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The Daily Reckoning

In this December 2012 photo a job seeker leaves his contact information with a potential employer during a job fair in New York. Those dependent on government support, Bonner writes, divert resources from the productive sector to their own personal consumption. (Mary Altaffer/AP/File)

Is the US a nation of dependents?

By Guest blogger / 01.14.13

[Editor's note: This post has been removed because of inappropriate material.]

Since the end of the recession, disability claims have soared while jobs have not. (The Daily Reckoning)

Welfare. Old elephants. And the entitlement cliff.

By Guest blogger / 12.24.12

The Welfare States of the Developed World are “long growth.” Without it, their finances are doomed.

First, a little background…

Generally, investors will pay more for a dollar’s worth of earnings from a stock than from a bond. Stocks are riskier than bonds, in the sense that share prices tend to go up and down more, depending on company results. But investors believe this ‘risk premium’ is worth it, because there is more ‘upside’ in stocks; they will grow with the economy. Over the long run, therefore, the rate of return on stock market investing should more or less reflect the stream of dividends received, plus the rate of growth in the economy. If the economy doesn’t grow, however, the risk premium becomes a costly artifact of an earlier age.

Pension and insurance funds, too, count on growth. They collect money. They invest it and make projections based on what they consider a likely rate of return. The difference between what they collect in premiums…and what they need to invest to cover their costs and payouts…is profit. As of 2012, the typical pension fund — such as those operated by state and local governments — was banking on a rate of investment return as much as four times higher than the GDP growth rate. If growth does not pick up, these funds will go broke. ( Continue… )

An employee of Indonesia's state-owned oil company Pertamina walks past oil drums at the company's main depot in north Jakarta in this December 2004 file photo. It is not so much the availability of energy that counts, Bonner writes, but what you can do with it. (Dadang Tri/Reuters/File)

Is there such a thing as too much energy?

By Guest blogger / 11.28.12

Energy is a good thing. But it is as obedient to the law of Declining Marginal Utility as everything else. The point is obvious, but I’ll prove it anyway. The real question on the table in this section is this: does it also obey the Rule of The Downside? Do you ever reach the point where further inputs of energy are actually negative…or even disastrous? Is there such a thing as too much energy?

In anticipation of the discussion, here are four observations:

1. Energy cannot be divorced from how it is used
2. The more energy resources come under government control, the more unproductive the system becomes
3. Government is subject to the Rule of the Downside too
4. The debt-drenched economies of today’s developed countries are already on the Downside

After 1943, Germany’s investment of more energy in the war effort was not only a waste — it was almost pure downside. Of Germany’s 5.5 million war deaths, most came after the war was effectively lost. The payoff from every ounce of strength, resources and energy devoted to the Wehrmacht after the battles of Stalingrad, North Africa, and the defection of its Italian ally, was needless death and destruction — leaving Germans poorer and fewer than they had been before.  ( Continue… )

House Financial Services Committee Chairman Barney Frank (D-MA) (C) talks with a group including Ranking Member Spencer Bachus (R-AL) (L) during a recess from a committee conference on Wall Street reform to hammer out sweeping changes in financial regulation legislation on Capitol Hill in Washington in this June 2010 file photo. Bonner writes that regulatory meddling prevents us from understanding the true value of goods and services. (Jonathan Ernst/Reuters/File)

The ideal economy: How do we get what we really want?

By Guest blogger / 09.18.12

The downside for Nazi Germany began almost as soon as it started. The regime shifted national resources towards armaments as soon as the Enabling Law of March 1933 gave him the power to rule by decree. More spending on the military left fewer resources for the consumer economy. As more and more men, steel and coal went into military output, non-military output declined, bringing down standards of living. The real wealth of the German people began to fall, almost immediately. At first, the decline was modest. Economists didn’t notice it. They focused instead on rapid industrial growth, falling unemployment, and belching smokestacks. But the typical German had less to eat, less to spend and less to buy. In the final years of the Third Reich, his standard of living was in free-fall.

Few people wake up in the morning and say to themselves: ‘what I really want is a tank.’ Nor do they turn to their wives and say: ‘Honey, we’re out of ammunition.’ Military spending is a state concern, not a private matter. Very few individuals want to use their time or money on weapons or defenses. Security spending is regarded as a necessary evil. It does not increase standards of living. But how much of it is necessary? A politician may say ‘we’ll be better off if we increase military spending.’ A general may advise that the nation will be ‘safer’ if it launches a new weapons program. But how do they know?

Normally, we only know what things are worth by observation. We watch what people buy and what they do. If a man chooses to spend all his time collecting stamps, we presume he likes it. If he chooses to buy an old painting or a new motorcycle, we presume he wants them. We can look at how he spends his money to determine what he desires…and look at prices to see what he thinks they are worth. People use their time and money as they fit. If a gallon of gas is priced at $4 — on the free market — then that is what it is worth. If a dozen eggs is priced at $2, we can say that a gallon of gas is worth two dozen eggs. We have no other reliable measure.

If people are 100% free to produce and to spend as they wish, we can presume they get 100% of what they want. Whether it is good or bad, we don’t know. All we know is that prices reflect the relative values that people give to things and that the economy fully expresses their wants and desires. This is, of course, a fantasy. Nowhere on Earth…no time in history…did such an ideal economy exist. Everywhere, in every epoch, there were restrictions, laws, regulations, theft, subsidies, slavery and other distortions. Still, it is worth keeping in mind this IDEAL ECONOMY. Like an honest man or a virtuous woman, it gives us a standard against which to measure our shortcomings.

