Welcome to the digital memory hole

We're watching, in real time, as 1984 turns from a futuristic fantasy long past into an instructional manual

By Peter Van Buren 
What if Edward Snowden was made to disappear? No, I'm not suggesting some future CIA rendition effort or a who-killed-Snowden conspiracy theory of a disappearance, but a more ominous kind.

What if everything a whistleblower had ever exposed could simply be made to go away? What if every National Security Agency (NSA) document Snowden released, every interview he gave, every documented trace of a national security state careening out of control could be made to disappear in real-time? What if the very posting of such revelations could be turned into a fruitless, record-less endeavor? 

Am I suggesting the plot for a novel by some twenty-first century George Orwell? Hardly. As we edge toward a fully digital world, such things may soon be possible, not in science fiction but in our world - and at the push of a button. In fact, the earliest prototypes of a new kind of "disappearance" are already being tested. We are closer to a shocking, dystopian reality that might once have been the stuff of futuristic novels than we imagine. Welcome to the memory hole. 

Even if some future government stepped over one of the last remaining red lines in our world and simply assassinated whistleblowers as they surfaced, others would always emerge. Back in 1948, in his eerie novel 1984, however, Orwell suggested a far more diabolical solution to the problem. He conjured up a technological device for the world of Big Brother that he called "the memory hole". In his dark future, armies of bureaucrats, working in what he sardonically dubbed the Ministry of Truth, spent their lives erasing or altering documents, newspapers, books, and the like in order to create an acceptable version of history. When a person fell out of favor, the Ministry of Truth sent him and all the documentation relating to him down the memory hole. Every story or report in which his life was in any way noted or recorded would be edited to eradicate all traces of him. 

In Orwell's pre-digital world, the memory hole was a vacuum tube into which old documents were physically disappeared forever. Alterations to existing documents and the deep-sixing of others ensured that even the sudden switching of global enemies and alliances would never prove a problem for the guardians of Big Brother. In the world he imagined, thanks to those armies of bureaucrats, the present was what had always been - and there were those altered documents to prove it and nothing but faltering memories to say otherwise. Anyone who expressed doubts about the truth of the present would, under the rubric of "thoughtcrime", be marginalized or eliminated. 

Government and corporate digital censorship
Increasingly, most of us now get our news, books, music, TV, movies, and communications of every sort electronically. These days, Google earns more advertising revenue than all US print media combined. Even the venerable Newsweek no longer publishes a paper edition. And in that digital world, a certain kind of "simplification" is being explored. The Chinese, Iranians, and others are, for instance, already implementing web-filtering strategies to block access to sites and online material of which their governments don't approve. The US government similarly (if somewhat fruitlessly) blocks its employees from viewing Wikileaks and Edward Snowden material (as well as websites like TomDispatch) on their work computers - though not of course at home. Yet. 

Great Britain, however, will soon take a significant step toward deciding what a private citizen can see on the web even while at home. Before the end of the year, almost all Internet users there will be "opted-in" to a system designed to filter out pornography. By default, the controls will also block access to "violent material", "extremist and terrorist related content", "anorexia and eating disorder websites", and "suicide related websites". In addition, the new settings will censor sites mentioning alcohol or smoking. The filter will also block "esoteric material", though a UK-based rights group says the government has yet to make clear what that category will include. 

The Reluctant Revolutionary

On Nelson Mandela’s inspiring achievements and tragic failures

By CHARLES LONGFORD

So it has finally come to pass that Nelson Mandela has succumbed to the inevitable and will be buried like every other mortal being. He is being praised, rightly, for his inspirational ability to rise above the brutal racial prejudices of his time. He is being characterised as the most famous victim of the old Apartheid regime, who, despite his 27 years of imprisonment, never sought vengeance against his oppressors but rather led an historic reconciliation process that transformed South Africa into a relatively peaceful, non-racial democracy.

To many, especially in this era of small politicians obsessed with petty issues, Mandela symbolises something profound: an individual willingness to devote one’s life to a grand and good cause. He has come to symbolise mankind’s desire to take a stand against repression and injustice and to create a freer, more equal world.

Alongside these nods to Mandela’s commitment to the cause of challenging Apartheid, with many news channels now playing the court recording from the early Sixties in which he said racial equality was an ideal ‘for which I am prepared to die’, Mandela is also being discussed as a kind of redeeming victim: the victim who inherited the world - more specifically, South Africa - and who prevented a bloodbath and charted a new moral path based upon reconciliation and compromise.

