Bureaucrats versus a Dynamic Free Society

In the preface to his 1944 book “Bureaucracy”, Ludwig von Mises tried to elucidate the difference between the German and the American mentality as he saw it at the time. In Germany, classical liberalism had been thoroughly suppressed in the decades following the failed revolution of 1848. Of Germany's youth Mises remarked: “They had one aim only: to get a job as soon as possible with the government.”

To this day, the ideas of classical liberalism find very little resonance in continental Europe. It is no wonder that the UK – in spite of having become a welfare state as well – is continually clashing with the EU's socialistic super-state bureaucracy in Brussels. It is simply its very different tradition that is coming to the fore. We dare to predict that the UK will eventually break with the EU, unless the centralizers and harmonizers are thoroughly rolled back and the principles of subsidiarity are once again considerably strengthened. That seems however rather unlikely at this juncture, given that the arch-federalist and habitual professional liar JC Juncker has just become the new parliamentary leader in Strasbourg, while the only other guy who was considered as an alternative for the position was the German socialist technocrat Martin Schultz, one of the few prominent EU politicians worthy of even more contempt than Juncker!

However, let us get back to Mises and how he tried to explain the German notion of the “Obrigkeits-Staat” to his US readers (the term can by the way be loosely translated as “authoritarian state”, but this translation does not really convey its meaning):


To the American mind the notion of an Obrigkeit, a government the authority of which is not derived from the people, was and is unknown. It is even extremely difficult to explain to a man for whom the writings of Milton and Paine, the Declaration of Independence, the Constitution and the Gettysburg Address are the fountain springs of political education, what this German term Obrigkeit implies and what an Obrigkeits-Staat is.

Perhaps the two following quotations will help to elucidate the matter. On January IS, I838, the Prussian Minister of the Interior, G. A. R. von Rochow, declared in reply to a petition of citizens of a Prussian city: "It is not seemly for a subject to apply the yardstick of his wretched intellect to the acts of the Chief of the State and to arrogate to himself, in haughty insolence, a public judgment about their fairness."

This was in the days in which German liberalism challenged absolutism, and public opinion vehemently resented this piece of overbearing bureaucratic pretension.

Half a century later German liberalism was stone dead. The Kaiser's Sozialpolitik, the statist system of government interference with business and of aggressive nationalism, had  supplanted it. Nobody minded when the Rector of the Imperial University of Strassburg quietly characterized the German system of government thus:

"Our officials . . . will never tolerate anybody's wresting the power from their hands, certainly not parliamentary majorities whom we know how to deal with in a masterly way. No kind of rule is endured so easily or accepted so gratefully as that of highminded and highly educated civil servants. The German State is a State of the supremacy of officialdom-let us hope that it will remain so."

Such aphorisms could not be enunciated by any American. It could not happen here.


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Life Below Deck

Dow down 70 points. Gold back under $1,300 an ounce. Nothing much to talk about there…

Meanwhile, we see pain and suffering. At the bottom of the financial heap, day by day, people struggle to get by. The averages hide it.



House in Salinas, California under foreclosure, following the bursting of the U.S. real estate bubble. 

(Photo via Wikimedia Commons)


The average figures – for wages, household incomes and household wealth – are lifted skyward by the gas at the top. Thanks to the rise in asset prices, those with substantial assets have become substantially richer, raising the averages.

But what about those at the bottom? This is not the middle class we’re talking about, but those down below. How do they live? What do they eat and drink? How do they make ends meet?

Not that we have become a bleeding heart. And not that we are concerned about fairness either. Those concerns are much too generous and socially conscious for us. No, we’re just worried, selfishly, about what happens to the passengers in the upper cabins, when life below deck becomes intolerable.


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John Hussman's Latest Comments on the Bubble

In his newest weekly column, John Hussman talks about a feature of the current echo bubble era that we believe will turn out to be an extremely important one. Readers of this site know of course that we have frequently sung from the same hymn sheet, but it is a topic the significance of which cannot be stressed enough.  After briefly recapping the history of the housing bubble and the ensuing credit crisis, Hussman writes:


“Now, as we observed in periods like 1973-74, 1987, and 2000-2002, severe equity market losses do not necessarily produce credit crises in themselves. The holder of the security takes the loss, and that’s about it. There may be some economic effects from reduced spending and investment, but there is no need for systemic consequences. In contrast, the 2007-2009 episode turned into a profound credit crisis because the owners of the vulnerable securities – banks and Wall Street institutions – had highly leveraged exposure to them, so losing even a moderate percentage of their total assets was enough to wipe out their capital and make those institutions insolvent or nearly-so.

