The Mafia vs. The State

December 31, 2011 · Posted in Government · Comment

Imagine your average neighborhood mafia: A scary armed group of people who plan, organize, and undertake regular extortion runs (meaning money raised by means of threat or use of aggression) at local businesses, in exchange for the “protection” they afford them.

Now imagine this mafia allowing the people of its district to submit votes, allowing them to choose who will be the main guy or party in charge of all its extortion runs.

Now imagine this mafia extending their extortion runs to every single working resident within its territory, demanding a percentage of incomes earned.

Now imagine this mafia demanding that the residents pro-actively send in the tribute “owed” and supply every detail about how much they earned and how and where in order to avoid having someone knock on their doors to collect.

Now imagine this mafia borrowing money from local and remote investors, against the collateral of future extortion proceeds which they then use, among other things, to expand their scope of intrusion into the lives of the residents.

Now imagine this mafia setting up learning camps that it funds with money from increased extortion threats. For generations moving forward the mafia would determine the curriculum used to educate the children of residents and shape their beliefs accordingly.

Now imagine this mafia establishing a bank where it prints its own currency the use of which it makes compulsory by demanding it in extortion payments, and by threatening aggression against anyone who doesn’t accept it in the settlement of debts and anyone who dares to compete in the production of currency.

Now imagine this mafia establishing its own permanent standing army, equipped with tanks, grenades, nukes, fighter jets, aircraft carriers, bases, helicopters, etc.

Now imagine this mafia establishing an institution where it approves or denies drug producers the right to sell drugs to its residents. Producers need to pay fees and wait for years before they’re granted this right.

Now imagine this mafia using its arms to attack other mafia gangs of other adjacent and remote territories, year by year killing millions of non-mafia residents in the process, all funded by money from increased tribute demanded in extortion threats and money borrowed against the promise of payment from yet more future extortion threats.

Now imagine this mafia setting up buildings with giant cages where it locks away people who don’t follow its orders, such as the prohibition against owning or selling certain pieces of harmless vegetation, or resistance against extortion payments.

Now imagine this mafia using extorted money or money borrowed against future extorted money to reward connected businessmen who made bad or economically harmful decisions with other people’s money.

Now imagine this mafia setting up thousands upon thousands of regulatory boards, institutions, departments, sub-departments, and agencies, equipped with rules, decrees, and the police force necessary to enforce them by shaking down businesses or individuals who are in violation of any of such rules or decrees.

Now imagine this mafia operating on a nationwide scale.

Imagine people having been “educated” in those compulsory education camps over the decades, telling you with a straight face that it is this mafia that we need in order to protect us from people who may steal from or aggress against us!

Imagine all these things and you get the largest and most dangerous mafia gang of all – the state.

Tags: Government, mafia, state

Lenin’s New Economic Policy (NEP)

December 29, 2011 · Posted in Global Economics, History · Comment

Lenin’s NEP was an instructive chapter in economic history:

Allowing some private ventures, the NEP allowed small animal businesses or smoke shops, for instance, to reopen for private profit.

(…)

Rather than repossess all goods produced, the Soviet government took only a small percentage of goods. This left the peasants with a marketable surplus which could be sold privately

(…)

The state, after starting to use the NEP, migrated away from Communist ideals and started the modernizing of the economy, but this time, with a more free-minded way of doing things. The Soviet Union stopped upholding the idea of nationalizing certain parts of industries. Some kinds of foreign investments were expected by the Soviet Union under the NEP, in order to fund industrial and developmental projects with foreign exchange or technology requirements.

The results:

Agricultural production increased greatly. Instead of the government taking all agricultural surpluses with no compensation, the farmers now had the option to sell their surplus yields, and therefore had an incentive to produce more grain. This incentive coupled with the breakup of the quasi-feudal landed estates not only brought agricultural production to pre-Revolution levels but surpassed them.

The only problem with the policy was that the state still maintained control over significant other aspects of the economy, leading to the usual problems of interventionism:

While the agricultural sector became increasingly reliant on small family farms, the heavy industries, banks and financial institutions remained owned and run by the state. Since the Soviet government did not yet pursue any policy of industrialization, and did not allow it to be facilitated by the same private incentives that were increasing agricultural production, this created an imbalance in the economy where the agricultural sector was growing much faster than heavy industry. To keep their income high, the factories began to sell their products at higher prices. Due to the rising cost of manufactured goods, peasants had to produce much more wheat to purchase these consumer goods. This fall in prices of agricultural goods and sharp rise in prices of industrial products was known as the Scissor crisis (from the shape of the graph of relative prices to a reference date). Peasants began withholding their surpluses to wait for higher prices, or sold them to “NEPmen” (traders and middle-men) who then sold them on at high prices, which was opposed by many members of the Communist Party who considered it an exploitation of urban consumers.