On one level, it is quite legitimate to describe Mandela as a victim of Apartheid. As we will see below, all blacks living in South Africa in the postwar period were victims of racial prejudice. But victimhood, suffering through oppression, is not the same thing as consciously resisting one’s oppression. To do that, what is needed is not the moral high ground that comes with victimhood, with accepting one’s lot, but rather ideas and politics that are capable of inspiring and mobilising one’s fellow victims to change their lot. We owe it to Mandela to assess his qualities as a politician and leader, and his true impact on South Africa, rather than simply remembering what was done to him by others.

Karl Marx, reflecting on the history-making potential of mankind, famously observed that men make their history but not in circumstances of their choosing. Nothing better sums up the political life of Nelson Mandela. It is useful to start with a brief outline of the conditions in which the young Mandela found himself in the early 1950s, in order to understand the circumstances that shaped his political choices and career.

Apartheid and victimhood

The common understanding of Apartheid is that it was an irrational system of racial discrimination introduced by the newly elected Afrikaner Nationalist Party when it came to power in 1948. But Apartheid was not irrational. It was a very rational response to the conditions the National Party found itself in at the time.

Up to the Second World War, South Africa was a colony of Britain. British influence restricted the development of the South African economy, centring it around the production of things Britain needed: gold, diamonds and other raw materials. This was good for Britain, but it thwarted the ambitions of the emerging indigenous capitalist class in South Africa. The National Party government elected in 1948 was strongly influenced by the independent outlook of the Afrikaners, the descendants of the early Dutch settlers. It was committed to promoting the independent development of the South African economy under the direction of local entrepreneurs. Earlier attempts to wrest control over South Africa’s gold and diamond wealth from Britain, half a century earlier, had led to the Anglo-Boer War, when Britain invaded the then independent Boer Republics of the Transvaal and Orange Free State - but now, in the postwar period, Afrikaner nationalists were in control.

The indigenous white South African capitalists set about creating the conditions in which a carefully controlled labour force might produce wealth on a scale that would allow South Africa to compete on the world market. They inherited a host of racist institutions from the British administration. And they took full advantage of this existing pattern of racial discrimination to streamline the economy and realise their capitalist ambitions. A high rate of exploitation had the added advantage of attracting much-needed foreign capital.

This is what gave rise to Apartheid, the subjection of all aspects of black people’s lives to stringent and discriminatory regulation. In 1952, a new law extended influx controls, making it necessary for every black over the age of 16 to carry a ‘reference book’ – the notorious ‘pass’. Another law proclaimed that blacks had no right to live in urban areas. The tribally based homelands for blacks – covering less than 13 per cent of South Africa’s total land space and based in remote and barren areas (initially established by British colonialism) – were now constituted as the only places where blacks were legally entitled to live and own land. ‘Separate development’ was enshrined in law.

Unarmed Man Goes On Shooting Rampage

If this flies in New York, then there is no law

By Mark Steyn

A mentally disturbed man is wandering through traffic outside New York’s Port Authority Bus Terminal. Naturally, the New York Police open fire. They miss the guy. However, the sidewalks being full of people, they manage to hit two female pedestrians, one of them already using a walker, which comes in handy when the coppers shoot you in the leg.

So the DA charges the guy with assaulting the women:

“The defendant is the one that created the situation that injured innocent bystanders,” said an assistant district attorney, Shannon Lucey.

Ah, yes: the “situation” injured the innocent bystanders. If you outlaw guns, only situations will have guns.

The defendant is looking at 25 years in jail for the crime of provoking law enforcement into shooting random citizens. If this flies in New York, then there is no law. 

The Post-Work Economy

A permanent dependency class means a citizenry deprived of dignity

By Mark Steyn

One consequence of the botched launch of Obamacare is that it has, judging from his plummeting numbers with “Millennials,” diminished Barack Obama’s cool. It’s not merely that the website isn’t state-of-the-art but that the art it’s flailing to be state of is that of the mid-20th-century social program. The emperor has hipster garb, but underneath he’s just another Commissar Squaresville. So, health care being an irredeemable downer for the foreseeable future, this week the president pivoted (as they say) to “economic inequality,” which will be, he assures us, his principal focus for the rest of his term. And what’s his big idea for this new priority? Stand well back: He wants to increase the minimum wage!

Meanwhile, Jeff Bezos of Amazon (a non-government website) is musing about delivering his products to customers across the country (and the planet) within hours by using drones.