At present, the major risk to economic stability is not that the stock market is strenuously overvalued, but that so much low-quality debt has been issued, and so many of the assets that support that debt are based on either equities, or corporate profits that rely on record profit margins to be sustained permanently. In short, equity losses are just losses, even if prices fall in half. But credit strains can produce a chain of bankruptcies when the holders are each highly leveraged. That risk has not been removed from the economy by recent Fed policies. If anything, it is being amplified by the day as the volume of low quality credit issuance has again spun out of control.


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Enriching Life with Gloom and Depression

It is cool in Paris. We have put on a sweater. To bring you fully into the picture, we are sitting at a sidewalk café in the 16th arrondissement, having a café crème with our mother.

We have periods of real joy in our lives, but we count on our natural tendency towards gloom and depression to get us through them. Our mother lacks this essential quality.

A woman walks down the street, trailed by a small, white dog. The poor old girl looks sorely used, we think. As if she ran over her other dog… and got beaten up by her husband.




Café de Flore, Paris.

(Photo via Wikimedia Commons)


Mother: “Oh… look at that cute dog.”

Two gypsy women came along.

“Watch your purse,” was the thought that rose to your editor’s lips.

“I love their dresses,” said his mother. “They are so colorful.”

A handsome, well-built man, with a full head of jet-black hair, comes ambling down the street. He looks friendly, happy, confident…

“Jerk… boulevardier… flâneur,” we think to ourselves.

“What a nice looking young man,” says mater familias.

We don’t know how much more of this looking on the bright side we can take.

“Mom, do you have any idea how many people have been driven mad by cheerfulness?”

“Okay… I’ll try to control it. Look… there’s a poor man with a sad look on his face,” she said, pointing to a grumpy SOB getting out of his car.

“No… you just don’t get it. You’re not supposed to be sympathetic. He probably deserves to be sad.”

But we realized it was hopeless. There is just no helping some people.


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Libya Burns

The interventionist success stories really keep piling up in recent months. It is no wonder that a solid and growing majority of Americans is recently saying the US should stop taking sides in foreign conflicts. In Ukraine, there is a civil war (and it isn't going well from what one hears). Iraq has de facto split into three smaller states, one of which is under the control of Sunni extremists, and one of which is under the control of some of Iran's most loyal allies in the region (the third is the already quasi-independent Kurdish state in North-Eastern Iraq).

In Yemen, Al Qaeda has just proclaimed the third independent fundamentalist emirate in the Middle East (the first was proclaimed by ISIS in Iraq and Syria, the second by the radical Jabhat al-Nusra Front in Syria in the region of Aleppo).

In Afghanistan, the Taliban are reconquering the country's Southern provinces and are threatening to take over Kandahar again, which they temporarily lost in 2010.

And now, Libya is burning – literally:


A fire at the oil depot for the airport in Libya’s capital raged out of control Monday after being struck in the crossfire of warring militias battling for control of the airfield, the latest violence to plague the country as foreigners flee the chaos.

Libya’s interim government said in a statement posted that the fire could trigger a “humanitarian and environmental disaster” in Tripoli, appealing for “international help” to extinguish the inferno. It did not say what it specifically needed. The blaze had spread to a second depot by Monday afternoon, the government said. It was unclear if there were any injuries from the fire.

“The government appeals to all concerned parties to immediately stop firing as the situation has become very grave,” the government said.

Libyan television stations called on residents to evacuate areas within a five-kilometer radius of the airport. Many Libyan families scrambled to leave. Black smoke billowed over the Tripoli skyline.

Mohammed al-Harari, the spokesman for the Libyan National Oil Company, said the oil depot had a capacity of 6 million litres and that if the fire was not brought under control, it could ignite liquid gas nearby.

Fire trucks from several nearby cities and towns have been deployed to help extinguish the blaze, said a Libyan security official, speaking on condition of anonymity because he is not authorized to talk to journalists.

The battle for control of the airport began two weeks ago when Islamist-led militias — mostly from the western city of Misrata — launched a surprise assault on the airport, which has been under control of a rival militia from the western mountain town of Zintan. It wasn’t clear whose fire started the oil depot blaze. The Health Ministry said Sunday that the fighting has so far killed 79 people and wounded more than 400.

More than three years after dictator Moammar Gadhafi’s downfall, Libya is witnessing one of the worst bouts of violence amid growing lawlessness in the country. Libya’s interim government, which relies on militias filled with rebels who battled Gadhafi’s forces for security, now finds itself unable to rein them in.


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Challenges and Extra Points

On Friday, the Dow fell 123 points. On Saturday, our youngest son, Edward, returned from Africa. He had escaped capture by a rebel army in the Democratic Republic of the Congo… walked 50 miles through the jungle… and eventually made his way to the US embassy in Kinshasa, where he was given a new passport.



Statues of the two symbolic beasts of finance, the bear and the bull, in front of the Frankfurt Stock Exchange

(Photo credit: Eva K.)


As to the Congo, Edward reported to his grandmother: “Rich country (in natural resources). Hard place to do business. The local people are nice. Until they decide to kill you.”

Grandmother: “Why would you want to do business there?”

Edward: “Because it’s there. It’s a challenge. It’s an adventure.”

Grandmother: “You don’t get extra points in life by doing things that are not worth doing.”


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Governing Coalition Breaks Up:


Ukrainian parliamentarians start wrestling again


Last week brawls broke out in Ukraine's parliament between Western Ukrainian nationalists and supporters of the Eastern Russian-speaking population on two occasions. The Eastern supporters mainly consist of Party of the Regions deputies that haven't defected and Communist Party deputies. It should be noted that Ukraine's parliament still reflects the composition it had prior to Yanukovich's ouster – minus the numerous political opportunists who have defected. It is a certainty that the next parliament will look very different. After parliament rejected a number of measures, the right-wing Svododa Party and UDAR (Vitaly Klitschko's party) withdrew from the coalition government, prompting the resignation of technocratic prime minister Arseny Yatseniuk, the US-approved paladin.


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A Brief Technical Update

In gold itself, the support defined by the apex of the triangle that preceded the action since mid May, as well as the 50/200 moving averages, has so far continued to hold:


Gold-Silver, dailyGold and silver – the blue dotted line on the gold chart coincides with the apex of the triangle that preceded the falose breakdown in May, as well as the 50 day moving average – on Thursday, the 200 day moving average served as support – click to enlarge.


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Like Dripping Silver Icicles

I don’t typically emphasize price charts in analyzing the market, however something unusual has been happening in the spot (physical) silver market. It did not happen in the silver futures market, nor in the gold market. I have been bearish on silver because of its supply and demand fundamentals, and the price action shown below adds a new dimension.

Let’s take a look at a candlestick chart. Candlestick charts show the open, close, and price range during a particular period. The region between the open and close prices is shaded. Green means that the price rose during the period and red indicates it fell.

In this chart, each candlestick corresponds to one hour. The numbers at the bottom are dates. The chart shows from July 17 to July 25, 2014. As with all charts in this article, times and dates are Arizona USA time (PDT).


Chart-1, silver hourlySilver Hourly Candlestick Chart - click to enlarge.


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Deflecting Attention, Greenspan-style

Alan “Bubbles” Greenspan is back in the news. At 88 years old, his mind is still sharp as a tack. He still sees his own interests clearly. And he is still clever enough to distort the facts to suit them.



(Photo credit: Steve JurvetsonBubble Rain)


Asked in an interview what he thought of Janet Yellen’s recent IMF speech, in which she maintained that bubbles should be addressed with more regulation, he replied:


“Bubbles are functions of unchangeable human nature. The obvious question is how to manage them. All bubbles expand, and they all collapse.” 


You see, it wasn’t his fault that the largest bubble in half a century blew up a year after he left his post as Manipulator-in-Chief of the world’s largest economy. It was just human nature.


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Mortgage Debt Purchases on Steroids

In calendar year 2013, the Fed purchased $788.25 billion in agency MBS (mortgage back securities).

In calendar year 2013, according to the Mortgage Bankers Association, total mortgage originations were $1,755 billion.  $652 billion (37.2%) were for purchases while $1,103 billion (62.8%) were refinances. I do not have the data for the percentage of non-agency loans and am using a rough estimate of 10% for the purpose of this post.  In other words, total agency originations should amount to $1,579.5 billion.

The Fed purchased 134% of all agency PURCHASE loan originations in 2013.  

In the first half of 2014, ending July 2, the Fed purchased $260.4 billion in agency MBS. 

In the first half of 2014, also according to the Mortgage Bankers Association, total mortgage originations amounted to $493 billion.  $273 billion (55.3%) were for purchases, while $220 billion (44.6%) were refinances. I am again using a rough estimate of 10% for non-agency loans.  In other words, total agency originations should total $245.7 billion (by the way, you may have noticed, mortgage originations are dropping from over $1.7 trillion in 2013 to a pace of less than $1 trillion annualized in 2014).

The Fed purchased 106% of all agency PURCHASE loan originations in 2014 so far.

The Fed had no choice but to taper.  Had it  continued with 'QE' at the same pace as in 2013, it would have purchased all purchase and refinance originations. What kind of monetary policy is that?  


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It Can't Be A Bubble!

