Thinking Outside the Circle

Political spectra are often designed to make a “center” appear reasonable

by SANDY IKEDA

A circle is sometimes a useful image, but not in the way it’s often used to depict the political spectrum. Above is an example I found on the Internet of what I’m referring to.

You’ve got the Left and the Right at opposite sides of the circle such that, as you move to down and to the left from the Right and down and to the right from the Left—that is, away from their propensities—you end up at a kind of equilibrium point between the two. But moving up and to the left from the Right or up and to the right from the Left, you not only wind up farther from the reasonable “center” but at—gasp—unstable anarchy!

I learned this metaphor in high school. The lesson as I recall was something like “all extremes will eventually meet,” so the reasonable place to be is at the moderate “center.” The metaphor’s continued use reflects a continuing muddle in political discourse, especially in the mainstream media.

Does a Circle Have a “Right” or “Left” Side?

I saw a good specimen of such “circular thinking” on television when Edward Snowden, via Glenn Greenwald, revealed that an arm of the U.S. government, the National Security Agency, has been tracking foreign and domestic emails and phone conversations. Remember? It happened before the distraction of the President’s let’s-please-bomb-Syria campaign. (And while we’re at it, let’s remind ourselves of the abuses earlier this year of the Internal Revenue Service.) 

Now, I watch MSNBC about as much I watch Fox News (i.e., almost never) because of the particularly dismal (and usually loud) level of discourse on both channels. Not long ago, a paid “political expert” on the former remarked how puzzling it was that “libertarians,” whom he described as representing "the extreme right wing" of the political spectrum, were making common cause with the "Left" on the Snowden affair.

(Apologies for all the scare quotes in this column, but these terms are used so loosely in political blather that it’s dangerous to take them at face value.)

For that commentator the paradox emerged not so much from the fact that both progressives (at least some of them) and libertarians were upset about the breathtaking, unprecedented, and ongoing NSA violations of our civil liberties. The circle metaphor does after all put extreme Left and Right on the same spot. No, the mystery lay in the metaphor itself: It describes the situation without providing any underlying logic. What is it exactly that’s being measured around the circle? Apparently the point is simply to characterize “the center” as a reasonable ideological point of balance.

Means Versus Ends

I’m not sure that a single image can capture all of the important factors that go into locating a particular doctrine with respect to others. For instance, while socialism and fascism share political means, they each have different political ends. Moreover, look at how many varieties of socialism there are! That goes for fascism and capitalism, too.

I do think, though, that a political/doctrinal spectrum that looks at a single relevant dimension can clear up a lot of confusion. Although not his idea, Hayek put it well in The Road to Serfdom: 

Merkel's Awful Election Blunder

Without breaking a sweat, Merkel could have brought her grateful Free Democrats across the five percent hurdle

By Paul Roderick Gregory

The German and world press universally laud Angela Merkel’s election triumph in the German parliamentary elections. She has won (not 100% sure) a third term and she fell only three seats short of the holy grail of German politics – the absolute majority. Pundits say she won because German voters like her slow but steady decision making and her down-to-earth style. Few have pointed out that her election victory has been marred by a huge electoral blunder.

Josef Joffe (Angela Merkel’s Gilded Status Quo) points out that, having fallen short of an absolute majority, Merkel faces a daunting task in putting together a coalition government. The Social Democrats are loathe to enter another Grand Coalition, where they again risk losing votes from their base. The Greens must decide whether they are a grown-up and not one-issue party. Both Social Democrats and Greens will demand high prices for entering into a coalition with Merkel. She must sign on to their favorite issues or they won’t play along. They can always threaten to swallow their pride and form a government with the despised Left (die Linke).

Merkel could have easily avoided this electoral disaster by giving her junior coalition partners, the Free Democrats, or Liberals as they are known, a minor boost. She could have campaigned with them jointly, which would have transferred some of her electoral clout to them. On election eve, she could have issued veiled appeals to her backers to cast their second ballots (German election laws give voters two ballots) for the Free Democrats. But no. In the run-up to the election, she issued a clear call for her supporters to cast all their ballots for her party. Without breaking a sweat, Merkel could have brought her grateful Free Democrats across the five percent hurdle. Merkel would then have been free to form a coalition that would have agreed to her platform without a blink of the eye.