Drones! If there’s one thing Obama can do, it’s drones. He’s renowned across Yemen and Waziristan as the Domino’s of drones. If he’d thought to have your health-insurance-cancellation notices dropped by drone, Obamacare might have been a viable business model. Yet, even in Obama’s sole area of expertise and dominant market share, the private sector is already outpacing him.

Who has a greater grasp of the economic contours of the day after tomorrow — Bezos or Obama? My colleague Jonah Goldberg notes that the day before the president’s speech on “inequality,” Applebee’s announced that it was introducing computer “menu tablets” to its restaurants. Automated supermarket checkout, 3D printing, driverless vehicles . . . what has the “minimum wage” to do with any of that? To get your minimum wage increased, you first have to have a minimum-wage job.

In my book (which I shall forbear to plug, but is available at Amazon, and with which Jeff Bezos will be happy to drone your aunt this holiday season), I write:

Once upon a time, millions of Americans worked on farms. Then, as agriculture declined, they moved into the factories. When manufacturing was outsourced, they settled into low-paying service jobs or better-paying cubicle jobs — so-called “professional services” often deriving from the ever swelling accounting and legal administration that now attends almost any activity in America. What comes next?

Or, more to the point, what if there is no “next”?

What do millions of people do in a world in which, in Marxian terms, “capital” no longer needs “labor”? America’s liberal elite seem to enjoy having a domestic-servant class on hand, but, unlike the Downton Abbey crowd, are vaguely uncomfortable with having them drawn from the sturdy yokel stock of the village, and thus favor, to a degree only the Saudis can match, importing their maids and pool-boys from a permanent subordinate class of cheap foreign labor. Hence the fetishization of the “undocumented,” soon to be reflected in the multi-million bipartisan amnesty for those willing to do “the jobs Americans won’t do.”

So what jobs will Americans get to do? We dignify the new age as “the knowledge economy,” although, to the casual observer, it doesn’t seem to require a lot of knowledge. One of the advantages of Obamacare, according to Nancy Pelosi, is that it will liberate the citizenry: “Think of an economy where people could be an artist or a photographer or a writer without worrying about keeping their day job in order to have health insurance.” It’s certainly true that employer-based health coverage distorts the job market, but what’s more likely in a world without work? A new golden age of American sculpture and opera? Or millions more people who live vicariously through celebrity gossip and electronic diversions? One of the differences between government health care in America compared to, say, Sweden is the costs of obesity, heart disease, childhood diabetes, etc. In an ever more sedentary society where fewer and fewer have to get up to go to work in the morning, is it likely that those trends will diminish or increase?

The Rise of an Insecure Giant

China’s rise is fraught with fear and uncertainty

By SHLOMO BEN-AMI

By the time China overtakes the United States as the world’s largest economy sometime in the next few years, it will have cemented its status as a major military power – one whose drive to assert itself strategically already is inspiring serious anxiety among its neighbors. But the truth is that China is a solitary, vulnerable rising power – one that faces potentially crippling domestic challenges.

China is currently encircled by US military installations and allies. While Asian countries are largely willing to maintain and even expand their economic ties with China, none (except North Korea, which depends on Chinese aid) is prepared to accept it as the region’s primary power. In fact, US allies like Indonesia and India have emerged as global players largely in response to China’s rise.

For its part, the US has shifted substantial military power toward Asia – with high-profile military deployments in Australia and the Philippines, and 60% of America’s naval capabilities now deployed in the region – and has enhanced its defense ties with Japan and South Korea. Moreover, it is helping to spearhead the Trans-Pacific Partnership, an economic and trade agreement that excludes China but includes many of its regional neighbors.

Against this background, US claims that its strategic rebalancing is not about containing China are not particularly convincing. Indeed, the US is pursuing a strategy of primacy in Asia, not a partnership between equals, and this, together with China’s own internal tensions, is undermining China’s ability to participate productively in regional and global forums.

As it stands, China lacks the confidence and experience needed to navigate the international arena. For example, it will not consider resolving in an international forum its dispute with Japan in the East China Sea over the Diaoyu Islands (called the Senkaku Islands in Japan). International law, China understands, is a double-edged sword that can be used against China in other territorial disputes, or even in its domestic affairs.

F.A. Hayek On "The Great Utopia"

Fascism is the stage reached after communism has proved an illusion

by F.A. Hayek

There can be no doubt that most of those in the democracies who demand a central direction of all economic activity still believe that socialism and individual freedom can be combined. Yet socialism was early recognized by many thinkers as the gravest threat to freedom.

