 | | The Daily Reckoning | Tuesday, May 8, 2012 |
- The return of Greece...and the unfortunate news that follows...
- A unique and important view of economics in our daily lives...
- Plus, Bill Bonner on when austerity makes its way to America, and how the Pentagon has gone rogue...
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|  | | | | Celebrating Profligacy | | How Bailouts Encourage Bad Behavior | | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Greece returned to Europe’s center stage this morning...and almost no one was happy about it. Most investors were pretty content when this “Debbie Downer-opoulos” of the European financial markets disappeared behind the curtains for a while.
But Debbie took the stage again Sunday when the left-wing Syriza party gained a surprisingly large number of seats in Parliament. The leftists hope to form a coalition government that would nationalize banks, repeal recent labor reforms and immediately cancel the bailout accords with the European Union and the IMF.
In other words, these politicians are threatening to undo the very austerity measures that the EU and the IMF adore. Whether or not such “leftist reforms” would benefit Greece, the idea that the Greeks would unhinge their EU shackles is worrying investors.
The major European stock markets dropped about 2% — pushing several stock indices on Europe’s periphery deeper into the red for the year. The Spanish, Italian, Portuguese and Greek stocks markets are all showing losses for 2012. Looking back over the last 12 months, all four of these markets have tumbled at least 33% in dollar terms.
For a fleeting moment earlier this year, many investors placed the Eurozone crisis in the past tense. But now it appears that the crisis is very much in the present and future tense. “Euro Near Three-Month Low on Greek Leadership Concern,” a Bloomberg News headline declares. “Alexis Tsipras, whose Syriza party placed second in Greek elections on May 6...said he wouldn’t agree to join forces with New Democracy and Pasok, the two Greek parties that have supported austerity measures in return for international funds.”
“When you have the guy who’s supposed to form the coalition saying that there’s a moratorium on debt limits,” a currency strategist tells Bloomberg, “that the bailout is not necessarily in place — stuff like that is getting people a little skittish,”
Indeed...and the skittishness is rippling across the Atlantic. Here in the US, the “risk-off” trade is back on. Stocks and commodities down; bonds and the dollar up. Although the major US stock indices are still clinging to gains for 2012, the S&P 500 is off about 4% since early April.
These modest signs of investor distress will no doubt inspire renewed bailout/austerity/manipulation efforts by the European and US governments’ financial meddlers. As we have observed time-after- time since the 2008 crisis, there is no economic downtick that is not simultaneously a call to action — a call to government action.
Regrettably, most of these government actions address symptoms rather than the disease itself. They “cure” gangrenous limbs with Lidocaine rather than amputations. As a result, a smattering of politically connected banks and corporations feel better, but the overall economy remains deathly ill.
The European interventions of the last two years tell the tale. Northern European taxpayers have sent hundreds of billions of euros to their southern neighbors, while the European Central Bank has printed more than €1 trillion and funneled most of that money to large European banks. As a result of all of these shenanigans, many large European banks feel much better. But millions of taxpayers are poorer... and the Greeks themselves are no better off.
In 2010, before the first bailout, the Greek government owed about €310 billion, all of it to banks and other members of the private sector. Today, a whopping 73 percent of Greek debt sits on the books of the European Central Bank, euro-area governments and the IMF. And by the time the EU and the IMF finish sending their bailout euros to Greece in 2015, Greek debt will total about €316 billion, close to 100% of which will be held by the ECB and other government agencies.
In other words, the Greek’s monstrous government debt load would be just as large in 2015 as it was in 2010. But government agencies would be on the hook for those debts instead of European banks and other private investors.
Is this really a remedy? If so, for whom?
This sort of remedy rewards imprudent banks, punishes taxpayers and condemns the Greeks to years of indentured servitude. And it probably condemns the entire European economy to a sustained period of slow-to-negative growth.
Unfortunately, while such governmental “do-gooding” almost always fails to restore health and viability to a sickly economy, it almost always succeeds in nourishing a lot of “do-badding.” By rewarding imprudence — over and over — government-sponsored bailouts encourage bad behavior...over and over, as Jeffrey Tucker explains in the following column.
Says Tucker, quoting Peter J. Boettke’s new book, Living Economics: Yesterday, Today and Tomorrow, “The teachings of the principles of economics should inform as much on what not to do, perhaps even more than providing a guide to public action.”
Government inaction, Tucker asserts, is a better remedy. It is a potent force that encourages entrepreneurial initiative by punishing imprudent and/or corrupt practices. Read on...
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| | The Daily Reckoning Presents | | Economics By and For Human Beings | | |  | | Jeffrey Tucker |
“Economics puts parameters on people’s utopias.”
Yes. That’s exactly it. That’s why the politicians hate economics. That’s why the media are so... selective in which economists they call on to talk about policy.
That’s why the economics departments in colleges are put down by the sociologists, philosophers, literature professors and just about everyone else who has romantic longings for a coerced utopia.
“The teachings of the principles of economics should inform as much on what not to do, perhaps even more than providing a guide to public action.”
That’s it again. Don’t control prices. Don’t socialize medicine. Don’t raise taxes. Don’t inflate the money supply. Don’t put up trade barriers. Don’t go to war. Economists just keep bursting people’s bubbles. And it’s because economists say these things that the ruling class wants them to shut up about.
It’s been going on for hundreds of years. Every generation for the past 500 years has seen the battle wage between those who want to use the power of the state to contort and distort the world to fit some daydream on one hand and the economists who have seen the futility in this manipulation and warn against it on the other.
The man who wrote those above words is Peter Boettke, economics professor at George Mason University. He is one of the nation’s leading producers of economists, having directed several dozen dissertations over 20 years and having spread his students to colleges and universities around the country and the world.
His new book, which ought to be read by every college student who secretly suspects that economics is not as dreary as they say, is Living Economics, just published by the Independent Institute. It’s a big book, but a luxurious read from Page 1 to 450.
The phrase “living economics” means two things: 1) economics is part of life whether we recognize it or not, and 2) economics is a living discipline, rooted in universal principles but always changing in nuance and application.
Professor Boettke’s purpose is to provide a guided tour through the profession as it is now and how he would like to see it changed. He does this by first explaining what got him interested in the science.
It turns out that he remembers the gas lines of the 1970s and recalls being amazed to discover that they were wholly manufactured by Washington policy. It was the price control of oil combined with inflationary pressures from bad monetary policy. Contrary to what the media mavens and politicians were saying at the time, it had nothing to do with producer greed, secret price manipulation or financial speculation.
That’s what did it for him. He realized that economics is woven into every aspect of our lives. It is inescapable. When the market is allowed to work, beauty and growth result. Humanity flourishes. When markets are truncated and hobbled, people suffer.
Then he realized how little public understanding there is of economics. And he realized that he could play a role in changing this. He has. His students are now teaching other students in six different Ph.D.-granting institutions, among dozens more institutions.
Here Boettke reflects on the decision to make economics his vocation. Economics as a reality in our world will exist whether there are people around to study and explain it or not. As a discipline, it was very late in developing, mostly during the High Middle Ages. And it came about precisely to elucidate the way the world works in order to prevent kings and other big shots from using force to interfere with its mechanisms.
As Boettke puts it, “We do not need to understand economics in order to experience the benefits of freedom of exchange and production. But we may very well need to understand economics in order to sustain and maintain the institutional framework that enables us to realize the benefits that flow from freedom of exchange and production.”
What follows this beginning material is a plunge straight into the core of what economics teaches. Boettke chooses a very engaging path. He tells the story through a series of intellectual biographies of the economists he most admires. We read about his teacher Hans Sennholz, about Ludwig von Mises, F.A. Hayek and Murray Rothbard (his chapter on Rothbard is particularly celebratory). He covers James Buchanan and Gordon Tullock. Perhaps the most- interesting sections are the ones that find “Austrianness” in unusual places — in the work of Kenneth Boulding, for example.
In contrast to most books on economics, this book is very warm and humane. He goes all out to describe economics as the science of human choice in the real world. The prose matches his intellectual sense. We are spared the usual academic pomp and the absurdities of trying to cram people and their spontaneous decisions into mechanical models. He never talks down to his readers. This reader found no showing off, no strutting around, no defensiveness or bickering. The prose and line of thinking are open and generous.
It’s no surprise that the Austrian School is at the core of the narrative. This figures into his choice of biography, of course. And it informs the whole of his worldview, accounts for why he is able to write about real-world problems and explains the failure of planning in such lucid terms.
At the same time, Boettke cautions: “The main thing that makes someone an Austrian is not the willingness to identify one’s work with that label, but the substantive propositions in economics that an economist identifies with.” With this in mind, he shows that Austrian ideas are very more widespread that one might suppose.
In general, Boettke attempts to show that the profession has lost much of the arrogance that it practiced from the 1930s through the 1970s. While methodological positivism and mathematical hubris still exist in form, he attempts to show that the old ways have shifted toward a greater emphasis on institutions and human choice. He detects the rise of a certain humility in the profession, which has made way for a broader and more-eclectic approach that includes even radical libertarians like Boettke himself.
A book like this will provide anyone vast insight into what economics has to offer the world of ideas. It is an excellent overview about what is great and what is awful in the profession today. But even when he criticizes, there is no anger; instead, there is conviction that openness and frankness is the best path to finding truth. I can’t think of a better good for an economics major to have on hand when the lecture content begins to depart from reality.