Why would a careful politician like Merkel make such a blunder? Perhaps the lure of the absolute majority was too great. She clearly underestimated the appeal of the anti-Euro  party (which also narrowly missed the five percent hurdle). But she went ahead and took the risk, and missed out on the coalition, which historically has ruled Germany well.

As Merkel goes about the difficult business of wooing reluctant coalition partners, the magnitude of her blunder will become apparent to the German and world press. 

How the West Destroyed Iraq

The bloody mess created by the occupation of Iraq was built on the West's own weakness and incoherence

By Tara McCormack

There has been considerable media focus recently on Syria and Egypt. Yet 10 years on from the invasion of Iraq, and two years after the official withdrawal of American troops (hundreds of thousands of private military contractors remain), the violence in Iraq is on-going. This year, the violence has been rising again. Earlier this month, several car bombs in Baghdad killed at least 25 people and wounded hundreds of others.

The intervention and occupation of Iraq ended a period during which intervention in other countries had won wide support among the political elites in Western states. During the 1990s, advocates argued that the post-Cold War order offered an opportunity for powerful states to act as a force for good in the world. Kosovo, arguably the high point (or low point, depending upon one’s political position) of humanitarian intervention was, as Tony Blair argued in his 1999 Chicago Speech, a war for values, not interests. The intervention in Iraq seemed to tarnish humanitarian intervention. Even those who had cheered as the bombs rained down upon Serbia in 1999, such as Jurgen Habermas and Gareth Evans, argued that Iraq was not a good intervention.

As David Clark, a key author of the UK’s so-called ‘ethical foreign policy’, has argued, the Iraq war had sown doubt about the legitimacy and efficacy of Western military power: ‘In departing from the principle of non-intervention and lacking a UN mandate, Kosovo is often regarded as the original sin that made Iraq possible. Even Russia’s invasion and recognition of Abkhazia and South Ossetia have been characterised as blowback from Kosovo’s declaration of independence a few months before. Comparisons of this kind confuse more than they clarify. The war in Kosovo was a response to a humanitarian emergency, not a geopolitical power play.’

Advocates of humanitarian intervention criticise the Iraq invasion on the basis that is was driven by material interests rather than values or the wish to liberate or save the people. Recently, the intervention in Libya, presented as an altruistic act, has to some extent rehabilitated the interventionist creed. Thus the intervention discussion is to a large extent framed in terms of a debate about whether intervention can ever be ‘pure’ or good.

Toby Dodge of the London School of Economics, who has been writing about Iraq for many years, has written an insightful book about the consequences of the Iraq invasion and occupation and what the future holds for Iraq. Iraq, From War to a New Authoritarianism is an important contribution to the debate about intervention and also for thinking about the nature of the Iraq conflict. As Dodge rightly concludes, what has happened in and to Iraq raises fundamental questions about the very capacity of external powers to change politics and economics in a society. In the context of demands to intervene in Syria, such questions need to be raised again and again. It is simply a cop-out by intervention advocates to suggest that the problem with Iraq is that it was not done with ‘pure’ intentions. In fact, as I will suggest below, this misunderstands what happened in Iraq.

Drawing upon literature about civil wars, Dodge uses three factors as a framework to understand civil conflict: ideological trends within a society that encourage the non-state use of violence; the weakness of the state’s administrative and coercive institutions; and the nature of the constitutional settlement structures and politics. Dodge looks in great detail at these factors in Iraq and finally considers the extent to which these have been overcome.

The victory of mumsy Merkel speaks to the infantilisation of European politics.

Mummy, please look after us

By Bruno Waterfield

In last weekend’s German elections, Angela Merkel’s Christian Democratic Union achieved its best result in 19 years, a victory which confirmed Merkel as German chancellor for a third term. The Christian Democrats fell just short of an absolute majority, but Merkel nonetheless destroyed the opposition, with the Social Democrats suffering their second worst result in history. (Their worst was in 2009, after being in coalition with Merkel.)

The election result may be a triumph for Merkel, and a vindication of the idea that ‘mummy will take care of it’, but the result bodes ill generally. That’s because it puts Germany in the vanguard of a pan-European flight from reality, one in which Europe’s governing elites attempt to avoid making the decisions necessary at this time of crisis.

Merkel personifies this trend. She combines a ruthless instinct for political survival with suffocating risk-aversion masquerading as canny pragmatism. The cult surrounding Merkel elevates the worst aspects of the contemporary political character while encouraging a woman, who is a very impressive operator, to employ her Machiavellian skills to avoid leadership and duck challenges, rather than engage with the real problems faced by German society.