If this is true it raises the deepest questions about economic policy. It suggests that there shouldn’t be any. Even the wings of an angel state, brushing against an ideal market economy, are bound to cause distortions. Every act of central planning is an interference with individuals’ plans. Every state-level policy decision interrupts thousands or millions of private ones. There is no way around it. Buyers and sellers express their preferences. We can see what things are worth. If, on the other hand, the price is set, or suppressed, or sustained by decree, the information content in the price disappears. We don’t know what people really want. We don’t know what things are worth. We can only guess. Would they buy so much gasoline if the price were higher? How much corn would people consume if the feds did not require us to put it in our gas tanks? How much would you pay for a hospital stay if the industry were not so heavily regulated? We don’t know.

Any attempt to fiddle the system, dictate prices, favor one industry over another or change preferences in any way creates a distortion which reduces the net satisfaction, aka what people want. Meddling distorts the results, so that people end up getting less of what they really want…and more of what someone else wants them to have.

But wait a minute. Suppose you take money from rich people and spread it around? Now, instead of one rich person getting a lot of what he wants, ten or twenty not-so-rich people would be able to get more of what they want. Wouldn’t that increase net satisfaction? Doesn’t the rule of declining marginal utility decrease the rich man’s enjoyment while permitting the poor men to enjoy their pleasures more fully? Perhaps. But something always seems to go wrong on the road to improving others’ lives.

You can presume, for example, that the rich are not consuming all they have. Otherwise, they wouldn’t be rich. So, you can also presume that what is taken from them has some role beyond satisfying their immediate whims and wants. In fact, it is the capital that is used to build businesses, create factories, endow universities and hospitals; these are the excess resources that are invested to create more consumer goods and services. Take away this capital and will the society be as rich? Will net satisfaction go up or down? Who knows? But it’s not something we have to worry about. No government in the world undertakes simply to redistribute money from rich to poor. Certainly not the Third Reich.

No serious person argues that a command economy is the most efficient way to identify and produce what people really want. Instead, the meddlers argue that there are some things that are more important than economics…some things more important than what the people actually want. Hitler said so:

“The job of the Ministry of Economic Affairs is simply to set the national economic tasks; private industry has to fulfill them… Either German industry will grasp the new economic tasks, or else it will show itself incapable of surviving any longer in this modern age…”

In 1936, he also proposed a law providing the death sentence to anyone guilty of ‘economic sabotage,’ that is, not going along with his plans. What he said…and what he wanted…was so good that it made sense, at least to him, to dismiss the parliament and override the wishes of his own constituents. He was merely doing what all central planners do — replacing what the people wanted with what he wanted, and replacing the whispers of the free market with the sound of his own voice.

As far as we know, God does not speak to public officials and tell them what would be best for the people. Instead, as far as we know, people who control government always use it in a sensible and obvious way — to get more of what they want and more of what they want others to have. And since they have the government’s police and military power to help them do it, unless they are saints and geniuses, the downside can be huge.

When people are allowed to spend their time and money as they wish, the system adapts readily to changes in preferences. A fellow wants a heavy coat in winter. In summer, he wants a bathing suit. Tastes change. Buying patterns evolve. Who really gives a damn? When a woman feels she has enough pairs of shoes…or a man feels he has drunk enough whisky…they stop. There is no need to worry too much about the return on investment. It is their own money; they can squander it any way they want. People don’t necessarily get what they want. But at least they get what they deserve.

One of the under-rated features of the free market is that it so readily separates fools from their money. In government, fools separate everyone else from his money. In private life, people often waste resources. But it is their own wealth they are wasting. And wasters quickly run out of money. Not so the feds. Given an opportunity, they can waste the output of a whole economy…and many decades of accumulated wealth.

In 1930, Germany was still recovering from the disaster of WWI. In terms of per-capita GDP, it had only 50% of America’s prosperity and about 65% of Britain’s. Still, its factories were competitive. It had some of the world’s best scientists and engineers and the strongest major currency in Europe. It was already manufacturing world class tractors, automobiles and airplanes. Left alone, it probably would have increased production, cut costs, raised salaries and gradually joined the US, Britain and France as one of the world’s most prosperous nations. Instead, Germany took a different route.

More on that tomorrow…


Bill Bonner,
for The Daily Reckoning

A representation of Adolf Hitler lies in a box after police searched the house of an alleged neo-Nazi in Juelich, western Germany, on Thursday. Germany's Nazi economy holds some lessons for today. (Michael Klarmann/dapd/AP )

Hitler and the false lure of more is better

By Guest blogger / 08.25.12

Economists cannot know what is ‘better.’ They can only know what is ‘more.’ They have numbers. They can count. They can add up ‘more’. As for ‘better,’ they have no idea. So, in their little minds, more is better.

That is the thinking that has driven the profession…and much of the world economy…to absurdity. Throughout the last 50 years, more looked so much like better, no one worried too much about the difference. More cars. More houses. More food. More gadgets. What was not to like?

But the cost was more debt. And by the 21st century the burden of debt had become so great that the system could no longer move forward. Here is how it worked, up until the early spring of 2007:

The Chinese, and others, made more stuff. The Arabs, and others, pumped more oil.

Americans, and others, created more credit and used the money to buy more stuff.

