Dr. Ben Carson on Obamacare

Dr. Benjamin Carson Addresses National Prayer Breakfast, Criticizes Obamacare - Real Clear Politics

DR. CARSON: Here's my solution: When a person is born, give him a birth certificate, an electronic medical record, and a health savings account to which money can be contributed -- pretax -- from the time you're born 'til the time you die. When you die, you can pass it on to your family members, so that when you're 85 years old and you got six diseases, you're not trying to spend up everything. You're happy to pass it on and there's nobody talking about death panels.

Sandbaggers

Collecting Disability Becomes A Career Choice For Men - Michael Barone

Between 1996 and 2011, the private sector generated 8.8 million new jobs, and 4.1 million people entered the disability rolls.

EU Debt Struggle

Ripped apart by financial crisis, Greek society in free-fall - AP

It has been three years since Greece's government informed its fellow members in the 17-country group that uses the euro that its deficit was far higher than originally reported. It was the fuse that sparked financial turmoil still weighing heavily on eurozone countries. Countless rounds of negotiations ensued as European countries and the International Monetary Fund struggled to determine how best to put a lid on the crisis and stop it spreading.

The result: Greece had to introduce stringent austerity measures in return for two international rescue loan packages worth a total of €240 billion ($313 billion), slashing salaries and pensions and hiking taxes.

The reforms have been painful, and the country faces a sixth year of recession.

Life in Athens is often punctuated by demonstrations big and small, sometimes on a daily basis. Rows of shuttered shops stand between the restaurants that have managed to stay open. Vigilantes roam inner city neighborhoods, vowing to "clean up" what they claim the demoralized police have failed to do. Right-wing extremists beat migrants, anarchists beat the right-wing thugs and desperate local residents quietly cheer one side or the other as society grows increasingly polarized.

"Our society is on a razor's edge," Public Order Minister Nikos Dendias said recently, after striking shipyard workers broke into the grounds of the Defense Ministry. "If we can't contain ourselves, if we can't maintain our social cohesion, if we can't continue to act within the rules ... I fear we will end up being a jungle."

Social Change in America

The Once and Future Liberalism - Walter Russell Mead

In the heyday of the blue model, economists and social scientists assumed that from generation to generation Americans would live a life of incremental improvements. The details of life would keep getting better even as the broad outlines of society stayed the same. The advanced industrial democracies, of which the United States was the largest, wealthiest and strongest, had reached the apex of social achievement. It had, in other words, defined and was in the process of perfecting political and social “best practice.” America was what “developed” human society looked like and no more radical changes were in the offing. Amid the hubris that such conceptions encouraged, Professor (later Ambassador) Galbraith was moved to state, in 1952, that “most of the cheap and simple inventions have been made.”1 If only the United States and its allies could best the Soviet Union and its counter-model, then indeed—as a later writer would put it—History would end in the philosophical sense that only one set of universally acknowledged best practices would be left standing.

Life isn’t this simple anymore. The blue social model is in the process of breaking down, and the chief question in American politics today is what should come next.

Future tense, X: The fourth revolution - James Piereson

The conflict today between Democrats and Republicans increasingly pits public sector unions, government employees and contractors, and beneficiaries of government programs against middle-class taxpayers and business interests large and small. In states where public spending is high and public sector unions are strong, as in New York, California, Illinois, and Connecticut, Democrats have gained control; where public sector interests are weak or poorly organized, as in most of the states across the south and southwest, Republicans have the edge. This configuration, when added up across the nation, has produced a series of electoral stand-offs in recent decades between the red and blue states that have been decided by a handful of swing states moving in one direction or the other.

This impasse between the two parties signals the end game for the system of politics that originated in the 1930s and 1940s. As the “regime party,” the Democrats are in the more vulnerable position because they have built their coalition around public spending, public debt, and publicly guaranteed credit, all sources of funds that appear to be reaching their limits. The end game for the New Deal system, and for the Democrats as our “regime party,” will arrive when those limits are reached or passed.

This point will arrive fairly soon for the following reasons: (1) unsustainable debt; (2) public promises that cannot be fulfilled; (3) stagnation and slow growth; and (4) political paralysis. The last point is important because it means that the parties will fail to agree on any preemptive solutions to the above problems until they reach a point of crisis.

...

The regime of public spending has at last drawn so many groups into the public arena in search of public dollars that it has paralyzed the political process and driven governments to the edge of bankruptcy. These groups are widely varied: trade associations, educational lobbies, public employee unions, government contractors, ideological and advocacy organizations, health-care providers, hospital associations that earn revenues from Medicare and Medicaid programs, and the like. These are what economists call rent-seeking groups because they are concerned with the distribution of resources rather than with the creation of wealth. They consume rather than create wealth. These groups are highly influential in the political process because they are willing to invest large sums in lobbying and election campaigns in order to protect their sources of income. While rent-seeking groups can be found in both political parties, the largest and most influential of them (at least on the spending side) have congregated within the Democratic Party. To expand on what was said earlier, one might describe the Democratic Party as a coalition of rent-seekers.

