The socialist state is necessarily a police state

Individualism and the Industrial Revolution

by Ludwig von Mises

Liberals stressed the importance of the individual. The 19th-century liberals already considered the development of the individual the most important thing. "Individual and individualism" was the progressive and liberal slogan. Reactionaries had already attacked this position at the beginning of the 19th century.

The rationalists and liberals of the 18th century pointed out that what was needed was good laws. Ancient customs that could not be justified by rationality should be abandoned. The only justification for a law was whether or not it was liable to promote the public social welfare. In many countries the liberals and rationalists asked for written constitutions, the codification of laws, and for new laws which would permit the development of the faculties of every individual.

A reaction to this idea developed, especially in Germany where the jurist and legal historian Friedrich Karl von Savigny (1779–1861) was active. Savigny declared that laws cannot be written by men; laws are developed in some mystical way by the soul of the whole unit. It isn't the individual that thinks — it is the nation or a social entity which uses the individual only for the expression of its own thoughts. This idea was very much emphasized by Marx and the Marxists. In this regard the Marxists were not followers of Hegel, whose main idea of historical evolution was an evolution toward freedom of the individual.

From the viewpoint of Marx and Engels, the individual was a negligible thing in the eyes of the nation. Marx and Engels denied that the individual played a role in historical evolution. According to them, history goes its own way. The material productive forces go their own way, developing independently of the wills of individuals. And historical events come with the inevitability of a law of nature. The material productive forces work like a director in an opera; they must have a substitute available in case of a problem, as the opera director must have a substitute if the singer gets sick. According to this idea, Napoleon and Dante, for instance, were unimportant — if they had not appeared to take their own special place in history, someone else would have appeared on stage to fill their shoes.

To understand certain words, you must understand the German language. From the 17th century on, considerable effort was spent in fighting the use of Latin words and in eliminating them from the German language. In many cases a foreign word remained although there was also a German expression with the same meaning. The two words began as synonyms, but in the course of history, they acquired different meanings. For instance, take the word Umwälzung, the literal German translation of the Latin word revolution. In the Latin word there was no sense of fighting. Thus, there evolved two meanings for the word "revolution" — one by violence, and the other meaning a gradual revolution like the "Industrial Revolution." However, Marx uses the German word Revolution not only for violent revolutions such as the French or Russian revolutions, but also for the gradual Industrial Revolution.

Incidentally, the term Industrial Revolution was introduced by Arnold Toynbee (1852–1883). Marxists say that "What furthers the overthrow of capitalism is not revolution — look at the Industrial Revolution."

Marx assigned a special meaning to slavery, serfdom, and other systems of bondage. It was necessary, he said, for the workers to be free in order for the exploiter to exploit them. This idea came from the interpretation he gave to the situation of the feudal lord who had to care for his workers even when they weren't working. Marx interpreted the liberal changes that developed as freeing the exploiter of the responsibility for the lives of the workers. Marx didn't see that the liberal movement was directed at the abolition of inequality under law, as between serf and lord.

Karl Marx believed that capital accumulation was an obstacle. In his eyes, the only explanation for wealth accumulation was that somebody had robbed somebody else. For Karl Marx the whole Industrial Revolution simply consisted of the exploitation of the workers by the capitalists. According to him, the situation of the workers became worse with the coming of capitalism. The difference between their situation and that of slaves and serfs was only that the capitalist had no obligation to care for workers who were no longer exploitable, while the lord was bound to care for slaves and serfs. This is another of the insoluble contradictions in the Marxian system. Yet it is accepted by many economists today without realizing of what this contradiction consists.

According to Marx, capitalism is a necessary and inevitable stage in the history of mankind leading men from primitive conditions to the millennium of socialism. If capitalism is a necessary and inevitable step on the road to socialism, then one cannot consistently claim, from the point of view of Marx, that what the capitalist does is ethically and morally bad. Therefore, why does Marx attack the capitalists?

Marx says part of production is appropriated by the capitalists and withheld from the workers. According to Marx, this is very bad. The consequence is that the workers are no longer in a position to consume the whole production produced. A part of what they have produced, therefore, remains unconsumed; there is "underconsumption." For this reason, because there is underconsumption, economic depressions occur regularly. This is the Marxian underconsumption theory of depressions. Yet Marx contradicts this theory elsewhere.

Marxian writers do not explain why production proceeds from simpler to more and more complicated methods.

Nor did Marx mention the following fact: About 1700, the population of Great Britain was about 5.5 million; by the middle of 1700, the population was 6.5 million, about 500,000 of whom were simply destitute. The whole economic system had produced a "surplus" population. The surplus population problem appeared earlier in Great Britain than on continental Europe. This happened, first of all, because Great Britain was an island and so was not subject to invasion by foreign armies, which helped to reduce the populations in Europe. The wars in Great Britain were civil wars, which were bad, but they stopped. And then this outlet for the surplus population disappeared, so the numbers of surplus people grew. In Europe the situation was different; for one thing, the opportunity to work in agriculture was more favorable than in England.

The old economic system in England couldn't cope with the surplus population. The surplus people were mostly very bad people — beggars and robbers and thieves and prostitutes. They were supported by various institutions, the poor laws,[1] and the charity of the communities. Some were impressed into the army and navy for service abroad. There were also superfluous people in agriculture. The existing system of guilds and other monopolies in the processing industries made the expansion of industry impossible.

