No Peace In Our Times: The Inevitability Of War

Via GEFIRA,

“While people are saying, peace and safety, destruction will come on them suddenly, as labor pains on a pregnant woman, and they will not escape.”

Are you, man or woman of Christian and European heritage, aware of this prophecy or do you prefer to live in a fancy world of happy-clappy wishful thinking that the brotherhood of men is about to put an end to human conflict once and for all? Though Christmastide is a time of merrymaking, it may also be a period of reflection. The Birth that we celebrate on Christmas Day was perceived by some as such a threat as to justify the Massacre of the Innocents. Peace and good will were closely intertwined with discord and hostility. Do you think we are living in better times? Do you think we are living in Fukuyama’s end of history?

War has persisted throughout history ever since the dawn of mankind. That’s probably the best indicator that it will persist for all eternity. Why should it cease? War for the purposes of this text is not merely the outright hostilities, the firing guns and resounding battle cries. It is a constant strife that is being played out on a day-to-day basis which now and again erupts into its dramatic form of the opposing armies acting on the theatre of war. Why do we broaden the definition of war? If only because casualties – and we mean loss of lives – are not necessarily the highest during the time of the roaring guns. Those sustained during the periods of peace may be just as high or even higher. Case in point: the Yeltsin era in Russia lasting for roughly ten years. Within that decade, life expectancy plummeted from 70 down to 60, which means that the country’s loss of lives amounted to the magnitude comparable to that during any war, which is millions. This loss of life was brought about by social and economic reforms i.e. steps taken supposedly to make the living standards better and these were demanded or suggested or advised by the powers outside Russia. The result? Closed down factories, laid off employees, poverty and the attendant disease and demise of many. Were these not regular hostilities?

War has persisted throughout history in one form or another, though we are only made aware of it acutely when we can smell gunpowder, see ruined buildings and maimed bodies. Yet war is the pith and core of existence. We live by it, we draw from it, and, on a more positive note, it tests our character. The Iliad, Beowulf, Chanson de Roland, Das Nibelungenlied, Jerusalem Delivered, El Cid, the Battle of Kosovo epic circle, and, and, and, to mention only European literary monuments, they are all about adversity, combat, heroic deeds or cowardly misconduct. Why haven’t our poets and bards composed works of goodness, peace and harmony? Being ones of us, they knew the human psyche and they knew that we wouldn’t feel attracted to stories of goodness and love and charity; they knew that if we had paradise on earth, peaceful coexistence and tolerance of everything, we would have nothing to write about or, to put it in modern terms, nothing to make films about.

Think about it. All literary and religious stuff is about conflict, serious and bitter conflict. Our play and entertainment are all about conflict. Look at the popularity of computer war games, at the popularity of sports which are but epitomes of battles and rivalries; look at the popularity of crime stories, at the popularity of – mind you – Star Wars movie series, as if world wars did not fully satisfy our militant fantasizing! We are hardwired for experiencing conflict in one way or another, much though nowadays we are trying to convince ourselves that the opposite is true. Medieval Christian chroniclers, who most often were Christian priests, i.e. preachers of love and charity, rebuked princes for idly staying at home rather than leading their warriors and knights on conquests. Islam was no better in this respect. The first two or so centuries from its inception were characterized by militant conquests: there were no apostles of Good News but rather mounted warriors wielding curved swords. It is only now that we are squeamish about armed conflicts and frown upon crusades or the conquest of the Americas. And yet we do it in a hypocritical way: we have removed words like war, military campaign or intervention from our polite vocabulary and we call these phenomena spreading or saving democracy, preventing humanitarian disasters, defending prosecuted minorities and what not. Nonetheless, by whatever name a rose is known, it is still a rose.

War runs in our blood. We are biologically designed for conflict, for struggle, for overcoming adversity. No globalization, no unification of nations, no removal of class, religious, racial, economic differences will ever do away with war. Conflict in general and war in particular is a result of (i) biology which manifests itself in (ii) economy and (iii) ideology.

(i) The otherwise scientifically-minded Western Man knows it very well as he firmly believes in the evolutionary mechanism i.e. the differentiation of species and struggle for existence. The animal world – and we are part of it, just an extension – is all about fight for survival, competing for females, guarding one’s breeding and hunting grounds. Genetically related individuals (individuals related by blood, as men of old would have said) form in-groups (families, clans, tribes, nations), where loyalty to its members has a top survival value. Heroic literature exploits the motif of loyalty and its moral counterpart, which is treason, to the full. That is how the biological mechanism of in-group loyalty and out-group exclusion has sublimated into ideas, and these have found reflection in works of art and, broadly, ideology, and in all this which is generally referred to as culture. Nations are a biological phenomenon. Ethnicity, not only race, can be determined by looking into genes! No wonder then that ethnic differences are the main fault lines along which conflicts arise. True, different human groups may from time to time exist as neighbours, never really merging with each other, but inevitably their coexistence must end in an eruption of hostilities.

A note here. Some say humans behave according to the dictates of the culture they live in or are born into, hence a change of cultural surroundings will result in the change of the individual’s behaviour, as if man were a piece of malleable stuff to be shaped at will. Wrong. Culture in its broadest sense is the sublimation of biology, not the other way round. Man creates culture; culture does not create man. Islam practised by white Europeans would look entirely different than Islam practised by Arabs and, similarly, Christianity practised by Arabs would not resemble that practised by Europeans.

(ii) In their daily struggle for survival human groups compete for the scarcity of resources and land. This economic competition is yet another powerful source of conflict and, eventually, war. Economy, i.e. the struggle to survive on a daily basis, brings into conflict also the interests of the members of the in-group. Some are employers, others are employees: some make a living from capital, others from labour. There arises a clash between the haves and the have-nots, ending up in violent revolutions. The dispossessed or simply less affluent members of society attempt to rid the well-to-do of their property, the latter defend themselves. A dream of a peaceful coexistence dictated creating a classless society where everybody’s income had to be levelled. That led to civil wars and ultimate impoverishment of whole nations, from Cuba to North Korea. The French revolutionaries, once they launched guillotining people, including their co-revolutionists, just could not stop doing it. Much the same was true of the Russian Bolsheviks: on one hand they started murdering themselves (Comrade Stalin had Comrade Trotsky killed in the far-flung Mexico where the latter had spent years in exile) and purging the party ranks, on the other they starved their own people, peasants and workers, on whose behalf they began the revolution in the first place. The “achievements” of the medieval notorious inquisition pale in comparison to the millions butchered, tortured and imprisoned in concentration camps in Soviet Russia. Think of it: all that was done for the happiness of future generations of a classless and nationless society.

(iii) Ideology, as said above, is the expression of biological instincts. If it takes the form of a religion, it becomes a weapon by means of which a nation’s dominance, conquest, or privileged position is most powerfully explained by the will of a god or gods. To a believer this religious reality is stronger than the physical one. Consider Muslim suicidal attacks or Christian executions of physicians in front of American abortionist clinics. The survival value of a religion may raise one race above others to the status of a chosen people with all attendant consequences; it may create social strata like a caste system in India which, as it has a blessing from a godhead, it is unthinkable to change; it can fossilize the relationship of dominance and subservience. The Western Man tends to disregard religions as superstition so much that he does not accept the facts that believers of whatever faith are ready to sacrifice their life for a cause.

