship, the fourth myth of reality: As the tides of war shift, so do loyalties.

Trust, the fifth myth of reality: Every truth holds the seed of betrayal.

             -Magic, The Gathering

You may have noticed the small blurb recently that the ECB had eased the rules for asset backed securitizations. You may have read this snippet and thinking nothing of it you moved on. This would have been a mistake because just here you would have noticed the cracks of a crumbling empire.

The French banks, the Spanish banks, the Portuguese banks are all engaged in an ongoing charade so they do not need to ask the EU for help. They all are taking their Real Estate loans, the properties that they have confiscated, the commercial loans that are no longer paying and they have put them into massive securitizations that are pledged at the ECB as they are given cash for the collateral. The collateral, as you may suppose, has all of the value of cents on the Dollar but they are given money at par while the ECB carries them on their books at par. It is a fraudulent scheme jam packed with money created out of nothing but it is judged to be a better plan that to have to admit to accurate financials and have the banks of Europe default all across the Continent.

Conspiracy of dogmatic, deliberate, and willful ignorance does not either form the “raison d'être” or constitute an excuse for inaction. It is the tolerance of sheer lies, self-deception and malfeasance. It merely locks all your flaws in floors and stored behind concrete doors; a thick veil that obscures clear seeing of reality and it may cause you to stumble, fall and drift into transgression to reach the end point of decadence.

After almost forty years on Wall Street let me assure you that reality always returns. Always and because it must. What is uncounted does not disappear. Losses eventually have to be paid. Deception by governments has a long time frame but it is not eternal. Lies are eventually confronted by truth.

There will be nothing but lying until September 22, 2013 which is the date of the German elections. This is the drop dead date that I have been asked about for so long. Then, as soon as the celebration is over that Ms. Merkel is to remain in power, the world will turn on its axis. The status quo will disappear and there will be a “shock and horror” campaign as the Southern nations of Europe demand more help and Germany squirms and then refuses to provide it because it does not have the assets to do so.

Spain, France, Portugal, Greece, Cyprus, and even Italy are all going to line up at the trough only to discover that the promise of water was just that, a promise, and does not exist. A Biblical drought will be upon the Continent and from the political battles will emerge new alliances and new screams calling the traitors by name. The twin towers upon which the markets rest, money from nothing and fairy tale financials, will decompose in the light of this new sun and our old friend, Fear, will return to haunt us.

First the bough will be exposed. Next it will crack. Let’s all hope that it does not break and toss the baby into the thorns.

“Reason is a choice. Wishes and whims are not facts, nor are they a means to discovering them. Reason is our only way of grasping reality; it is our basic tool of survival. We are free to evade the effort of thinking, to reject reason, but we are not free to avoid the penalty of the abyss we refuse to see.”

        -Terry Goodkind, Faith of the Fallen

Seven reasons to hate your parents: Reason #2

The so-called retirement funds, both private and governmental, are allocated toward sovereign bonds

by Eugen von Böhm-Bawerk 

We could write volumes on the western world’s obsession with their beloved welfare systems and volumes have been written. The reader is obviously familiar with most of this history and the glaringly obvious unsustainability of the systems enacted.

We will therefore only make a couple of observations that are novel to the debate. When the systems were introduced in the 1960s it is true that we did get a boost to savings. Payments into the system were made without large payments out of the system. However, contrary to the old system before public pension funds were introduced, saved capital that were supposed to be allocated to productive business loans were now diverted into the government coffers. What used to be cash strapped politicians now suddenly saw a windfall of wealth flowing into their grip, which consequently could be used to buy votes in the next election. Unsurprisingly ambitious projects within the government sphere were undertaken to “invest” the newfound money.

Consider the Swedish experience during the time of plenty. The Swedish politicians “invested” the capital in low cost housing for the poor often in less well-off municipalities. While the intent may have benign and not a wilful act to bribe the electorate to be re-elected it does not change the conclusions that can be drawn from this story. The government allocated scarce capital to highly unproductive usage and gave it to dependents. Participants paying into the system did so under the pretence of saving for old age while they unknowingly consumed valuable capital. As the government coerced them to “save” people were tricked into reducing their own savings confident they were secure from the government program. Instead of securing a decent yield to secure consumption as dependents, they ended up by bailing out the municipalities that obviously could not pay back. First their taxes went into poor investments, and then they had to bail out the inevitable default from current taxes. All was lost. Twice!

In other words, the Swedes reduced savings through the introduction of a system with the intention to make sure everybody saved. Talk about unintended consequences and perverted incentives through government intervention! We are sure the Swedish experience was not unique as similar programs were introduced all over the western world.

More generally we know that a large part of so-called retirement funds, both private and governmental, are allocated toward sovereign bonds. The system is rigged in several dimensions to make sure that happens. But is this not just a more sophisticated version of the Swedish experiment? Think about it; today’s retirement saving goes into destructive debt (see previous blog post), which reduces the productive potential of the economic system! In other words, the assets held by pension funds are an unwilling promise forced upon our generation to pay taxes in the future. Since the system reduces our productivity we have to pay higher and higher taxes just to keep up. From this we can draw the obvious conclusion that a welfare state will per definition create less and less wealth and prosperity, and this vicious circle of lower and lower growth must continue until insolvency strikes and restructuring is forced upon a bewildered population. The generational fight for resources that we face will undoubtedly be ugly, and until the demographics shift to our favour, we will lose.  