In those precapitalist ages, there was a sharp division between the classes of society who could afford new shoes and new clothes, and those who could not. The processing industries produced by and large for the upper classes. Those who could not afford new clothes wore hand-me-downs. There was then a very considerable trade in secondhand clothes — a trade which disappeared almost completely when modern industry began to produce also for the lower classes. If capitalism had not provided the means of sustenance for these "surplus" people, they would have died from starvation. Smallpox accounted for many deaths in precapitalist times; it has now been practically wiped out. Improvements in medicine are also a product of capitalism.

Arguably

Arguing Hitchens

Arguably: Essays [1], Christopher Hitchens, Twelve Books, 788 pages

By George Scialabba 
^[2]It has always been with me a test of the sense and candor of anyone belonging to the opposite party whether he allowed Christopher Hitchens to be an ornament of Anglo-American literary journalism. Hundreds of novelists, historians, memoirists, and politicians have undergone Hitchens’s critical attentions, to the frequent edification and unfailing entertainment of his readers. Few present-day journalists have a detectable, much less unmistakable, prose style; the suavity and piquancy of Hitchens’s prose are unmatched among his critical peers.
Equally admirable is his breadth of reading; he has made an art of casual allusion. “Erudition” is not quite right; it suggests labor, and what is most impressive about the way Hitchens liberally sprinkles apposite quotes from Auden and Larkin, Waugh and Wodehouse, Jefferson and Churchill throughout his essays is his apparent effortlessness. He always seems to have been reading just the right book at just the right moment—though at a certain point it dawns on you that it can’t be an accident; he really must be intimate with an extraordinary expanse of modern European history and literature.


The essays collected in Prepared for the Worst (1988), For the Sake of Argument (1991), Unacknowledged Legislation (2000), Love, Poverty, and War (2004), and now Arguably range almost inconceivably widely. A short gallery of personal favorites would begin with his portrait of Thomas Paine, whom he praises in terms that strikingly parallel Lionel Trilling on Orwell:

Everything he wrote was plain, obvious, and within the mental compass of the average. In that lay his genius. And, harnessed to his courage (which was exceptional) and his pen (which was at any rate out of the common), this faculty of the ordinary made him outstanding.

It would include his portrait of Conor Cruise O’Brien, to whose variegated political and intellectual career Hitchens renders difficult and delicate justice. His first embattled defense of Orwell (several others would follow) remarks penetratingly that “the essence of Orwell’s work is a sustained criticism of servility. It is not what you think but how you think that matters.” There are blistering takedowns of English politicians Reginald Maudling and Michael Foot and American neoconservatives Norman Podhoretz and Charles Krauthammer, which, brief though they are, deserve to outlive their subjects. There is a harrowing report from El Salvador under the death squads, with a muted and diffident, but all the more affecting, tribute to the Catholic resistance.
A tossed-off column from 25 years ago is virtually Hitchens’s sole effort to formulate a political philosophy. It is so good that one is furious with him for never returning to the subject:

I bought an armful of socialist magazines in London recently, and was impressed by their dogged iteration of the new rage for free-market, individualist formulae. … Once the intoxication of this ‘new thinking’ has worn off, it will again become boringly clear that all macro questions are questions that confront society rather than the individual. … This is true of the imperiled web of nature and climate, which when messed around with can lead to dustbowls in one province and floods in the neighboring one. It is true of the water that can bring lead into the blood and bone of children. There is no ‘minimal government’ solution to any of these pressing matters.
One doesn’t want or need to argue this with any relish. The idea of the individual should not be glibly counterposed to the idea of society. After all, what is society made up of, if not individuals? But there are two ways of facing collective responsibilities. One is to ignore them until it is too late, at which point things like rationing, conscription, and regimentation become the options, irrespective of whether the system is capitalist or socialist. The other is to recognize them in time and take the necessary measures freely and by consent. But there is no evading these responsibilities altogether, or of dismissing them as ‘One World sentimentality.’

Alas, these examples have only gotten us through Hitchens’s first collection, Prepared for the Worst. There is no space left to mention his authoritative pieces on the New York intellectuals and Noel Annan’s portrait of the British Establishment, or “Booze and Fags,” a jolly paean to alcohol and tobacco, or an illuminating essay on Daniel Deronda (all in For the Sake of Argument); the pair of exquisite tributes to Oscar Wilde, the discerning essays on Conan Doyle, Kipling, and Anthony Powell, or the full-on considerations of Isaiah Berlin and Whittaker Chambers, Gore Vidal and Andy Warhol (in Unacknowledged Legislation); the magisterial assessments of Trotsky and Churchill, the wonderfully perceptive, V.S. Pritchett-like essays on Byron, Huxley, Waugh, Joyce, Proust, Borges, and Bellow, or the simultaneously rollicking and haunting record of a trip the length of Route 66 in a rented red Corvette (in Love, Poverty, and War).


And even this leaves out his books: No One Left to Lie To, a definitive account (or as near as possible) of Bill Clinton’s mendacity; The Trial of Henry Kissinger, which has convinced hundreds of thousands of readers (some of them sitting magistrates in foreign countries) that President Obama’s fellow Nobel laureate should be behind bars; and God Is Not Great, the first New York Times number one bestseller to advance that claim. It’s clear, I’m afraid, that within the confines of a mere book review, any short gallery of personal favorites will be frustratingly incomplete. There’s simply too much very good Hitchens.