What started off as a nickname, mutti or mummy, was intended by Merkel’s rivals to undermine her among the German Christian Democrats. But she has turned the ‘mummy’ moniker to her advantage. It is now her brand in a campaign that drove home the message of care and caution, complete with election posters showing her trademark clasped hands – a symbol of safety and a conflict-free maternal embrace. As the Wall Street Journal reports: ‘In a play on Merkel’s unofficial nickname – “Mutti” or “Mom” – her party’s youth organisation touts the slogan “Mutti Macht’s,” or loosely, “Mom will take care of it”.’

Merkel personifies the desire to duck responsibility, to leave it to someone else. As one German political pundit told the BBC: ‘Your mummy is always there for you. She doesn’t care what she looks like, but you can rely on her. Sometimes she might tell you to clean up your room but she’s always there for you.’

As Sabine Beppler-Spahl has observed on spiked, the building of the Merkel cult is based on a turn away from politics and the stigmatisation of political conflict as destabilising or dangerous. Merkel deliberately eschews vision because it leads to conflict. Little wonder that many commentators have noted that no one really knows what Merkel’s political agenda is.

The State As An Attractor for Sociopaths

War is an end in itself, and it matters little who is chosen as the enemy of the year

By Butler Shaffer

What the government is good at is collecting taxes, taking away your freedoms and killing people. It’s not good at much else.

                      -   Tom Clancy

In the science of chaos, “attractors” are operational principles around which turbulence and apparent chaos are harmonized. What the limited nature of our prior experiences dismisses as randomness or disorder, the study of chaos and complexity is revealing as deeper patterns of regularity. Attractors help to identify the dynamics by which complex systems organize themselves. Thus, it could be said that an earthquake fault line serves as an “attractor” for geologic forces in plate tectonics, just as river systems are attractors for water engaging in its ongoing relations with the forces of gravity. At a social level, an estate sale can be seen as an attractor for antique dealers; dumpsites as attractors for abandoned property; or hospitals as attractors for diseases. In marketplace economics, the pricing system is an attractor for buyers and sellers seeking to exchange property claims.

The study of chaos is helping us understand why all political systems are disruptive and destructive of life processes. Through this new science, we are discovering – contrary to Plato’s hubristic assumptions – that complex systems produce behavior that is bothdetermined and yet unpredictable. Left to the playing out of the forces operating within and upon it, a complex system will spontaneously generate consequences that are implicit – albeit unpredictable – within it.

But we know that many people do not like a world that is unpredictable and indifferent to their particular interests. Thus, a business owner who is unable to effectively compete for customers in a free market, may seek to disrupt the order that does not accommodate his whims. He might begin by pursuing voluntary agreements with his competitors to reduce the pace with which they pursue their respective interests, a strategy that is rarely successful. When the voluntary approach doesn’t satisfy all industry members, he and many of his business rivals turn to the state to compel, by force, results unobtainable in the marketplace. My book, In Restraint of Trade: The Business Campaign Against Competition, 1918-1938, documents this politicization of the business system.

Hezbollah gambles all in Syria

The strife that will consume everybody

By Samia Nakhoul

In the photograph the two robed men stand shoulder-to-shoulder, one tall and erect, the other more heavyset. Both smile for the camera. The picture from Tehran is a rare record of Iran's Supreme Leader Ayatollah Ali Khamenei meeting Sayyed Hassan Nasrallah, the head of Hezbollah, the Lebanese Shi'ite paramilitary group.

Taken in April during a discreet visit by the Hezbollah chief to his financial and ideological masters, the photograph captured a turning point in Syria's civil war and the broader struggle between Sunnis and Shi'ites, the two main branches of Islam. It was the moment when Iran made public its desire for Hezbollah to join the battle to help save Syria's President Bashar al-Assad, diplomats said. At the time, Assad and his Alawite sect, an offshoot of Shi'ite Islam, were losing ground to an advancing Sunni insurgency.

Within days of returning home, Nasrallah gave a televised speech making it clear that Hezbollah would fight alongside Assad to prevent Syria falling "into the hands" of Sunni jihadi radicals, the United States and Israel. The very survival of the Shi'ites was at stake, he said.

Soon afterwards, fighters from Hezbollah - which until then had largely stayed out of its neighbour's civil war - entered Syria. In June they helped Assad's forces recapture the strategic town of Qusair and other territory, turning the war in Assad's favour.