As for the author himself, I can’t add to what Israel Kirzner has already said (and I’m almost certain that Kirzner has never written an endorsement this over-the-top):
Living Economics is in many ways a remarkable book. The volume luminously reflects the amazing breadth of professor Boettke’s reading, and the deep and careful thoughtfulness with which he reads. But the true distinction of this volume consists of more than the profound economic understanding and wealth of deeply perceptive doctrinal-history observations that fill its pages. Its distinction consists in the delightful circumstances that these riches arise from and express Peter Boettke’s extraordinary intellectual generosity and unmatched intellectual enthusiasm — rare qualities that have enabled him to discover nuggets of valuable theoretical insight in the work of a wide array of economists, many of whom are generally thought to be far away from the Austrian tradition, which Boettke himself splendidly represents. Boettke’s prolific pen is dipped, not in the all-too-common ink of professional one-upmanship, but in the inkwell of an earnest, utterly benevolent — and brilliant — scholar, seeking, with all his intellectual integrity, to learn and to understand. |
Many others have said the same: Bruce Yandle, Richard Wagner, Steve Hanke, Randall and dozens more. As you read through the tributes, you realize that these are more than coerced blurbs. Boettke has managed to make economists themselves re-excited about what they do. He will do the same for you, and help you appreciate the creativity, courage and sheer adventure associated with this grand craft that elucidates the workings of our world like no other.
Regards,
Jeffrey Tucker,
for The Daily Reckoning
Editor’s Note: Jeffrey Tucker’s newest project, the Laissez Fair Club, is full of books just like Living Economics — full of knowledge and wisdom too seldom recognized for its brilliance...and too often dismissed by the mainstream. The Club features a compendium of the best work from names like Mises, Hayek and Bastiat...but with an interesting caveat... We’ll let Jeffrey explain the details, but suffice it to say, you play arguably the most import role in this new project. Click here to see what we mean.
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| | | | | And now over to Bill Bonner who has the rest of today’s reckoning from Baltimore, Maryland... | | Coming to America... | | US Austerity in the Face of a “Fiscal Cliff” | | |  | | Bill Bonner |
In yesterday’s note, we learned that the Pentagon has gone rogue. This assertion is so shocking...and so apparently irresponsible...a few Dear Readers wrote to suggest that we had spent too much time in the hot Argentine sun.
Clearly, the burden of proof is on us...more in a minute.
First, let’s look at the economy. The financial news yesterday was dominated by alarming reports from Europe.
“Backlash,” said The Financial Times...referring to an “anti- austerity wave” that washed over Europe in weekend voting.
If the FT doesn’t mind mixing metaphors, we don’t either. But our metaphors are a bit different. What has happened is not a backlash but a wake-up call. It comes as voters realize that the placebo medicine — phony, half-hearted austerity measures peddled by the Euro elite — don’t work. They want an elixir with more of a kick to it. That’s why the leftists are gaining so much ground.
In Greece, support for leftwing parties has trebled since the last elections. But what do you expect? The typical family has lost almost a third of its real income since the recession (which continues) began. Youth unemployment is at 50%. Young Greeks fear being a ‘lost generation’ that must emigrate in order to find jobs.
In France, Francois Hollande promises to be reasonable. But he won the election by attacking Sarkozy’s austerity moves. He won’t make Sarkozy’s mistake. Instead, he’ll go after the rich with a top marginal tax rate of 75%...and promise ‘growth,’ not ‘austerity.’
The trouble with the austerity proponents is that they didn’t go far enough. Budgets were cut. But not enough. The average deficit is still about 5% — well above the Maastricht 3% limit. This left the deficit nations in tough spots. They cut spending, which angered the leftists and the layabouts. But they still were beholden to lenders to cover their deficits. And whenever their unemployment rates rose...or the GDP growth rate fell...they had to pay more for their borrowed money.
Real austerity — with deep cuts and balanced budgets — could work. But it contradicts the whole idea of government, which is to transfer as much wealth from the outsiders to the insiders as possible. Besides, such deep cutbacks would probably trigger a zombie revolution.
And by the way, ‘austerity’ is coming to the US too — if Congress doesn’t stop it. Economists are calling it the “fiscal cliff.” The nation is scheduled to run off the edge on Dec. 31st... Mohammed El- Erian explains:
Economists are rightly starting to warn that the United States faces a worrisome “fiscal cliff” at year’s end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling — and the failure of the “supercommittee” that followed — along with across- the-board tax increases would derail the US recovery and undermine the well-being of the global economy. We should be avoiding the edge of this cliff — and politicians should not believe that they have until the end of this year to act.