Unbelievable

Canada: "We Believe in Free Trade" and Will End Dozens of Tariffs on Imports to Help Manufacturing

By Mark Perry

TORONTO (Reuters) - "Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring. The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy. "We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015."

A few thoughts:

1. We sometimes forget that "tariffs" and "duties" are really "taxes" on imports; and therefore eliminating or reducing tariffs or duties is the same thing as eliminating or reducing taxes on consumers and businesses buying foreign products.  In the same way that "tax cuts" can stimulate economic activity, "tariff cuts" do the same, and that's the approach being taken in Canada. 

2. When it comes to helping domestic manufacturers through trade policy, the usual approach is to impose tariffs or restrictions on imports as a way to protect domestic producers from more efficient foreign producers.  But the Canadian case illustrates the reality that domestic producers are often using foreign-produced inputs, parts and supplies, to manufacture products domestically, and in that case reducing tariffs on imports ("cutting taxes") helps domestic manufacturers by lowering the cost of their foreign inputs.  

The chart above displays U.S. imports by category for 2011 (through September) and shows that roughly 58% of imported goods are: a) industrial supplies and b) capital equipment that are being purchased by U.S. producers.  If we were to completely eliminate tariffs on imports, U.S. manufacturers relying on foreign inputs would receive significant benefits, while other U.S. manufacturers competing against imports would be less protected from foreign competition.  

Bottom Line: Even though we usually think of increasing exports as the route to increased domestic manufacturing output and employment, Canada's trade policy of reducing tariffs for its manufacturing sector highlights the important contribution of imports to domestic manufacturing.

Update: By keeping its currency undervalued, China is in effect subsidizing American businesses and consumers buying products "Made in China."   We should be thankful for that form of "foreign aid," or transfer of wealth from relatively poor Chinese to rich Americans, as unfair as that might be.  If the U.S. pressures China to appreciate its currency, it would be exactly the same as imposing (or increasing) tariffs on Chinese products.  And just like increased tariffs would make Americans worse off overall, I would argue that a stronger yuan would have the same result.

Deregulation is our last, best hope.

Curing the Unemployment Blues

by Richard A. Epstein 

One of the enduring faiths of modern progressive thought is that omniscient policy makers can cancel out the errors of one form of economic intervention by implementing a second. That lesson was brought home to me when I was a third year student at Yale Law School, whenever discussion turned to the perennial debate over the minimum wage. The charge against the minimum wage was that it had to introduce some measure of unemployment into labor markets by raising wages above the market-clearing price. “Not to worry,” came the confident reply. The way to handle that imperfection is to raise the level of welfare benefits in order to remove the dislocations created by the minimum wage. If one government program had its rough edges, a second government program could ride to the rescue. Implicit in this argument was the tantalizing, but fatal, assumption of economic abundance: The government has the power to tax, and with that power, has access to a cornucopia of public funds that never runs empty—at least until it does.

This abundance-based argument is not confined solely to the minimum wage, but has been extended to countless programs of state intervention in labor, or indeed, any market. Thus in 1935, American labor law created a system of collective bargaining whereby employees bargain with a single voice. That system allows unions to seek, and often obtain, monopoly profits for their members. That system in turn reduces the number of workers hired by the unionized firms. So what is to be done with the excess workers? They should be shepherded into job-training programs, funded by the public, which would allow them to reenter the labor force with other jobs.

For example, job training is the solution for those workers in the Northwest whose skilled jobs in the timber industry have been decimated by a variety of environmental diktats, of which the Endangered Species Act of 1973 is only the most notable. That same two-pronged strategy is evident in the American Jobs Act. Key provisions require recipients of government expenditures (of at least $50 billion) to adopt Buy American programs or to pay prevailing wages, both of which hobble the recipient firms. One predictable offset is tax credits to employers who hire long-term unemployed workers, coupled with yet another “Bridge to Work” job-training program.

The two-sided programs so popular in the United States also play a large role in the European Union, which has stronglycollectivist labor policies. There, employers find it next to impossible to fire workers, to whom they owe a rich set of statutory benefits covering everything from maximum hours to minimum vacations, funded, of course, by government tax revenues. Meanwhile, displaced or unemployed workers receive generous welfare benefits, which reduce their incentive to find new work. The upshot is chronic levels of unemployment in countries like Greece, Italy, Spain, and Portugal, whose fragile financial conditions have put into doubt the survival of the Euro and indeed the European Union.

The massive level of economic dislocation both at home and abroad offers conclusive evidence that this venerable two-part strategy does not, and cannot work. Pinpointing its systematic errors is critical to avoid expanding on past mistakes. The proper approach is simple to state but hard to execute: Always seek “first-best” solutions. The correct response to any restriction on capital or labor is its prompt removal. A “second-best” effort to introduce some offsetting program only makes matters worse. The two errors do not cancel out. They cumulate.