Perverse Economic Incentives

Europe: The World’s Worst Dentist With the World’s Dullest Drill - Walter Russell Mead

The details change, but the underlying situation is the same. There are two games of chicken being played in Europe at the moment. One is the game between Greece and the rest of the eurozone. The Greeks believe, or at least they are doing their best to pretend to believe, that a Greek exit for the eurozone will be so catastrophic that in the end the EU will have no choice but to offer the Greeks substantially better terms than are now on offer. The eurozone authorities, on the other hand, believe, or at least they are doing their best to pretend to believe, that the consequences of a Greek exit can be managed for Europe as a whole, but that the devastation in Greece will be so great that the Greeks will have no choice in the end but to comply with the agreements they have already signed.

The other game of chicken is the contest between Germany and France. The Germans swear up and down that whatever happens they will never, never, never accept the ‘mutualization of eurozone debt’ or the ‘politicization of European monetary policy.’ They won’t bail out the debts of the Club Med countries and they won’t accept the classically Latin form of currency management in which the currency’s value is manipulated (generally downward) by the political elite. The French (politely and deferentially in the Sarkozy era and more confrontationally under Hollande) point out that this German policy will lead Europe into an interminable series of financial crises, and at each crisis point the Germans will have to accept new bail outs and new debt guarantees in order to stave off a general European financial collapse.

Property Rights and the Tragedy of the Commons - Jonathan H. Adler

One thing that Hardin overlooked is that the political process often replicates the same economic dynamic that encourages the tragedy of the commons -- a dynamic fostered by the ability to capture concentrated benefits while dispersing the costs. Like the herder who has an incentive to put out yet one more animal to graze, each interest group has every incentive to seek special benefits through the political process, while dispersing the costs of providing those benefits to the public at large. Just as no herder has adequate incentive to withhold from grazing one more animal, no interest group has adequate incentive to forego its turn to obtain concentrated benefits at public expense. No interest group has adequate incentive to put the interests of the whole ahead of the interests of the few. The logic of collective action discourages investments in sound public policy just as it discourages investments in sound ecological stewardship. This, in addition to the pervasiveness of special-interest rent seeking, explains many of the failings of centralized regulation. So despite the environmental gains of the past half-century, real challenges remain, and the tragedy of the commons is still with us.

Copybook Headings Outbreak

I've noticed several references to Kipling's 'The Gods of the Copybook Headings' recently.  Here is the actual poem, by Rudyard Kipling:

The Gods of the Copybook Headings

 
 The Gods of the Copybook Headings: Haven't We Learned Our Lesson Yet? - CrownThomas

The point of this poem is that if we decouple ourselves from common sense & reality, we will ultimately pay for it in the end. And each time, as we begin to recover from our mistakes, the "enlightened" ones (who led us down the wrong path in the first place) always pop back into the picture. They once again tell us that 2 + 2 = 5, and we can have prosperity for everyone without having to work for it, thus leading us down the road and into our next crisis.

Hopefully someday we'll learn our lesson.

Instapundit


A God of the Copybook Headings  - Bret Stephens

In today's economy, the hard truth is that we can't spend, consume, manipulate and inflate our way to general prosperity—as opposed merely to the enrichment of Democratic Party interest groups. This was the dominant economic model of the 1970s, with results that were once well known. "The Great Money Binge" makes short work of the theory:

"Demand-side economics holds that the economy derives its momentum from consumption, and it is of little moment if that consumption is financed by credit," he writes. "But if that were true, everyone could merrily use his credit card to supply his wants and never have to work. Maybe there's a logical flaw there somewhere."

The great strength of Mr. Melloan's book is to show, in exacting detail, not only how we came to our current crisis—thank you, Barney Frank, Chris Dodd, Alan Greenspan and Tom DeLay—but where that logical flaw is destined to take us again.

The alternative is supply-side economics, which, for all the invective heaped upon it, boils down to the inescapable fact that "consumption must be paid for with production"—that if you don't work (i.e., produce) you die (i.e., can't consume). The obviousness of this is so manifest that the real wonder is how it has escaped the grasp of otherwise intellectually competent people.

California Exodus

Joel Kotkin: The Great California Exodus  - Allysia Finley

Now, however, the Golden State's fastest-growing entity is government and its biggest product is red tape. The first thing that comes to many American minds when you mention California isn't Hollywood or tanned girls on a beach, but Greece. Many progressives in California take that as a compliment since Greeks are ostensibly happier. But as Mr. Kotkin notes, Californians are increasingly pursuing happiness elsewhere.

Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving. According to Mr. Kotkin, most of those leaving are between the ages of 5 and 14 or 34 to 45. In other words, young families.

As California Collapses, Obama Follows Its Lead - Joel Kotkin

Obama’s push to nationalize many of California’s economy-stifling green policies has been slowed down, first by the Republican resurgence in 2010 and then by his reelection considerations. But California’s politicians, living in what’s become essentially a one-party state, have doubled down on green orthodoxy. As the president at least tries to cover his flank by claiming to support an “all-in” energy policy, California has simply refused to exploit much of its massive oil and gas resources.