And when government intervention in free markets creates problems, what do bureaucrats always inevitably pursue as panacea? Right, more government intervention:

To combat the price of consumer goods the state took measures to decrease inflation and enact reforms on the internal practices of the factories. The government also fixed prices to halt the scissor effect.

Naturally, a policy that increases the wealth of the common man is a thorn in the side of tyrannical sociopaths, thus Josef Stalin ended the NEP in 1928 with the Soviets’ first 5 year plan.

Tags: NEP, new economic policy, russia

Mish & Max Keiser, Economic & Political Predictions for 2012

December 29, 2011 · Posted in Global Economics · Comment

Here are Mish’s predictions for 2012:

Severe European Recession as the sovereign debt crisis escalates: Austerity measures in Italy, Greece, Spain, and Portugal plunges all of Europe into a major recession. Spain and Portugal will follow Greece into an outright depression.

Political Crisis in Europe: French President Sarkozy loses to socialist challenger Francois Hollande. German Chancellor Angela Merkel’s coalition collapses. The Merkozy agreement is either modified to do virtually nothing or is not ratified at all. This chain of events will not be good for European equities or European bonds.

Relatively Minor US Economic Recession: The US will not avoid a recession in 2012. Retail spending ran its course with the tail-off into Christmas of 2011. The Republican Congress has little incentive for fiscal stimulus measures in 2012 so do not expect any. However, with housing already limping along the bottom in terms of construction and investment (not prices), a US GDP decline will not be severe. The US may see a recession even if GDP barely drops. Certainly the US recession will be far less severe than the recession in Europe and Australia.

Major Profit Recession in US: Profit margins in the US will be torn to shreds as businesses will be unable to reduce costs the same way they did in 2008 and 2009 (by shedding massive numbers of employees).

Global Equity Prices Under Huge Pressure: Don’t expect the same degree of reverse decoupling of US equities we saw in 2011. The US economy will be better than Europe, but equities globally will take a hit, including the US. Simply put, stocks are not cheap.

Fiscal Crisis in Japan Comes to Forefront: Japan’s fiscal crisis and debt to the tune of 200+% of GDP finally matters. The crisis in Japan will start out as a whimper not a bang, but will worsen as the year wears on. If Japan responds by monetizing debt, not a remote possibility at all, Japanese equities will massively outperform in nominal and perhaps even in real terms. “Real” means “yen-adjusted”, not “inflation-adjusted” terms.

Few Hiding Spots Other than the US Dollar: US treasuries and German bonds were safe havens in 2011, but with yields already depressed don’t expect huge gains. Expect to see a strengthening of the US dollar across the board against all major currencies. Moreover, cash (one the most despised asset classes ever), may outperform nearly everything, even if the dollar goes virtually nowhere. Hiding places will be few and far between for much of 2012.

US Public Union Pension Plans Under Attack: States finally realize the need to rein in pension plans much to the dismay of public unions. Social and economic tensions in the US rise.

Regime Change in China has Major Ramifications: China will start a major shift from a growth model dependent on housing and infrastructure to a consumer-driven model. The transition will not be smooth. Property prices in China will collapse and commodity prices will remain under pressure.

Hyperinflation Calls Once Again Will Look Laughable: Unless there is a major disruption in the Mideast (which I do not rule out by any means), oil prices will drop and food prices will follow. If so, we will once again see silly talk from the Fed about preventing “unwelcome drops in inflation”. As always, the deflation key is not prices at all but rather credit and credit marked-to-market. Expect credit in all forms to come under attack and expect junk bonds take a hit as well. By the way, regardless of what happens to oil prices, hyperinflation calls will look silly.

As always, out of all the experts out there, Mish’s predictions are probably the ones I would pay most attention to.

Tags: 2012 predictions, china, europe, gold, mike shedlock, mish

Chinese Government Determined to Let Housing Prices Fall

December 15, 2011 · Posted in General Economics · Comment

China’s massive real estate bust has only just begun to unravel.

In light of that, it’s interesting to see the Chinese leadership take the exact opposite view to the US government’s regarding housing prices:

China’s leaders affirmed they will stick next year with a campaign to bring down property prices even as a “very grim” global outlook threatens growth in the second-largest economy.

The nation will target “basically stable” consumer prices and “unswervingly” implement real-estate curbs, according to a statement after an annual economic planning meeting in Beijing. At the same time, officials will seek “steady and relatively fast growth,” Xinhua News Agency said.

Premier Wen Jiabao’s officials may limit the scale of monetary and fiscal easing to support growth as officials grapple with elevated house prices and local-government debt burdens after record lending in 2009 and 2010. So far, the government has cut banks’ reserve requirements, while leaving interest-rates unchanged at a three-year high.

