A Popular Meme, that Remains as Wrong as When it Was First Conceived

A recent article in the Guardian mocks JC Juncker’s latest scheme to produce some €300 billion in “investment” with a magical money multiplication scheme. Naturally, we agree that Juncker’s plan is deeply flawed, to put it as politely as possible. We have pointed this out already, even before he made the financing details known, which make very little sense.

The article also correctly notes that “QE” has not achieved anything worth noting. However, it is otherwise based on an utterly flawed analysis. The author pleads for “QE bombing” the citizenry itself, i.e., he wants central banks to print money and simply hand it out to everybody. A similar proposal has been made by several economists recently, in Germany and elsewhere. It follows on the heels of the just as absurd idea that central banks should simply “cancel” the government debt they have bought.

Apparently the purveyors of these hoary inflationist schemes – which arguably are economically an order of magnitude more crazy than what modern-day central bankers have already perpetrated – have forgotten about John Law and post-revolution France. The assumption that the British pound would have retained anything close to its current purchasing power if 24,000 pounds had been mailed to every family in the UK is absurd. But this is by far not the only or even the most important problem. The main problem is that all these supporters of unbridled inflationism are making the cardinal mistake of confusing money with wealth.

 

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(© despair.com)

 

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The Scandalous Takedown of Mega-Upload

As famous founder and former owner of Mega-Upload Kim Dotcom notes in the presentation and Q&A below, when Sony first presented the VCR technology, the Hollywood content mafia tried to get the technology banned, until the Supreme Court decided that while it was a “dual use technology”, which “could be used for both legitimate and illegitimate purposes”, the benefits of the legal use outweighed the possible damages from illegal use. As far as we are aware this is also the stance taken in the US constitution on a product that is potentially far more dangerous than the VCR, namely guns.

Dotcom and his colleagues always assumed that the same considerations applied to Mega-Upload. After all, as Dotcom points out, no-one is closing down the Post office just because people may mail something bad through it. At its peak, the site had 50 million unique users, of which just 7% were from the US. Moreover, Mega-Upload actually had a policy in place to take down illegal content as far as this was administratively possible, and even gave Hollywood studios access so they could delete offending links.

 

megaupload_logoMega-Upload’s logo

 

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Positioning Indicators at new Extremes

We are updating our suite of sentiment data again, mainly because it is so fascinating that a historically rarely seen bullish consensus has emerged – after a rally that has taken the SPX up by slightly over 210% from its low. Admittedly, a slew of such records has occurred in the course of the past year or so, and so far has not managed to derail the market in the slightest– in fact, since 2012, only a single correction has occurred that even deserves the designation “correction” (as opposed to “barely noticeable dip”).

While a number of positioning and survey data show a bullish consensus that easily dwarfs anything that has been seen before, this consensus is not reflected in expressions of exuberance by the broader public. “Anecdotal” sentiment seems more cautious and skeptical than the quantitatively measurable kind. Most likely this is because the vast bulk of the middle class has been so thoroughly fleeced in the last two boom-bust sequences that it finds itself in dire straits in spite of the reemergence of major asset bubbles across a wide swathe of assets. This includes by the way an astonishing revival of the bubble in real estate prices – see e.g. this 330 square foot shack in San Francisco, which recently sold for $765,000:

 

expensive SF shackYes, that tiny dark-brown thingy situated on a steep road sold for $765,000. The real estate bubble is back.

(Photo credit: SFARMLS)

 

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Working with their Hands

Things are slowing down. This is Thanksgiving week. People are leaving work early, trying to beat the holiday traffic rush. US stocks and gold were flat yesterday.

We’re still in New York, taking care of business. Tomorrow, we’ll get an early start and head back down to Maryland. We have a lot of young men coming for the holiday – friends of our sons. Your correspondent does not like to see young men with idle hands.