Regional security officials told Reuters there are now between 2,000 and 4,000 Hezbollah fighters, experts and reservists in Syria. One Lebanese security official said a central command in Iran led by the Revolutionary Guards directs Hezbollah operations in Syria in close coordination with the Syrian authorities. Another source said Hezbollah had "hit squads" of highly trained fighters in Syria whose task is to assassinate military leaders among the Sunni rebels.

Hezbollah declined to comment for this report on its involvement in Syria. Nasrallah has previously said it is necessary for Hezbollah to fight Sunni radicals allied to al Qaeda.

Officials in Iran did not respond to requests for comment. Last week, Iran's foreign ministry spokeswoman, Marzieh Afkham, said that Iran had no official military presence in Syria, but was providing humanitarian assistance. Last September, Mohammad Ali Jafari, head of the Revolutionary Guards, said some members of Iran's elite Quds force were in Syria but that it did not constitute "a military presence."

Hezbollah's role in Syria has ramifications not just in its home in Lebanon but across the region. If Assad wins, Iran's influence along the shores of the Mediterranean will grow. If he loses, Hezbollah and Iran's reach will likely be damaged. For some members of the group, the fight is an existential one.

Reuters has learned that a few voices within Hezbollah, which is considered a terrorist organisation by the United States and Europe, opposed joining the conflict in Syria. Two prominent members feared intervention would drag Hezbollah and the Shi'ite community into a quagmire; they questioned where the group would draw the line after Qusair.

The Economics and Politics of the Psychopath

The Gulags, the Chinese and Nazis Labor camps, were not the work of capitalists, but of capitalism’s enemies

BY JR NYQUIST

In November 2010 The Economist published a piece on psychopathy. The article suggested, however indirectly, that if psychopaths are packed into prisons they might also be packed into corporate boardrooms. It is, after all, the stupid psychopaths who get arrested. Perhaps the smart ones – being far more dangerous – go up the corporate ladder. According to The Economist, “The combination of a propensity for impulsive risk-taking with a lack of guilt and shame (the two main characteristics of psychopathy) may lead, according to circumstances, to a criminal career or a business one.”

In a short paper by Clive R. Boddy, titled The Implications of Corporate Psychopaths for Business and Society, the Corporate Psychopath is defined as “those people working in corporations who are self-serving, opportunistic, ego-centric, ruthless and shameless but who can be charming, manipulative and ambitious.” Boddy claims that psychopaths “may theoretically be present in organizations at senior managerial levels in much larger numbers than their approximately 1% incidence in the general population would suggest….”

Boddy’s paper claims that “Corporate Psychopaths are drawn to corporations as sources of power, prestige and money.” However, these folks are a “threat to business performance and longevity because they put their own interests before those of the firm.” In other words, psychopaths seek out situations where their tyrannical behavior and exploitive abilities will be condoned or even admired without actually caring if the business they manage ultimately succeeds. 

In a book titled Working With Monsters, Australian academic psychologist John Clarke shows how destructive psychopaths can be in the workplace. They present themselves as charming and efficient while, in reality, they are irresponsible and self-serving. Always in search of victims to enslave, the psychopath prefers to destroy rather than to build and should never be given authority over others. Yet, more often than we would like to admit, such people acquire positions of power for inflicting their petty tyranny on others. As Boddy wrote in his paper, “coming across [psychopaths] in organizations could present an employee with situations of harassment and humiliation.”

In an age of colossal financial loss – of Ponzi schemes at the corporate and federal level – there must be, somewhere in upper management, more than a few psychopaths. The damage done by such people may be incalculable. Think of the Savings and Loan crisis of the late 1980s and early 90s. Out of 3,234 savings and loan associations, 747 failed at an estimated total cost of $370 billion. Ruthless individuals, with no sense of responsibility, are highly dangerous when given management positions in sensitive organizations such as banks, investment firms, or government. In this respect, the news may be worse than we want to hear. Organizational psychologist Paul Babiak, author of Snakes in Suits, claims that psychopaths tend to rise quickly in business on account of their charm and readiness to manipulate others. While perfectly normal in outward appearance, the psychopath may appear to be an ideal leader. But in reality he victimizes everyone who relies on him.

As He Clips Our Coins, Bernanke Steals A Page From Nero's Playbook

Bending economic gravity

By Keith McCullough

“In 64 A.D., in a naïve attempt to deceive the populace, Nero decreased the silver content in the coins and made silver and gold coins slightly smaller” (The History of Money, pg 52)

As the quote above reveals, central planners have been clipping coins and devaluing the The People’s hard-earned currency for at least two thousand years.  The Roman Emperor Nero of course devalued the Roman currency for the first time in the Empire’s history. What was it that gave both the Roman and Ottoman Empires the audacity to plunder the purchasing power of their people?

After 200 years of operating as an independent bank, what made the British Empire so soft that it felt the need to socialize (nationalize) the Bank of England in 1946? What was the US “Free-Market” Empire and why have we empowered the Fed to change it?

If you disregard the vacuum of history in which Ben Bernanke thinks (the 1930s) and contextualize the moment his Fed currently occupies (within the construct of long-term history, which will ultimately judge Bernanke when he’s long gone), it’s getting scary again. But you probably already knew that. The sad thing is that some of his Fed heads do too.

On Monday, Dallas Fed Head Richard Fisher basically admitted two key things:

1.                 The current White House Administration has politicized the US Federal Reserve

2.               By not doing what they led the market to believe they would do (taper), the Fed is losing credibility

Check. check.

If you don’t understand the history of un-elected politicians devaluing currencies, you have some reading to do. Most people who aren’t paid not to “get” it understand this now. Self-education is the best long-term path to avoid becoming a lemming.

Look, I’m not that smart. Most people who have seen my SAT scores would agree. But I work hard and I recognize that Mr. Market is a very smart cookie. What I tend to get on a lag, is what Mr. Market is telling me to get. Unlike our Fed Chief, I don’t wake up every morning trying to bend economic gravity.

Ben Bernanke believes he can “smooth” gravity, economic cycles, etc. He’s basically telling the entire bond, currency, and stock markets that they are all wrong. So let’s stop, rewind the tapes and go to the score – what have markets done since Bernanke decided not to taper?

Crown, Church, and Rent-Seeking

Shakespeare's "Henry V"

by SARAH SKWIRE

Shakespeare’s Henry V—a favorite of theater companies and movie studios—begins with an invocation of the muse of fire, presumably because only her powerful heat and light can provide the inspiration necessary for Shakespeare’s great task of bringing forth so “great an object”  on “this unworthy scaffold.” The prologue promises, after all, that we are about to see the armies of two great monarchies clash at the famous battle of Agincourt. A plea for divine aid seems only reasonable.

After all that buildup, however, the opening scene of the play has to be one of the dullest stretches in all of Shakespeare’s writing. Promised a ferocious battle with knights and horses and blood and thunder, we are given instead more than one hundred straight lines of a highly technical legal discussion between the Bishop of Canterbury and the Bishop of Ely. It is historically accurate. It is important. And it is exceptionally tedious.

It is tedious, that is, unless you are familiar with one basic piece of Public Choice theory. 

Gain without Mutual Benefit

One its core concepts is the idea of rent-seeking. Unlike profit-seeking, which aims at mutually beneficial trade, rent-seeking is the attempt to use the political process to capture a bigger slice of wealth for oneself. Unlike trade, there is no mutual benefit. No wealth is created. The only profit is to the rent-seeker, and possibly his cronies. With that in mind, the opening scene of Henry V is gripping. It is no longer more than one hundred lines of fifteenth-century legal trivia. It is more than one hundred lines of some of the most explicit, uncensored, behind-the-scenes rent-seeking action in literary history.

The Triumph Of Angela Merkel

The Dire Long-Term Consequences Of Sunday's Vote

By Doug Bandow

The world’s most watched elections occur in America.  The world’s most boring election just occurred in Germany, characterized by debate over such critical issues as meat-free days in government cafeterias.  As expected, Chancellor Angela Merkel was effectively reelected.

The Federal Republic of Germany is the world’s most admired nation and one of the globe’s most vital trading states.  It possesses Europe’s largest economy and has bankrolled the bail-out of the European Union’s crisis states.  Berlin’s political and economic stability is the envy the EU.

Merkel has served as Chancellor for eight years.  “Mutti,” or “Mummy,” as she is known, is a skilled political infighter who has dispatched every potential rival and even knifed former Chancellor Helmut Kohl, her political benefactor, on her way to the top.  But she exudes confidence and competence; there is no firmer guardian against radical experimentation.  Former CDU defense minister Karl-Theodor zu Guttenberg said her approach to politics is:  “First, keep all options open but do it decisively.  Second, hesitate vigorously.”