I don’t think I’ve heard a single US politician in any position of power even hint at the idea that maybe it’s not only desirable but necessary for home prices to come down in order for any meaningful recovery to begin.

The respect for concept prices as a steering and balancing indicator for entrepreneurs and capitalists in an economic system is one of the most basic pillars for understanding the economics of voluntary action, that is free market capitalism.

It’s a bit misleading for the Chinese leadership to say they are going to “bring down” property prices. Property prices are going to come down no matter what they do, the question is just how fast.

It’s possible the the Chinese have learned from the recent attempts of the US and European governments to support or stimulate housing prices and the not so recent ones next door in Japan, and figured if prices are going to come down anyway why not take credit for falling prices and even make it look like it’s them making this happen deliberately?

Tags: china, china housing bust, china property bubble, housing, real estate china

Finland, Netherlands, and Irelend Thwart Franco-German Plans; New Euro Accord To Include 23 Countries – For Now

December 9, 2011 · Posted in Global Economics · Comment

Merkozy plans are dead on arrival as a A rebellion by Finland, the Netherlands and Ireland is threatening to torpedo the Brussels summit plans:

Hours before leaders arrived in Brussels , the Finnish parliament ruled that treaty changes proposed for the European Stability Mechanism (ESM) were “unconstitutional”.

The summit was further put at risk with news that after failing stress tests, European banks need to raise €115bn (£98bn) in fresh capital to satisfy regulators.

Finland’s grand committee said decisions made by the ESM – the eurozone’s permanent bail-out fund set for launch in 2012 – had to remain unanimous, and not changed to the “qualified majority” that French president Nicolas Sarkozy and German chancellor Angela Merkel have agreed.

The Finns are backed by the Netherlands, which fears proposals to withdraw veto powers from the ESM is an erosion of democracy and would make it vulnerable to funding bail-outs without recourse. Meanwhile, the Irish want to block plans for the “convergence and harmonisation” of the eurozone’s “corporate tax base”.

And this just in – New euro accord to include 23 countries:

The president of the European Council said Friday that a new intergovernmental treaty meant to save the euro currency will include the 17 eurozone states plus as many as six other European Union countries — but not all 27 EU members.

The failure to get agreement among all the members of the European Union at a summit meeting in Brussels reflected in large part a deep split between France and Germany on the one hand and Britain on the other. France and Germany are the two largest economies in the eurozone; Britain does not use the euro as its currency.

French President Nicolas Sarkozy said early Friday he would have preferred a treaty among all the members of the European Union. But that could not be achieved, he said, because the British proposed that they be exempted from certain financial regulations.

“We could not accept this” because a lack of sufficient regulation caused the current problems, Sarkozy said. The new intergovernmental accord should be ready by March, he said.

Note Sakozy’s assumption that anyone who hears him talk is a complete moron. The Euromess is a complete and total result of bureaucratic regulation from all angles, to assume people can’t see that is to assume that people are literally mentally challenged.

And then to bring it up against the British who avoided this bureaucratic mess precisely by staying out of Euro currency regulations … that, my friends, truly takes the full force of arrogant, negligent, and shameless statesmanship that only a Nicholas Sarkozy could display.

Anyway, the number of future member stats is already down to 17+6, the Euro has officially begun to crumble. Expect more states to quit this failed experiment until it finally disappears where it belongs: the dustbins of history.

Tags: euro, europe

The Fed’s Secret Loans, Europe’s Crisis, and the Boring Patterns of Statist Propaganda

November 29, 2011 · Posted in General Economics · Comment

In response to recently published information about the Fed’s emergency loans, Bloomberg’s Felix Salmon was promptly ready to perpetrate this piece of grade A scumbaggery:

Ladies and Gentlemen, this is what a lender of last resort looks like. What you’re looking at here are three lines. The black line is Morgan Stanley’s market capitalization, which tends to hover in the $40 billion range but which fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve on any given day — an amount which peaked at $107 billion on September 29, 2008. And the red line is the ratio between the two: Morgan Stanley’s debt to the Federal Reserve, expressed as a percentage of its market value.That ratio, it turns out, peaked at some point in October, at somewhere north of 750%.

Many congratulations are due to Bloomberg, for extracting this information from the Fed after a long and arduous fight. It couldn’t have come at a timelier moment: if the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act.

The Euromess has everything to do with the fact that the ECB exists in the first place, and the fact that it enabled irresponsible bureaucrats to hide behind relatively responsible ones and borrow beyond their respective taxpayers’ means.

Almost 3 years ago I already said that if European government bureaucrats don’t quit the centralization of power which enables the above, things would only get worse and worse.

