Cash for Clunkers

Cash for Clunkers is a prime example of the law of unintended consequences in action. It reduced the supply of running used cars at a time when recession-minded buyers increased the demand for used cars. Anyone understanding the simple economic principle of supply and demand could foresee an increase in used car prices as a result.

It was also a colossal waste of real assets and highly destructive to the environment.

Whoops—'Cash for Clunkers' Actually Hurt the Environment - Takepart.com

Back in 2009, President Obama’s “Cash for Clunkers” program was supposed to be a boon for the environment and the economy. During a limited time, consumers could trade in an old gas-guzzling used car for up to $4,500 cash back towards the purchase of a fuel-efficient new car. It seemed like a win for everyone: the environment, the gasping auto industry and cash-strapped consumers.

Though almost a million people poured into car dealerships eager to exchange their old jalopies for something shiny and new, recent reports indicate the entire program may have actually hurt the environment far more than it helped.

According to E Magazine, the “Clunkers” program, which is officially known as the Car Allowance Rebates System (CARS), produced tons of unnecessary waste while doing little to curb greenhouse gas emissions.

The program's first mistake seems to have been its focus on car shredding, instead of car recycling. With 690,000 vehicles traded in, that's a pretty big mistake.

Other People's Money

Sooner or Later ... - Glenn Reynolds

Sooner or later, you run out of other people’s money. Something that can’t go on forever, won’t. Debt that can’t be repaid, won’t be. Promises that can’t be kept, won’t be.

Technology and Global Markets

As 2012 Comes To An End, The World Has Never Been Better - Ralph Benko

In 1990, the UN announced Millennium Development Goals, the first of which was to halve the number of people in extreme poverty by 2015. It emerged this year that the target was met in 2008. Yet the achievement did not merit an official announcement, presumably because it was not achieved by any government scheme but by the pace of global capitalism. Buying cheap plastic toys made in China really is helping to make poverty history. And global inequality? This, too, is lower now than any point in modern times. Globalisation means the world’s not just getting richer, but fairer too.

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Let it not be thought, however, that the laws governing Hippie Capitalism are somehow kinder, gentler, or more renewable, than that of Republican Square Capitalism.  To most everyone’s surprise it turns out that the laws of economics, being laws of nature, apply to all equally.  The law of supply and demand, like the law of gravity, applies to Progressives as well as conservatives.  (This is a fact mostly unnoticed, or at least unforgiven, by Progressive policy makers.)

Some years ago, Kvistad noticed that international suppliers were beginning to sell chimes almost as good as Woodstock’s, and more cheaply. The necessary response, as it turned out, did not involve redeploying to the city dump in search of more discarded lawn chairs.  “We had always manufactured our chimes right here, near Woodstock,” Kvistad told me.  “It was very gratifying to be able to provide work to skilled artisans here in my home town.  Yet it was clear to me that if we continued to make them here we soon would be out of business and providing no jobs at all.  So I sought out and found reliable, high quality, ethical suppliers — in China and Indonesia — and… between natural workforce attrition, people moving on or moving away, and retraining my team to handle the complexities of managing an inventory built abroad, I was able not only to keep jobs here in America but to generate more highly skilled, better paying, jobs right here.  It was a positive, not a negative, sum game.  (Emphasis added.)  We also sell in Europe, Canada, and are opening up a distribution center in the UK.  All of that goes to create more American jobs.”

Kvistad’s action provides empirical proof, as if more were needed, of Tamny’s Law (named for the editor of Forbes.com Opinion who has reiterated this observation ad infinitum, and, one hopes, will continue to do so until the policy elites come to grips with reality): “Technology erases unnecessary work so that we can constantly migrate toward more productive pursuits. We destroy jobs to create better ones.”

Michael Saylor Channels Joseph Schumpeter In His Vision Of An Abundant, Cyber Future - John Tamny

Saylor writes of an agricultural revolution that was thousands of years in the making, and that smothered productivity for so much individual effort geared toward growing and finding food. The United States used to be very much an agrarian society, yet Saylor writes that agriculture workers as a percentage of the U.S. labor force today are less than 1%. Put simply, the mass destruction of farming jobs allowed for the redirection of precious human capital toward more productive, higher value work.

So while Americans were the certain beneficiaries of farming advances that freed up their labor, Saylor writes that 36.7% of the worldwide labor force is still stuck in agriculture. That sad number is about to shrink, however. As Saylor puts it, “I believe that mobile computing is the tipping point technology for the larger Information Revolution.” In our pockets in the form of smartphones is increasingly powerful software that will drive “an explosion of start-up companies that will enter markets that previously had high barriers to entry.”

Macro Economics

Just in time for Christmas:

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.

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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.

What is a Pencil Worth?

Milton Friedman on the value of a pencil.

Milton Friedman on Capitalism

Milton Friedman on capitalism, free enterprise, and what really relieves the masses of grinding poverty (1979, The Phil Donahue Show).



If the link disappears, go to YouTube and search for Milton Friedman.

Remembering Margaret Thatcher

Why watch a fictional portrayal concocted by her political adversaries in Hollywood when you can watch the "Iron Lady" herself? Here she is speaking to Parliament as Prime Minister of the UK (1979 to 1990).

Austrian Economics

How Liberals Distort Austrian Economics - Sheldon Richman

The earliest Austrian economists did not make their mark by advocating free markets and other classical-liberal ideas. They did so by proffering a revolutionary positive (not normative) theoretical approach to understanding how markets work, focusing on value, price, and capital, theory. What Wikipedia says is consistent with my understanding of the matter: “When Carl Menger, Eugen von Böhm-Bawerk, and [Friedrich von] Wieser began their careers in science, they were not focused on economic policy issues, much less in the rejection of intervention promoted by classical liberalism. Their common vocation was to develop an economic theory on a firm basis.”

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Austrian economic theory describes how purposive action by fallible human beings unintentionally generates a grand, complex, and orderly market process. An additional ethical step is required to pronounce the market process good. Economic theory per se cannot recommend but only explain markets. This is what Ludwig von Mises meant when he insisted that Austrian economics is value-free. Anyone of any persuasion ought to be able to acknowledge that economic logic indicates that imposing a price ceiling on milk will, other things equal, create a shortage of milk. But that in itself is not an argument against the policy. Mises assumed the policymaker would have thought that result bad, but the economist qua economist cannot declare it such. As Israel Kirzner likes to say, the economist’s job in the policy realm is merely to point out that you cannot catch a northbound train from the southbound platform.

The Economy - Jan 2012

MURRAY AND BIER: Avoiding a lost decade - Iain Murray and David Bier

Japan’s 1990s were lost for all the same reasons America’s 2011 was lost - the status quo prevailed. In 1986, Japanese economic growth fell from 4.4 percent to 2.9 percent. In response, the Bank of Japan slashed the discount rate in half, from 5 percent to 2.5 percent. During the next three years, Japan created one of the largest economic bubbles in history. It didn’t last. Real estate prices fell by 80 percent from 1991 to 1998, and the stock market collapsed to a quarter of its 1989 high.

Throughout the 1990s, Japan tried at least 10 fiscal stimulus programs and left interest rates below zero, while economic growth kept marching southward. None of this did anything other than ruin Japan’s fiscal health, taking the country from the best fiscal position in 1990 to annual deficits of 7 percent of gross domestic product and a national debt of 227 percent of GDP. Sound familiar?

The president has vowed that his new pile of programs will be different. He has called for new publicly funded infrastructure projects, and yet that’s exactly what Japan tried in the 1990s, repeatedly on a massive scale ($1.4 trillion in 2011 dollars). Rural towns were paved over, given grand new bridges, and a huge highway system was built. All of it failed to spur growth, and similar schemes are bound to fail as well.

Economic growth is not created from the top down. Government’s main job is providing a constant, consistent playing field - something Washington lawmakers have done much to undermine over the past decade. Americans can create wealth. Extending unemployment benefits indefinitely, playing around with new gimmicks or suggesting more stimulus won’t help in the long run. Leaving individuals free to use their talents and keep what they earn will. The recovery will only start with significant regulatory relief.

Eurozone Downgrades - Desperate, But Not Serious - Forex.com

The much-feared, yet equally much-anticipated, EU sovereign credit rating downgrades have arrived. The winners were Germany, the Netherlands, Finland, and Luxembourg, which saw their AAA ratings sustained. The losers were Belgium, Austria and France, which were cut one grade to AA+. The biggest losers were Italy, Spain and Portugal, which were cut two grades to BBB+, three steps above junk. The hope was that France could maintain its AAA rating, but a single notch downgrade was not entirely unexpected. Still, it does jeopardize the AAA rating of the EFSF and the successor ESM, but we will need to see the ratings agencies make that determination later.

Debt crisis: as it happened January 16, 2012 - Szu Ping Chan and Andrew Trotman

S&P has stripped the European Financial Stability Facility (EFSF) of its AAA crown, potentially pushing up the bail-out fund's borrowing costs, and adding to the eurozone's general woes. S&P said that the fund was only as good as its backers, and that the EFSF could face further downgrades if "additional credit enhancements" were not put in place. The head of the EFSF said the downgrade would not reduce its €440bn lending capacity, though Germany's finance minister Wolfgang Schaeuble has ruled out any hike in EFSF guarantees.

Class Warfare

The Class Warfare We Need - Steve Conover

A proper class war would require Democrats and Republicans to admit that the distinguishing characteristic of the enemy is not the level of income or wealth; rather, it is whether that income or wealth was earned. The true heroes in our economy are the producers and earners; they can be found all the way up and down the income ladder, and class warfare should defend and reward them instead of targeting them. Conversely, the proper targets are the class that includes cheaters, predators, pirates, and parasites—who can also be found at all income levels.

If class warfare is inevitable, let’s at least go after the right enemy. Fingering “millionaires and billionaires” as the culprits is the easy way out; it might pass muster in focus groups and might fit well into campaign speeches, but it doesn’t even come close to a proper description of the true enemies of economic growth and broadly shared prosperity. If we can target the right enemy, we’ll be fighting a good war; in that case, by all means, let the 2012 class war begin in earnest.

Class Markers vs. Causes - Glenn Reynolds

One point that I haven’t blogged, but that is worth mentioning here: The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.

Keeping it Simple

The peril of ‘smart’ politicians - Frank J. Fleming

The main problem may be confusing “simple” with “dumb.”

If something is simple, then dumb people will believe it. And if dumb people believe something, then soon some conclude that smart people should believe something else. There’s a flaw in that philosophy.

Why shouldn’t you touch a hot stove? There’s no complex, smart answer to that. You’ll get roughly the same answer from Stephen Hawking that you’d get from Forrest Gump: It’s hot, and it will hurt.

But say you were going to argue that you should touch a hot stove. That would have to be a very complex answer, since it defies basic logic. And some people could run with that, talking in detail about pain receptors and the brain’s reaction to stimulus, and come up with a very smart-sounding argument on why touching a hot stove is a great idea.

Others will go further and mock all those ignorant people in the flyover states for their irrational fear of hot stoves and announce, “The most enlightened thing to do is to press one’s face against a hot stove.” Those people are what we call intellectuals.

Similarly, when someone comes up with a well-reasoned argument backed by top economists that two plus two equals five, there’s no brilliant way to refute it. The only response is: “No, you’re an idiot; it’s four.” But if you say that, you’ll be called anti-smart people.

And that’s the problem with the right: All its main stances on the issues are rather simple. And when concepts are simple, it’s hard to make smart-sounding arguments for them, while the arguments against them would have to be complex, which some people mistake for meaning they’re smart.

Which reminds me of one of my favorite Reagan quotes:

They say the world has become too complex for simple answers. They are wrong. There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right.

Ronald Reagan

Eurozone Update

Europe's great divorce - Charlemagne

WE JOURNALISTS are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. What is clear is that after a long, hard and rancorous negotiation, at about 5am this morning the European Union split in a fundamental way.

In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets. Britain and three others have decided to stay out. In the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.

So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU's tectonic plates have slipped momentously along same the fault line that has always divided it—the English Channel.

Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go their way.

Europe's blithering idiots and their flim-flam treaty - Ambrose Evans-Pritchard

This "fiscal compact" is not going to make to make the slightest impression on global markets, and they are the judges who matter in this trial by fire.

Yes, there is more discipline for fiscal sinners, but without any transforming help. Even the old "Marshall Plan" of the July summit has bitten the dust.

There is no shared debt issuance, no fiscal transfers, no move to an EU Treasury, no banking licence for the ESM rescue fund, and no change in the mandate of the European Central Bank.

In short, there is no breakthrough of any kind that will convince Asian investors that this monetary union has viable governance or even a future.

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No doubt these dramatic events will be uncomfortable for Britain, but this will all be swept away by bigger events before long. The Europols have not begun to work out a viable solution to their deformed and unworkable currency union, and perhaps no such solution exists. The system will lurch from crisis to crisis until it blows up in acrimony.