It is rarely remembered now that socialism in its beginnings was frankly authoritarian. It began quite openly as a reaction against the liberalism of the French Revolution. The French writers who laid its foundation had no doubt that their ideas could be put into practice only by a strong dictatorial government. The first of modern planners, Saint-Simon, predicted that those who did not obey his proposed planning boards would be "treated as cattle."

Nobody saw more clearly than the great political thinker de Tocqueville that democracy stands in an irreconcilable conflict with socialism: "Democracy extends the sphere of individual freedom," he said. "Democracy attaches all possible value to each man," he said in 1848, "while socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude."

To allay these suspicions and to harness to its cart the strongest of all political motives—the craving for freedom — socialists began increasingly to make use of the promise of a "new freedom." Socialism was to bring "economic freedom," without which political freedom was "not worth having."

To make this argument sound plausible, the word "freedom" was subjected to a subtle change in meaning. The word had formerly meant freedom from coercion, from the arbitrary power of other men. Now it was made to mean freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us. Freedom in this sense is, of course, merely another name for power or wealth. The demand for the new freedom was thus only another name for the old demand for a redistribution of wealth.

The claim that a planned economy would produce a substantially larger output than the competitive system is being progressively abandoned by most students of the problem. Yet it is this false hope as much as anything which drives us along the road to planning.

Although our modern socialists' promise of greater freedom is genuine and sincere, in recent years observer after observer has been impressed by the unforeseen consequences of socialism, the extraordinary similarity in many respects of the conditions under "communism" and "fascism." As the writer Peter Drucker expressed it in 1939, "the complete collapse of the belief in the attainability of freedom and equality through Marxism has forced Russia to travel the same road toward a totalitarian society of un-freedom and inequality which Germany has been following. Not that communism and fascism are essentially the same. Fascism is the stage reached after communism has proved an illusion, and it has proved as much an illusion in Russia as in pre-Hitler Germany."

Fractional Reserve Banking: How to Create and Destroy Money

In sum, bank lending is the primary driver of monetary expansion and contraction

BY MATTHEW KERKHOFF

"The key function of banks is money creation, not intermediation."— Michael Kumhof, Deputy Division Chief, International Monetary Fund

In November 18th's remarks I wrote a piece on Quantitative Easing and its implications regarding the money supply and inflation. I received lots of feedback and would like to say thanks to those who took the time to write in. The additional questions posed were very insightful and show there is substantial interest in understanding these concepts in greater detail.

The following piece delves deeper into bank lending and its function as the primary driver of expansion and contraction of our monetary system.

This is going to sound harsh, but any discussion about economics is pointless without a fundamental understanding of the fractional reserve banking system on which our economy is built. The intricacies of this system have profound implications on everything from the money supply to credit market health to price stability and even whether reversion to a gold standard is possible. We're going to start small and lay a foundation of knowledge from which we can then explore some of the these controversial topics.

Jumping right in, fractional reserve banking is the practice where bank deposits are backed by only a fraction of the total deposits. This system predates the formation of governmental banking authorities and regulations. It originated from the practices of early bankers, after they realized that depositors typically do not all demand payment at the same time.

Fractional reserve banking is thought to have evolved through the observations and actions of goldsmiths. Before the advent of central banks, goldsmiths assumed a role similar to depository institutions. They would accept gold and silver for safekeeping and provide a "note" as proof of deposit. These notes slowly gained acceptance as a medium of exchange, thereby acting as a form of paper money. Goldsmiths soon realized that their outstanding notes would not all be redeemed at one time, and began looking for ways to earn extra income from the deposits. As goldsmiths began investing their deposits, they soon ended up with more issued notes than redeemable gold, and the concept of fractional reserve banking took form.

As we're going to see, money in our modern banking system has the ability to multiply through bank lending. Each time a loan is made, money is created. Out of where, you may ask? Out of thin air. Most people would attribute this feat only to the Federal Reserve, but in actuality, every bank does it with every loan they make.

Who Really Betrayed Detroit?