Some of the systems have been advanced for the sole purpose of blessing the whole of humanity with a pretense of introducing an age of eternal peace and brotherhood. Recall the French and Bolshevik revolutions, globalism or economic and political unions of all types. They are all doomed to fail as they run counter to biological reality, which is constant differentiation and the resulting strife. A new ideology (religion) must first overcome the resistance of the followers of the old one(s), and then or even while ousting the old beliefs, it itself splits into new sub-movements of the first original one. Consider Christianity with its many denominations and the socialist or communist movements, Christianity’s archenemy, which ended up with as many heresies. The movement of whatever kind begins with conflict with ideological out-groups and ends up as a house divided against itself. And then, again, the biologically-conditioned in-group loyalty and out-group exclusion prevail: Catholic, Muslim or communist nations are very often bitter enemies. The shared faith or ideology lose to blood ties.

Is there a solution to wars? Everlasting peace? None, really.

Consider uniting the peoples of the earth in one “nation” (globalization) in the hope of achieving everlasting peace. Quite apart from the feasibility of such an idea and the fact that there will be resistance to it, one nation is no guarantee of a life without conflicts. After all, all homogeneous nations have experienced civil wars. Just one example. The English people were torn by the War of the Roses, then the Cromwellian revolution, then a part of the nation settled down in North America and rebelled against their brothers on the old continent only to wage a fratricidal war of secession among themselves. Much the same story can be told about all other nations around the globe. So, if a nation’s life is rife with conflict, how much more the life of an artificial one, like the Soviet or European Union?

Consider uniting the peoples of the earth by imposing on them one religion, ideology, or a universal lack thereof or indifference (which nowadays goes by the name of tolerance) to all beliefs. Again, we know from history such an attempt is doomed to fail. Remember the initially universal Christianity: one did not have to wait long till it produced Arianism and other heresies, then it split into Orthodox and Western branches; the Western branch gave rise to a number of heresies and split into Catholics and Protestants, who in turn gave rise to numerous denominations thereof. Much the same held good for political ideologies (a form of lay religion) where the socialist or communist movement kept dividing itself into opposing and hostile factions, like national or international socialism, communism, Marxism, Leninism, Trotskyism, Maoism, Eurocommunism (Gramscians), liberation theology (social Christianity)… Russian Communists used military intervention to quell the aspirations of Czechoslovak communists; Comrade Tito was hated by Stalinists, and Chairman Mao was insulted by Stalin for a purpose. Any global ideology with all-encompassing tolerance is sure to follow that way. No doubt about it.

Man thought that religion would overcome national sentiment. Man thought lay ideologies would overcome national sentiment. Both failed miserably. Supposedly suppressed or eradicated national feelings all of a sudden revive as was the case at the outset of the First World War, when socialist parties previously renouncing nationalism turned out to be patriotic; when international soviet communism adopted national colouring during the Great Patriotic War and so on.

Consider uniting the peoples of the earth economically. That, too, will inevitably lead to differentiation in the level of affluence and the resulting tensions between the top and the bottom dogs, sparking social unrest, violent clashes and then revolutions. And we should not forget that also here we may have a hard time deciding whether we develop our global economy according to free market ideas of Austrian school, Keynesian economics, socialist welfare and, and, and…

Eternal peace is not only impossible but also undesirable. Eternal peace and brotherhood of men would mean stagnation, lack of development, death. Yes, there is life because there is death.

All these factors – biological, ideological and economic – are prime movers behind conflict and war. Nations or social classes, ideologies or economic interests, they all exist, keep splitting and competing with each other. When present-day democracies come to blows with regimes as they call them, they only prove that war is inevitable and do not even see that those ‘regimes’ fight against democracies with precisely the same amount of conviction of waging the righteous, if not holy, war.

The modern Western man may laugh at the medieval methods of suppressing dissent or at the fatwas issued by ayatollahs, thinking himself above such measures, but he is none wiser. He moves in the same biological treadmill of eternal – internal, ethnic, sectarian, political, religious, social and even marital! – strife. The enemy is called names – heretic, fascist, racist, imperialist, colonizer, dictator – is burnt at the stake, excluded from polite society, judged by a court or becomes anathema. His right to free speech is denied by the Index Librorum Prohibitorum or political correctness or you name it. War rather than brotherhood. To feel good we all need the bad guys somewhere around. To combat the bad guys gives us a purpose in life. To think of it, only very few of us realise that we ourselves are the bad guys (kafirs, infidels, aggressors) for those whom we regard as bad guys. In a noble attempt to impose our righteous ways on others we meet with resistance. Resistance means conflict and conflict ultimately results in war. That’s the eternal circle of life and death described in The Iliad, Beowulf, Chanson de Roland, Das Nibelungenlied, Jerusalem Delivered, El Cid, the Battle of Kosovo epic circle. We have not been born for a life in liberty, equality and brotherhood. These words only reflect sentimental fantasizing enshrined in the wishful thinking of human rights, but have nothing to do with reality.

To forestall Christian believers’ opposition to the observations described above, let us remind them of Christ’s words, which read: “You will hear of wars and rumors of wars, but see to it that you are not alarmed. Such things must happen.” If they are true believers, they had better repeat after the psalmist: “Praise be to the Lord, my Rock, who trains my hands for war, my fingers for battle.” The realist atheists and agnostics as scientifically-minded people should not stand in need of being convinced that war is part and parcel of our earthly existence.

Doug Casey On Why Millennials Favor Communism

Via CaseyResearch.com,

Communism is better than capitalism...At least, that’s what a growing number of young people in the U.S. think.

I wish I were joking. But a recent study from the Victims of Communism Memorial Foundation, a D.C.-based nonprofit, found that half of the millennials it surveyed would rather live in a socialist or communist country than a capitalist society.

And 22% of those surveyed had favorable views of Karl Marx… while 13% viewed Joseph Stalin and Kim Jong-un as “heroes.”

To figure out what’s behind this disturbing trend, I called Doug Casey…

*  *  *

Justin: So Doug, about half of U.S. millennials would rather live in a socialist or communist country… What’s gotten into the youth?

Doug: The youth are being corrupted, and it’s more serious than ever.

I say that a bit tongue-in-cheek, however.

That’s because one of the two charges against Socrates when he was executed in Ancient Greece was corrupting the youth. Older people always think the youth are foolish, ignorant, lazy, crazy, and generally taking the world to hell in a handbasket. And of course many of their charges are, and always have been, true.

But as kids get older, they generally get wiser, more knowledgeable, harder-working, and more prudent. Nothing new here. The world has survived roughly 250 new generations since civilization began in Sumer 5,000 years ago. And it will likely survive this one too.

That’s the bright side. And, as you know, I always look on the bright side. But, on the other hand, the American university system has been totally captured by Cultural Marxists, socialists, statists, collectivists, promoters of identity politics, and people of that ilk. These people hate Western Civilization and its values, and are actively trying to destroy them.

Justin: How’d that happen? Don’t young people go to college to learn how to think critically?

Doug: When the average 18-year-old goes to college, he knows very little about how the world works in general. He’s got vague ideas he picked up mostly from TV, movies, and people who got a job teaching high school. They know roughly nothing about economics, government, or history. Worse, what they think they know is mostly wrong.