Rather than demand payment — in gold — for their excess dollars, as they would have before 1971, the exporters took the money and lent it back to the Americans. In this way, the US never really had to settle up. Approximately $8 trillion of purchasing power — the accumulated trade deficits between 1970 and 2007 — was created in this way. There is supposed to be ‘no such thing as a free lunch’ in economics. But for years Americans ate breakfast, lunch, and many of their dinners too at foreigners’ expense.

Not needing to redeem the old credits, new ones were made available to Americans. Cheap credit drove up housing prices…and gave them the collateral to borrow more money and buy more stuff.

But when subprime mortgage market collapsed in ’07-’08, suddenly, US real estate prices stopped rising. This left millions of households in a bind. They could no longer borrow against rising house prices because housing was going down. They had to cut back on spending…which meant less stuff could be sold to them…and it left producers with bulging warehouses with unsold goods.

Economists looked at this situation, after the crash of subprime mortgages in ’07 and ’08, and came to the same conclusion they had on the occasion of every other slowdown over the previous 60 years. The economy needed more “stimulus” to encourage consumers to buy more stuff. They did not notice that consumers already had too much stuff…and that they were now paying the price for buying more stuff than they could afford. Nor did they wonder whether consumers’ lives might be better if they focused more on quality and less on quantity. ‘More’ is all they know; it is all they can do. So they called for ‘more stimulus,’ more debt, more credit, more spending, and more stuff.

But more is not always the right answer. There are times when less is better.

One of those times was in the mid-1930s…when Germany faced a critical decision. More? Or less?

Adam Tooze, a British historian, has written a marvelous book on the Nazi economy, The Wages of Destruction. He shows that, far from illustrating the success of intelligent central planning, the German economy of the Third Reich was a disaster. The National Socialists — or “Nazis” — had their plans for Germany. They were determined to put them into practice, regardless of what the Germans may have wanted for themselves. They fiddled with one sector after another. When one fix failed to produce the desired results, actually bringing unintended and undesired consequences, they tried to fix the fix with a new fix. Most of these fixes involved spending money — if not on actual output, then on bureaucracies that regulated output. And most of them were directed towards a goal that only a demagogue politician or a lame economist would find attractive — making Germany self-sufficient. Imports cost money, they reasoned. Besides, trade forced a nation to behave. Neither was attractive to the Nazis.

Like America in the 2000s, by the mid-1930s Germany had already spent too much money — with the military as its biggest single expense. It faced enemies much more real and dangerous than America’s ‘terrorist’ adversaries. And under Adolph Hitler’s leadership it had decided to invest heavily in armaments. This created a sense of purpose for many people and a source of ‘demand’ that got people working again. Germany was still a relatively poor country, with a standard of living only about half the US equivalent. An autoworker in Munich, for example, could not expect anywhere near the same lifestyle as one in Detroit. Henry Ford paid his workers so well they were able to afford large houses with hot and cold running water and electricity. They could buy automobiles too…which gave a huge boost to America’s heavy industry. When war began, the US could fairly quickly convert its auto factories to production of jeeps, tanks and trucks. Germany could not.

In Germany, automobiles were still a luxury item. Few people owned them; certainly not the people who made them. Military orders made up for the lack of demand from the civilian population.

In this regard, many economists looked at Germany and labeled the rearmament program — from an economic standpoint — as a central planning success story. It ‘put people back to work.’ It ‘got the economy moving again.’ More stuff was being produced. ‘More’ worked! From all over Europe, people came to admire the revival in Germany. American Congressmen praised Hitler. So did many magazine editors and other leaders in France and Britain too.

Besides, compared to what was going on in Russia, Japan and Italy… Germany looked positively benign, if not a perfect role model. Stalin was purging or starving his enemies — millions of them. Benito Mussolini had invaded Abyssinia and was busily massacring the locals. The Japanese were beginning their bloody war against the Chinese. Hitler may have sounded mad from time to time, and he may have murdered many of his rivals on the ‘night of the long knives,’ but now — by 1935 — he was beginning to sound reasonable, at least in comparison.

But vast spending on the military brought problems for the Nazi leadership. The German economy was still recovering from the destruction of WWI, the loss of the Ruhr heavy industrial area, the Great Depression and the reparations payments. Germany. While other economies had been forced off the gold standard, Germany held to its strong mark policies. It lacked the raw materials needed to build heavy military equipment and the fuel needed to power a modern economy and modern war machine. Those could only be bought with foreign currencies, which it could earn by trade, or by drawing down its own hard currency reserves of gold.

By 1936, it was clear that the government would run out of money in just a few months. The Nazi leadership had already ‘fixed’ the farm sector — with various jury rigs and many unintended consequences. The market system had largely been replaced by a system of bureaucratic meddles and price controls which, naturally and predictably, led to shortages that had to be reconciled by rationing.

Now, this same sort of meddling was causing shortages in the manufacturing sector too. If something were not done, the whole rearmament effort could come to a halt. Germany was not rich enough to be able to afford guns and butter — at least not on the scale promised by the Nazi Party. And with their spreading system of bureaucratic management, neither the guns nor butter were likely to last long.

At the time, Mr. Hitler was lucky to have at least one economist with a clearer head than most of his other advisors and henchmen. Carl Friedrich Goerdeler came from a tough, conservative Prussian family. He was smart. He was a good organizer. He was persuasive. Goerdeler seemed like a decent sort, too. After all, in 1933, as mayor of Leipzig, he refused to enforce the national boycott against Jewish businesses and ordered the police to release several Jews who had been taken hostage by the S.A.