Any way you slice it, Germany wins

Germany holds all the cards in the euro power struggle

By Cyrus Sanati

The faster Europe realizes that Germany holds most, if not all, of the cards when it comes to ending the eurozone debt crisis, the faster a lasting solution can be found. With positive economic growth, low unemployment and fantastically low interest rates, Germany is simply in no rush to implement reforms that have been proposed by its economically weaker neighbors, as they would negatively impact Germany's ability to borrow cheaply and expand exports.

The only way the EU's biggest member can be convinced to take on reforms, like issuing eurobonds, would be if it were granted incentives, such as control over the fiscal policy of the eurozone. Other members of the eurozone, namely France, have been wary about handing more of their economic power over to Brussels and ultimately to Frankfurt. But while solutions like the pooling of eurozone's existing debt is a good first step to diffusing the crisis, they still require incentives for Germany to get on board.

Since the start of the crisis, Germany's chancellor Angela Merkel has been accused of dragging her feet when it comes to ending the eurozone crisis. Headlines like, "Where is Germany?" or "Merkel's failure to lead," have graced newspapers on both sides of the Atlantic.

But unlike nearly every other eurozone leader, Merkel hasn't been thrown out of power since the crisis began more than two year ago. While that is due in part to election rules in Germany, it is also due to Germany's economy, which, while a little wobbly now, has actually improved since the crisis began in 2010. That year, Germany's GDP grew at 3.5% - much faster than its neighbors. In 2011, it grew at 2.7% at the same time most of its neighbors slipped into recession. And while economists had predicted a terrible first quarter for Germany this year, its economy actually grew five times more than expected, at 0.5%.

That might seem puzzling given that many of Germany's main trading partners are crippled eurozone members, but the country seems to have benefitted greatly from the weakening of the euro, since it has increased the competitiveness of its exports in non-eurozone countries. Unlike the rest of the eurozone, Germany is an exporting powerhouse, making high-quality goods that are in demand across the world. The eurozone crisis has ironically only increased its export strength, continuing to make it the world's second-largest export economy in the world, behind China.

At the same time, Germany has also benefitted from an increase in investor demand for its debt. Germany has a debt-to-GDP ratio of around 80%, which is higher than troubled Spain at 68%, yet its debt is trading at zero, while Spain's debt is trading near 7%. Demand for German debt was so great this month that at some points it actually traded at a negative yield. Investors buying this debt range from German banks to U.S. pension funds. But the big surge in buying lately has come from Spanish and Greek depositors who are frantically withdrawing their life savings and putting them in German bonds on fear that their respective governments will leave the eurozone and destroy their savings through devaluation.

Sharks, Vampires and Central Planners

Even at low tide you won’t see the shark until it’s upon you

By Moshe Silver

This shark – swallow you whole.

                                     - Quint, “Jaws”

We often hear government economists and policy makers express concern that market turmoil might “spill over and affect the real economy,” an Orwellian locution where the price of oil spiking over $110 is seen as a “market dislocation,” and not as a multi-billion dollar tax on America’s middle class.

There have been measurable benefits from government programs going back to the first responses to the crisis under Treasury Secretary Paulson, though largely of dubious value.  The fact that we spent a trillion dollars to keep a bunch of bankers employed, while technically a win for the nation’s employment statistics, was arguably not the application that would have attained the utilitarian goal of the Greatest Good for the Greatest Number.

Last week saw a convergence of data points that all point to the likelihood that Chairman Bernanke wants to retain Friends in High Places, assuming that his legacy will be set not by those who write history – and especially not by those who live it – but by those who decide what gets published.  (Quoth the Duke of Gloucester, patron of historian Edward Gibbon, upon being presented with the completed Decline and Fall of the Roman Empire, “Another damned thick, square book!  Always scribble, scribble, scribble, eh?”)

We don’t mean to scoff at the very real suffering caused by economic collapse, but Hedgeye holds firm to the view that government meddling in the economy is generally not a good thing, and that a long-term program of persistent government meddling in the economy is a decidedly harmful thing. 

Government intervention has the predictable effect of shortening economic cycles, while also increasing volatility – perhaps two sides of the same coin of time compression.  In consequence, it also has the predictable effect of generally not really fixing anything and of battering the middle class, edging them nearer to the abyss with each new policy nudge.

By the Fed’s own reckoning, each successive round of QE has a diminishing impact on the markets.  Mind you, that impact is measured in basis points – one-hundredths of a percent – and the twenty-five basis point impact looked for from any future round of QE is not predicted to last.  The banks are still not lending, largely because of uncertainty over government policy.  But don’t blame the banks.  People aren’t borrowing, for much the same reason: no one wants to take a loan to expand a business that might be shot execution style by the Fed suddenly reversing its interest rate policy.

So, if the Fed’s easy money policy is not supporting the “real economy,” who is benefitting from it?

Most excess liquidity seems to be supporting the short-term trading of major financial houses – which helps explain the furor over the Volcker Rule, designed with the sole purpose of walling off risk trading from deposit taking (a proposition that a tenth-grader could clearly articulate in a single sentence – do you know a tenth grader who wants to be President?)