That makes them easy prey for professors with totally bent views to indoctrinate them.

It’s not so much that they’re taught inaccurate facts. There are plenty of “factoids” (artificial facts), of course—like the War Between the States (which shouldn’t be called the Civil War) was mainly fought to free the slaves. Or that Keynesian economics is correct. And many, many more. But that’s just part of the problem.

It’s not the factoids they’re taught. It’s the way the schools interpret actual facts. The meaning they infuse into events. The way they twist the “why?” of events, and pervert concepts of good and evil.

The real problem, however, is that, contrary to what you suggested a moment ago, they’re not taught critical thinking. Rather just the opposite—they’re taught blind acceptance of what’s currently considered politically correct.

Instead of questioning authority in a polite and rational manner—which is what Socrates did—the current idea is to prevent any divergent views from even being discussed. The profs are basically all socialists, and the kids tend to believe what they’re taught. Those views are buttressed by the other sources of information available to them—Hollywood, mass media, and government.

These bad ideas usually start with “intellectuals.” Intellectuals typically despise business and production, even though they envy the money the capitalists have. Intellectuals feel they’re not only smarter, but much more moral. That gives them the right, in their own eyes, to dictate to everyone else. That’s one reason why they’re usually socialists, and approve of a “cadre,” like themselves, ordering everyone else. Intellectuals naturally gravitate to the university system, where they’re paid to hang out with each other, be lionized by kids, hatch goofy ideas.

This has always been the case. But it’s becoming a much bigger problem than in the past.

Justin: How come?

Doug: A much, much higher percentage of kids go to college now than have ever gone to college in the past.

In the recent past, maybe five or a max of ten percent of kids went to college. These days, almost everybody goes. So a much higher proportion of the youth are being infected with memes that the leftists have put in there.

So yeah, some kids will grow out of it, and will realize that most of what they’ve paid an exorbitant amount of money to learn is nonsense. But most will reflexively believe and defend what they were taught in the cocoon. And I’m afraid those people now make up a big chunk of the U.S. population.

So yeah, I think the numbers that are quoted in that article, about how many kids think socialism is good, are probably accurate. And if they don’t think it, almost all of them feel it. Few know the difference between thinking and feeling…

Justin: Today’s universities aren’t just teaching bent ideas about politics and economics. They’re also dispelling insane notions on race.

For example, an anonymous student at Tulane University in New Orleans recently posted a sign that read “It’s okay to be white.”

Nothing wrong with that, right? Well, apparently the Tulane administration wasn’t pleased. Here’s an official response from Tulane’s public relations department.

We have no idea who posted these signs, but that person is obviously not speaking for Tulane University.

I got a chuckle reading that. But it’s a disturbing sign of the times. Wouldn’t you agree?

Doug: Yeah, it borders on the unbelievable. The insane, actually.

Most whites have been indoctrinated, both indirectly and directly, subtly and overtly, over the years. They’ve bought the propaganda that being white is bad. They believe Western Civilization is a bad thing…that white people have destroyed the world.

Even if they don’t want to believe it, because the concept is so stupid and so utterly contrafactual, they end up believing it just because they’ve heard it over and over. It’s very bad news across the board.

Justin: The mainstream media seems to be peddling these bad ideas, too. Wouldn’t you agree?

Doug: Absolutely. The memes that originated with intellectuals in universities have thoroughly infiltrated the mass media and the entertainment industry—places “thought leaders” gravitate towards.

And you’re getting no defense at all from so-called capitalists and business leaders. All they’re interested in is making money. And—absolutely if they’re wired with the Deep State—they don’t really care how they do it. They’re happy to work with and for the government. They self-righteously make charitable contributions to universities and NGOs, subsidizing the source of the poison.

So, there’s almost nobody to defend the ideas that have brought us Western Civilization. And—with the exception of a few anomalies like Taoism, yoga, and Oriental cooking—it’s responsible for about everything that’s good in the world. Without it the whole world would resemble Africa, or Cambodia, or Mongolia—not even today, but 200 years ago. Western ideas are things like individualism, freedom of thought, freedom of speech, science, rationality and capitalism. These concepts no longer have any defenders anywhere. They’re under attack everywhere.

Justin: This can’t be good for the economy in the long run.

Doug: No. It’s one of the reasons I’m generally bearish.

I mean, how can the markets be healthy when what’s left of the ruling class in the country actually hate themselves? When the middle class is collapsing? When political entrepreneurship is valued more than making money through production?

In fact, the economy and the markets are the least of our problems. The very foundation of civilization itself is under attack. The acceptance of destructive ideas is getting to be as serious as what we saw in Russia under the Soviets, in Germany under the Nazis, or China under Mao. More serious, since civilization is under serious attack in the U.S., which has been the bulwark for the last century.

So, excuse me for my bearishness, but I think it’s warranted.

Justin: Thanks as always, Doug.

Doug: You’re welcome.

*  *  *

As Doug says, civilization is under attack in the U.S. And this crisis is only getting worse by the day. That’s why Doug and his team recently released an urgent video that explains exactly what’s going on…and why it’s so important that you take action today. You can learn more right here.

More Spending Does Not Drive More Employment

It is almost universally asserted today that consumer spending drives employment.

This thesis gives support to the general Keynesian idea that government should “stimulate” the economy when it is suffering from a recession, whether it is through fiscal or monetary policy.

Glorious Spending

At the core, the idea is that if spending on goods and services goes up, then more people are needed in their production. And, as a consequence, more people are able to get jobs, earn a wage, and thus buy goods and services. In other words, it doesn’t matter if government wastefully increases spending — even if it is borrowed money — because the economic wheels start turning and as growth picks up we’ll be able to deal with debt, deficits, and so on.

Not to mention the human suffering through involuntary unemployment and poverty that is averted by such a single act!

Government spending in a recession is therefore seen as an almost costless solution that we simply cannot afford not to make as much use of as possible.

So it is easy to understand why Keynesians are at best confused by those arguing against government stimulus, and would likely call them “evil” for opposing something so grand.

The problem is while the logic is easy to follow, it is based on an utterly false assumption. There is no such relation between consumer spending and employment as Keynesians believe is obvious.

The Economy Backwards

Treating the economy as demand driven is placing the cart before the horse. It is easily done if one does not include entrepreneurship or have a conception of what entrepreneurs do in an economy, as is commonly the case in the formal modeling of modern economics.

If we think of the economy in terms of equilibrium, then there is no reason to consider the entrepreneur. As a result, as Schumpeter noted, economics has become Hamlet without the Danish prince: a system view of the economy devoid of both actors and action.

But such a mechanistic view of the economic system is necessary to successfully argue for government intervention as a means to improve economies. The economic organism, in contrast, will always produce unintended consequences that undermine and make impossible such interventionism.

Furthermore, viewing the economy as a mechanistic system is also necessary for the very possibility of establishing and running a socialist economy. Indeed, the market socialists’ attempted rebuttal of Mises’ calculation argument implicitly assumes this mechanistic view. But Mises’ original argument does not — it is based on the view that entrepreneurship is the driving force of the market.