By then, a separate cluster will have emerged (not the 10 "outs" against the 17 "ins", always a ludicrous concept), but rather a loose Anglo-Nordic-Swiss grouping that may not do so badly on the fringes and may begin to solidify into a seductively comfortable outer tier.

Eurozone banking system on the edge of collapse - Harry Wilson

Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region's struggling banks, however City figures said a "collateral crunch" was looming.

"If anyone thinks things are getting better then they simply don't understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.

Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding.

"The system is creaking. There is a large amount of stress," said Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.

France Has Second Thoughts About the Euro - Michel Gurfinkiel

The problem of the euro is that it is a currency, but not money. Money is largely magic. It is the sum total of what allows production, trade, work, innovation, profit. It works as long as there is confidence in it. “Give me good politics, I’ll repay you in good finance,” said Baron Louis, the finance minister of King Louis XVIII under the French restoration. In other words, see to it that everybody thinks he has a future under your government, whether he is a Royalist or not. As long as that will be the case, it will be comparatively easy to manage business, raise taxes, and balance budgets.

Baron Louis’ modus operandi was the secret of the American era of prosperity from 1945 to 2008. In a globalized world, the United States — as a benevolent hegemonic power — was providing good politics, i.e., confidence, and it allowed for good business everywhere. Whatever the theoretical state of the dollar and other currencies, the United States had iron: the will and the practical means to make war if needed. It cost the American taxpayer 4% to 5% of its GDP annually — no other Western business-oriented nation (except Israel) invested as much. Europe as a whole never took off from a 1% to 1.5% level. France and the UK never raised above 2%. And the American iron transmuted into gold.

The Europeans got weary of American leadership — especially when things were so good throughout the Reagan and then the Clinton booms — and most people forgot why they were so good. They mused about having their own currency and outdoing the dollar. They did it. They created a currency. But no money. Because they were just unable and unwilling to get together and to build up a federal European government and a federal European army. They did not realize there is no gold without iron.

Just in order to exist in front of the dollar as a mere currency, the euro had to be the most deflationist one ever, i.e., to be linked to superhigh interest rates and a rigid no-inflation policy. This in turn meant that local European economies were suffocated, and that the European welfare state was unworkable overnight. The only way out was to make maximum use of the non-European, still American-centered, globalized world. Even there, however, success was linked to inner discipline. The only eurozone country that really survived the euro was Germany, where industry workers agreed to lower wages in order to stay competitive.

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.

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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.

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.

National Banking Troubles

Monster Prediction From BofA: Another US Debt Downgrade Is Coming In Just A Few Weeks - Joe Weisenthal

The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress. Since the fall-back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes

Eurozone summit - despair and backbiting in the corridors of power - Bruno Waterfield

Just when the eurozone governments thought it could not get worse for Europe's single currency, it did.

Shell-shocked EU finance ministers meeting in Brussels on Saturday were already reeling from the worst Franco-German rift for over 20 years and a fractious failure to resolve the problems that have brought Greece, and the euro, close to the brink.

But then a new bombshell hit as a joint report by the EU and the International Monetary Fund (IMF) warned that, without a default, the Greek debt crisis alone could swallow the eurozone's entire €440 billion bailout fund - leaving nothing to spare to help the affected banks of Italy, Spain or France.

An EU already rocked by divisions between France and Germany over how to increase the "firepower" of the European Financial Stability Facility (EFSF) in order to save the wider eurozone from Greek contagion now faced the prospect of losing it all in one go.

As dark-suited finance ministers contemplated the pains au chocolat laid out on their desks alongside their talking points and position papers, Jan Kees de Jager, the Dutch finance minister, told colleagues: "We've got to get real. People are talking about new defences but with one gulp the whole €440 billion could be gone, leaving the eurozone with no protection at all."

Charting Europe's Toxic Debt Jack In The Box - Redux - Tyler Durden

That Europe is, and for a long time has been nothing more than one spring club loaded, and destructive Jack in the Box, just waiting to be unleashed upon the world when the conditions are most dire, is by now nothing new to regular readers: it was roughly two years ago when we presented for the first time the case of how European bank debt is not only orders of magnitude greater than American debt, but that the equity tranches is a tiny sliver in a world where one bank's assets are another bank's liabilities, and any modest write down of debt would result in a cascading domino effect which wipes out billions and possibly trillions in "book value."

See the linked graphic.