Articles claiming that the current situation in financial markets does not deserve the epithet “bubble” are a dime a dozen – we come across several every week since at least late 2013. Before continuing, we should point out that there is a big difference between recognition of a bubble and forecasting the timing of its actual bursting. For instance, we were well aware that there was a bubble in the late 1990s, but not only did it still take a good while before it hit its peak (a peak that was then retested in terms of the broader market half a year later), it also expanded considerably further before it did so, and only started collapsing in earnest in late 2000.

It is important to realize in this context that this particular bubble – the one in technology stocks that peaked in early 2000 – is not some sort of “standard measure” for what constitutes a bubble. It was certainly the most extreme stock market bubble in all of history in a major developed market (in terms of valuation expansion in this particular sector) – beating even the Nikkei's famous 1989 blow-out by a huge margin. Again, only if one compares the tech sector's then trailing P/E of more than 300 to the Nikkei's trailing P/E of more than 80 in 1989.

In terms of the broader market's valuation, the bubble peak in 2000 was less than half as spectacular as the Nikkei's, but it was still the top of the greatest valuation expansion ever experienced in the US stock market. We merely want to point out here that it would be wrong to claim that “well, the year 2000 was a bubble, and therefore anything that doesn't look quite as extreme as this one outlier isn't”.

We came across another article of this type recently and want to discuss what we believe the flaws in its arguments are. The article in question is “Bubble paranoia on S&P 500 is a storm in a teacup”, which was posted at Saxo's tradingfloor.com by Mr. Peter Garnry. Note here that we don't want to make an argument about the likely timing of the bubble's bursting or its potential for further expansion (that is a different subject) – we only want to discuss whether a bubble actually exists or not.


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The Dear Departed

Not much action in the markets on Wednesday. So, let us return to the economy. That’s where the excitement is. According to leading economists – notably those paid by the US government to forecast the future – interest rates are going to stay low for a long time.

Perhaps we should pause and say an Ave Maria… or whatever you say when you put a market cycle into the grave. Maybe we should proclaim a day of mourning. Or at least raise a glass or two.

Yes, the feds have pronounced our old friend dead. Dead… dead… stiff dead… cold dead. Immobile. They denied responsibility for the death of the credit cycle, but admit that it was in their custody when it expired.


memento-moriHic iacet cyclus fenebris semimortuus

(Photo © Sekitar)


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China's 'Eco' Ghost Town

Back in 2006, Hu Jintao was excited when he visited Caofeidian, the “the world’s first fully realized eco-city”, built on land reclaimed from the sea. Since construction began in 2003, it has devoured the princely sum of $100 billion, most of it provided by banks. One million resident were once supposed to live there. It is a ghost town today, sporting only a few thousand inhabitants. Practically no-one has ever stayed in the city, and the buildings are already deteriorating. In fact, many of the buildings have been left half-finished, as credit eventually ran out.

The Guardian has posted a number of haunting pictures of this monument to massive capital malinvestment.

As the Guardian notes:


The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.”


A few of the pictures are reproduced below:


bridge to nowhereThe city's obligatory bridge to nowhere – only the ten pylons have been erected, then the project had to be abandoned.

(Photo credit: Gilles Sabrie)


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Legal Tender Renders Planning Impossible

There is much confusion over what the legal tender law does. I have read articles, written by people who are otherwise knowledgeable about economics, claiming that legal tender forces merchants to accept dollars under threat of imprisonment. Recently, I wrote a short article for Forbes clarifying how legal tender law works in the US.

Legal tender law has nothing to do with merchants. If you want to sell steak dinners in your restaurant for silver, you may legally have at it. Unfortunately, the tax code discourages your would-be customers as I wrote in another article.

The legal tender law targets the lender. It grants to debtors a right to repay a debt in dollars. In practice, this means that if you lend gold, the debtor gets a free put option at your expense. If the gold price rises, he can repay in dollars. If it falls, of course he will be happy to repay in gold. It’s a rotten deal for the lender.

The relationship between lender and borrower is mutually beneficial, or else it would not exist. The parties are exchanging wealth and income, creating new wealth and new income in the process. The government is displeased by this happy marriage, and busts it up by sticking a gun in the lender’s face. His right to expect his partner to honor a signed agreement is violated.

Because no lender will lend gold under such circumstances, gold is relegated to hoarding and speculation only. This strikes a blow to savers, because the best way to save is to lend and earn interest. Savers are forced to choose betweenhoarding gold, getting no yield, or holding dollars and getting whatever yield crumbs are dropped by the Fed.

If there’s no lending in gold, what takes its place? The Fed force-feeds credit in ever-larger amounts, and at ever-falling interest rates.

The Fed is supposed to make its credit decisions in order to optimize two variables. First, employment shouldn’t be too high or too low. Second, consumer prices shouldn’t rise too quickly or too slowly. The Fed has little ability to predict employment and prices, and even less control over them.


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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future