The point is made by looking at the interaction between tough minimum wage laws and high unemployment benefits. The minimum wage law introduces two immediate distortions into labor markets, which grow as the gap between the market-clearing wage and the minimum wage increases. First, it imposes huge administrative burdens on the Department of Labor and other state and federal agencies that have to enforce the law, and the private firms who have to be sure that they act in compliance with its commands. It is no easy thing to define an “hour” for the full range of jobs. There are no uniform answers for dealing with statutory exemptions, commuting time, work breaks, sick leave, or jobs away from home. Overtime pay is a world unto itself. The complex regulations needed to implement this one provision of the labor code require large investments from firms who need to avoid the heavy exposure to government sanctions and private lawsuits from noncompliance. None of these costs are eliminated by the adoption of any program of unemployment benefits or job creation, each of which imposes its own distinct, and costly, administrative overlay.

These costs have to be borne by someone else, and most of them are in fact covered by a combination of general revenues and specific unemployment taxes on current workers. Both of these programs produce additional distortions. Any tax on general revenues reduces the income available for both investment and consumption in all sectors of the economy. Unlike taxes that are imposed to create sensible infrastructure and other public goods, these unemployment taxes do not generate benefits for the parties taxed that equal even a small fraction of the costs that they impose. Firms do not benefit by paying income taxes to government agencies whose job it is to oversee their operations. The same can be said of specific taxes geared to fund unemployment programs, which hit most heavily those firms that have expanded their workforce in ways that reduce the ranks of the unemployed. Make no mistake about it: Any effort to cushion the blow of unemployment also functions, in both the short and long run, as an impediment to job creation. The effort to cushion the blow of unemployment necessarily adds to the ranks of the unemployed.

The two-part strategy also fails as a long-term measure. The consequence of higher rates of unemployment is the detachment of workers from the workforce. One of the serious mistakes of much labor market regulation, including the minimum wage law, is to assume that the only compensation given to employees is found in wages and benefits. But a sounder understanding of labor markets indicates that workers at all levels of the workforce also gain additional marketable skills from working on a steady job. For workers at the bottom of the ladder, those key skills could be as simple as knowing how to keep to a schedule, how to dress for work, how to take instruction, how to work in teams, and how to balance a ledger. For workers up and down the income distribution, idleness means a deterioration of work skills that reduces the potential for job advancement down the road.

Government job-training programs are a feeble substitute for real work experience. Labor markets are always dynamic while job-assistance programs are designed by agency bureaucrats who have all the flexibility of a Soviet bureaucracy. These agencies lack a profit motive, they are heavily budget-constrained, and they specialize in the use of outdated equipment for jobs that will have disappeared before the training program is completed. It has long been known that most graduates of these programs don’t get jobs. That trend continues today, especially in fields like energy.

The only lesson of History is that it does not teach us anything

Lessons of History?

By Thomas Sowell

It used to be common for people to urge us to learn "the lessons of history." But history gets much less attention these days and, if there are any lessons that we are offered, they are more likely to be the lessons from current polls or the lessons of political correctness.

Even among those who still invoke the lessons of history, some read those lessons very differently from others.

Talk show host Michael Medved, for example, apparently thinks the Republicans need a centrist presidential candidate in 2012. He said, "Most political battles are won by seizing the center." Moreover, he added: "Anyone who believes otherwise ignores the electoral experience of the last 50 years."

But just when did Ronald Reagan, with his two landslide election victories, "seize the center"? For that matter, when did Franklin D. Roosevelt, with a record four consecutive presidential election victories, "seize the center"?

There have been a long string of Republican presidential candidates who seized the center -- and lost elections. Thomas E. Dewey, for example, seized the center against Harry Truman in 1948. Even though Truman was so unpopular at the outset that the "New Republic" magazine urged him not to run, and polls consistently had Dewey ahead, Truman clearly stood for something -- and for months he battled for what he stood for.

That turned out to be enough to beat Dewey, who simply stood in the center.

It is very doubtful that most of the people who voted for Harry Truman agreed with him on all the things he stood for. But they knew he stood for something, and they agreed with enough of it to put him back in the White House.

It is equally doubtful that most of the people who voted for Ronald Reagan in his two landslide victories agreed with all his positions. But they agreed with enough of them to put him in the White House to replace Jimmy Carter, who stood in the center, even if it was only a center of confusion.

President Gerald Ford, after narrowly beating off a rare challenge by Ronald Reagan to a sitting president of his own party, seized the center in the general election -- and lost to an initially almost totally unknown governor from Georgia.

President George H.W. Bush, after initially winning election by coming across as another Ronald Reagan, with his "Read my lips, no new taxes" speech, turned "kinder and gentler" -- to everyone except the taxpayers -- once he was in office. In other ways as well, he seized the center. And lost to another unknown governor.

More recently, we have seen two more Republican candidates who seized the center -- Senators Bob Dole in 1996 and John McCain in 2008 -- go down to defeat, McCain at the hands of a man that most people had never even heard of, just three years earlier.

Michael Medved, however, reads history differently.

To him, Barry Goldwater got clobbered in the 1964 elections because of his strong conservatism. But did his opponent, Lyndon Johnson, seize the center? Johnson was at least as far to the left as Goldwater was to the right. And Goldwater scared the daylights out of people with the way he expressed himself, especially on foreign policy, where he came across as reckless.

On a personal note, I wrote a two-line verse that year, titled "The Goldwater Administration:"

Fifteen minutes of laissez-faire,

While the Russian missiles are in the air.

Senator Goldwater was not crazy enough to start a nuclear war. But the way he talked sometimes made it seem as if he were. Ronald Reagan would later be elected and re-elected taking positions essentially the same as those on which Barry Goldwater lost big time. Reagan was simply a lot better at articulating his beliefs.

Michael Medved uses the 2008 defeat of tea party candidates for the Senate, in three states where Democrats were vulnerable, as another argument against those who do not court the center. But these were candidates whose political ineptness was the problem, not conservatism.

Candidates should certainly reach out to a broad electorate. But the question is whether they reach out by promoting their own principles to others or by trying to be all things to all people.

Virtual reality gone out of control

2012=1968?

 

In 2008, Barack Obama lit a fire among young activists. Next year, Occupy Wall Street could consume him.

By John Heilemann

The post-Zuccotti era of Occupy Wall Street began for Max Berger just after 1 a.m. on November 15, when he learned via text message that a forcible eviction of the park was close at hand. At 26, Berger is a redheaded Reed College alum and professional activist; his employers have included the Progressive Change Campaign Committee and Van Jones’s outfit, Rebuild the Dream. By hard-core standards, he had come late to the OWS action, not visiting the park until a week after the protest got going on September 17. But Berger found himself sucked in and became one of its central players. Now, with Zuccotti under siege, he raced to the park and fired off a series of frantic tweets—before being put in handcuffs. “People singing Marley!” “Press not being let in. This is gonna be some Tiananmen shit.” “They can take this park, but they can’t stop this movement. This will backfire. We will win.”

Berger’s optimism was shared by his OWS cohorts. Upset as the organizers were about losing the symbolic value of the encampment at Zuccotti, the way it happened—in a late-night raid by police in riot gear, with reporters denied access and even arrested—had its own symbolic oomph. The organizers thought, too, that the eviction would confer another benefit: catalyzing turnout for the next major OWS demonstration, which was scheduled to take place two days later. And although the “day of action” on November 17 failed to shutter the stock exchange, the demo’s marquee goal, the show of force in Gotham was impressive—and replicated on a smaller scale in cities around the country.

When histories of Occupy Wall Street are written, those days in November will no doubt be seen as a watershed. In just two months of existence, OWS had scored plenty of victories: spreading from New York to more than 900 cities worldwide; introducing to the vernacular a potent catchphrase, “We are the 99 percent”; injecting into the national conversation the topic of income inequality. But OWS had also suffered setbacks. The less savory aspects of the occupations had provided the right with fuel for feral slander (Drudge: “Death, Disease Plague ‘Occupy’ Protests”) and casual caricature. Even among some protesters, there was a sense that stagnation had set in. Then came the Zuccotti clampdown—and the popular perception that it meant the end of OWS.

It’s perfectly possible that this perception will be borne out, that the raucous events of November 17 were the last gasps of a rigor-mortizing rebellion. But no one seriously involved in OWS buys a word of it. What they believe instead is that, after a brief period of retrenchment, the protests will be back even bigger and with a vengeance in the spring—when, with the unfurling of the presidential election, the whole world will be watching. Among Occupy’s organizers, there is fervid talk about occupying both the Democratic and Republican conventions. About occupying the National Mall in Washington, D.C. About, in effect, transforming 2012 into 1968 redux.

The people plotting these maneuvers are the leaders of OWS. Now, you may have heard that Occupy is a leaderless ­uprising. Its participants, and even the leaders themselves, are at pains to make this claim. But having spent the past month immersed in their world, I can report that a cadre of prime movers—strategists, tacticians, and logisticians; media gurus, technologists, and grand theorists—has emerged as essential to guiding OWS. For some, Occupy is an extension of years of activism; for others, their first insurrectionist rodeo. But they are now united by a single purpose: turning OWS from a brief shining moment into a bona fide movement.

That none of these people has yet become the face of OWS—its Tom Hayden or Mark Rudd, its Stokely Carmichael or H. Rap Brown—owes something to its newness. But it is also due to the way that Occupy operates. Since the sixties, starting with the backlash within the New Left against those same celebrities, the political counterculture has been ruled by loosey-goosey, bottom-up organizational precepts: horizontal and decentralized structures, an antipathy to hierarchy, a fetish for consensus. And this is true in spades of OWS. In such an environment, formal claims to leadership are invariably and forcefully rejected, leaving the processes for accomplishing anything in a state of near chaos, while at the same time opening the door to (indeed compelling) ad hoc reins-taking by those with the force of personality to gain ratification for their ideas about how to proceed. “In reality,” says Yotam Marom, one of the key OWS organizers, “movements like this are most conducive to being led by people already most conditioned to lead.”

And so in coffee shops and borrowed conference rooms around the city, far from the sound and fury in the park and on the streets, the prime movers have been doing just that—meeting, planning, talking (and talking) about the future of OWS. The debates between them have been fierce. Tensions have been laid bare, factions fomented, and ideological cleavages exposed—all of it a familiar recapitulation of the growing pains experienced by protesters of the past, from those in favor of civil rights and against the Vietnam War in the sixties to those fighting for workers’ rights in the thirties.

Like an ancient Greek Tragedy

The Euro Area Is Coming to an End

By Peter Boone and Simon Johnson

Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.

Here’s why. Until 2008, investors assumed that all euro- zone sovereign bonds, as well as bank debt, were risk-free and would never default. This made for a wonderfully profitable trade: European banks could buy government debt, finance it at less expensive rates through funding provided by the European Central Bank, and pocket the spread.

Then credit conditions tightened around the world and some flaws became evident. Greece had too much government borrowing; Ireland had experienced a debt fueled real-estate bubble; and even German banks had become highly leveraged. Investors naturally decided some credit-risk premium was needed, so yields started to rise.

Greece, Ireland, Portugal, Spain and now Italy have large amounts of short term debt that they can’t roll over at low cost. Leading European banks are in the same situation. None of these countries or banks can long bear the burden of their current debt levels at reasonable risk premiums.

Last Resort Technocrats

Many of Europe’s leading politicians, some International Monetary Fund officials, and the technocrats-of-last-resort -- Mario Monti in Italy and Lucas Papademos in Greece -- mistakenly believe that these risk premiums can be quickly reduced. They argue that if they cut budget deficits, carry out structural reforms and modestly recapitalize banks, their countries will soon grow and regain access to markets.

More realistically, none of these countries will be borrowing again soon in the capital markets. Ireland’s finance minister, Michael Noonan, is at odds with reality when he claims that Ireland should return to the markets in 2013. This is a country with 133 percent of gross national product in public debt and about 100 percent GNP in additional contingent liabilities to the banking system. (We use gross national product because gross domestic product is artificially raised by the offshore profits of non-Irish multinational corporations, most of which Ireland doesn’t tax.)

With such enormous debt burdens, even if the Irish or other troubled countries manage to convince the market that there is only a 5 percent to 10 percent annual risk of default, these countries will experience high real interest rates -- plus ensuing low investment and fragile banks -- for decades.

The French, along with U.S. and U.K. officials, are pleading with the European Central Bank to come to the rescue. Their hope is that the ECB can remove credit risk by promising to back all sovereign and bank credits in the euro zone. This is what politicians mean when they say “bring out the bazooka.”

When large amounts of any currency are printed in response to deep structural flaws, it’s hard to trust that money. A massive bond-purchase program by the ECB would reduce credit risk but increase the danger that the euro will decline in value against the dollar and other currencies. And if the ECB needs to continue buying more debt to finance deficits and prevent defaults -- because peripheral countries could stop making painful fiscal adjustments once the ECB starts buying bonds -- wages and prices would increase, as we saw in the U.S. in the 1970s. This is anathema to the Germans.

Inflation Risk

We would soon see German bonds sold off as investors protect themselves from long-term inflation, which erodes the value of such debt. People holding bonds with a high credit risk (such as Italy and Spain) would surely sell many of those to the ECB, or simply cash out when those bonds mature in case the central bank, at some point, stops buying.

An ECB “bazooka” wouldn’t restore competitiveness to Europe’s periphery, so even with this, Europe’s troubled nations would require many more years of tough austerity and budget reform to stabilize debt.

This would all just look like another unsustainable debt profile. Germany would be paying higher interest rates on its debt, while most banks and the periphery would be heavily financed by the ECB -- and both credit and currency risk premiums would remain. Markets would eventually turn against Europe with a vengeance, and with no more plausible solutions, the whole system would come tumbling down amid both inflation and debt restructuring.

Germany’s credit is impeccable, but the country is issuing debt in a currency that is flawed and could soon be worth much less than it is today. If Germany does block the “bazooka” and instead takes on more of the fiscal burden in Europe -- for example, through the obligations inherent in any kind of euro- bond issue -- this would reduce currency risk but undermine the country’s credit rating.

The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

An influx of creativity

Will They Survive?

By Yoani Sánchez

Between the ugly concrete buildings and the mansions with gardens, timid spaces for entertainment are emerging. A neighborhood that for decades was condemned to nocturnal boredom, a slice of the bedroom city, now sees glowing signs and bars offering drinks springing up here and there. Comfortable cafes, bars, gyms, and hairdressers flourish with the rebirth of self-employment. Among today’s entrepreneurs, few were a part of the wave of tiny private businesses that appeared in the mid-nineties. So they have no memory of the trauma of being shut down, of governmental will strangling them with high taxes, absurd restrictions, and excessive inspections.

 

Along with the timbiriches — the tiny businesses with few resources — places are also opening that compete in beauty and efficiency with the best hotel on the Island. Works of art on the walls, carved wood furniture, lamps made to order by local artisans, are some of the details this new class of impresarios use to decorate their premises. Word spreads quickly: “They’re opening a Mexican restaurant on that corner”… “A Swedish chef has come to give classes to cooks planning to open sites in Central Havana”… “On that balcony they serve the most exquisite paella in the country.” It would seem that such an influx of creativity is unstoppable and that they will not be able — as they did in the past — to cut off a sector whose quality exceeds the State establishments.

The neighborhood has become a destination for people after they leave 23rd Street or the Malecon in search of recreation. But a certain uneasiness still keeps us from enjoying the impeccable tablecloths and the waiters in ties; some questions wash over us with every spoonful we taste: Will they survive? Will they let them exist, or will they return to eliminate them?

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Quote of the Day

Pro-Market vs. Pro-Business

 

"There is a world of difference between being pro-market and being pro-business. Sometimes, the two positions happen to coincide; often they don’t."

                                                                                   ~Daniel Hannan

Stated differently, many of the criticisms of capitalism are really criticisms of "crony capitalism."  

The short of the century

The bubble in government bonds is finally bursting

by DETLEV SCHLICHTER

“The government can always pay.”