Does this matter? Well, Texas has created 200,000 oil and gas jobs over the past decade; California has barely added 20,000. The state’s remaining energy producers have been slowing down as the regulatory environment becomes ever more hostile even as producers elsewhere, including in rustbelt states like Ohio and Pennsylvania, ramp up. The oil and gas jobs the Golden State political class shuns pay around $100,000 a year on average.

Instead, California has forged ahead with ever-more extreme renewable energy mandates that have resulted in energy costs roughly 50 percent above the national average and expected to rise substantially from there. This tends to drive out manufacturing and other largely blue-collar energy users.

Over the past decade the Golden State has grown its middle-skilled jobs (those that require two years or more of post-secondary education) by a mere 2 percent compared to a 5.3 percent increase nationwide, and almost 15 percent in Texas. Even in the science-technology-engineering and mathematics field, where California has long been a national leader, the state has lost its edge, growing just 1.7 percent over the past 10 years compared to 5.4 percent nationally and 14 percent in Texas.

Eurozone Watch

The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan) - Tyler Durden

"Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. " So begins an article not in some hyperventilating fringe blog, but a cover article in the venerable New York Times titled "Europe Fears a Credit Squeeze as Investors Sell Bond Holdings." Said otherwise, Europe's continental bank run in which virtually, but not quite, all banks are dumping any peripheral exposure with reckless abandon is now on.

...

To summarize: everyone is dumping European paper, except for the ECB and Italian banks, which have no choice and instead have to double down and buy more. In the meantime, the market is going increasingly bidless as liquidity evaporates, confidence has disappeared and virtually everyone now expects a repeat of Lehman brothers. Of course, this means that when the bottom finally out from the market, the implosion of the Italian banking system, and thus economy, will be instantaneous. And when Italy goes, so goes its $2 trillion+ in sovereign debt, and at that point we will see just how effectively hedged and offloaded the rest of the world is, as contagion shifts from Italy and slowly but surely engulfs the entire world.

Incidentally, is it really that surprising that Goldman is now doing its best to precipitate a bank run of Europe's major financial institutions by "suddenly" exposing the truth that was there all along? During the great financial crisis of 2008, the one biggest winner from the collapse of Bear and Lehman was none other than the squid. This time around, Goldman has set its sights on Europe and has already made sure that its tentacles will be in firmly in control at all the right places when the collapse comes, as the Independent shows.

Guest Post: How Monetization Happens: Being at the Helm When the Ship Goes Down - Tyler Durden

Via Lew Spellman of the Spellman Report

How Monetization Happens: Being at the Helm When the Ship Goes Down

The consequences of excess debt are now facing the leaders of Europe head on, and a monumental decision must be made whether explicitly or implicitly. Excess debt leads to a long chain of D words: Deleveraging in an attempt to retire debt results in a depressed economy and declining asset prices. The depressed economy breeds private debt defaults that in turn produce distressed banks. The chain then runs through depositor flight from the banks, producing a financial crisis and in turn a devaluation of the currency as capital flees. When foreign goods become more expensive there is a declining standard of living as import prices rise faster than wages. Then in an effort to stop the government debt trap, there is a default on promised entitlements under an austerity program leading to the swift defeat of the political leaders. But ultimately there is a sovereign restructuring or a default of the government debt. Most, if not all, the D words are visiting Europe at the moment and its leaders are falling by the wayside.

There is not a precise science that tells us when the debt trap begins the downward spiral that takes the ship down, but there are some rough guidelines. Reinhart and Rogoff (This Time is Different) have found to the extent one can generalize when a country’s debt-to-income ratio reaches the 90 percent level the ship of state begins to list and currently the OECD aggregate of 30-country gross debt-to-income ratio is 105 percent.

Lots more at The Spellman Report channel on YouTube.


The Euro Zone's Deadly Domino Effect - Wolfgang Münchau

The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment -- in almost worthless drachmas.

Crises Must Be Solved Quickly and Decisively

So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won't be able to pay back its debt. As things now stand, Italy's debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it's a matter of mathematical inevitability that Italy won't be able to service its loans if interest rates on its sovereign debt don't fall.

11/24 Update:
German Bond Auction Fails - Megan McArdle

Effectively, Germany and France and a handful of other tiny countries have to guarantee both the sovereign debt and the bank liabilities of the whole eurozone. Given the holes that recent events have exposed in these systems, can they credibly do that? Even if the Greeks and Italians don't use that guarantee as a blank check to avoid reform?

We may be getting an unhappy answer to that question: a German bond auction went rather badly today. In fact, a lot of commentators are using words like "disastrous". They sold just over half of the €6 billion they had put out to market, the worst such outcome anyone can remember. This comes on the heels of a Spanish debt auction in which the yields on their three month notes more than doubled to 5%. That's a higher interest rate than I pay on my credit card.