In a mechanistic, circular-flow view of the economy, too little spending is a problem as that causes a general glut, which in turn forces employers to cut costs and lay off workers. This is not how the real economy works, however. As Ricardo noted, "[the actual problem is that] men err in their productions, there is no deficiency of demand.".

The Role of Entrepreneurship

Economists prior to the Keynesian avalanche, which contemporary Say’s Law scholar Steve Kates argues was all about dismissing the organic view of the market economy, had the same understanding of the economy as Mises. What drives the economy is not demand or spending, but entrepreneurship and production.

Indeed, JS Mill famously notes that "Demand for commodities is not demand for labour" in his fourth fundamental proposition on capital. While this statement is subject to much debate and most modern economists cannot make sense of it, it is in effect very straight-forward if one recognizes the role of entrepreneurs.

What is it that entrepreneurs do? They produce in anticipation of being able to sell their goods and services. Whether there "is" demand for the individual entrepreneur’s undertaking depends on people’s valuations of the goods when they are offered. It also depends on what other goods and services they can choose to buy instead. Also relevant is how consumers view the world, because in some situations they will find saving instead of consuming the best course of action.

In other words, entrepreneurs bear the uncertainty of their enterprise. They anticipate that consumers will value their goods and, based on this, estimate the price. That price, in turn, determines what costs the entrepreneur can reasonably expect to cover in production, which means the entrepreneur’s actual choice is for the cost structure in production – the price is an anticipation of consumer value.

Spending Is Inconsequential

What this means is that entrepreneurs speculate about the future in which they will offer their intended goods for sale. Consequently, the investment to produce happens whether or not there “is” spending in the market. Entrepreneurs do not make decisions based on what is, but based on what they anticipate about the future. Production, of course, takes time, so what is at the time the decision is made is not very relevant for what will be when the production process is concluded.

This fundamentally undermines the Keynesian view of the economy, because the entrepreneur will employ people before demand is known — in fact, even before demand can be known.

When the entrepreneur is successful, which means the goods are eventually sold at a price that covers the cost of production, there is a relationship between spending (on those goods) and the profitability of the enterprise.

But if the entrepreneur fails, which means there is not sufficient demand to generate revenue to cover the costs, the enterprise still employed workers. Granted, if the entrepreneur does not believe the situation will change, those workers may lose their jobs. But the point is that the jobs are created whether or not there is spending.

The case of the successful entrepreneur actually only strengthens the argument that spending does not drive employment. If the entrepreneur realizes there is a much greater quantity demanded than he dared hope for, does this not drive employment? Not necessarily: there is nothing saying that the entrepreneur must employ more workers.

Rather, if this demand is anticipated to remain in force (it is still speculation), the entrepreneur will invest to increase production. This can be done by simply doubling down on the existing processes, but it is more likely that investments are made in automation. Higher production volumes make it easier to cover fixed upfront cost of machinery, and profits would suffer from relying on variable cost such as wages. Also, employing more people will require training of the workers — also an upfront investment.

But even if we disregard the observation that capital replaces labor (by making it more productive) and instead assume the entrepreneur simply doubles down on the initial production process, the Keynesian demand-driven view still falls. The investment to increase production volume is still in anticipation of future demand — not a response to existing demand.

There is no escaping the fact that production precedes consumption in a very real and fundamental sense: that entrepreneurs endeavor in production before they know that they will be able to sell the goods produced.

Spending is a possible outcome of entrepreneurial production, but not the other way around. The former does not employ people, but the latter does.

The Sermon On The Mount[ain Of Debt]

Via Global Macro Monitor,

“Blessed are the young, for they shall inherit the national debt.” – President Herbert Hoover

The Hoover administration thought there was no room and was ideologically opposed to fiscal expansion to stimulate aggregate demand.  Furthermore, Keynesian theory was not even developed at the time.  The General Theory of Employment, Interest and Money  was not published until February 1936.

A policy error, partially due out of  ignorance, that led to the Great Depression, though it was monetary policy and the Fed’s failure as “lender of last resort” that “put the Great in the Great Depression.”

…what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary  – Milton Friedman

Here is Ben Bernanke,

The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon’s infamous ‘liquidationist’ thesis, that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks – which would have intervened before the founding of the Fed – felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view. – Ben Bernanke

National Debt

06/29/1929 =  16,931,088,484.10    (16.8 % of GDP)

09/20/2017 =  20,179,769,858,967.22     (104.9 % of GDP)

Source:  U.S. Treasury Department

How many generations can keep “kicking the can down the road”?

Ernest Hemingway “kicking the can the down the road” in Sun Valley, Idaho.

Have we finally bumped up against the upper bound of the debt limit?   “This Time Is Different.”

Prepare for the “clash of generations.”

It has already started.

Britain's Top Priest Slams Rich-Poor Divide In "Britain's Broken Economy"

While the world has grown used to The Pope sticking his papal nose in the world"s business ("horrrific" borders, "grave risks" of libertarians, and the virtues of socialism); Britain"s most senior clergyman, the Archbishop of Canterbury, has now decided that it is not enough to preach His word, but better to use his position of influence and adulation to discuss what"s wrong with capitalism...

The British economic model needs fundamental reform.

It is no longer generating rising earnings for a majority of the population, and young people today are set to be poorer than their parents. Beneath its headlines figures, the economy is suffering from deep and longstanding weaknesses, which make it unfit to face the challenges of the 2020s.

Fundamental reform has happened before, in the 1940s and 1980s.

The persistent economic problems we have experienced since the 2008 global financial crash demand change of the same magnitude now. This should be guided by a new vision for the economy, where long-term prosperity is joined with justice for all.

The Most Reverend Justin Welby, writing as part of a new report from think tank, the Institute of Public Policy Research,  said that Britain"s economic system is effectively not fit for purpose, benefitting the haves (to the detriment of the have-nots).

"Our economic model is broken. Britain stands at a watershed moment where we need to make fundamental choices about the sort of economy we need," Welby said in comments released as part of IPPR"s "Time for Change: A New Vision for the British Economy" report.

"We are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising."

The solution - simple - spend more "government" money, end fiscal austerity, and maker sure everyone "pays their fair share" - sound familiar?

We have experimented with bold monetary policy, but are constrained by pre-Keynesian fiscal orthodoxy. Since the financial crisis, the UK economy has been supported by extremely low interest rates and a major programme of ‘quantitative easing’ (unconventional money creation) by the Bank of England.

Fiscal austerity – public spending reductions and tax rises – has left the UK’s recovery in this period slower than almost all of our major competitors.

Growth is now being fuelled again by consumer spending, based on rising debt and falling savings. With monetary policy having little further scope to deal with a slowdown, there is a strong case for increased public investment now to drive demand.

Archbishop Welby"s comments are by no means the first time he has intervened in the UK"s economic debate. As BI reports, Welby famously said in 2013 that he would effectively help to try and put much maligned payday lender Wonga out of business, by assisting credit unions which compete with the firm. Welby - who worked in the oil business before becoming a clergyman - was later left embarrassed after it emerged that the Church of England had investments in funds which provided money to Wonga.

*  *  *

Full IPPR Report - "A New Vision for the British Economy"

Does Government Spending Create More Economic Growth? (Spoiler Alert: No, Silly!)

Authored by Frank Shostak via The Mises Institute,

After the 2007-2009 global financial crisis, fears of ballooning public debt and worries about the drag on economic growth pushed authorities in some countries to lower government spending, a tactic that economists now think may have slowed recovery. Note that in the United States the total debt to GDP ratio stood at 349 in Q1 this year.

In a paper presented at the Kansas City Federal Reserve’s annual economic symposium on August 26 2017, Alan Auerbach and Yuriy Gorodnichenko from the University of California suggested that “expansionary fiscal policies adopted when the economy is weak may not only stimulate output but also reduce debt-to-GDP ratios”. (Fiscal Stimulus and Fiscal Sustainability, August 1,2017, UC – Berkley and NBER).

Some commentators are of the view that these findings may be welcome news to central bankers who face limited options of their own to combat a future downturn, given existing low interest rates and low inflation rates in their economies. "With tight constraints on central banks, one may expect — or maybe hope for — a more active response of fiscal policy when the next recession arrives," the University of California researchers wrote.

These findings are in agreement with Nobel Laureate in economics Paul Krugman, and other commentators that are of the view that an increase in government outlays whilst the economy is relatively subdued is good news for economic growth.

Can increase in government outlays strengthen economic growth?

Observe that government is not a wealth generating entity as such - the more it spends, the more resources it has to take from wealth generators. This in turn undermines the wealth generating process of the economy.

The proponents for strong government outlays when an economy displays weakness hold that the stronger outlays by the government will strengthen the spending flow and this in turn will strengthen the economy.

In this way of thinking, spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual"s earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the flow of spending. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.

Following this logic, in order to prevent an emerging slowdown in the economy’s growth rate from getting out of hand, the government should step in and lift its outlays thereby filling the shortfall in the private sector spending.

Once the flow of spending is re-established, things are back to normal, so it held, and sound economic growth is re-established.

The view that an increase in government outlays can contribute to economic growth gives the impression that the government has at its disposal a stock of real savings that can be employed in emergency situations.

Once a recessionary threat alleviated, the government may reduce its support by cutting the supply of real savings to the economy. All this implies that the government somehow can generate real wealth and employ it when it sees necessary. Obviously, this is not the case.

Given that the government is not a wealth generator, whenever it raises the pace of its outlays it has to lift the pace of the wealth diversion from the wealth-generating private sector.

Hence the more the government plans to spend, the more wealth it is going to take from wealth generators. By diverting real wealth towards various non-productive activities, the increase in government outlays in fact undermines the process of wealth generation and weakens the economy’s growth over time.

The whole idea that the government can grow an economy originates from the Keynesian multiplier. On this way of thinking an increase in government outlays gives rise to the economy’s output by a multiple of a government increase.

However, is it possible that an increase in government will give rise to more output as popular wisdom has it? On the contrary, it will impoverish producers.

Producers are forced to part with their product in an exchange for goods and services that are likely to be on a lower priority list of producers and this in turn weakens the flow of production of final consumer goods.

Not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general. According to Mises,

…there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens" spending and investment to the full extent of its quantity.

Contrary to our University of California researchers and commentators such as Krugman, at no stage of the economic cycle can an increase in government outlays be supportive to economic growth. On the contrary, what is required is to cut government outlays as much as possible, thus leaving more wealth in the hands of genuine wealth generators.

A cut in government outlays is great news for wealth generators and to the economy.

It is of course bad news for various artificial forms of life that emerged on the back of increases in government outlays and cannot survive without the ongoing support from these outlays.

The Chinese Economy's Fatal Flaws

Dr. Per Bylund’s recently published article poignantly states one of the core problems in the Chinese economy and its the state-manipulated Keynesian foundation. I do agree with his opinion. And if we dig deeper into the exact situation of Chinese economy, we will find that it’s a typical failing of the Keynesian, cronyist system.

By using the perspective of Austrian business cycle theory, lets take a look at China’s real estate industry, which is suffering more and more painfully from artificial credit issued by China’s central bank, the People’s Bank of China (PBC).

During the 2008 global economic crisis, China’s central government issued the famous RMB 4 Trillion Stimulus Package Plan (equaling to $586 billion).

Since 2009, the Chinese real estate economy has already suffered from three small economic cycles. As it is becoming more difficult for real estate companies to live on artificial prosperity, the duration of every business cycle has become shorter than the previous one. We also see more and more ghost cities because of the economic boom in every sub-economic cycle. There were at least 12 ghost cities founded in 2013, and the number of them jumped to at least 50 in 2017! Bankruptcy is happening more frequently among Chinese real estate enterprises. Since 2016, at least three real estate companies — with a combined debt of at least RMB 763 million — have gone bankrupt. The story of bankruptcy is continuing, with one of the biggest real-estate-driven enterprises, Wanda Group, facing financing problems. If Wanda no longer has access to cheap debt, it might not be able to refinance or roll over all its debt again. If Wanda has to face bankruptcy, it could possibly accelerate an end of the the current Chinese boom. 

The data from the Chinese local governments is also not optimistic; their debt levels have reached almost RMB 25 trillion (US$ 4 trillion) at the end of 2014. In 2015, even the PBC admitted in one of its annual reports saying that China’s financial system is facing higher instability and uncertainty.

The above evidence is not a surprise. All these are the consequence of artificial bank credit created by central banking and central planning.

In China, the loans are easy to get from the State Owned Enterprises (SOEs) or the businessmen who are the friends of the politicians in the Communist Party. China’s real estate industry is also the ally of the state and only the people who are friends of those in authority can participate in housing programs. 

Besides the SOE economic system, what we should worry more about is how the Keynesian and crony system hurts small and private businesses in China, who are driving the economy of this country. Compared with the SOEs, and the businessmen who are the close allies of some influential politicians, it is harder for ordinary entrepreneurs who are running small businesses to get loans. Moreover, the recent market squeeze makes it harder for Chinese small business to survive. These entrepreneurs are not only facing an unfriendly bank credit situation, but also the threat of having to bribe the government to circumvent the massive scale of governmental economic regulations.

Consider the story of a small business boss Li Lang, who is a typical Kirznerian alert businessman in China. Several years ago, he observed a shortage of moving companies in the Southwest Chinese town of Chengdu. He started his business to serve the local people. The business is not easy, not only because it requires hard work, but Li also must bribe and maintain good relations with the local politicians to let them “protect” his business and help him introduce some business opportunities. According to Li, if the local bigwigs in the crony system had already discovered the opportunity of earning a fortune by managing a moving company, it wouldn’t have been possible for him to enter the business. Though now that he has earned a lot of money, he still has to carefully maintain the relationship with the politicians to "protect" his business. His is not an isolated case. In China, the less connections you have with the cronyist system, the less business opportunity you have. And even if you become successful in your business, be careful, the state has eyes on your wealth.

Though we know that the private sector is driving the Chinese economy and has improved the living standard of many Chinese individuals despite state economic manipulation, we still have to emphasize that the nature of the Chinese economic model is dominated by Keynesianism and cronyism.

Otherwise, the false prosperity would make us misread what is happening in China.

*  *  *

In other words - don"t start believing.

China Suffers Worst Start To A Year For Retail Sales Growth Since 2002

With its credit impulse wearing off (and inflation spikes stalling any hopes of renewed stimulus anytime soon), it appears China"s always-happy consumer is not so happy as 2017 begins.

Against expectations of a 10.6% year-over-year gain in year-to-date cumulative retail sales, February saw just a 9.5% rise - the weakest February since 2002.

Presumably there is some lunar-new-year adjustment that will rescue this terrible print from its 15 year lows but we note once again that every one of the 37 analysts over-estimated (or forgot to read the calendar).

This was a 4 standard deviation miss...

The Questionable State & Abusive Use Of Economics – Part 1

Via Benjamin Masters of RealInvestmentAdvice.com,

As lackluster results from rather experimental central bank policies continue to emerge, it’s time to readdress the seemingly endless nature of the perpetual-motion machine known as central bank stimulus — to stop and be still for moment and question whether the endlessly spinning wheels should be spinning at all, to question whether the maze is leading us back to the beginning. It’s often difficult to do — to question a lifetime’s worth of custom — but it’s so very important, as even the most advanced civilizations have drifted off course at some point in history.

A brief look at the charts below can give us a sense of the misalignment that is occurring:

1. The experimental monetary policies (Large Scale Asset Purchases / Quantitative Easing) that have been used to expand the monetary base have not met the goal of dramatically affecting the money supply.

2. A misallocation of capital has occurred shifting assets away from the broader economy, and toward a portion of the economy — tradable securities. Since the 1980s, the prices of many tradable securities, including stocks, have seen a significant rise, yet the economy as a whole has been unable to reach previously-attainable levels of growth.

And although the results can be damaging (to be addressed in this multi-part series), the outcome should not be surprising:

When faced with near-zero interest rates, it’s not surprising if banks decide against pursing their low-return commercial banking side, and instead favor leveraged asset speculation via their proprietary trading desks. If the trade-off from low-risk/guaranteed-low-return to high-risk/potential-for-return takes place, it may actually deprive the economy of funds while banks temporarily improve earnings through risk-taking — a point that would be consistent with Robert Hall’s comment at the Jackson Hole Monetary Conference in 2013: “An expansion of reserves contracts the economy”. And in a similar fashion, when savings rates are near-zero, there may be an irresistible temptation for companies and investors to take on unsustainable, speculative, investment risk (in an attempt to try to meet performance and savings goals).

Questions then arise: Why is this form of economics being pursued? Are there other options available? Is economics and central bank policy worthless?

A Starting Point

Although economics is typically addressed without a qualifier to distinguish one version from another, it may be worthwhile to begin the custom as there are many schools of economics — each with strongly opposing views of the world. And if there are many schools of economics (see the video Economics is for Everyone), why should we assume that the choice made by many of the world’s economies — which is to eschew all but one version — is the proper decision? Given that the world is constantly changing, and that each version of economics has its own built in assumptions, it may be naïve to assume that economics in its existing state has reached peak perfection; and based on the charts above, the current form of economics may not even be desirable.

The Questionable State — and Abusive Use — of Economics

A necessary and constant desire to explore alternative viewpoints — as a way to broaden the scope of understanding — has brought me to Henry Hazlitt’s Economics in One Lesson. It aligns with the important recognition that an idea, profession, concept, axiom, or story, should not be seen as a static topic to be memorized and repeated, but as one to be challenged in a constantly evolving process of reeducation, to merge established ideas with novel ones; it should constantly be influenced, adjusted, and questioned. Only then, is the fallibility of any one particular idea realized — its transitory nature recognized.

And this brings us to our current economic environment, where one predominant ethos has been perpetuated, saturating the economic landscape — arguably because its benefits are lucid and ramifications clandestine. That idea is a bizarre version of keynesian economics — not even in its originally intended form — a version that pursues debt-based spending to temporarily boost growth, a version that disregards the quality of debt being taken on and the long-term affects on all other parties; this is the version of economics used by central banks and governments throughout the world. It’s a stagnant policy that has favored the short term over the long term, while creating an illusory environment based on inflation, the results of which are a misallocation of wealth, and social disruptions.

In moving away from the study of classical economics — which also suffers its own drawbacks, showing a certain callousness toward the groups immediately hurt by its attempt to focus on the long term — modern economic policies have reversed course so drastically that they have merely unbalanced the ship to the other side.

“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: ‘In the long run we are all dead.’ And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed.

From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

– Henry Hazlitt (H.H.)

And the oversight suggested in the last line is the reason that economics and central bank policy are becoming questionable endeavors — not because they are worthless but because they have been abused. The immediate effects of a policy are visible, the affects on one (or a few) particular groups are seen, yet the implications for all remaining groups are overlooked; the chain of events that is set into motion — each causing its own further effects — is forgotten.

“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.” – H.H.

One may stop to ponder on why the immediate is preferred to the future (An innate survival instinct? Merely due to a lack-of-awareness of consequence?), but one point is clear and immovable in our current environment: it is easier to choose the “here and now”.

The Fallacy of Deficit Spending

The fallacy in the concept that a country can borrow money to boost growth (i.e. deficit spending) in an economic downturn is that it assumes that politicians will counter the process in the recovery period to actually slow growth down.

When an individual takes a loan they are able to boost their current spending, yet at the same time they’re also reducing their future spending (future payments toward the loan are reducing their income and ability to spend at that time). Just as an individual can only spend from income, a country can only spend from taxes, so a country that uses deficit spending to boost the economy during a downturn will be forced to slow the economy while the loan is being paid back through increased taxes.

Deficit spending is easy to agree to, but its other side is so very difficult to complete — especially when it’s likely that a different politician will be the one that will need to complete the process. Although it’s possible, what politician would campaign to slow the growth of the country? — yet that’s what is necessitated by deficit spending.

Although deficit spending can be used to boost growth in a deflationary / recessionary / depression-type environment, by doing so the country is pulling growth forward — borrowing from future taxes — and if it occurs over a long enough period of time, the taxes will be placed on a different generation; this is the concept of “generational warfare” — the consequences of a spendthrift generation are passed to another.

…stay tuned for Part II

The Fed's Dependence On The Consumer Will Backfire

Via C.Jay Engel of The Mises Institute,

The story is that it is consumers that are going "to push the economy to grow more than 2 percent this year." That"s Dallas Fed President Robert Kaplan"s recently expressed view. It"s the old fallacy of spending — rather than saving — our way into growth.

It"s remarkable that no one talks about the fact that the economy since 2008 was built on little but cheap debt, and therefore depends on the continued flow of such debt.

To raise interest rates in that environment, will lead to the very conditions that the Fed fears the most. Of course, Austrians would praise such a blessed blow to the artificial boom. However, since the Fed, operating through a Keynesian lens, sees no inherent instability in such an economic environment. They don"t see how much this would severely undermine the alleged stability they think they"ve achieved.

Kaplan and the rest of them are depending on indebted consumers, exhausted by their credit levels, to push the economy all the way up to 2 percent growth. That it"s come down to this speaks volumes about the Fed"s alleged success over the years. Aside from the terrible labor participation rate is the fact that we are now supposed to be impressed by a GDP growth print above 2 percent. And even worse, the economy is so bad that in order to hit this 2 percent mark, we have to rely on the consumer. 