Goerdeler may not have been impressed with Adolf Hitler in every respect. Still, as late as 1936 he believed the Fuhrer was an “enlightened dictator” and that if he could only explain to him what was going on, he might be led to make the right choice. He saw readily that you can’t continue to spend more than you earn; Germany would have to adjust its priorities. ‘More’ would no longer work.

While he knew Hitler was dead-set on military expansion, Goerdeler urged the Fuhrer to forget the whole thing. Germany could not afford both guns and butter, he argued, and the German people would be better off with butter. Devalue the mark, he urged. Abandon the program of breakneck re-militarization. Come to terms with England, France and America. Drop the hard-line anti-Jewish claptrap. In short, become a civilized nation with a market economy, rather than a centrally-planned war economy.

He wanted to take this message to Hitler personally, to talk to him, to try to persuade him. But his friends talked him out of it. Hitler had put Hermann Goring into a position as his chief economic advisor. But Goring was very unlike Helmut Schacht at the central bank, who was also calling for a more ‘normal’ free market economy. Goring was a central planner…and a Nazi…through and through. So, Goerdeler prepared a memo for Hitler and passed it to Goring. The latter annotated it before passing it to the Fuhrer, marking critical passages “nonsense!”

Instead of embracing Goerdeler’s plan, Hitler came up with his own 4-Year Plan, released in 1936. It rejected a free-market economy altogether. Instead, Germany would have a war economy, in which all economic and financial decisions were subordinate to the interests of the military.

Like today’s neo-cons, Hitler told his followers that Germany was in a fight for its very survival. Therefore, the laws that applied to normal societies — including the laws of economics — no longer applied to Germany:

“The nation does not live for the economy, for economic leaders, or for economic or financial theories; on the contrary, it is finance and the economy, economic leaders and theories, which all owe unqualified service in this struggle for the self-assertion of our nation.”

In the age-old battle between force and persuasion…civilization and barbarianism…the market and politics…central planning and individual planning…the winner was clear. Germany had gone over to the dark side. Hitler had chosen more military spending…more central planning…and more war.

Politics was triumphant. War was inevitable. And Carl Goedeler was soon history. He began to conspire against Adolph Hitler…including the attempt to kill him in 1944. For his trouble, Goedeler was hung in 1945.

Argentina's President Cristina Fernandez, right, talks to Joseph Stiglitz, left, a Nobel-winning economist, during a meeting in Buenos Aires, Argentina last week. Bonner argues that many modern economists are more interested in their careers than making accusrate, useful observations about the economy. (Eduardo Di Baia/AP/File)

Are economists useful anymore?

By Guest blogger / 08.21.12

In the years 2007-2012, Nobel Prize winning economists Paul Krugman and Joseph Stiglitz — along with celebrity economist Jeffrey Sachs and practically all their colleagues — failed to notice the most-important thing to happen in their field. But not noticing things came naturally, easily to them. In fact, you might say they had built their careers on not noticing things, especially the most-important thing in economics.

It was part of their professional training. It was what allowed them to be economists and to win coveted prizes and key posts in a very competitive occupation. Had they been more reflective…and more observant…they would probably be teaching at community colleges.

But that is just a part of our story. By the late 20th century, economists — especially leading economists — had ceased being useful. They had become a nuisance. They closed their eyes to what an economy actually is…and to how it works…and focused on their own world — a make-believe world of numbers and theories, with little connection to the world that most people lived in. And now in the 21st century, they are up to mischief. And part of the mischief involves not noticing things that are right in front of their noses.

The most-important single feature of modern economies is growth. Without it, neither businesses, households nor governments can pay their bills. Without it, pension funds…private and public…go broke. Without it, the stock market is doomed….and bonds get crushed when debtors can’t pay.

In fact, without growth, every government in the economically developed world faces catastrophe. Its revenues stagnate while its costs — largely driven by open-ended health and pension obligations to aging populations — continue to expand.

By the year 2012, in fact, every major government in the developed world is already in trouble. Some more than others, depending on their ability to borrow money… or to print it. The US, Japan and Britain are still technically “solvent” because they control the currency in which their debts are calibrated. They can always print money to pay their debts; creditors do not have to worry about a simple default. Greece, Italy, Spain, Ireland, Illinois and California, on the other hand, are already keeping lenders up at night worrying that they will not and cannot pay their bills.

Even on these terms, Japan and Britain stand out, each with total debt of more than 500% of GDP. But even this Everest of debt was overlooked by most economists. Rather than look out the window, they hunched over their computers and studied their formulas and their numbers, apparently unaware of the avalanche that was headed their way.

Ultimately, an economy must pay its bills. And it can do so only by drawing on its own savings and output. Debt is money that has already been spent. It is like sin; it may be fun when you are doing it, but there’s always a price to be paid later on. Debt repayment is a painful part of the cycle. And sometimes it is so painful…so enormous…that the bill can never be settled.

Britain and Japan had had their spending sprees. They had their carefree days. How will they now pay their debts? You can forget paying them “off”; no one even imagines that such a thing is possible. But they must be serviced. A lender must get something for his trouble, even if it is a pittance.

Typically, lenders demand a pound of flesh for every 20 or so pounds they lend. The present period is unusual in that regard. Growth rates are so slow, savings rates so high and lenders so fearful, that they no longer require much in the way of yield. They are happy to take no real flesh at all. The U.K. 10-year bond yielded all of 1.68% in mid-August 2012, well below the rate of consumer price increases. As for the Japanese equivalent, investors were content with 0.8%. If there were any consumer price inflation at all, investors would lose money.