Then about 2 years ago I wrote:

The truth is very simple: The best that can be done for the people of Greece is to not provide one cent of assistance to its corrupt, bloated, and union-controlled government apparatus. A country’s bailout is like a corporate bailout, only many times worse! From this logically follows that the absolute worst Europe could do to the people of Greece would be to give their rulers any more means to continue their irresponsible policies.

The European Currency Union and the European Union itself are both such gigantic failures that it is already pre-ordained that the entire experiment will go down in flames sooner or later. Now is certainly not that time yet. What we are seeing are just a few more cracks emerging in the structure of the system. The European bureaucrats will come up with some sort of pseudo solution to paper over and patch the Greek problem for now.

Even if the Greek government were saved to the detriment of the people it tyrannizes, this won’t be the last time we’ll be having this discussion, and it sure as hell won’t get any better!

We’re having that discussion again now, and the time has run out for patchwork and pseudo solutions. The system is going down as predicted.

To say that the Euromess is caused by a lack of even more ECB intervention is to say that the heroin addict’s withdrawal pains are to be imputed upon a lack of an increase in his dosage.

I think that’s pretty lazy and irresponsible stuff to put out there and it genuinely hurts reading it.

Wouldn’t it make sense at some point to stop and think a little more carefully and precisely about the things we say in public discourse?

Bank of England governor King pointed out a few weeks ago: “This phrase ‘lender of last resort’ has been bandied around by people who, it seems to me, have no idea what lender of last resort actually means, to be perfectly honest. It is very clear from its origin that lender of last resort by a central bank is intended to be lending to individual banking institutions and to institutions that are clearly regarded as solvent. And it is done against good collateral, and at a penalty rate. That’s what lender of last resort means.”

And about the Fed having solved any problems in the US … are you going to say the same thing when the public debt burden, subsidized by QE1,2,3,4,5…, will have reached an amount where the government’s automatic spending cuts start to kick in and begin to impoverish more and more of the millions of people who have been made dependent upon government handouts?

Or better yet, are people going to be asking for the Fed and government to step in, grab more power, and regulate all these banks’ irresponsible speculation binges, because for some inexplicable, magical reason they don’t seem to have much of an incentive to conduct business prudently, to pay themselves reasonable salaries, or to lend responsibly, and not, say … invest in Greek bonds for example?

The pattern is simple and boring: Keynesian and other statist clowns out there will continue doing what they’re paid for. They will support one stupid ass government spending and expansion program after another, applaud one newly created government institution after another, be completely incapable of predicting the long term effects of those unsustainable policies, ignore or even ridicule those who are capable, and then when the inevitable crisis hits they will boldly “predict” that a tragic crisis is going to hit, should all those unsustainable programs not be sustained.

This is truly embarrassing to watch.

But at the same time it’s encouraging to see other people around the world wake up to the truth, and ditch the repetitive dronings and platitudes of entitled and state tenured ivory tower academics whose cumulative output will supply plenty of instructive and awe-inspiring entertainment for future generations.

Tags: ecb, europe, european central bank, federal reserve bank, keynesian, lender of last resort

ICAP Testing Trades In Greek Drachma Against Dollar

November 28, 2011 · Posted in Global Economics, Monetary Economics · Comment

The WSJ reports ICAP Testing Trades In Greek Drachma Against Dollar:

NEW YORK (Dow Jones)–ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

The firm has been testing systems that would allow dealer banks to trade the drachma against both the dollar and the euro, the ICAP executives said, cautioning that the measures taken in recent weeks were precautionary. They said the currency pairs would not be accessible for trading unless required by market events, and may never be used.

“What precipitated this were customer concerns about what would happen if a country pulled out of the common currency,” said Edward Brown, executive vice president in business development and research at ICAP.

The U.K. Chancellor of the Exchequer George Osborne said Sunday that the government has stepped up its own planning measures in recent months to be prepared for a possible collapse of the euro zone. The U.K. isn’t a member of the euro zone, but it is home to Europe’s financial hub and is the world’s biggest currency-dealing center.

It’s good to be prepared for the likely …

Tags: drachma, euro, euro breakup, eurozone

China Housing Bust – Prices in Ordos Fall by 62.5 Percent

November 25, 2011 · Posted in Global Economics · Comment

From China Financial Daily:

Living in the edge of the Ordos storm , Ordos was beset with a different version of real estate lending Wenzhou panic . For example, local ” Jinxin Han Lin Yuan ” project , its second-hand house prices are around 10,000 yuan, while the market price now only is 3750 yuan.

Tags: china, china housing bust, china property bubble, chinese bubble, chinese economy

Economics 101 – Part 1: The Scope of Economics

November 25, 2011 · Posted in General Economics · Comment

I recently started a recorded learning series where I read out and comment on some of the concepts that I work with here. This is the first part, titled “The Scope of Economics”:

Praxeology: