What is wrong about the euro, and what is not

By Detlev Schlichter

Every Monday morning the readers of the UK’s Daily Telegraph are treated to a sermon on the benefits of Keynesian stimulus economics, the dangers of belt-tightening and the unnecessary cruelty of ‘austerity’ imposed on Europe by the evil Hun. To this effect, the newspaper gives a whole page in its ‘Business’ section to Roger Bootle and Ambrose Evans-Pritchard, who explain that growth comes from government deficits and from the central bank printing money, and why can’t those stupid Europeans get it? The reader is left with the impression that, if only the European states could each have their little currencies back and merrily devalue and run some proper deficits again, Greece could be the economic powerhouse it was before the Germans took over.

Ambrose Evans-Pritchard (AEP) increasingly faces the risk of running out of hyperbolic war-analogies sooner than the euro collapses. For months he has been numbing his readership with references to the Second World War or the First World War, or to ‘1930s-style policies’ so that not even the most casual reader on his way to the sports pages can be left in any doubt as to how bad this whole thing in Europe is, and how bad it will get, and importantly, who is responsible. From declining car sales in France to high youth-unemployment in Spain, everything is, according to AEP, the fault of Germany, a ‘foolish’ Germany. Apparently these nations had previously well-managed and dynamic economies but have now sadly fallen under the spell of Angela Merkel’s Thatcherite belief in balancing the books and her particularly Teutonic brand of fiscal sadism.

How the Rich Rule

By Sheldon Richman

ERNEST HEMINGWAY: I am getting to know the rich.
MARY COLUM: I think you’ll find the only difference between the rich and other people is that the rich have more money.

Irish literary critic Mary Colum was mistaken. Greater net worth is not the only way the rich differ from the rest of us—at least not in a corporatist economy. More important is influence and access to power, the ability to subordinate regular people to larger-than-human-scale organizations, political and corporate, beyond their control.
To be sure, money can buy that access, but only in certain institutional settings. In a society where state and economy were separate (assuming that’s even conceptually possible), or better yet in a stateless society, wealth would not pose the sort of threat it poses in our corporatist (as opposed to a decentralized free-market) system.
Adam Smith famously wrote in The Wealth of Nations that “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Much less famously, he continued: “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”
The fact is, in the corporate state government indeed facilitates “conspiracies” against the public that could not otherwise take place. What’s more, because of this facilitation, it is reasonable to think the disparity in incomes that naturally arises by virtue of differences among human beings is dramatically exaggerated. We can identify several sources of this unnatural wealth accumulation.
A primary source is America’s financial system, which since 1914 has revolved around the government-sponsored central banking cartel, the Federal Reserve. To understand this, it must first be noted that in an advanced market economy with a well-developed division of labor, the capital market becomes the “locus for entrepreneurial decision-making,” as Walter E. Grinder and John Hagel III, writing within the perspective of the Austrian school of economics, put it in their 1977 paper, “Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure.”

Anatomy of the End Game

by Martin Sibileau

About a month ago, in the third-quarter report of a Canadian global macro fund, its strategist made the interesting observation that “…Four ideas in particular have caught the fancy of economic policy makers and have been successfully sold to the public…” One of these ideas “…that has taken root, at least among the political and intellectual classes, is that one need not fear fiscal deficits and debt provided one has monetary sovereignty…”. This idea is currently growing, particularly after Obama’s re-election. But it was only after writing our last letter, on the revival of the Chicago Plan (as proposed in an IMF’ working paper), that we realized that the idea is morphing into another one among Keynesians: That because there cannot be a gold-to-US dollar arbitrage like in 1933, governments do indeed have the monetary sovereignty.
Is this true? Today’s letter will seek to show why it is not, and in the process, it will also describe the endgame for the current crisis. Without further ado…
After the fall of the KreditAnstalt in 1931, with the world living under the gold-exchange standard, depositors first in central Europe, and later in France and England, began to withdraw their deposits and buy gold, challenging the reserves of their respective central banks. The leverage that linked the balance sheet of each central bank had been provided by currency swaps, a novelty at the time, which had openly been denounced by Jacques Rueff. One by one, central banks were forced to leave the gold standard (i.e. devalue) until in 1933, it was the Fed’s turn. The story is well known and the reason this process was called an “arbitrage” is simply that there can never be one asset with two prices. In this case, gold had an “official”, government guaranteed price and a market price, in terms of fiat money (i.e. schillings, pounds, francs, US dollars). The consolidated balance sheets of the central bank, financial institutions and non-financial sector looked like this before the run:

Relevance of the Austrian School of Economics in the 21st Century

The Austrian School of Economics has prevailed through time given the relevance it has gained in understanding the way markets really work. Peter Boettke has a conversation with Luis Figueroa regarding the importance of the philosophy of economics and explains the value of its premises. They discuss the process of thinking and understanding life through an economics point of view, as a result of dynamic laws present in everyday situations. Finally, Boettke comments on the role of ethics in the Austrian School of Economics and portrays common misconceptions about these sciences.

Peter Boettke professor of economics at George Mason University, where he also serves as vice president for research, BB&T Professor for the Study of Capitalism, and research director for the Global Prosperity Initiative at the Mercatus Center. Furthermore, he is deputy director of the James M. Buchanan Center for Political Economy. He is author and coauthor of various books on economics and politics, such as: Challenging Institutional Analysis and Development: The Bloomington School, The Economic Way of Thinking, The Political Economy of Soviet Socialism: The Formative Years, among others. Boettke received his BA in economics from Grove City College, MA and PhD in economics from George Mason University.

original video source:http://newmedia.ufm.edu/boettkerelevance

Where to from here?

By Gerardo Coco

We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Without understanding their dynamic relationship and their implications is difficult to predict how things might unfold. The economic future depends on the interplay of both these forces. From the point of view of their final effects, inflation and deflation are, respectively, the devaluation and revaluation of the currency unit. The quantity theory of money developed in 1912 by the American economist Irving Fisher asserts that an increase in the money supply, all other things been equal, results in a proportional increase in the price level [1]. If the circulation of money signifies the aggregate amount of its transfers against goods, its increase must result in a price increase of all the goods. The theory must be viewed through the lens of the law of supply and demand: if money is abundant and goods are scarce, their prices increase and currency depreciates. Inflation rises when the monetary aggregate expands faster than goods. Conversely, if money is scarce, prices fall and the opposite, deflation, occurs. In this case the monetary aggregate shrinks faster than goods and as prices decrease money appreciates.

What the Road to Hell is Paved With....

by Bill Bonner

Improving the world costs money. When you have it, your efforts either bear fruit. Or they don’t. But when you don’t have it, when you have to change the world on credit, then what?

John Maynard Keynes revolutionized the economics profession in the early 20th century. It was he more than anyone who changed it from a being a refuge for observers and willowy philosophers into a hard-charging phalanx for men of action. But Keynes’ big insight, like all the useful insights of economics, was based on a story with a moral.

In the Book of Genesis, Pharaoh had a dream. In it, he was standing by the river. Out came 7 fat cattle. Then, 7 lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ones devoured by the thin ears.

Pharaoh was troubled. His dream interpreters were stumped. So, they sent for the Hebrew man who was said to be good at this sort of thing — Joseph. Pharaoh described what had happened in his dreams. Without missing a beat, Joseph told him what they meant. The 7 fat cattle and 7 fat ears of corn represented years of plenty with bountiful harvests. The 7 lean cattle and thin ears of corn represented years of famine. Joseph wasn’t asked his opinion, but he gave his advice anyway: Pharaoh should put into place an activist, counter-cyclical economic policy. He should tax 20% of the output during the fat years and then he would be ready with some grain to sell when the famine came. Genesis reports what happened next:

"We're Flying Blind," Admits Federal Reserve President

Eric S. Rosengren, the president of the Boston Federal Reserve Bank, recently gave a speech at Babson College on November 1. That was a good place to give it. Founder Roger Babson in September, 1929, warned of a stock market crash. Wikipedia reports: "On September 5, 1929, he gave a speech saying, "Sooner or later a crash is coming, and it may be terrific." Later that day the stock market declined by about 3%. This became known as the "Babson Break". The Wall Street Crash of 1929 and the Great Depression soon followed."

Dr. Rosengren began:

Today I plan to highlight three main points about the economic outlook. I always like to emphasize that my remarks represent my views, not necessarily those of my colleagues on the Federal Open Market Committee or at the Board of Governors.

A first point is this: while it is still early to gauge the full impact of the Federal Reserve's September monetary policy committee decision to begin an open-ended mortgage-backed security purchase program, the program has so far worked as expected. The initial response in financial markets was larger than many expected. Given that our conventional monetary tool, the fed funds rate, has hit its lower bound of zero, we have turned to unconventional monetary policy. By that I mean policy that attempts to affect long-term interest rates directly, via asset purchases, rather than indirectly by setting the short-term interest rate, as in conventional policy.

The Downside of Debt

by Bill Bonner


Cristina Fernandez de Kirchner, president of Argentina, will never be remembered as a great economist. Nor will she win any awards for ‘accuracy in government reporting.’ Au contraire, under her leadership, the numbers used by government economists in Argentina have parted company with the facts completely. They are not even on speaking terms. Still, Ms. Fernandez deserves credit. At least she is honest about it.

The Argentine president visited the US in the autumn of 2012. She was invited to speak at Harvard and Georgetown universities. Students took advantage of the opportunity to ask her some questions, notably about the funny numbers Argentina uses to report its inflation. Her bureaucrats put the consumer price index — the rate at which prices increase — at less than 10%. Independent analysts and housewives know it is a lie. Prices are rising at about 25% per year.

At a press conference, Cristina turned the tables on her accusers:

“Really, do you think consumer prices are only going up at a 2% rate in the US?”

This Is A Moment In Time That’s Never Been Seen Before

by kingworldnews.com

“Greece is a serial bailout, restructuring, can-kick, and I guess this is going to continue as long as the riots don’t get worse. Maybe eventually Greece will get ejected from the euro. The question (in Europe) is, is Draghi going to get serious about the OMT or not?”

“My suspicion is he is going to. They are going to use the central bank there to make sure the euro doesn’t fracture, in the same way Greenspan and Bernanke have used the printing press to make sure that the United States financial markets don’t collapse.

I suspect Europe will muddle through as long as Draghi is willing to keep buying the government debt and keep the whole process moving.
“The (US) fiscal cliff, near as I can tell, is mostly just a boatload of tax hikes and some proposed spending cuts. But at the end of the day, there is a mood of class warfare in the country which is being fomented by the Democratic Party.
Part of the reason for the disparity of wealth in the country is because the policies of the Federal Reserve have helped eviscerate the middle class, both through losing money in bubbles and inflation, and the misallocation of capital and the ensuing destruction of jobs. So the Fed’s policies have hammered the middle class.

Carlo Ponzi, Alias Uncle Sam

by  Gary North

Carlo "Charles" Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated ever since.

Every Ponzi scheme involves five elements:
1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors' angry rejection of exposures by investigators

Strangely, most Ponzi schemes involve a sixth element: the unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The Die Is Cast And Only One Question Remains

by kingworldnews.com

“The Rubicon is a river in Italy that played a major role in the history of Rome and Western Civilization. Prior to Julius Caesar, it was considered an inviolable boundary for a general commanding an army. To cross it with your army was considered an act of treason against the State.

Caesar did just that in 49 B.C. Caesar left Rome to be come the governor of Cisalpine Gaul (northern Italy), Illyricum (southeastern Europe) and Transalpine Gaul (southern France) in 58 B.C.. Actually, he unsuccessfully fled Rome to avoid his mounting debts (he liked to gamble and was a bon vivant). He was only allowed to continue to Gaul after his wealthy friend Crassus paid and guaranteed the debts for him. His conquest of all of Gaul and the details of his military genius are well known, particularly since he wrote it all down in the form of a partial autobiography.

Ambitious men were not welcome to the old Roman order. The Romans had an unpleasant experience with a dictator that led to their founding, and it was in their DNA to despise such men. Caesar was a major threat....

Jim Rogers Economic Collapse Martial Law Alex Jones

How Central Bank Policy Impacts Asset Prices Part 5: How Far Can They Go?

by Tyler Durden  source : www.zerohedge.com
With the unlimited asset purchase announcements by the Fed and ECB recently, the limits of balance sheet expansion will be put to the test. The current levels would have been seen as inconceivable a mere few years ago and now it seems business-as-usual as investors have become heuristically biased away from the remarkable growth. The problem is - central banks are missing inflation targets and credit growth is still declining - need moar easing, forget the consequences.

Via SocGen:

Balance sheet expansion resumes in advanced countries
Following the unlimited asset purchases announcements by the ECB and the Fed, the limits of balance sheet expansion will be put to the test once again.

How Central Bank Policy Impacts Asset Prices Part 2: Bonds

by Tyler Durden

The Fed sees the need to reduce interest rates as it takes over the US Treasury and MBS markets; but the ECB's actions are more aimed at reducing divergences between peripheral nations and the core. As SocGen notes, it remains unclear how and when the Fed would exit this situation and in Europe, bond market volatility remains notably elevated relative to the US and Japan as policy action absent a political, fiscal, and banking union remains considerably less potent.

Via SocGen:

Fed action pushes rates to record lows

The Fed bought around $2tn of securities since November 2008, pushing rates to historical lows (US treasuries becoming popular safe havens also contributed to lowering rates).



It remains unclear how and when the Fed would exit this situation. Operation Twist expires at year-end and any extension seems to be put on hold until after the presidential elections.

A potential Romney victory could bring an end to low QE rates in 2014 (when Mr Bernanke’s term expires).

As a result of the very low rate environment, the US equity risk premium is currently extremely high (6.3% in October 2012).

Hurdles in transmission of ECB monetary policy

The Tragedy of the European Union and How to Resolve It

 

 by George Soros New York Review of Books

Preface: In a fast-moving situation, significant changes have occurred since this article went to press. On August 1, as I write below, Bundesbank President Jens Weidmann objected to the assertion by Mario Draghi, the president of the European Central Bank, that the ECB will “do whatever it takes to preserve the euro as a stable currency.” Weidmann emphasized the statutory limitation on the powers of the ECB. Since this article was published, however, it has become clear that Chancellor Merkel has sided with Draghi, leaving Weidmann isolated on the board of the ECB.
This was a game-changing event. It committed Germany to the preservation of the euro. President Draghi has taken full advantage of this opportunity. He promised unlimited purchases of the government bonds of debtor countries up to three years in maturity provided they reached an agreement with the European Financial Stability Facility and put themselves under the supervision of the Troika—the executive committee of the European Union, the European Central Bank, and the International Monetary Fund.
The euro crisis has entered a new phase. The continued survival of the euro is assured but the future shape of the European Union will be determined by the political decisions the member states will have to take during the next year or so. The alternatives are extensively analyzed in the article that follows.

I have been a fervent supporter of the European Union as the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes – creditors and debtors – with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt and this is reflected in their cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent.

Is deflation a major threat to the eurozone?

By Dr Frank Shostak
source www.cobdencentre.org

In its October 2012 World Economic Outlook report the International Monetary Fund (IMF) said that the European Central Bank (ECB) should keep interest rates low for the foreseeable future and may need to cut them further given the risk of deflation.
Now, even if the IMF is correct and prices in the Euro-zone will start falling, why this is so bad?
The conventional wisdom holds that price deflation causes people to postpone their buying of goods and services at present on the belief that the prices of these goods and services will be much lower in the future.
Hence why buy today if one can buy the same good at a bargain price in the future? As a result a fall in consumer outlays via the famous multiplier will lead to a large decline in the economy’s rate of growth.
In fact deflation could set in motion a vicious downward spiral, which could plunge the economy in a severe economic slump similar to the one that took place during the Great Depression of the 1930’s, or so it is held by most experts.
It is for this reason that the IMF is of the view that the ECB should push the policy interest rate further down.
Now, if deflation leads to an economic slump then policies that reverse deflation should be good for the economy.

Two Reasons Why the Gold Market is Under Pressure

 by Michael Pento - Pento Portfolio Strategies

 

There are two reasons why the price of gold has been under pressure in the last few days. One of them is legitimate; while the other is completely without grounds.

1. The U.S. Labor Department announced on Thursday that Initial Jobless Claims fell 30k for the week ending October 6th. The plunge took first-time claims for unemployment insurance to a four-year low. Despite the fact that this drop was mainly produced by one large state not properly reporting additional quarterly claims, the gold market took the data as a sign interest rates may soon have to rise. So I thought it would be a good time to explain that rising interest rates would not negatively affect the price of gold, as long as it is a market-based reaction to inflation; rather than the work of the central bank pushing rates positive in real terms.
2.  

The price of gold increased from $100 an ounce in 1976, to $850 an ounce by 1980. During that same time period the Ten year note yield increased from 7% to 12.5%. The reason why gold increased, despite the fact that nominal interest rates were rising, is because real interest rates were falling throughout that time frame. Bureau of Labor statistics shows that inflation as measured by the Consumer Price Index jumped from 6% in 1976 to 14% by early 1980. In addition, the Fed, under Arthur Burns and G. William Miller, kept the Funds rate far below inflation throughout their tenure; increasing the interbank lending rate from 5% in 1976, to just 10.5% by late '79--just before Chairman Volcker took the helm.

If Romney Wins, Expect the End of Quantitative Easing

by Gary Dorsch - Sir Chart a lot

It’s been nearly eight years, since Fed chief Ben Bernanke told the Senate Banking Committee at his confirmation hearing, that “with respect to monetary policy, I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority.” The former Princeton University professor who served as a Fed governor from August 2002 to June 2005 before accepting the post as President George W. Bush’s top economic adviser, also pledged, “I will be strictly independent of all political influences,” Bernanke said.

History will show that Bernanke did follow in the footsteps of his mentor for the first 3-½ years of his tenure. The infamous “Greenspan Put,” or the knee-jerk reaction by the Fed to rescue the stock market whenever risky bets went sour, - through massive injections of liquidity and reductions in interest rates, - was seamlessly replaced by the “Bernanke Put.” Since Bernanke gained control over the money spigots, the Fed continued to expand the MZM money supply by +65% to a record $11.3-trillion today. That’s an increase of about +9.4% per year, on average. The yellow metal never traded a nickel lower since Mr Bush tapped Bernanke to become the next Fed chief in Nov 2005, when the price of Gold was $468 /oz. Today, Gold is hovering around $1,735 /oz, up +370% for an annualized gain of +57%, - highlighting the most devastating blow to the purchasing power of the US-dollar of all-time.

Extreme Symptoms & Hidden Menace

by Jim Willie CB - Hat Trick Letter

Some competent analysts claim the United States and Western nations are stuck in the eye of the hurricane. Maybe so, but the internal stresses are so great that they will move beyond the eye into a zone of clearly apparent destruction soon. Some aware analysts believe the bond monetization plans will lift the financial markets. Maybe so, but the ensuing and continuing damage to the economies is profound from rising cost structures. Some awakening analysts no longer look to the USFed as a source of solutions. They see the central bank as increasingly desperate, pushing the same levers that accomplished nothing in the past. In fact, the failing central bank franchise system is visible in the open for all to see, with the embarrassment noticeable when the good chairman speaks as high priest of hollow dogma. New money backed by nothing swims around, financing the USGovt deficits, redeeming toxic bonds, adding nothing to the capital base. In the background is a pernicious effect, having come full circle. The Chinese industrial expansion since year 2000 came largely at the expense of the Western economies. They forfeited thousands of factories in the mindless pursuit of lower costs, while overlooking the abandoned wealth engines that produced legitimate income. In the last couple years, the Western economies have served as weakened customers for the Chinese production. The effect finally has slammed China, which complains of weaker US and European demand. Any trip through Spain will demonstrate that smaller Spanish factories and mills are shut down, with Chinese imports in replacement, as local shops stock mainly Chinese products.

We are on the road to serfdom

By Detlev Schlichter

We are now five years into the Great Fiat Money Endgame and our freedom is increasingly under attack from the state, liberty’s eternal enemy. It is true that by any realistic measure most states today are heading for bankruptcy. But it would be wrong to assume that ‘austerity’ policies must now lead to a diminishing of government influence and a shrinking of state power. The opposite is true: The state asserts itself more forcefully in the economy, and the political class feels licensed by the crisis to abandon whatever restraint it may have adhered to in the past. Ever more prices in financial markets are manipulated by the central banks, either directly or indirectly; and through legislation, regulation, and taxation the state takes more control of the employment of scarce means. An anti-wealth rhetoric is seeping back into political discourse everywhere and is setting the stage for more confiscation of wealth and income in the future.

War is the health of the state, and so is financial crisis, ironically even a crisis in government finances. As the democratic masses sense that their living standards are threatened, they authorize their governments to do “whatever it takes” to arrest the collapse, prop up asset prices, and to enforce some form of stability. The state is a gigantic hammer, and at times of uncertainty the public wants nothing more than seeing everything nailed to the floor. Saving the status quo and spreading the pain are the dominant political postulates today, and they will shape policy for years to come.

Unlimited fiat money is a political tool

A free society requires hard and apolitical money. But the reality today is that money is merely a political tool. Central banks around the world are getting ever bolder in using it to rig markets and manipulate asset prices. The results are evident: Equities are trading not far from historic highs, the bonds of reckless and clueless governments are trading at record low interest rates, and corporate debt is priced for perfection. While in the real economy the risks remain palpable and the financial sector on life support from the central banks, my friends in money management tell me that the biggest risk they have faced of late was the risk of not being bullish enough and missing the rallies. Welcome to Planet QE.