Inflation rates have been going down for more than 30 years. Ever since the CPI hit a high of 11% in 1980. Investors must think they will continue going down forever. If that is so, nations such as Japan and Britain will continue to carry their debt at vanishingly low interest cost. But it would be a strange world in which markets went only in one direction. And it will be an even stranger world in which foolish investors fail to get what’s coming to them.

The word normal is in the language for a reason. It was coined to describe what usually happens after something very extraordinary has happened. It is rare for lenders to lend below the rate of consumer price inflation. In effect, they are consenting, at the get-go, to a loss. What normally happens after investors do such a thing is that they do lose money — far more than they expected. Interest rates normally give lenders a 2-4% real return on their money. So if inflation rates were to hit the mark central bankers have set for them — about 2% — and if lenders were to want the interest payments that they normally expect, Japan and Britain would have to devote about a quarter of their entire annual output just to service debt. That’s another way of saying that one out of every four dollars of GDP must be used to pay for things that were consumed…used up…and probably already amortized…years ago.

There’s another word, in English, that describes the likelihood of that happening — zilch.

But deeper than the numbers or the words themselves or the particularities of the situation circa 2012 was a whole theory of government…a “social contract” now in jeopardy. The modern social welfare state was invented by Otto von Bismarck in the mid-19th century. The idea was simple. Governments required the consent and support of the masses. That was the lesson that Republican France had taught the world and that Bismarck had learned. You could get a lot more out of “citizens” than you could out of “subjects.” The subjects of Frederick the Great might reluctantly pay their taxes…and might join his armies. But they would always keep a distance — emotional and physical — between themselves and their masters. War and government were Frederick’s business, not theirs. Monarchs might retain the loyalty of their subjects. They could claim some of their money, too. But even the Sun King, Louis XIV, the man for whom the term “absolute monarch” was coined, was lucky if he collected 10% of the kingdom’s GDP in taxes. As for his soldiers, every one of them wanted payment. In real money.

In the course of the 19th century, monarchy was gradually replaced by some form of representative democracy or republicanism. Not that democracies were necessarily better in any moral or practical way. They did not necessarily improve the lot of the people who lived in them, neither materially nor judicially. Why were they such a hit? It may have been that defensive weapons — repeating rifles — had become cheap and effective. It was much more expensive to keep an armed, subject population in line. Or it may have been a result of the spread of ideas via cheap newspapers and books. Or it may have been merely that because of the Industrial Revolution, people were getting richer and could afford more government.

Readers will find more on the role of government, its growth and efficiency, later. For now, let’s just note that parliamentary, participatory democracy became fashionable in the 19th century. The main reason was probably because it is easier to squeeze and bamboozle a citizen than it is a subject. The real genius of modern democracy is that it makes the citizen feel that the government and its workings are somehow the product of his own aspirations. If he wants more money for his retirement, he presumes he can get is — provided only that enough fellow citizens share his desire. If he wants to go to war, that too is up to him and his fellow voters. If he wants to spend more money on space exploration or ban people from saying prayers in bars, the majority — of which he feels he should be part — can do that too.

There is hardly anything he and his fellow lumpenvoters cannot do — just so long as they are of one mind on the subject. That is why you so often hear people say, ‘If we could only get together on this…” They believe solidarity is the key to success. Whatever the majority wants, it gets.

Even kings had bits in their mouths and a hand on the reins. According to the “divine right of kings” doctrine, a king was a servant of God. A king was subject as well as monarch. God himself had given them the post; they could not refuse it. Nor could they refuse to carry out the job on the terms that they believed God had prescribed. God could pull on the reins whenever He wanted.

Often, monarchs were ridden by those who claimed to represent God. In the famous example from the 11th century, Pope Gregory VII got into a dispute with Henry IV, the Holy Roman Emperor. Henry was excommunicated. How much harm Gregory’s excommunication would do him, Henry might not have known. But he didn’t want to find out. He dressed as a penitent and waited three days outside the Pope’s refuge at Canossa. Then he was admitted and forgiven.

The democratic majority, on the other hand, recognizes no authority — temporal, constitutional nor religious — that can stand in its way. And thus it deludes itself to thinking that it is the master of itself, its own government and its own fate.

“The government is all of us,” said Hillary Clinton.

More to come…


Bill Bonner
 for The Daily Reckoning

This undated photo, released by the General Dynamics Land System, shows the production of an Abrams tank in Lima, Ohio. Rows of sand-colored armored vehicles ready for deployment are parked outside the nation’s only tank manufacturing plant. But the Pentagon says it will soon have enough tanks and wants to halt production for several years as it wrestles with deep cuts in military spending over the next decade. (HO, General Dynamics Land System/AP/File)

Defense spending and the declining 'bang' for the buck

By Guest blogger / 08.09.12

Gore Vidal, veteran of WWII, died last week. Here’s something he wrote in 2003.

I can recall thinking, when I got out of the Army in 1946, Well, that’s that. We won. And those who come after us will never need do this again. Then came the two mad wars of imperial vanity — Korea and Vietnam. They were bitter for us, not to mention for the so-called enemy. Next we were enrolled in a perpetual war against what seemed to be the enemy-of-the-month club. This war kept major revenues going to military procurement and secret police, while withholding money from us, the taxpayers, with our petty concerns for life, liberty and the pursuit of happiness.