The pension-system trustees and the municipal unions

by Steven Malanga

A federal judge’s ruling yesterday that Detroit worker pensions can be cut as part of the city’s bankruptcy case has angered city workers and shocked some of their supporters. Workers carrying signs outside the federal bankruptcy court yesterday blamed big banks for Detroit’s fiscal woes and demanded, “No cuts to our pensions.” They carried photos of Michigan governor Rick Snyder, painted to make him look like the devil. But if workers seek a culprit, they might look at the city’s pension-system trustees and the unions that were supposed to have influence over them. For years, the trustees granted annual bonuses to retirees and fattened worker-savings accounts with high guaranteed rates of return, siphoning crucial assets out of the retirement system, even as Detroit’s finances deteriorated. By one estimate, reported in theDetroit Free Press in September, the bonuses and guaranteed-interest programs cost the pension funds nearly $2 billion in contributions and foregone investment returns—money that might have made the pension system well-funded today and allowed retirement benefits to remain untouched.

Most press accounts note that city-worker pensions in Detroit are modest. They rarely mention that, for two decades, the city supplemented those pensions with annual, so-called “13th checks” for retirees—an additional monthly pension payment. Pension-fund trustees—themselves city workers, retirees, city residents, and elected officials—handed out nearly $1 billion in these annual payments to retirees in the city’s general pension fund. The trustees defended the payments as rewards to workers in years when the pension system’s investment returns exceeded projections. In lean years, they justified them as social policy. “Many retirees relied on that check to pay their increased utility bills during the winter,” wrote an attorney for the city’s pension system in 2011. “Also remember that the money would go directly into the local economy.”

Self-fufilling beliefs of the left

Children taught that they’re disadvantaged, fail to achieve

By T. Sowell

Depressing news about black students scoring far below white students on various mental tests has become so familiar that people along different parts of the ideological spectrum have long ago developed their different explanations for why this is so. All may have to do some rethinking, in light of radically different news from England.

The Nov. 9-15 issue of the distinguished British magazine The Economist reported that among children who are eligible for free meals in England’s schools, black children of immigrants from Africa meet the standards of school tests nearly 60 percent of the time — as do immigrant children from Bangladesh and Pakistan. Black children of immigrants from the Caribbean meet the standards less than 50 percent of the time.

At the bottom, among those children who are all from families with low-enough incomes to receive subsidized free meals at school, are white English children, who meet the standards 30 percent of the time.

The Economist points out that in one borough of London, white students scored lower than black students in any London borough.

These data might seem to be some kind of fluke, but they confirm the observations in a book titled “Life at the Bottom” by British physician Theodore Dalrymple. He said among the patients he treated in a hospital near a low-income housing project, he could not recall any white 16-year-old who could multiply nine by seven. Some could not even do three times seven.

The German Scapegoat

Solving the wrong problem may not be productive but it can serve as a useful diversion

By DANIEL GROS

Could Germany, which accounts for 1% of the world’s population and less than 5% of its GDP, actually be responsible for the sorry state of the global economy? The US Treasury Department started the chorus with a report on currency manipulators that criticized Germany’s current-account surplus. The European Commission added its voice last month, when it published its scorecard on macroeconomic imbalances and called for an in-depth analysis of the German surplus.

The emphasis on Germany seems much more justified within the context of Europe. But, even there, Germany represents less than 30% of eurozone GDP (and less than one-quarter of output in the EU as a whole). Germany is important but not dominant.

This focus on Germany also overlooks the fact that the country represents just the tip of a Teutonic iceberg: All northern European countries with a Germanic language are running a current-account surplus. Indeed, the Netherlands, Switzerland, Sweden, and Norway are all running surpluses that are larger as a proportion of GDP than Germany’s.

These small countries’ combined annual external surplus is more than $250 billion, slightly more than that of Germany alone. Moreover, their surpluses have been more persistent than those of Germany: ten years ago, Germany had a current-account deficit, while its linguistic kin were already running surpluses of a similar size as today. Over the last decade, this group of small countries has recorded a cumulative surplus larger than even that of China.

Are all of these countries guilty of mercantilist policies? Have all of them engaged in competitive wage restraint?

Much of the facile policy advice provided to correct the German surplus seems misguided when one examines the persistent surpluses of this diverse group of countries. Some, like Germany, are in the eurozone (the Netherlands); others have pegged their currency to the euro unilaterally (Switzerland), while still others maintain a floating exchange rate (Sweden).

Within the eurozone, the counterpart to the German surpluses used to be the deficits of the peripheral countries (mostly Spain, but also Portugal and Greece). This is no longer the case.

Today, the counterpart to Teutonic excess saving is “Anglo-Saxon” dissaving: most English-language countries are running current-account deficits (and have been doing so for some time). Together, the sum of the current-account deficits of the United States, the United Kingdom, and major Commonwealth countries amounts to more than $800 billion, or roughly 60% of the global total of all external deficits.

ECB Examines Weapons of Last Resort to Combat Debt Crisis...

ECB Considers Extreme Crisis Measures

The European Central Bank wants to spur lending by banks in Southern Europe, but conventional methods have shown little success so far. On Thursday, ECB officials will consider monetary weapons that were previously considered taboo.

by Spiegel

From Mario Drahgi's perspective, the euro zone has already been split for some time. When the head of the powerful European Central Bank looks at the credit markets within the currency union, he sees two worlds. In one of those worlds, the one in which Germany primarily resides, companies and consumers are able to get credit more cheaply and easily than ever before. In the other, mainly Southern European world, it is extremely difficult for small and medium-sized businesses to get affordable loans. Fears are too high among banks that the debtors will default.

For Draghi and many of his colleagues on the ECB Governing Council, this dichotomy is a nightmare. They want to do everything in their power to make sure that companies in the debt-plagued countries also have access to affordable loans -- and thus can bring new growth to the ailing economies.

The ECB has already gone to great lengths to achieve this objective. It has provided the banks with virtually unlimited high credit and drastically lowered the collateral required from the institutions. The central bank has also brought down interest rates to historical lows. Since early November, financial institutions have been able to borrow from the ECB at a rate of 0.25 percent interest. By comparison, the rate was more than 4 percent in 2008.

Lending Still in Decline

The only problem is that all those low interest rates have so far barely been put to use. Lending to companies in the euro zone is still in decline. In October, banks granted 2.1 percent less credit to companies and households than in the same period last year.

In addition to a further cut in interest rates to zero percent, the central bankers are considering new, drastic measures to combat the negative trend. Some of them are likely to be hotly debated when the Governing Council meets this Thursday in Frankfurt.

So what measures are still on the table and how would they effect the European economy?

One scenario that drives fear into the hearts of all savers is the so-called negative interest rate. It would mean that the banks would have to pay a fee for the money they park, currently without interest, at the ECB -- a kind of penalty interest rate. The idea is to create an incentive for the institutions to loan out extra money to other banks, in Southern Europe for instance. This, it is hoped, would then lead to more lending to businesses and consumers.

The penalty interest rate was already a topic at the last Governing Council meeting in early November. ECB board member Benoit Coeure recently confirmed that the negative interest rate had been discussed and considered from both a technical and legal perspective. "The ECB is ready," he said.

The World’s New Outlaws

With America’s presence in the world receding, regional hegemons flex their muscles.

By  Victor Davis Hanson

The American custodianship of the postwar world for the last 70 years is receding. Give it its due: The American super-presence ensured the destruction of Axis fascism, led to the eventual defeat of Soviet-led global Communism, and spearheaded the effort to thwart the ability of radical Islam to disrupt global commerce in general and Western life in particular.

American military power and bipartisan proactive diplomacy also brought back Japan and Germany into the family of nations and allowed their dynamism to be expressed through economic rather than military power. It protected the territorial integrity of smaller and weaker nations. It guaranteed open seas, free commerce, and reliable and safe global transportation. Without a free-market U.S. economy, NATO, and American military power there would have been no globalization.

In contrast, the world that Hitler, Mussolini, Tojo, Stalin and his successors, and bin Laden and the Islamists envisioned was quite a bit different. Regional enclaves would have their own laws and protocols overseen by local hegemons immune from global scrutiny. Tragically, we are reentering just such an age, not through the defeat of the United States but through its abdication of power.

In the Middle East, Iran in the next decade will become the de facto hegemon, coupling wild threats with private assurances that it not only has nuclear weapons, but also is more likely than others to use them. In response, the Gulf states will either buy their own nuclear weapons from fellow Sunni Pakistan, or form some sort of de facto alliance with nuclear Israel. At some point when Iran’s serial junk talk promising the end of the “Zionists” is supercharged with nukes, it will earn a response.

In Fracking, Sand Is the New Gold

Energy Boom Fuels Demand for Key Ingredient Used in Drilling Wells

By ALISON SIDER and KRISTIN JONES

The race to drill for oil in the U.S. is creating another boom—in sand, a key ingredient in fracking.

Energy companies are expected to use 56.3 billion pounds of sand this year, blasting it down oil and natural gas wells to help crack rocks and allow fuel to flow out. Sand use has increased 25% since 2011, according to the consulting firm PacWest, which expects a further 20% rise over the next two years.