The sequestration mandated by the Budget Control Act of 2011 and the reversal of the Bush-era and payroll tax cuts would essentially mean withdrawing from the economy some 4 percent of the national income in one blunt go — and this doesn’t factor in possible knock-on effects. The importance of this issue cannot be overstated. A fiscal contraction of this magnitude and composition would stop dead in its tracks the economy’s nascent healing and job creation. Consumption and investment would be harmed. Foreigners would become more cautious about buying our ever-increasing debt issuance. And with our internal growth momentum weakened, the headwinds from the European debt crisis could prove overwhelming. |
The austerity show has been playing in Europe for the last two years. That’s why half of Europe is in recession...with the other half not far behind. Europeans are tired of it.
So, now the Europeans seem to be giving up on phony austerity and turning to phony growth. They are going to spend more borrowed and printed money. This will look vaguely like “growth.” There will be more jobs and more incomes. But there will be precious little real prosperity going on.
Of course, going for growth is precisely what got the developed world into such a jam in the first place. Too many people spent too much money they didn’t have on too many things they didn’t need.
In America, the Fed encouraged it with low rates...then after the private sector debt bubble blew up, the feds made up for the missing spending by spending more themselves.
In Europe, the euro-feds made a debt bubble possible by establishing a single currency bloc...with harmonized interest rates. All of a sudden Greece and Ireland could borrow as easily and cheaply as France and Germany. And so they did; they borrowed their way to the brink of bankruptcy.
Now, Francois Hollande has a plan. He wants to make Europe more like America...with a central bank that lends to government directly and “mutualization” of credit risk. In other words, he wants to do what Alexander Hamilton did to the US in 1791: make the states collectively responsible for each other’s debt. And then he’ll let the ECB print the money to buy sovereign bonds directly.
Yes, dear reader, the trend towards centralization continues...with central financial planning...central bank counterfeiting...and everybody going broke together.
In Europe, as in America, it’s one for all...and all for one...
..and every man for himself.
And more thoughts...
The pentagon goes rogue...
The Obama Administration deserves credit. What other government ever reached such staggering achievements?
On the home front, as we reported last week, over the last 4 years more people have been declared disabled than have found jobs.
And overseas, an American soldier shipped out to serve in Afghanistan is more likely to be killed by himself than by the enemy. That is, the suicide rate is higher than the rate of combat losses.
Which raises a question. What kind of military force would fight a war in which its soldier’s worst enemy was himself?
Answer: one that has gone rogue.
What happens when a military establishment goes rogue? Simple, it stops serving the country and begins serving itself. Instead of protecting the nation from war, it deliberately causes wars. Instead of defending the country’s most sacred principles, it over-turns them in the interests of national security. Instead of holding expenses to those that are actually necessary and appropriate, it sucks up so many resources it weakens...and ultimately destroys...the economy it is meant to serve.
Typically, as the nation becomes more financially desperate, it also becomes more disorganized and unhappy. Strikes, mob violence, terrorist attacks increase. Then, to the noise of cheering crowds, the military makes its move.
That is what happened, for example, in Argentina in 1975. Isabelita Peron was making a mess of the economy. Her chief economist was a fellow named Celestino Rodrigo, who believed he was the Archangel Gabriel reincarnated. No kidding.
Rodrigo knew no more about economics than, say, Ben Bernanke. On July 17, 1975, he devalued the peso...yes... by “more than 100%.” Which proves our point about money from “out of nowhere.” Take away 100% of something and what do you have left? Nothing. So, what do you take away the “more than 100%” from? The same place you got the money in the first place.
At first, the crowds were delighted with Rodrigo. Then, he raised prices and the fickle mobs of Buenos Aires turned on him. They coined the term “rodrigazo” to describe the fiasco. He was gone in a few weeks. So was Isabelita, who had to be rescued from the roof of the president palace by helicopter.
Then what happened? Another election? Nope. Robert Cox tells us:
“...the armed forces, encouraged by the establishment, the media and public opinion, not to speak of the guerrilla/terrorist organizations, preferred another military dictatorship...” |
When economic policies fail, people soon get sick of the politicians. They want a more muscled form of leadership. Uri Avnery describes what happens:
In some countries, they arrest the president, occupy government offices and TV and annul the constitution. They then publish Communique No. 1, explaining the dire need to save the nation from perdition and promising democracy, elections etc.
In other countries, they do it more quietly. They just inform the elected leaders that, if they don’t desist from their disastrous policies, the officers will make their views public and precipitate their downfall.
Such officers are generally called a “junta”, the Spanish word for “committee” used by South American generals. Their method is usually called a “putsch”, a German-Swiss term for a sudden blow. (Yes, the Swiss actually had revolts some 170 years ago.)
What almost all such coups have in common is that their instigators thrive on the demagoguery of war. The politicians are invariably accused of cowardice in face of the enemy, failure to defend national honor, and such. |
Don’t expect a military coup in America. It won’t be necessary. The security industry already gets 8% of GDP — about the same amount as America’s deficit. With that kind of money to spend, there is barely a single member of Congress or a single corporation that the Pentagon can’t buy.
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
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