Germans rewarded her Christian Democratic Union, and its sister  party, the Christian Social Union, with 41.5 percent, well ahead of the more left-wing Social Democratic Party, which garnered a bit under 26 percent.  It “is a super result,” she said.  However, the CDU/CSU fell five seats short of a parliamentary majority.  And her current coalition partner, the Free Democratic Party, failed to receive the five percent necessary to be represented in the Bundestag.

Commentary on the election has focused on Merkel’s triumph.  It is the biggest electoral victory since Kohl was reelected in 1990 in newly reunified Germany.  There is no doubt that she will remain Chancellor.  The only question is the identity of her coalition partner—and what price she will have to pay for that party’s support.  (In theory the SPD, former communists, known as The Left, with 8.6 percent, and Greens, with 8.4 percent, could join forces with a tiny majority, but the first two have ruled out joining with the latter.)

Ironically, policy isn’t likely to change very much even if Merkel revives the “grand coalition” with the SPD, which seems most likely.  A decade ago the last SPD government (joined by the Greens) made tough economic reforms liberalizing Germany’s labor markets, sparking its current success.  Her predecessor, Gerhard Schroeder, was far bolder than Merkel.

Indeed, she has steadily pulled her party leftward.  She once was called Germany’s Margaret Thatcher, but the latter believed in economic liberty and fought for it even when the odds seemed long. In 2005 Merkel ran as an advocate of “freedom” and suggested trimming back the welfare state.  Her party barely finished ahead of the SPD.  Since then, rather like most Republican Presidents, she adopted the economically interventionist policies of her political opponents.

The Land Of The Free Is Now A Nation Of Sheep, Wolves, Pigs And Sloths

The progressive package deal we’ve been sold is unraveling, both here and around the world

By Bill Frezza

No, this is not another diatribe about the futility of many gun control laws and the geographic correlation between the level of gun crime and the hurdles law-abiding citizens have to surmount to provide for their own defense. Nor is it a rant about the media exploitation of tragedies like the recent Navy Yard shooting. It is a reflection on the home of the brave’s transformation into a nation of sheep, wolves, pigs, and sloths.

The American character, at least until recently, was unique and considered exceptional. What could be more obscene than being lectured to the contrary by a Russian despot throwing our president’s deprecating words back at him in the pages of The New York Times? Despite attempts to argue away history, ours was the only national character forged by millions of self-made strivers settling a new land under a unique formulation of self-government that strictly constrained the state in its powers, reach, and influence, leaving the people to thrive through the free exercise of their inalienable rights.

Those days are gone, our birthright progressively squandered. Yet, the Constitution’s constraints were not shredded overnight. First, it took getting the American people accustomed to a view of government as unlimited and ever-expanding, bringing the nation forward in an unstoppable march of state-directed “progress.” That task of indoctrination fell to our media, educational and cultural institutions. Judging by the evidence, they have succeeded.

Our forebears took arms against a level of government oppression that would be considered a Tea Partier’s dream compared to the burden of government we carry today. What productive person would not trade our imperious IRS for the comparatively light and distant hand of the mad King George? Why do we tolerate government intrusion into our persons, houses, papers, and effects that are supposedly held sacrosanct by a Bill of Rights? Why do we acquiesce when our government sends armed forces abroad in search of monsters to destroy? Why do we look the other way when fellow citizens are hauled off to rot in jail over the possession of a weed? How is it that any proposals to reduce government benefits are met with an outpouring of opprobrium, the most recent hue and cry raised over attempts to reduce the planned growth of a runaway free food program by five percent that has doubled in the last five years?

We are just living up to our training.

The purpose of training citizens to become sheep is to make the world easier for wolves. Wolves come in two varieties, the law making and the law breaking. It is not a coincidence that the nation that has among the most laws in the world also has the highest percentage of its population in prison.

The Big-Picture Economy, Part 3: Scarcity, Risk and Debt

"Growth" that depends on manipulated interest rates and easy credit is a sand castle awaiting the rising tide; its destruction is assured. 

When skimming and speculation are more profitable than actually increasing the production of goods and services, the discipline and incentives of a market economy are distorted to the point of no return.

In the natural order of a market economy, income and credit are scarce. Income must be earned, and is thus limited by the hours of the day, capital, competition, ingenuity and luck. Credit is scarce because the pool of savings (capital) available to be loaned out at interest is limited, as is the income available to service debt.