Beyond this, we just got the 2016 fourth quarter GDP numbers and guess what: it came in at a seriously lousy 1.9 percent. The "expectations" were in the 2.1 percent range. It gets even better: this low number was in spite of a 3 percent increase in consumer spending. This of course means that the spending isn"t helping. And without it, where would economic growth be then?

If the Fed raises rates, where will the "recovery" go? Or more accurately, where will the facade of a recovery go?

Global Inflation 'Surprise' Index Spikes To Highest Since 2011

The specter of global stagflation is looming ever larger as inflation across the world is beating analysts’ forecasts (even before the potential effect from Donald Trump’s economic policies) but economic growth expectations remain stagnant.

As Bloomberg notes, the global Citi Inflation Surprise Index, which measures price surprises relative to market expectations, is at the highest in more than five years.

The reading turned positive in December -- meaning inflation data were higher than expected -- for the first time since 2012.

However, in its Keynesian-Krushing way, economic growth expectations are not tracking higher - flashing red warnings signs for global stagflation.

Merkel Says She Is Ready To "Fight A Generational Battle" With Trump To Preserve Liberal Democracy And Trade

Shortly after Germany retaliated to Trump"s overnight press attack, when German economy minister Sigmar Gabriel said on Monday morning that Germans would gladly buy US automobiles if only America could "build better cars", and that - responding to Trump"s criticism of Germany"s "catastrophic" refugee policy - he said there "is a link between America’s flawed interventionist policy, especially the Iraq war, and the [European] refugee crisis", Merkel fired her own shot across the bow of Trump"s proposed protectionism, when she told industry leaders late on Monday that she would remain committed to free trade, rebutting Trump"s comments about a border taxes on car imports.

Taking advantage of the anti-populist wave stirred by Trump, Merkel, speaking to the German Chamber of Commence and Industry in Cologne, urged industry leaders to remain supportive of the German government in the forthcoming Brexit negotiations between Britain and the European Union. "We can"t let anyone divide us," she said quoted by Reuters.

As far as free trade and open markets go, Merkel told the industrialists her government was prepared to fight to preserve them.

"We"ve got to fight this battle, if for no other reason than principle," Merkel said, referring to Germany"s commitment to the free trade, and asking German business to "join her in defending liberal democracy and trade", saying “in every generation one has to fight for one’s ideals.”

"I"m ready for that," Merkel added.

“I have the impression that we are once again at a crossroads,” Merkel tells a business chamber gala in Cologne, hinting at an ideological crusade to rid the world of backward-looking protectionists.

Indeed, she then said that halting protectionism is part of the struggle, and would not give up on free-trade deals with the U.S. “I have a lot of resolve, but the number of doubters is growing,” says she’s “deeply convinced” that “embracing competition rather eliminating it is best for human development and for prosperity in Germany.”

Needless to say, Merkel has never met anyone quite like Trump.

She then appealed to the audience to resist giving up those principles “too hastily for reasons of short-term gain."

Merkel echoed words from her Finance Minister Wolfgang Schaeuble earlier on Monday, who issued a not so thinly veiled warning to Trump over the dangers of protectionist trade policies.

"Whoever wants growth - and I trust this administration will be a growth-friendly one - must be in favor of open markets," Schaeuble told the Wall Street Journal in an interview. "Protectionism can afford short-term advantages but is almost always damaging in the long term."

Of course, Keynes himself said the same thing about Keynesian economics, the bedrock of all modern economic thinking, but that"s a different topic.

As for Germany and its preparedness for an "ideological" crusade against Trump and the world"s protectionists, be careful what you wish for.

Paul Krugman Flip-Flops...Again

Presented with little comment...

h/t @KevinWGlass

In other words, 5 months after telling the world "it"s time to borrow," ...

..investing more in infrastructure would clearly make us richer. Meanwhile, the federal government can borrow at incredibly low interest rates: 10-year, inflation-protected bonds yielded just 0.09 percent on Friday.

Put these two facts together — big needs for public investment, and very low interest rates — and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms. How so? Spending more now would mean a bigger economy later, which would mean more tax revenue. This additional revenue would probably be larger than any rise in future interest payments.

Suddenly the esteemed "economist" says - after Trump"s election - "this time is different"...

In the depressed economy that prevailed for years after the financial crisis, government borrowing didn’t drive up interest rates, money creation by the Fed didn’t cause inflation, and nations that tried to slash budget deficits experienced severe recessions. But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.

Now, government borrowing can still be justified if it serves an important purpose: Interest rates are still very low, and borrowing at those low rates to invest in much-needed infrastructure is still a very good idea, both because it would raise productivity and because it would provide a bit of insurance against future downturns. But while candidate Trump talked about increasing public investment, there’s no sign at all that congressional Republicans are going to make such investment a priority.

No, they’re going to blow up the deficit mainly by cutting taxes on the wealthy. And that won’t do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention.

Which is all very odd given the market"s reaction to this pro-growth agenda.

Why One Trader Believes The Dollar Rally Is Over

The dollar"s slump this morning may be the start of a much larger correction, according to Bloomberg"s Mark Cudmore.

It"s worth paying attention to the inability of both the dollar and U.S. yields to make the most of strong U.S. data this week.

And also to the strong euro-zone PMIs and higher-than- estimated inflation prints that have boosted the euro.

The main takeaway from the Fed minutes was that many of the policy makers’ forecasts for rate hikes are dependent on fiscal stimulus. That introduces some dovish-surprise risk.

Suddenly it seems more relevant that plenty of FX technicals were warning of the potential for a dollar-correction. On Tuesday, Cable made a double-low at the 61.8% Fibo- retracement from the flash-crash low. 21-DMAs were breaking in many dollar crosses. And then the post-election USD/JPY upward trendline was shattered this morning.

Now the PBOC is successfully squeezing yuan-shorts, which will further hit the broad dollar index.

My colleague Vincent Cignarella outlined five ways the dollar rally may end if Trump policy fails....

1. The repatriation of $2.5t. This is meant to spur corporate investment at home, but in 2004 a similar tax holiday on overseas profits saw companies mostly pay dividends, repurchase shares and cut jobs to trim costs.


2. Tariffs or destination taxes. These could raise the cost of imported goods and potentially slow the economy and derail the dollar unless Congress in tandem cuts personal taxes to increase disposable income.


3. Trade pact renegotiation. This could push inflation closer to or above the Federal Reserve’s target, prompting the central bank to bring forward rate hikes. That monetary tightening without concurrent fiscal stimulus might drag on growth and the dollar.


4. Infrastructure spending. Total U.S. debt is approaching $20t and Congressional leaders may fight widening the budget deficit. Senate Majority Leader Mitch McConnell has called the level of U.S. debt “dangerous.”


5. Household income. U.S. real average earnings had been on a slide since the end of 2015 and linked to the decline of the dollar up until the election, when the correlation broke down on hopes of Trump’s fiscal stimulus.

My suspicion is that it may already be finished...

What Is This "Neutral" Interest Rate Touted By The Fed?

Submitted by Mark Spitznagel via The Mises Institute,

There’s a lot of talk these days about the so-called “neutral” (or “natural” or “terminal”) interest rate projections of the Federal Reserve. In fact, their projection of this number is a key argument in their ongoing decision to keep rates at historically very-low levels for what has been an extended period of time. (Specifically, Federal Reserve officials have argued that the neutral interest rate has sharply declined in recent years, meaning that apparently ultra-low interest rates do not really signify easy monetary policy.)