In Wisconsin, the source of white sand perfectly suited for hydraulic fracturing, state officials now estimate more than 100 sand mines, loading, and processing facilities have received permits, up from just five sand mines and five processing plants operating in 2010.

And the stocks of publicly traded companies that deal in sand have soared. Shares of Houston-based Hi-Crush Partners LP have jumped 59% since it began trading in August 2012. Shares of U.S. Silica Holdings Inc., based in Frederick, Md., have doubled since it went public in 2012, giving it a stock market value of $1.9 billion.

Less than a decade ago, U.S. Silica focused on sand for industrial and consumer products—plate glass for windows and, more recently, glass for iPhone and iPad screens. Now those uses account for just half the sand the company digs out of its open pits and even less of revenue.

During the first nine months of this year, the more than $245 million in sand sold to energy companies accounted for 62% of U.S. Silica's sales, up from 53% during the same period in 2012 and 33% during the first nine months of 2011.

Hydraulic fracturing is the process of pumping a mixture of sand, chemicals and water down a well at high pressure to break up dense rock formations so that oil and gas can flow to the surface. The sand left behind in the fracking process props open those tiny pathways so trapped fossil fuels can escape.

The failed Fed

A central bank vulnerable to political pressure was never intended

By Richard Rahn

“I wouldn’t start here if I were you,” is the punch line of an old Irish joke, which monetary scholar Kevin Dowd cites to illustrate the deeper and deeper hole the Federal Reserve is getting us into.

Mr. Dowd, in a paper delivered last week at the Cato Institute’s 31st annual Monetary Conference, concluded: “The modern financial system has not only kicked away most of the constraints against excessive risk-taking, but positively incentivized systemic risk-taking in all manner of highly destructive ways . We have gone from a system that managed itself to one that requires management, but cannot be managed. We have gone from a system that was guarded by market forces operating under the rule of law to one that requires human guardians instead — but we have not solved the underlying problem of how to guard the guardians themselves.” These last two lines could equally be applied to Obamacare, because both are examples of F.A. Hayek’s description of the “fatal conceit” so often exhibited by those who believe in government more than markets.

Speakers at the monetary conference included current and past Fed bank presidents, other former senior Fed officials, members of Congress and noted monetary scholars. All concluded that the Fed has gone well beyond its original mandate and has had a long record of failure, owing not only to its own misjudgments, but also as a result of pressures by various administrations and Congress to do the wrong thing.

The Fed was originally established to be a lender of last resort to stop bank runs, a payments’ processor to clear checks, and an issuer of a uniform national currency (rather than have individual banks issue bank notes). From this limited beginning, it quickly evolved into a full-fledged central bank. The list of failures is long. Once the United States went off the gold standard, the Fed was charged with maintaining the value of the currency — yet the dollar is only worth roughly one-twenty-third of what it was worth when the Fed went into operation a hundred years ago. The Fed is supposed to maintain full employment, which cannot be done by monetary policy alone when excessive government spending, taxing and regulations sap the vitality out of the economy. The Fed has been given powers to regulate banks and, most recently, to “protect consumers,” which is undefined and infinitely elastic.

A former president of the Cleveland Federal Reserve Bank, Jerry Jordan, explained the fundamental dilemma. 

“The existence, per se, of central banks with discretionary powers in a fiat-currency world creates moral hazard in the financial system. Because of the explicit and implicit ‘safety net’ offered by the existence of central banks, private financial institutions cannot be observed behaving as they would in absence of moral hazard. Because of moral hazard in the financial system — privatization of gains from risky decisions and socialization of the losses — the trend has been toward ever more regulations and calls for closer supervision of financial companies. The resulting ‘permission-and-denial’ regime opens ever wider the door to crony capitalism in the financial system.”

Again, to quote Mr. Jordan, 

“In the beginning, the U.S. central bank was supposed to be a ‘lender of last resort.’ But even after almost 100 years, there are no established rules for providing this safety net. No one can say who will and who will not be bailed out in the future.”

Other central banks are not immune to the same forces that are pushing the Fed into an ultimate death spiral. Ever-increasing debt as a percentage of gross domestic product by most countries, coupled with ever-increasing global financial regulation, means the global banking and financial system becomes less and less efficient. Central banks have become the enablers of destructive fiscal policies by buying endless quantities of government debt, rather than disciplinarians — because, in the end, they cater to irresponsible politicians. The idea of central bank “independence” is a myth. Former Fed Chairman Arthur Burns is reported to have said, “We dare not exercise our independence for fear of losing it.” Even if it were not a myth, there is no reason to think that the decision-makers in central banks can see the future any better or are wiser than markets. The evidence is to the contrary.