This is a statement that has no basis in fact. Any rational analysis will quickly expose it to be a fallacy. Economic theory, economic history, and plain good old horse sense can demonstrate effortlessly that this statement is an illusion. Yet, it is today a widely held and deeply cherished illusion in the world of finance (and, incidentally, the world of politics). In fact, it has become one of the defining myths of the modern fiat money era. It has for decades provided portfolio managers and bankers with an imaginary refuge from the turbulent world of capitalist “creative destruction”, a ‘safe haven’ where their nerves and capital could rest. The ‘free lunch’ might not have been a feast – only the ‘risk-free rate’ was to be had – but it was better than nothing and anyway a welcome break from capitalism and entrepreneurship. And by the way, if you leverage your government bond portfolio sufficiently with the help of central-bank-provided, zero-cost fiat money, the returns could still be quite handsome.

The fate of myths is that they sooner or later clash with reality. Then they are exposed as myths, which requires a painful giving-up of beloved certainties, a readjustment of paradigms and an abrupt change in behaviour. This is what we have been witnessing in European sovereign bond markets and will soon observe outside Europe as well. To believe that this process would stop with Greece or even Italy, as seemed to be the consensus in the summer of 2011, was naïve. That it would stop with France or even be contained within the European Monetary Union is the present hope of government bond investors and government-bond issuers, i.e. politicians. It is equally naïve and it received a meaningful dent last week in form of the worst auction result for German government debt (Bunds) ever.

When the irrational belief that the major governments – those of the U.S., Germany, U.K., France, Japan – can and will always pay, regardless of the size of their overall obligations, and that their bonds are therefore ‘risk-free’, is finally being questioned, we could witness a momentous change in market behaviour. That this moment will be reached at some point is beyond doubt. I would argue that this moment could be sooner than many think.

Before we look at present events more closely and risk a peek into the future, let us revisit some of the fundamental facts of government bond investing.

Some basic facts about lending to the state

Government bonds are not backed by productive capital and will not be repaid out of capitalist production, at least not directly. Those who lend to the state do so in the expectation that the state, after consuming what it has borrowed right away, will repay its creditors by either taxing the productive section of society (i.e. those who have not put their money into ‘safe’ government bonds but risked it in a competitive enterprise and managed to generate a return by providing something of value to the buying public) or by printing the money and thereby taxing the fiat-money users in society (i.e. everybody) via a declining purchasing power of the monetary unit. Government bonds channel savings back into consumption, and they shift scarce resources away from employment that is directed by markets (and thus ultimately consumers) and into employment that is directed by politics. The rising public debt levels of the modern fiat money era indicate substantial and growing waste of resources and misallocation of capital, and are harbingers of great social and economic upheaval.

That banks and portfolio managers lend so generously to the state is not surprising as the cost of error (over-lending and over-borrowing) is apparently easily socialized across the wider public, either via higher levels of taxation or faster paper money debasement. “The state can always pay.”

The game is now up. The accumulated debt load has become too big to be serviced or repaid in any stable manner out of taxation or fiat money creation. If these mechanisms are nevertheless still employed it must lead to chaos.

Fact is this: Around the world government spending, budget deficits and accumulated debt loads are unsustainable in light of real underlying economic strength and the true available pool of private savings. But the modern welfare state cannot shrink. Nobody in the political machinery has any idea how it should be done. The fiat money economy is not built for deleveraging and the welfare democracy not for downsizing.

If you needed any further evidence of this you got it in spades last week. In the U.S. the ‘super-committee’ failed to reach agreement on spending cuts, and in the UK the Prime Minister admitted that the government was failing in its effort to reduce the debt load and announced various subsidies for the housing market, tax-funded bribes for companies to hire unemployed teenagers, and New Deal-style infrastructure projects to ‘kick start’ the economy.

The confused and pointless “Occupy Wall Street” movement seems to have brought to the forefront of public discussion again the notion that all of this could be sorted by taxing the rich. That this is even debated shows how little the public appreciates the sheer mind-boggling extravagance of the modern welfare-warfare state: In 2011 the U.S. government will have spent at least $3,700 billion while taking in about $2,200 billion, thus running an eye-watering $1.5 trillion deficit. It collects less than $1 trillion in income tax. Thus, even if the government doubled its intake from income taxation instantly it could not close the budget gap. The situation is completely out of control, and to those who believe that this is no problem because the U.S. government can always print the money, I can only say: Be careful what you wish for.

Beyond repair

But back to Europe, which continues to get most attention at the moment: As I said, long-held and cherished myths are not abandoned easily. The investment community has for months demanded ever more urgently a policy ‘bazooka’ that would restore the old order. Of course, by this is meant again the established mechanisms for repaying the lenders to the state: tax somebody else or print money. If the taxes needed to repay Greek and Italian debt could not be had from Greeks and Italians, then the Germans should pay as part of ‘fiscal integration’ or communal bond issuance. Or, the bond investors get repaid out of printed money from the ECB. “Unlimited bond-buying” via the printing press was the other bazooka.

Such proposals are unoriginal and illustrate that the gravity of the situation is not fully appreciated. Germany and France simply lack the resources to bailout the others, or even their own banks. As to the ECB’s printing press, as I explained here, ‘unlimited’ bond buying cannot be limited to Italy, which in itself would pose an enormous challenge. The overall size of the operation would soon be such that concerns about inflation must rise, and once real interest rates begin to go up deficits will expand even faster, forcing the ECB to buy ever more bonds. A spiral of ever higher real rates, more central bank bond buying, and in turn rising inflation expectations and even higher real interest rates is the classic fiat money endgame.

(At this point I often get the following comment: But what about Japan? Have they not been conducting QE for many years without a rise in inflation? — No! The Bank of Japan’s balance sheet is roughly the same size today as it was ten years ago. By contrast, since 2008, the balance sheets of the Fed, the Bank of England and the ECB have roughly tripled in size. For numerous reasons, Japan is a gigantic accident waiting to happen but in terms of monetary sanity the Japanese are presently the least mad.)

The political class, the fiat money bureaucracy and their eager creditors in the financial community have collectively checkmated themselves. Dreams of the policy ‘bazooka’ and the helpless babbling about ‘lack of political leadership’ cannot mask that sinking feeling that a lot of the ‘risk-free assets’ that have been carelessly accumulated over recent decades now turn out to be toxic waste that could burn a sizable hole into investment portfolios. Hiking taxes or printing the money is not a sensible solution but that does not mean it won’t be tried – it most certainly will be, and with predictably disastrous results. But here is the funny bit: if these are the potential outcomes of the European debt crisis: defaults, fiscal integration, unlimited helicopter money  – why would anybody buy German Bunds? Did anybody really think that the ECB could print the entire European sovereign bond market to a sustainable 2 percent communal interest rate, or that in a fiscal union everybody converges on Germany’s 2 percent rate? Yet, for months and months now (until last week), the investment community has happily piled into German debt as the alleged ‘safe haven’. Why?

Mass psychosis

To explain this we have to resort to psychology. As I explained here, amateur psychology has no place in economic theory but it is often useful when trying to make sense of short-term market phenomena. Traders, bankers and investors simply didn’t want to give up the myth of the safe asset. Although the problems are essentially the same almost everywhere, the investment community did not want to believe that government bonds as such were a dodgy investment but only that certain government bonds were dodgy investments. Bizarrely, the realization of acute fiscal predicament in one state thus led to massive inflows into the bonds of other, only slightly less fiscally challenged states, which were then prematurely declared ‘safe havens’ precisely until their predicament was exposed as well. It almost appeared as one only had to wait for the tidal wave of fiscal concern to take one state after another out of the safe-haven basket into the basket of basket cases.

So why not get a step ahead of this train wreck in slow motion and go short Bunds, U.S. Treasuries and UK gilts now? The math on these seems straightforward. If the ECB, the Fed and the Bank of England do not engage in large-scale money-printing (and once again, they certainly should not but the Fed and BoE are already itching to do more) then the underlying disinflationary forces and the fiscal death trap that these nations are already caught up in should make their bonds excellent shorts: the endgame is default. At least this would be an honorable and not entirely unethical outcome. But more likely is the somewhat cowardly ‘solution’ of debt monetization. The many bank economists who are now clamoring for this approach do so against better judgment – one can only assume they do it out of desperation, which gives us some indication of the situation their banks are in.

The problem is way too big for some elegant inflating-away of the debt. As QE in the U.S. and the UK demonstrates, providing a fiat-money-funded backstop to the government does not mean debt-reduction but additional debt-accumulation. Once started, large-scale bond buying will have no endpoint but simply have to continue ad infinitum. This must at some point raise inflation concerns and thus lead to ever more of the remaining private-held government bonds getting dumped onto the central bank. To keep the government in business the central bank will then have to print more money faster and do so at times of rising inflation expectations. This is a recipe for disaster. The endgame is currency collapse and default.

While the math seems to be clear, the desire to believe in the infallibility and omnipotence of the state, which in our secular age has become the new deity, is powerful and may keep those government bonds bid for a while longer. Who knows? But when the ice breaks, this is surely one of the major trading opportunities in this unspeakable financial mess, maybe the short of the century. In this context, the events of last week were meaningful. Reality has finally caught up with German Bunds. The poor price action in Bund futures is indication that German government debt is losing its safe haven status. Fiscal concerns are now engulfing ‘the core’ of Europe. Again, investors desperately hold on to their belief that ‘safe havens’ exist somewhere out there, so they are stupidly piling into Gilts and Treasuries. Soon these will make an excellent short as well.

At this point, I should probably add a disclaimer: The purpose of this site is not to give investment advice but to provide a different and – I like to believe – superior explanation of the present crisis. I am expressing opinions here, and it remains the responsibility of the reader to see if he/she follows my rationale and what conclusions he or she draws for his/her own actions. We are in the endgame of our present – mankind’s latest – experiment with unlimited state paper money. This crisis will continue to unfold and many people will lose money. If we understand this crisis correctly, we may protect our wealth better. For this, I believe, holding substantial positions in physical gold (and probably a few other assets) is crucial. But there could occasionally be other opportunities to make money. This crisis has already exposed the fallacy that our fiat money system in combination with deposit insurance and hyper-regulation has made our banks safe. The next fallacy to get exposed is the belief in safe government bonds. The consequences for financial markets are enormous – and this can offer opportunities. But be careful. Markets are very volatile. Also, at some stage in the future, I expect government interference and a ban on naked shorts. But until that happens, we could be looking at the short of the century.

In the meantime the debasement of paper money continues.