I've seen three explanations offered for this:

1. The market is pricing the euro, not German credit
2. Bund yields, at 1.98%, are too low to be attractive
3. European banks are delveraging, depriving the auction of buyers

Dexia Bailout On Verge Of Collapse, Threatens To Take France AAA Rating Down With It - Tyler Durden

Having followed the fortunes of the beleaguered Belgian bank [Dexia Bank Belgium] from before it appeared on anyone's worksheets, we are hardly surprised that the EU Commission charged with confirming the good-bank / bad-bank restructuring is concerned at the deal that Belgium has with the French (and Luxembourg) government to backstop/finance Dexia's debt. Belgium's De Standaard (and two other European newspapers) today suggests the Belgians fear the EUR90bn deal is 'not feasible' as it stands (with a Belgium 60.5%, France 36.5%, and Luxembourg 3% weighting). Given the change in market conditions the commission, according to the article, is concerned at the ability of each country to finance its respective guarantee (most obviously Belgium) and therefore can renegotiate the October bailout deal.

11/25 Update:
Death Spiral in Euroland - Jeff Carter

Europe has hit the point of no return I am afraid. Debt ratings in some countries went to junk yesterday. Italy paid record highs in their latest auction. Tell me, how is Italy not junk?

The only countries in Europe that aren’t junk are probably France and Germany. However, without knowing the true exposure of their government finances to the rest of the EU, it’s hard to know if they can maintain their status or not. As rates continue to steepen in weekly European Union debt auctions, the entire continent speeds it’s collision course with stagflation.

The only way out of their financial mess is print money or grow. They aren’t going to grow given their current economic policies.

Want to read something scary about Europe? - Michael Barone

Sarkozy is the brother of French President Nicolas Sarkozy and a high executive at The Carlyle Group; Altman is a Wall Streeter with Evercore Partners who served in the Clinton Treasury Department. Sarkozy seems to think the Eurozone countries are going to have to come up with a financial rescue package ten times the size of our TARP--and very soon.

Sarkozy: Europe's "Liquidity Run" Has Begun Because There Is An Unsolvable $30 Trillion Problem - Tyler Durden

In the meantime, Sarkozy on Europe math fail: "The math I'm working with is very simple. In the US banking sector, we had 3 trillion of wholesale funding that needed to be stabilized, got stabilized by the implementation of TARP which saw the US treasury buy $212 billion worth of preferred in the banking sector to stabilize that $3 trillion, give our banks the time to work through their problem assets. In Europe, that $3 trillion is $30 trillion. So if you multiply the $212 by 10, you get the $2.12 trillion. In my view, the issues on the European banks are bigger than the issues on the books of the US Banks. So if you want to stabilize that $30 trillion and in my view it's not that you want to, it's that you have to, you do not have a choice, you're going to have to be at least at 2.1 trillion and I suspect it may need to be more." Q.E.D. - there, the math wasn't that difficult, was it?

"Awful" Italy debt sale heightens euro zone stress - Valentina Za

Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome's new emergency government.

The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.

Though Italy managed to raise the full planned amount of 10 billion euros, weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market.

Yields on two-year BTP bonds soared to more than 8 percent in response, a euro lifetime high, despite reported purchases by the European Central Bank.

Death of a currency as eurogeddon approaches - Jeremy Warner

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world's major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.

EU Crackup Begins

Strained By Its Debts, EU Is Breaking Up - IBD Editorials

Euro Zone: It's been clear for some time that the European Union is in deep trouble. But now even its own leaders admit something shocking: The EU, and its currency the euro, may soon be a thing of the past.

The EU has had a troubled existence since the euro was first rolled out on Jan. 1, 1999. Sure, the EU has advantages — a single currency, one giant market, freedom of movement for a well-educated workforce, all benefits. Still, it's impossible to have an economic union based on rules no one follows. And that's exactly what's happened in the EU.

Under the 1993 Maastricht Treaty, no EU country was allowed to run a budget deficit of more than 3% of GDP or issue public debt in excess of 60% of GDP. This was to be the bedrock of the EU's financial stability.

In recent years, Greece, Ireland and Portugal have all run deficits over 10% of GDP. Worse, the debts of Greece, Italy, Ireland, Portugal and Spain average 112% of GDP. In short, the countries on the EU's periphery have used membership as a way to redistribute wealth from Europe's rich north to its poorer south.

For a while it worked. But now the debts are enormous, and the amounts needed to bail out the peripherals from their profligacy are so large that citizens in countries such as Germany are saying "no more." By some estimates, as much as $4 trillion will be needed — a number that would bankrupt the EU.

Europe’s Disaster Is Headed Our Way - Niall Ferguson

But the third reason Americans should care about Europe is more important even than the risk of a renewed financial crisis. It is the danger that what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.

Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of ... higher rates.

Eurozone Update

Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return" - Tyler Durden

Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barcalys, the math is not pretty, and the conclusion is that "Italy is now mathematically beyond point of no return."