This intrinsic scarcity of income and credit generates capitalism's inherent discipline: capital must be saved by sacrificing consumption, scarce capital must be placed at risk to earn a return, and capital that is lent to borrowers (i.e. credit) must earn a return commensurate to the risks of default and alternative uses of the money.

The natural order has been completely upended in our state/crony-capitalist economy. The Federal Reserve's Zero Interest Rate Policy (ZIRP) and easy credit has destroyed capitalism's inherent discipline and incentivized the destructive forces of speculation, leverage and debt.

We need to distinguish between income earned from generating goods and services and unearned income skimmed from government giveaways and central-bank enabled carry trades. Consider the investment banks that, thanks to the Fed's manipulation, can borrow billions of dollars at near-zero interest and then use the money to buy non-U.S. bonds paying 3.5%. This is a carry trade, as the cost of carrying the debt is much smaller than the yield on the foreign bonds.

In an unmanipulated market economy, the cost of borrowing money would generally be 1.5% above inflation for very low-risk situations. That suggests the interest rate if the Fed ceased its intervention would be around 3.5% to 4%.
How many currently profitable carry trades would vanish if investment banks had to pay 4% to borrow money in the U.S.? How much risk would speculators have to take on to skim higher-yield trades?

The Fed's ZIRP is a blatant gifting of billions of dollars in low-risk carry trades to large banks, speculators and financiers. The Fed might as well write a check and send it to the bankers--ZIRP and easy credit are the equivalent of a free-money check.

On the lower end of the economic spectrum, low rates and abundant government-backed credit enable marginal borrowers to load up on debt that they would not qualify to borrow in unmanipulated markets. This incentivization of marginal borrowers increases risks of defaults and systemic crashes, which tend to be triggered by marginal-debt defaults.

The Big-Picture Economy, Part 2: Surplus, Spending and Debt

Incentivizing fraud and speculation we create a pernicious sense of entitlement

By CHARLES HUGH SMITH

If things are going so great, why does our government need to borrow $1 trillion a year and our central bank create another $1 trillion a year just to keep the bloated status quo afloat? That $2 trillion a year (about 13% of the nation's gross domestic product, roughly equivalent to the entire GDP of France) is really starting to add up.

Federal debt has skyrocketed (note that this is "debt held by the public" and excludes intergovernment debt, i.e. what the Treasury owes Social Security for squandering $4 trillion in Social Security payroll taxes):

Here is the Federal Reserve's balance sheet (bonds bought with freshly created money), which has shot up with quantitative easing money-creation:

The key concept here is surplus. Surplus is what's left after you pay all costs of producing goods and services. You can only spend what's left over, i.e. surplus.

If you own an oil well and it costs $100 to extract and ship a barrel of oil, if the barrel only fetches $90 on the open market, you lose $10 per barrel. Eventually your capital is consumed and you go broke.

If you sell your output for $120/barrel, you need to set aside $10 of the $20 surplus to pay for maintenance and capital investment in the well; you can't just blow every cent of surplus, as eventually the well parts wear out and your production falls to zero.

So you can really only spend $10 of the $20 surplus per barrel.

This holds true for any good or service, for every business and every nation: no nation can spend more than it generates in surplus. the only way we can spend more than we generate in surplus is to borrow money and use the surplus to pay the interest.

The Big-Picture Economy, Part 1: Labor, Imports and the Dollar

It is impossible for the U.S. to maintain the reserve currency and run trade surpluses 

By CHARLES HUGH SMITH

Many well-meaning commentators look back on the era of strong private-sector unions and robust U.S. trade surpluses with longing. The Progressive consensus (articulated by Robert Reich, among others) is that unions gave the working and middle classes bargaining power that has been lost in the decline of unions.

Other commentators look back with similar nostalgia on the large trade surpluses (i.e. current account surplus) of the same era--the 1950s and 1960s.

The two trends are connected. Unions had bargaining power because the corporations on the other side of the table were generally cartels (autos, steel, etc.) that were largely domestic, meaning that they were captive to domestic markets and politics.

All these conditions have changed. Present-day U.S. corporations are global, not domestic; up to 75% of their sales and/or profits are generated in overseas markets, and a similar percentage of their workforces are also overseas, not just for cost reasons but to stay close to the markets generating their profits.

Free-trade agreements restrict attempts to protect domestic markets from overseas competition, and as a result domestic unions have essentially zero bargaining power with either nominally American firms or their global competitors in most markets. The only sectors open to union bargaining power are domestic monopolies or cartels with no overseas competition, i.e. the government, which is why the union movement is now dominated by public unions.

The trade surpluses vanished for two reasons: global competition and protection of the dollar as the world's reserve currency. This is a difficult issue to grasp, so let's do it in parts:

1. When the global exporting nations recovered after World War II, their costs of labor and production were cheaper than American industry, which was hobbled by the strong dollar. For example, $1 bought 250 yen as recently as the early 1970s. Today, it barely buys 100 yen.

2. As a result, cheap imports took market share from domestic producers (believe it or not, BMWs were once relatively cheap), and the U.S. trade balance went negative, i.e. the U.S. ran trade deficits. To settle the deficits, the U.S. had to ship gold to the creditor nations. 

3. As the trade deficits expanded, America's gold holdings shrank. The writing was on the wall: continued deficits would eventually shrink the U.S. gold holdings to zero, at which point deficits would be impossible to sustain.

4. As a result, President Nixon closed the gold window and the U.S. dollar floated in a market of supply and demand.

The second half of the story is Triffin's Paradox, an issue I have covered in depth in:

My name is Bill, and I’m an arthritic

Is Drug Addiction Really Like ‘Any Other Chronic Illness’?

Who can imagine an organization called Arthritics Anonymous whose members stand up and say “My name is Bill, and I’m an arthritic”?

By Theodore Dalrymple

Sometimes a single phrase is enough to expose a tissue of lies, and such a phrase was used in a recent editorial in The Lancet titled “The lethal burden of drug overdose.” It praised the Obama administration’s drug policy for recognizing “the futility of a punitive approach, addressing drug addiction, instead, as any other chronic illness.”  The canary in the coal mine here is “any other chronic illness.”

The punitive approach may or may not be futile. It certainly works in Singapore, if by working we mean a consequent low rate of drug use; but Singapore is a small city state with very few points of entry that can hardly be a model for larger polities. It also seems to work in Sweden, which had the most punitive approach in Europe and the lowest drug use; but the latter may also be for reasons other than the punishment of drug takers. In most countries (unlike Sweden) consumption is not illegal, only possession. That is why there were often a number of patients in my hospital who had swallowed large quantities of heroin or cocaine when arrest by the police seemed imminent or inevitable. Once the drug was safely in their bodies (that is to say, safely in the legal, not the medical, sense), they could not be accused of any drug offense. Therefore, the “punitive approach” has not been tried with determination or consistency in the vast majority of countries; like Christianity according to G. K. Chesterton, it has not been tried and found wanting, it has been found difficult and left untried.

But the tissue of lies is implicit in the phrase “as any other chronic illness.” Addiction is not a chronic illness in the sense that, say, rheumatoid arthritis is a chronic illness. If it were, Mao Tse-Tung’s policy of threatening to shoot addicts who did not give up drugs would not have worked; but it did. Nor would thousands of American servicemen returning from Vietnam where they had addicted themselves to heroin simply have stopped when they returned home; but they did. Nor can one easily imagine an organization called Arthritics Anonymous whose members attend weekly meetings and stand up and say, “My name is Bill, and I’m an arthritic.”

Some people (but not presumably The Lancet) might say that it hardly matters what you call addiction. But calling it an illness means that it either is or should be susceptible of medical treatment. And one of the most commonly used medical “treatments” of heroin addiction is a substitute drug called methadone. According to The Lancet, though, 414 people died of methadone overdose in Great Britain in 2012, while 579 died of heroin and morphine overdose. Since fewer than 40 percent of heroin and morphine addicts are ‘”treated” with methadone, treatment probably results in more death than it prevents, at least from overdose. Moreover, some of the people it kills are the children of addicts.

The United States, with five times the population of Great Britain, has nearly fifteen times the number of drug-related deaths (38,329 in 2010). This, however, is not because illicit drug use is much greater than in Britain. It is because doctors in America are prescribing dangerous opioid drugs in huge quantities to large numbers of patients who mostly do not benefit from them. More people now die in the United States of overdoses of opioid drugs obtained legally than are murdered. It is not true, then, that all the harm of opioid misuse arises from its illegality.

Recently I asked a group of otherwise well-informed Americans whether they had heard of the opioid scandal. They had not.