What is this neutral rate? The neutral rate, it is argued, is simply the federal funds rate at which the economy is in equilibrium or balance. If the federal funds rate were at this mysterious neutral rate level, monetary policy would be neither loose nor tight, and the economy neither too hot nor too cold, but rather just chugging along at its long-run optimal potential. The underlying theory is that loose monetary policy — where the Fed’s policy rate is set below the neutral rate — can temporarily stimulate the economy, but only by causing price inflation that exceeds the Fed’s desired target (which, by the way, eventually causes overheating and a crash). On the other hand, if the Fed is too tight and sets the policy rate above the neutral rate, then unemployment creeps higher than desired and price inflation comes in below target.

In short, the neutral interest rate is one where the central bank is not itself distorting the economy. Monetary policy would really be nonexistent, as the Fed would not be altering the interest rate resulting from a free market discovery process between borrowers and savers. (This of course raises the question, why do central planners need to fabricate something that would naturally exist in their absence?) This is near where Yellen actually thinks we are these days, hence she sees little urgency in raising rates and thus lessening what, on the face of it, looks like a very loose current monetary policy.

The Theory of the Neutral or Natural Rate 

Much of this neutral rate talk at the Fed is supposedly supported by the work of Swedish economist Knut Wicksell (1851–1926), who argued that the “natural” interest rate would express the exchange rate of present for future goods in a barter economy. If in practice the banks actually charged an interest rate below this natural rate, Wicksell argued that commodity prices would rise, whereas if the banks in practice charged an interest rate above the natural one, then commodity prices would fall. But that’s where Wicksell — often associated with the free-market Austrian school of economics — would cease to recognize his own ideas in current central bank thinking. Wicksell’s natural rate was a freely discovered market price in an economy, which reflected the implicit (real) rate of return on capital investments. For Wicksell, the natural interest rate was not a policy lever to be manipulated, in order to hit some employment or output goal. Yellen and the other Fed economists writing on this topic have conveniently (and probably unwittingly) co-opted Wicksell into their own Keynesian (and exceedingly un-Austrian) framework.

Can the Neutral Rate Be Used to Tweak the Economy? 

That’s the theoretical explanation of the neutral or natural rate. From a more practical standpoint, one must ask: How do we even know what that neutral rate is? The neutral rate is, by its current definition, inherently unobservable, as there is no discovery process in short-term interest rates (and there hasn’t been for as long as any of us have been around). Central banks calculate the neutral rate based on their formulas and identifying assumptions about output gaps and what interest rates, according to those models, will close those gaps. Here we have an immense circularity problem: Policymakers think they know the neutral rate because the assumptions of their interventionist model that they impose on the data say so, not because they have any insight that the market would actually clear at that rate, sans intervention. There is an underlying assumption that “markets, left on their own, are wrong, while our model is right.” Moreover, they are using observable data as model inputs that are the result of interventions that are already in effect. There are no controlled experiments in economics. Only market participants, acting freely in borrowing and lending at whatever interest rates make sense for that borrowing and lending, can ever discover what the neutral rate should be.

(To give a specific example: One of the key alleged pieces of evidence that the neutral rate has fallen in recent years is the sluggish growth of productivity. But suppose the ZIRP of the Fed itself has been choking off real savings and distorting credit allocation among deserving borrowers, and hence has crippled sustainable growth in output? In this case, the Fed models would conclude, “Nope, our policy rate hasn’t been too low, look at the weak productivity growth,” confusing cause and effect.)

In fact, the circular logic is such that economists are far from an agreement on the current calculation, and their admitted model estimation errors are enormous. Contrary to Yellen’s recent monetary policy ruminations, reputable estimates using two different approaches have concluded that the Fed has set policy rates below the neutral rate since 2009.

Things get worse. It’s not merely that we can’t know in real-time what the neutral rate is; we can’t even know after the fact. Suppose the Fed gradually hikes rates, and then the economy crashes. Dovish Keynesians would no doubt say, “We told you not to tighten! The neutral rate was obviously lower than the Fed realized, and they just raised the policy rate above it.” But this isn’t necessarily so. It could be that the policy rate had been below the neutral rate for years, fostering a giant asset bubble which eventually had to collapse. Both theories are consistent with the observed outcome of modest rate hikes leading to a crash.

The great Austrian economist Friedrich Hayek stressed the role of market prices in communicating information to firms and households, and the impossibility that central planners can ever effectively calculate those prices. If the Fed’s economists think they are able to estimate what the neutral interest rate is, then we can dispense with prices altogether. The Fed’s economists can estimate the “neutral wage rates” for various types of labor, the “neutral commodity prices” for various inputs, and so forth, and issue comprehensive plans for the economy, all calculated in kind.

Of course, this is absurd. The point is, in a capitalist economy, the interest rates themselves — as determined in a competitive discovery process in the bond and credit markets — are central to the coordination of the economy. To assume experts at the Fed could determine the proper, optimal interest rate, without that discovery process, is to assume away the real-world information problems that we all can agree market prices solve. Indeed, perhaps this is why our economic problems persist?

Paul Krugman Loses It: Hints At Trump 9/11-Style Attack False Flag

Some establishment types took the election of Donald Trump - and the implicit rejection of their omnipotence - a lot harder than others. Perhaps the arch-Keynesian himself, New York Times" Paul Krugman, is the best example, lashing out this morning at the ignorance of Trump voters once again (well they must be ignorant, right?) along with his co-conspirators Noah Smith and Brad DeLong, exclaiming:

"A fact-constrained candidate wouldn’t have been able to promise such people what they want; Trump, of course, had no problem."

And falling back to playing the race card also...

"California is an affluent state, a heavy net contributor to the federal budget; it went 2-1 Clinton. West Virginia is poor and a huge net recipient of federal aid; it went 2 1/2-1 Trump.

I don’t think any kind of economic analysis can explain this. It has to be about culture and, as always, race."

But, it was a tweet that the great "debt doesn"t matter" guru blurted out this morning that has many questioning his sanity (or paranoia)...

Thought: There was (rightly) a cloud of illegitimacy over Bush, dispelled (wrongly) by 9/11. Creates some interesting incentives for Trump

— Paul Krugman (@paulkrugman) December 16, 2016

We are shocked that Twitter followers have not demanded Krugman be banned, blocked, and shamed for such conspiracy theory hate-speak.

Reading between the lines of the so-called economist"s comment, he appears to be suggesting that president-elect Donald Trump has an "incentive" to stage a 9/11-style terrorist attack in order to legitimize his presidency ("like Bush did"?)

Hell, we nearly had a seizure upon reading this, though not of course as bad a Kurt Eichenwald"s...

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Now, does Krugman"s tweet seem like real news worthy of the great New York Times" columnist or "fake news"? Is this the kind of suggestive propaganda that The CIA is hoping maintains a groundswell of "well, if he is not hitler... he must be worse" thoughts among those so easily led? Still, coming from a man who has prognosticated alien invasions as a global economic growth engine, we are not sure if he is mental situation is improving or deteriorating.