He might have added another petty concern: national solvency.

And still another: military preparedness.

Today, the US has no worthy enemies. Still, it spends $1 trillion a year — fully loaded — to defend itself against them. The ‘terrorists’ and ‘insurgents’ it protects us against have no divisions, no trained officers, no heavy armor, no ships, no aircraft, and no heavy weapons. That is why the news from the front is so boring; the newspapers barely report it. There are no pitched battles. No Napoleonic charges. No breathtaking victories. No Stalingrads. No Gettysburgs. No brilliant strategies. No crushing defeats.

Oh, for another battle of Kursk! It was the greatest land battle in history…a tank battle pitting the Germans’ Tigers and Panzers — about 3,000 of them — against the Soviet’s T-34s, of which there were about 5,000 in the area. The Germans’ tanks had greater range. But the Soviets’ tanks were faster…and there were more of them. Wehrmacht forces numbered almost half a million men. For their part, the Soviets had 1.5 million soldiers. The ground was firm. The sky was clear. Both sides fielded experienced, battle-hardened troops.

This was a monster slugfest. Too bad both monsters couldn’t lose!

It was a battle on a scale the world never saw before…or since. You already know how it ended. The Soviets had many advantages. First, they had the German’s battle plans. They knew where they would strike. So, they built 8 defensive lines…including tank traps and minefields…which slowed the attackers down and wore them out. Second, the Soviets had shorter supply lines. They could rush more troops and equipment to the front much more easily than their enemy. Third, they had a huge superiority in men and machines.

Most important, after the defeat at Stalingrad, the gods of war had gone over to the other side. The momentum of the war had quickly turned against the 1,000-year Reich. Christmas fruitcake would last longer.

Even if the Germans had won the battle of Kursk, they would have gained little. It would have been an empty victory; there was no way to follow up. They lacked the forces to launch another big offensive into the Soviet heartland.

The Germans were on the defensive everywhere. They had already lost North Africa and now they were losing Italy too. A huge invasion of France, though still a year away, was inevitable.

If they had been smarter, they would have renounced their agenda of conquest, taken all their troops back to Germany itself — as fast as possible — begging forgiveness and promising never to set foot beyond the Rhine or the Oder ever again. Maybe there they could put up enough of a fight to force an end to the war without being totally annihilated.

Instead, Hitler had given orders to hold ground everywhere. The Battle of Kursk was intended to give the Germans time. Time to what? Time to lose on a bigger scale!

If only the US had been on the scene; it might have learned something. The US was not involved in that battle. Which is probably a good thing, since its tank crews were inexperienced, and its tanks inferior; US forces probably would have been wiped out, no matter which side they backed.

But now, 70 years later, the US is prepared for the battle. It has 2,300 M1 Abrams tanks in service around the world….and another 3,000 just sitting around in the desert awaiting orders. These tanks are super-big, super-heavy, super sophisticated with super firepower…and super expensive. They can turn an entire building into a pile of rubble from 2 and a half miles away.

On today’s battlefields, if you can call them that, the M1 Abrams is in a class of its own. None were knocked out of action in the Iraq war by enemy tanks. The main threat to the M1 turned out to be friendly fire and IEDs — homemade explosives.

Unlike WWII, when the US had the 16th largest army in the world, smaller than Rumania, this time the US is prepared. But preparedness is like everything else under the sun. It soon reaches the point of declining marginal utility. When you reach that level, the more prepared you get the less prepared you are.

That point was probably reached some 110 years …at least 500 billion dollars… and perhaps 5,000 M1s ago. In the 1890s, Teddy Roosevelt had so much preparedness he used it to wallop 200,000 Filipinos. As for the half a trillion dollars, it’s the part of current ‘security’ spending — grosso modo — which has nothing to do with defense and everything to do with giving offense to civilized people all over the globe, which is what got Gore Vidal worked up.

No need to get indignant about it. That’s just the way the gods of war amuse themselves. They encourage dim militarists to spend themselves into bankruptcy, preparing for a war the nation will never again fight. Which is why the M1 story is important.

The maker of the M1 Abrams is General Dynamics. When the Pentagon announced that it would like to stop spending money on the M1, the company was justifiably upset. It had spent millions to buy key members of Congress. It expected to get a good return on its investment.

For its part, the Pentagon thought it could save a little money by putting off refurbishment of the tanks for a few years. This would save $3 billion, admittedly chicken feed, but it would also give it time to redesign the beast for what it imagines might be future combat.

But lobbyists got on the case, apparently timing their campaign donations to correspond with key decision points. Lydia Mulvany reports on what happened next:

“After putting the tank money back in the budget then, both the House and Senate Armed Services Committees have authorized it again this year, allotting $181 million in the House and $91 million in the Senate. If the company and its supporters prevail, the Army will refurbish what Army chief of staff Ray Odierno described in a February hearing as “280 tanks that we simply do not need.”

Mr. Odiero says the M1 is a relic of an earlier age of warfare. It would have been great — maybe — at Kursk. But when the enemy has no tanks, it is merely an expensive — and vulnerable — pile of metal.

Said Mr. Odiero at a February hearing:

“We don’t believe we’ll ever see a straight conventional conflict again in the future,” he said.

Which is why the M1 is perfect. At least to the Law of Declining Marginal Utility.

It allows the military industry to spend billions while actually making itself less able to fight the wars of the future.

In this January file photo, Mario Draghi, president of the European Central Bank listens to a question at a press conference in Frankfurt, Germany. Mr. Draghi reportedly has gained authority for 'unlimited open-market operations,' an ability to flood markets with credit much as America's Federal Reserve has done in times of crisis. (Michael Probst/AP/File)

Mario Draghi's big bazooka: a weapon, not a cure

By Guest blogger / 08.08.12

This message is one of a series. It began when Mario Draghi, former Goldman man and now head of the European Central Bank, promised to do “whatever it takes” to save Euroland.

The issue on the table: whatever does it take to bring a real recovery?

First, whatever it takes, Mario Draghi didn’t seem to have it. Or maybe he did. The situation in Europe is so complicated it’s hard to tell. So, investors have been fearful one day and cheerful the next. At the beginning of last week they thought all was lost. Then, by the end of the week, stocks were rallying again. The Dow rose more than 200 points on Friday. Yesterday, it still had some forward momentum…going up another 21 points.

What does Mr. Draghi have? This report from the Telegraph, which has been hard on the story from the beginning, suggests that at least Mr. Draghi has something:

Mr. Draghi has secured a mandate for “unlimited open-market operations”, a far cry from the half-hearted and self-defeating bond purchases of the last two years. The ECB at last has a license to act with overwhelming force, like the US Federal Reserve.

‘Overwelming force’ is what Ben Bernanke has, which is thought to be the same as ‘whatever it takes.’ But is that enough? What force do central bankers really have? All they can do is provide the markets with more cash and credit. And even if they give it all they’ve got that still won’t be enough to cause a real recovery. Because you can’t cure a debt crisis with more debt. If you could, no one would ever bother with austerity.

Households, governments, businesses — faced with too many debts and not enough money — sooner or later have to straighten up, reduce spending and reckon with their bad debt.

On the other hand, we’ve never heard of a counterfeiter who failed to pay his debts. And since the bank of Ben Bernanke has the power to print money, investors are inclined to give him and the US some slack. That’s because he has ‘whatever it takes.’ At least, they give him more slack than they give to, say, Greece. When Greece is in a pinch, it defaults. That’s what it has done many times. Half its history since independence in 1828 has been spent in default. But when the US is in a pinch, it prints!

That’s the Big Bazooka Theory in a nutshell, where it belongs. And here’s a forecast, too. Readers take note: this is not a formula for a healthy economy. Nor does it bring a recovery. It’s only a formula for blasting the can so far down the road that most investors and savers can’t see it, and therefore don’t worry about it.

As for Mario Draghi, we don’t know. He may have the power to use unlimited force. Or he may not.

According to the theory, you’re bazooka can’t be just big, it has to be infinitely big. Because, the only way you can hold off a default is by promising to print an infinite quantity of cash. And you have to mean it. If you just print up a few hundred billion, speculators take out their calculators. If they see you’re a little short, they sell your bonds, fearing that you will default. Then, other speculators buy them at low prices, betting that you will print more of whatever it takes. Then, when you do print more, prices soar and the speculator sells the bonds back into the market…

….and the whole process repeats itself…until you finally default.

As long as the amount you print is limited, speculators can look ahead and see when it runs out. The only way to end this speculation against your bonds is to say: ‘don’t bother selling my bonds, I’ll print an infinite amount to protect them.’

Then, the whole drama goes away. Savers and investors just want to know they’ll get their money back. Your willingness to print, completely unrestrained by law or common sense, reassures them.

In fact, in today’s world, they’ll buy so many of your bonds that your interest rates will fall below the level of consumer price inflation (which is usually falling too)…making the real yield actually negative! In other words, if you agree to act like a damned fool, they’ll lend you money and ask for no real yield.

That’s because you will have ‘whatever it takes.’

All of which is passing strange. But very amusing.

But it still leaves us with the question: whatever does it take to bring a real recovery?

In this June file photo, a woman walks into a Lane Bryant store in San Jose, Calif. Americans cut their spending at retail businesses for a third straight month in July, and Bonner thinks that could mean the US is headed for another recession. (AP Photo/Paul Sakuma, File) (Paul Sakuma/AP/File)

Falling retail sales could spell recession

By Guest blogger / 07.26.12

Stocks down another 104 points yesterday…measured by the Dow.

What’s going on…? What’s going on?

That was a song by Marvin Gaye. It was also the question the interviewer asked. Followed by, what’s going to happen next?

But those are questions no one can answer. All we can do is guess…speculate…and wonder.

“Deflation now. Inflation later” is what we’ve been saying for the last 4 years.

The interviewer seemed happy with the answer. And the elaboration:

Japan now…but don’t be surprised when we end up in Argentina.”

What do Japan…Argentina…and the US all have in common? They can print money. And when their backs are to the wall, that is what they will do.

But that’s later, remember. Right now, investors are lending money to governments at the lowest rates in history. They do not ask anything more than to get the money back. Eventually. And since the US and Japan can print, they are confident that they’ll paid.

But what about Argentina? Turns out, Argentina borrowed in dollars too…and pledges to repay, in dollars. So, you might think you’d get the same interest yield in an Argentine bond as an American one.

But what’s this? The yield on the ‘Boden,’ which is what they call Argentina’s dollar bonds, is over 17% — which is more than 10 times what you get from a 10-year US note. What gives? Simple. Argentina can print pesos. It can’t print dollars. So investors are afraid that when time comes for repayment, the Argentines won’t have enough dollars on hand.

No such problem in the US. And as long as this recession or ‘contained depression’ continues…investors will probably continue to treat US debt like a mattress. You put your money in. You can get it out when you want. You don’t make anything. But you don’t lose anything either.

But how long will this Japan-like slowdown continue, our interviewer wanted to know?

“Hard to say,” was the reply. In terms of private sector debt, the downturn is taking out an amount equal to about 10% of GDP every year. But there’s still the equivalent of 100% of GDP of excess debt left to go before we’re down to ’70s levels.

If that’s where it is going, we’ve got another 10 years of travel — at this rate.

Meanwhile, in the near term, it looks like the US economy is headed into another recession. That’s what usually happens when retail sales go down for 3 months in a row.

Seventy percent of the US economy is consumption. So, when the consumers stop buying, the economy goes down. Lakshman Achuthan, who runs Economic Cycle Research Institution, says he thinks a recession has already begun.

And when the economy goes down, generally, stocks go down. The little sell-off we’ve seen so far is nothing. The Dow hit 13,000 in 1999. It has gone nowhere since. And now, it should begin to sink.

As mentioned, retail sales are falling…
 Corporate profit estimates are going down…
 The Chinese growth rate has dropped 6 quarters in a row…
 America’s corn and soybean crops have failed…
 Family income is in decline; never before has it gone down over such a long period (12 years)…
 US bond yields are at their lowest ever, with the 10-year at 1.39%.

Came the question: “Well, what should our viewers do?”

“Sell stocks,” was the answer.


Bill Bonner
 for The Daily Reckoning

French President Francois Hollande, seen here delivering a speech in Paris Sunday, has responded to the debt crisis by reducing the pension age, increased the minimum wage, and increased taxes. (Jacques Brinon Pool/AP)

France's debt crisis could doom the European Union

By Guest blogger / 07.24.12

From one ragged country to another. We are on a tour of Europe’s unraveling economies. IrelandSpain…and now France.

Spain was in the news again yesterday. Its borrowing rate rose to 7.5%…a level that everyone says in “unsustainable.” We haven’t done the math ourselves, but we will take their word for it.

Policy makers in Madrid were rattled. Naturally, they took no responsibility for the mess. Instead, they blamed…short sellers! Yes, and banned short selling for 3 months.

That ought to do it, right? Everybody knows markets go down because people sell. So make selling illegal. Problem solved!

Now our travels have brought us back to France. At the heart of Europe…and at the heart of the alliance with Germany and the whole European Union project, if France can’t keep itself together…the whole EU is doomed.

And yet, France seems to be hanging by a thread too…while Francois Hollande reaches for a pair of scissors!

The Telegraph:

The debt levels which the country has are as unsustainable as Britain’s, yet its policies are more irresponsible and its remedies more restricted. Although it is considered a core country in the eurozone, France’s economic profile now bears more resemblance to Greece’s [than] Germany’s.

Public debt in France is at 86.1pc of GDP (146pc if ECB liabilities and bank guarantees are included). The projected budget deficit this year is 4.5pc, with France having exempted itself from the EU’s instruction to bring deficits down to 3pct by the end of the year.

These numbers are not unusual in the context of eurozone economies in general. What distinguishes France is the lack of political will to address them and, as a consequence, a projected debt to GDP ratio which would place it firmly amongst the PIIGS grouping…

France’s numbers are not so different from those of the US. But America has a very big bazooka….one that France does not have…at least not yet. The US can give out the word to its central banks to buy its own bonds. It can ‘monetize the debt’ in other words.

This is always a disastrous policy…but that doesn’t make it unpopular. And in a period of debt destruction, the disaster may be far in the future…and it may not be suffered by the people who cause it. But France doesn’t have that option. It has to operate in a more honest system…like the individual US states. Which means, it has to cut spending.

But Mr. Francois Hollande doesn’t seem particularly interested in addressing the situation in a reasonable way.The Telegraph describes his efforts so far:

  • Lowering the pension age from 62 to 60.
  • Increasing the minimum wage above inflation (albeit not much above inflation).
  • Demanding that the EU take even more money from the national governments than was planned, violating a prior agreement and potentially adding £3bn to Britain’s annual tribute.
  • Introducing a top rate of income tax at 75pc for those earning €1m or more – a move which gives a marginal rate of tax of 90.5pct on certain types of income.
  • Introducing a tax on anyone owning assets in France but living abroad which will see 15.5pc of the rent or capital gain on property transferred to the state.
  • Introducing a one off wealth tax at double the rate which had been previously trailed.

Yesterday, a lunch companion explained how the French are reacting:

“France is finished. We’re leaving! Well, of course, I’m exaggerating. Young people with talent, brains and ambition are leaving. And old people with money are leaving. That leaves the middle classes…and what you call the ‘zombies.’ And there are more and more of them. France is becoming a divided place. But it’s not divided between those with money and those without…it’s divided between those who work and those who don’t. Those who do honest work have to work harder and harder to support those who don’t work.”

Meanwhile, from back in the USA, the Dow fell another 100 points yesterday. Why? Word got out that corporate earnings projections show the slowest growth in 4 years… This was reported as more evidence of approaching recession.

…and more evidence that the Fed needs to take action.

“Touch us. Heal us. Give us more QE,” said the multitudes. And the economists.

It is probably just a matter of time until the big bazooka fires off another blast…

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