European Wheels Spin Faster, Still No Traction - Walter Russell Mead

Even as Prime Minister Berlusconi announced his impending resignation, the yields on Italian bonds rose above seven percent, the highest level yet, and a level that just about everyone agrees will force Italy into a bailout sooner rather than later.

While Italy may not be too big to fail, it is too big to bail out; the IMF and the EFSF can’t handle the consequences of an Italian collapse. An Italian failure would force both Germany and France into massive bailouts of their domestic banking systems, destroy France’s credit rating and generally wreak unspeakable havoc on the increasingly fragile underpinnings of both the single currency and the European economy.

Idiot's Guide to the Euro Crisis - Simon Edge

So what went wrong?

As we discovered in the New Labour years, politicians find it very easy to spend their way into their voters’ good books, knowing that paying the debt back will be someone else’s problem.

In Greece and Italy much of the borrowed cash went on public-sector wage rises.

In the global financial meltdown that followed the collapse of Lehman Brothers bank in 2008 all economies contracted and it became painfully clear that the governments of the weakest countries in the eurozone had precious little means of paying back the money.

The debt totals in question are massive. While Britain’s entire debt is around 63 per cent of gross domestic product, Italy’s is 120 per cent and Greece owes 160 per cent of GDP.

That’s like having an income of £20,000 a year and debts of £32,000 on your credit card. And the point of bonds is they need paying back on a specific date. Not doing so is defaulting.

Stein's Law

Herbert Stein's Wikipedia Page

Stein was the formulator of "Herbert Stein's Law," which he expressed as "If something cannot go on forever, it will stop," by which he meant that if a trend (balance of payments deficits in his example) cannot go on forever, there is no need for action or a program to make it stop, much less to make it stop immediately; it will stop of its own accord. It is often rephrased as: "Trends that can't continue, won't."

The Glenn Reynolds paraphrase: "If something can’t go on forever, it won’t."

Five Delectable Examples of "Steins Law" - John Mauldin

Dr. Woody Brock:

The most basic statement of Stein's Law says: "If something cannot go on forever, it will stop". More specifically, the late Herb Stein stressed that, when a trend cannot go on, it always stops--even when nothing is done about it. This yardstick of common sense is particularly apposite today, as we see in the following five examples of trends whose time has come and gone.

1. Mean Reversion in US Wealth Growth: A March 7 front page headline of the Financial Times proclaimed, "Fed Data Alarms Markets - Wealth of US Households Contracts". We have written about "mean reversion in national wealth growth" for the past five years, and explained why it would soon have to occur. In this regard, one of the most fundamental of all theorems in economics tells us that national wealth must (and empirically does) grow over the long run at the rate of GDP growth.

Well, wealth reversion has now arrived, and will be with us for far longer than most anyone expects. First, wealth has already contracted by $500 billion in 2007. Second, wealth contraction will continue to occur until mid-2009 when house prices reach their trough. And third, wealth growth will probably be sluggish up to and beyond 2020, running at about 3%. One reason why is that most baby boomers have their money in their houses--not in traditional defined benefit pension plans. Accordingly, the only way they will be able to retire in the style they expect is to sell their houses to one another. Next joke.

How remarkably this new 2.5% wealth growth regime of 2007-2020 will differ from the previous regime of 1981-2006! During that period, US net worth soared from $10 trillion to $57 trillion--an arithmetic average growth rate of 18% and a compound annual growth rate of 7.2%. For readers who doubt what we are arguing, note that the average growth of wealth across the two regimes being analyzed compounds at exactly 5.5%. This is precisely the long-run growth of nominal GDP. And all the Golden Rule Theorems in Growth Theory require that wealth growth and GDP growth converge to the same growth rate in the long-run.

This will fundamentally change both American politics and daily life. In particular, it will be the final nail in the coffin of hopes of early retirement for most baby-boomers. In short, "wealth reversion" is finally coming home to roost. What cannot go on does not go on.

Europe Confronts Stein’s Law - Desmond Lachman

The late Herb Stein was fond of observing that if something cannot go on forever, it will stop. This aphorism appears particularly apt for the current Eurozone. It seems unreasonable to expect that voters in the Eurozone’s north, and especially in Germany, will indefinitely acquiesce to transferring large amounts of bailout money to the Eurozone’s south in an effort to keep those countries afloat. And it seems even more unreasonable to expect voters in the south to indefinitely endure the severe economic and social pain associated with continued euro membership and the austerity measures attached to the financing they receive from the north.

The Eurozone Bailout

Why the latest eurozone bail-out is destined to fail within weeks - Liam Halligan

By late Thursday, though, and certainly on Friday, the warning signs were there. Global bond markets, by character more sober and smarter than the excitable equity guys, were voting against the deal. This is alarming. For it is only by selling more bonds that the eurozone's deeply indebted governments can roll-over their enormous liabilities and keep the show on the road.
...

The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So "euroquake" fears, once viewed as outlandish, are gaining pace. Despite Thursday's deal, and all the reassurances of a "durable solution", the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone's third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic.

Unrest Grows in Greek Government With Debt Deal in Doubt - AP

Papandreou's decision upended a deal that was the product of months of work by European leaders who were trying, sometimes opposed by their own people, to agree the details of a second bailout for Greece and shore up their own economies in the name of saving the euro, the common currency.

The deal would require banks that hold Greek government bonds to accept 50 percent losses and provide Greece with about $140 billion in rescue loans from European nations and the International Monetary Fund.

But Greeks have been outraged by repeated rounds of tax increases and salary and pension cuts imposed as the government struggles to meet the conditions of a first, $153 billion bailout the country has been relying on since May 2010. With Greece facing a fourth year of recession next year, unions have held frequent strikes, and protests have often degenerated into riots.

...

In New York, the stocks of major banks like Citigroup and JPMorgan Chase were hit hard. The value of the dollar rose, and bond prices jumped so dramatically that analysts said they were stunned.

Analysts said the bond action reflected fears that the turmoil in Greece would tear at the fabric of Europe's financial system and create a crisis that could engulf the entire European Union, which together forms the world's largest economy.

"This brings all of the concerns about Europe back to the front burner," said Scott Brown, chief economist at Raymond James. "If this ends up turning into a financial catastrophe in Europe, then no one will escape it."

State Budget Troubles

Rhode Island: Athens of America? - Walter Russell Mead

Rhode Island is looking more and more like Greece, and not in a good way. That is one message of this important piece by Mary Williams Walsh in the New York Times. Years of blue social policy have wrecked local and state government finance in the country’s smallest state, and now the bills are coming due. Services are being cut to the bone and elderly retirees are losing money they thought was secure.

In Rhode Island, it is Democrats, not nasty union-hating Republicans, who are doing the dirty work. Democratic mayors are telling their unions that there isn’t any money — not because they are vicious corporate stooges who hate working people and want to see them suffer, but because There. Isn’t. Any. Money.

...

Rhode Island politicians, government and union officials have done everything possible to conceal the true state of affairs from the voters, the bondholders, retirees and even themselves. Unrealistic assumptions about rates of return helped hide the ugly truth about the looming pension meltdown — and anybody who tried to raise the alarm about the coming crisis was hooted down as an enemy of the workers. Even now the true blue firing squads are assembling to shoot the messenger; Mary Williams Walsh can expect angry push back from a whole sector of American political life that thinks this whole problem will go away if we tax the rich, clap our hands and all say together, “I believe in government”.

But “objectively”, as our Marxist friends would say, the union leaders and their political chums were the worst enemies of the workers: they told state workers that their benefits were secure even as it became increasingly obvious that, as a matter of arithmetic, they were not.

Let’s be crystal clear about this. To tell a 50 year old pretty lies about the soundness of a pension plan is one of the most wicked and irresponsible things you can do without actually shedding blood; people who believe these phony promises will not make the extra savings, work the extra years or otherwise take steps to protect themselves until it is too late. Telling those pretty lies is exactly what Rhode Island’s establishment has been doing for some time; it is what Ostrich Party legislators, trade unionists, journalists and governors are still doing across much of the country.

AP Newsbreak: Brown to seek sweeping pension cuts - Juliet Williams

Gov. Jerry Brown will propose sweeping rollbacks to public employee pension benefits in California, including raising the retirement age to 67 for new employees who are not public safety workers and requiring state and local employees to pay more toward their retirement and health care, according to a draft of the plan obtained Wednesday by The Associated Press.

The governor will also propose Thursday a mandatory "hybrid" system in which future retirees would get their retirement from a guaranteed benefit and a 401(k)-style plan subject to market whims. For employees with at least 30 years of service, retirement benefits would aim to replace about 75 percent of an employee's salary through retirement funds and Social Security, according to the draft.

...

A report last year by the Stanford Institute for Economic Policy Research said that retirement funds for 2.6 million California teachers, state workers and university employees together faced long-term gaps of over $500 billion. The California Public Employees' Retirement System has $75 billion in unfunded future pension liabilities, and the state is on the hook for an estimated $51.8 billion in unfunded retiree health care costs.

The Economy - October 2011

This is just the beginning. Things are going to get worse before they get better. Americans need to follow some good old-fashioned advice:

• If you're in debt, pay off your debts.
• If you're out of debt, do not borrow.
• If you're having trouble making ends meet, reduce your overhead.
• If you're unemployed, acquire some marketable skills asap, or start your own business. Do not rest until you get some cash-flow.
  
• If you're earning money, set some aside for the future.
  
• If you're going to college, pay as you go. Under no circumstances enroll in a college you cannot afford. And while you're there, gain some knowledge that will get you started on a rewarding career.
• Have some self-respect: Do not depend on the government to take care of you, and don't mooch off of friends and relatives.
• Create wealth through your own productive labor (including mental labor). Labor is only productive if someone is willing to exchange cash or services for it, or it increases your personal capital.
• Don't vote for politicians who promise to give you something. They are con-artists and thieves.

A long, steep drop for Americans' standard of living - Ron Scherer

What has led to the most dramatic drop in the US standard of living since at least 1960? One factor is stagnant incomes: Real median income is down 9.8 percent since the start of the recession through this June, according to Sentier Research in Annapolis, Md., citing census bureau data. Another is falling net worth – think about the value of your home and, if you have one, your retirement portfolio. A third is rising consumer prices, with inflation eroding people's buying power by 3.25 percent since mid-2008.

Scary Budget Fact of the Day - Peter Suderman

The United States will officially pass the 100 percent debt-to-GDP line on Halloween. Via Zero Hedge:

October 31, elsewhere known as Halloween. Yes, ladies and gentlemen: All Hallows E'en will be doubly scary this year: for the first time since World War II, US debt will officially surpass GDP on Halloween 2011.

Student Loan Bubble To Exceed $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" And Another Taxpayer Bailout - Tyler Durden

USA Today reports once again on one of its favorite subjects, student loans are set to surpass $1 trillion in total notional for the first time in history on what appears to be relentless demand and interest for this cheap form of educational financing, making this debt burden the single largest form of consumer debt, well bigger than outstanding credit card debt, and smaller only compared to mortgage debt. "The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards."

...

So... debtors know it's a bubble, lenders know it's a bubble, everyone knows it's a bubble, yet it is growing faster now than ever before.

Economic Production

How Government Spending Impoverished Us All - Tyler Durden

A tonne of copper can't be consumed until it is produced. But the government can spend money that it doesn't have. So government spending can't be part of what was produced by a country unless it has been covered by taxation--then at least the wealth was produced prior to consumption. If the spending is empowered by debt creation, then no production was involved.

It's like measuring the wealth of a family by counting the money they spend, with no regard as to whether they are piling up credit card debt.

More EU Crisis

Europe on the Brink - Megan McArdle

I haven't been blogging much about Europe because I felt like I was mostly repeating myself. Europe is not an optimal currency zone. It opted for monetary union without the fiscal or labor market integration that make America's sprawling currency zone work. So far, the various governments have failed to mount a really credible coordinated response. I don't see how the thing can hold together, except that Jesus, it will be hell if it all falls apart.

But it's probably worth interrupting your regularly scheduled unemployment-and-kitchen-blogging to point out that it all really seems to be coming to a head:

In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

At Least Try Out Your Idea On Monkeys

From the illustrious Frank J. Fleming
Okay, so let’s try real science - Frank Fleming

But despite the obvious importance of science, one group of people does everything in pure defiance of scientific methods: politicians.

What do politicians do when they think they have a great idea? They just go and implement it. It’s like someone thinking he’s got a cure for cancer and immediately injecting it into everyone he can. That’s a madman, not a scientist. You always have to at least try out your idea on monkeys to make sure it doesn’t kill them.

Were farm subsidies first tried on monkeys? Social Security? Bank bailouts? No, the unscientific politicians went straight to trying all their ideas on humans, and now we have a bunch of bankrupt people instead of harmless bankrupt monkeys.

But the problem with testing political ideas on monkeys is that forcing them to go billions into debt would violate animal-cruelty laws. The only ones we’re allowed to do that to are people.

Look! There's more from Frank J!

• http://www.imao.us/
  
• http://pajamasmedia.com/blog/author/frankjfleming/

The Economy - September 2011

California Employment at Record Low - Christopher Palmer

The percentage of working-age Californians with jobs has fallen to a record low, and employment may not return to pre-recession levels until the second half of the decade, according to a research group.

Just 55.4 percent of working-age Californians, defined as those 16 or older, had a job in July, down from 56.2 percent a year earlier and the lowest level since 1976, the Sacramento- based California Budget Project said in a report released late yesterday.

California’s 12 percent unemployment rate in July, the nation’s second-highest after Nevada, compared with 9.1 percent nationwide. The most-populous state lost 1.4 million jobs during the recession that began three years ago, and has gained back only 226,800, or about 17 percent, according to the report.

Senior IMF Economist Expects Hard Default For Greece. Soon. - ForexCrunch

The Greek government says any more steps will only deepen the recession and make things even worse. The debt trap is quite clear at this stage.

These complications triggered not only the aforementioned expectations for a hard default, according to WSJ:

“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”

A hard default means a messy one. A default that is not controlled could have a serious domino effect: it can push banks to bankruptcy (such as French banks, that are highly leveraged), and it can send bond yields of other countries much higher. A hard default for Greece also seriously endangers .

...

All in all, the bailout mechanism secures only one thing: a crisis on every inspection. Last time, it ended with a reshuffle of the Greek governments, fresh austerity measures and violent protests on the streets of Athens.

Zero Jobs 101 — the Psychology of Alienating Employers - Victor Davis Hanson

Zero jobs last month — a net change of zero job growth? It was just announced that last month’s unemployment is still above 9% — despite the nearly five trillion dollars in Keynesian pump-priming, the near zero interest rates, the expanded unemployment and food stamp support, and the government takeovers and subsidies of businesses. There is a scary sort of deer-in-the-headlights look about Obama and Biden that is quite disturbing, as if they are thinking, “This was not supposed to happened to us. Geithner, Goolsbee, Orszag, Romer, Summers assured us that all this borrowing would turn things around — but they are all gone or leaving, so now we are alone? What to do?