The fact is we do not need a central bank. Many eminent monetary and financial scholars both past — such as Friedrich Hayek, Ludwig von Mises and Milton Friedman — and present — such as Richard Timberlake, Lawrence White, George Selgin, Gerald O’Driscoll (all of whom spoke at the conference) and former International Monetary Fund official Warren Coats — have explained better ways of running a monetary system, including a return to the gold standard.

Janet Yellen appeared last week before the Senate for her confirmation hearing as new Fed chairman. The essence of her testimony was that the Fed will continue on course to keep buying government debt as long as there is less-than-full employment, and she is a very smart lady, so trust her. No doubt Ms. Yellen is smart and well-intentioned, but so are many other smart people who see the world very differently. The choice is a system based on a few “smart” people who are subject to political pressure, or one based on free markets — you choose.

The World Is Stuck Between A Rock And A Squishy Place

The Destruction of Capital Formation is Still Going Strong 

by Howard Kunstler

The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy. The essence of racketeering is the use of dishonest schemes to get money, often (but not always) employing coercion to make it work. Some rackets can function on the sheer cluelessness of the victim(s).

Is it fair to suppose that money management is at the heart of the sort of advanced, complex economy that developed early in the 20th century? I think so. Money is the lifeblood of trade and of investment in productive activities that support trade. Of course, in order for money to have meaning, to function in such transactional relations, the people must be convinced that it legitimately represents its face value. Otherwise, money must be labeled “money” — that is, a medium of exchange suspected of false value. An economy that uses “money” — especially an economy of rackets — is an economy in a lot of trouble, and that is where ours is in December 2013.

The trouble reached escape velocity in the fall of 2008 when a particular brand of racket among the Wall Street kit-bag of rackets got badly out-of-hand, namely the business of selling securitized bundled mortgages and their “innovative” derivative “products” to dupes unaware that they were booby-trapped for failure which would, perversely, hugely reward the seller of such trash paper. These were, in the immortal words of Senator Carl Levin (D-Mich), the “really shitty deal[s]” propagated by the likes of the Goldman Sachs crypto-bank — so-called collateralized debt obligations — pawned off on credulous pension fund managers and other “marks” around the world greedy for “yield.”

It turned out that all the large banks trafficking in such booby-trapped contracts ended up choking on them when “the music stopped” — that is, when the derivative “swaps” payoffs at the heart of this particular racket began to fail, sending up a general alarm that all such “products” were primed to blow up the entire “banking” system. By the way, the quotation marks I so liberally resort to are necessary to denote that in such a matrix of rackets things are not what they appear to be but only what they pretend to be.

Immigration versus social cohesion?

The elites benefit, so it's becoming a leftish issue

by Matt Ridley

It looks as if David Cameron is determined not to emulate Tony Blair over European immigration. Faced with opinion polls showing that tightening immigration is top of the list of concerns that voters want the Prime Minister to negotiate with Europe, he is going to fight to keep a Romanian and Bulgarian influx out as Mr Blair did not for Poles in 2004. It is the ideal ground for him to pick a fight with Brussels.

One reason is that he now has more political cover on the issue of immigration. It is no longer nearly as “right wing” an issue as it once was, though popular enough with UKIP voters. Migration as a political issue seems itself to be migrating across the political spectrum from right to centre, if not left. Where once any kind of opposition to immigration was seen by left-wing parties and the BBC as just a proxy for racism, increasingly it is now a subject for real debate.

The best example of this is the positive reception that Paul Collier’s new book Exodus has received from the bien-pensant Left. Collier has raised worries about immigration with which left-leaning commentators can sympathise: in particular social cohesion and the effect on the global poor. He is following a path pioneered by David Goodhart, whose book The British Dream argued that overzealous multiculturalism had “reinforced difference instead of promoting a common life”, putting at risk the welfare state.

Both books make the case that the generosity with which British citizens are prepared to hand welfare payments to others could be damaged if Britons no longer think of their neighbours as part of the same “country”. In effect they are voicing an old-fashioned nationalism. Collier warns that “while migration does not make nations obsolete, the acceleration of migration in conjunction with a policy of multiculturalism might potentially threaten their viability”. Nations, he points out, have fallen out of favour as “solutions to collective action problems”. It is not clear how large an unabsorbed diaspora could get before it weakened “the mutual regard on which society depends”.