...


Here is the lament I heard: the near $5 trillion in borrowing in just three years, the radical growth in the size of the federal government and its regulatory zeal, ObamaCare, the Boeing plant closure threat, the green jobs sweet-heart deals and Van Jones-like “Millions of Green Jobs” nonsense, the vast expansion in food stamps and unemployment pay-outs, the reversal of the Chrysler creditors, politically driven interference in the car industry, the failed efforts to get card check and cap and trade, the moratoria on new drilling in the Gulf, the general antipathy to new fossil fuel exploitation coupled with new finds of vast new reserves, the new financial regulations, an aggressive EPA oblivious to the effects of its advocacy on jobs, the threatened close-down of energy plants, the support for idling thousands of acres of irrigated farmland due to environmental regulations, the constant talk of higher taxes, the needlessly provocative rhetoric of “fat cat”, “millionaires and billionaires,” “corporate jet owners,” etc. juxtaposed, in hypocritical fashion, to Martha’s Vineyard, Costa del Sol, and Vail First Family getaways — all of these isolated strains finally are becoming a harrowing opera to business people.

Despite enormous opportunity for many cash-rich firms to take advantage of the down cycles (low interest, plentiful potential employees, discounted prices, etc.), they are taking a pass, almost as if to collectively sigh, “This bunch doesn’t like me much and I’m going to hunker down, hoard my cash, and sit out the next year and a half until they are gone.” And the administration’s efforts to counteract these symbols and impressions by courting a high-profile, hyper-capitalist Warren Buffett, or a GE CEO Jeffrey Immelt have proven even more ironic: the former calls for higher taxes that his firms seek to avoid, or targets his post-mortem wealth to (more efficient?) private foundations that rob the Treasury of billions in lost inheritance taxes, or knows higher taxes won’t much matter to his tens of billions in net worth; the latter’s firm paid no 2010 U.S. income taxes on many of its profits and outsourced jobs overseas.

Two From England

If we are to survive the looming catastrophe, we need to face the truth - Janet Daley

The Tea Party faction within the Republican party was demanding that, before any further steps were taken, there must be a debate about where all this was going. They had seen the future toward which they were being pushed, and it didn’t work. They were convinced that the entitlement culture and benefits programmes which the Democrats were determined to preserve and extend with tax rises could only lead to the diminution of that robust economic freedom that had created the American historical miracle.

And, again contrary to prevailing wisdom, their view is not naive and parochial: it is corroborated by the European experience. By rights, it should be Europe that is immersed in this debate, but its leaders are so steeped in the sacred texts of social democracy that they cannot admit the force of the contradictions which they are now hopelessly trying to evade.

No, it is not just the preposterousness of the euro project that is being exposed. (Let’s merge the currencies of lots of countries with wildly differing economic conditions and lock them all into the interest rate of the most successful. What could possibly go wrong?)

Also collapsing before our eyes is the lodestone of the Christian Socialist doctrine that has underpinned the EU’s political philosophy: the idea that a capitalist economy can support an ever-expanding socialist welfare state.

In this grave crisis, the world's leaders are terrifyingly out of their depth - Peter Oborne

The events of the past few days have been momentous: the eurozone sovereign debt crisis has escaped from the peripheries and spread to Italy and Spain; parts of the European banking system have frozen up; US Treasuries have been stripped of their AAA rating, which may be the beginning of a process that leads to the loss of the dollar’s vital status as the world’s reserve currency.

There have been warnings that we may be in for a repeat of the calamitous events of 2008. The truth, however, is that the situation is potentially much bleaker even than in those desperate days after the closure of Lehman Brothers. Back then, policy-makers had at their disposal a whole range of powerful tools to remedy the situation which are simply not available today.

First of all, the 2008 crisis struck at the ideal stage of an economic cycle. Interest rates were comparatively high, both in Europe and the United States. This meant that central banks were in a position to avert disaster by slashing the cost of borrowing. Today, rates are still at rock bottom, so that option is no longer available.

Second, the global situation was far more advantageous three years ago. One key reason why Western economies appeared to recover so fast was that China responded with a substantial economic boost. Today, China, plagued by high inflation as a result of this timely intervention, is in no position to stretch out a helping hand.

But it is the final difference that is the most alarming. Back in 2008, national balance sheets were in reasonable shape. In Britain, for example, state debt (according to the official figures, which were, admittedly, highly suspect) stood at around 40 per cent of GDP. This meant that we had the balance sheet strength to step into the markets and bail out failed banks. Partly as a result, national debt has now surged past the 60 per cent mark, meaning that it is impossible for the British government to perform the same rescue operation without risking bankruptcy. Many other Western democracies face the same problem.

Eric Cantor

A Wall Street Journal interview with Eric Cantor.
From: Eric Cantor: “Our country is suffering” - Scott Johnson