A strong back is a terrible thing to waste! So, he has a project: to save an old tobacco barn, using the soft hands of these future lawyers and financial managers. The trouble with most young people, we’ve observed, is they don’t know how to use their hands. They’ve spent their entire lives in school and on laptops and smart phones. Few have had any contact with tools or hard work.

Our plan – for the benefit of readers interested in tobacco barn preservation – is to turn an old-fashioned oak-frame barn into a pole barn. The sill is rotten, as are many of the main supporting posts. We will dig holes, plant treated 12-inch poles in concrete and bolt them to the uprising posts above the rot. And we will hope that the barn doesn’t fall on our heads when we start banging on it.

“You’re gonna do this with a bunch of college boys?” asks Tommy, a much weathered local man who has spent his whole life “movin’ dirt.”

“You’re gonna put a hurtin’ on ‘em.”

Yes. That’s the plan. We’ll let you know how it works out.

 

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If You Can’t Beat Them, Outlaw Them …

We have previously reported on the French obsession with stifling competition to the vast detriment of the consumer, so as to protect established businesses with all sorts of legal restrictions. A prime example of this nonsense is that the French have made free shipping by Amazon illegal in France (as discussed by Mish here). Mercantilism has never died in France, and today it is imposed under the guise of the so-called “cultural exception”, which ostensibly aims to “protect French culture” (see “France Threatens Trade Talks Over Cultural Exception” for details on this). There is much about French culture that is indeed admirable and admired the world over – and it obviously doesn’t require bureaucratic “protection”. That is a turn-off at best.

So we are not surprised to learn that the French government is in ever greater hysterics over the success of US based internet companies. “There ought to be a law”, and very likely there will be a law – French consumers and their preferences be damned. A recent article at Yahoo reports on “One country’s desperate battle to erase Google, Netflix and Uber from existence”:

 

“The French don’t play. Ever since Minitel bit dust, the continental power has been hopping mad about American domination of Internet services. And over the past weeks, attacks on U.S. giants have escalated from Paris to Lille.

Netflix is right now in the middle of an ambitious European expansion drive that started in Scandinavia and is fanning out south. Sure enough, France’s Association for the Protection of Consumers and Users has now sued Netflix for “malicious and illegal clauses.” These include changing the terms of contract without informing consumers, not offering information of guaranteed minimum quality and writing contract clauses in English.

No doubt this is only the opening salvo against Netflix in France, which guards its cultural heritage jealously. The U.S. streaming service tried to preempt Gallic criticism by financing a political drama series called Marseilles, but this appears to have been ineffective.

Uber’s French launch has been, if anything, more controversial than the Netflix debut. Infuriated taxi drivers in Lille have attacked a student for trying to enter an Uber car, first attempting to block her from opening the car door, then allegedly throwing a bottle at her head. The Uber POP service is about 20% cheaper than French taxis.

The French legal attacks on Google are too numerous to list here but the latest one actually has an entirely novel twist. France is now threatening Google with a hefty, €1,000 penalty for every defamatory link the company fails to remove from its global network of Google subsidiaries.

Google agreed earlier this year in Europe to remove links to articles that may be considered “outdated and inflammatory” — in other words, Europeans can demand removal of old search results that they consider embarrassing. But the new penalty scheme essentially holds the French subsidiary of Google responsible for the actions of its sister and parent entities. This in turn means that the French are attempting to make their legislative decisions global.

What to make of all these recent moves against some of America’s most successful corporations? They seem to indicate that France has no intention of trying to emulate the American model and foster growth of its own IT industry — instead, the country seems to be sliding towards perpetual guerrilla war against foreign tech powers. It is hard to overemphasize just how futile this bitter battle against the future looks to foreign observers.”

 

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We are all Idiots who Have to be Saved from Themselves

 

“Forced by the verdict of a German court, a long-established fishmonger in Hamburg had to attach a sign above his shop’s counter recently, which informs his customers that “fish may contain fish bones”. Packs of peanuts meanwhile contain, as requested by law, the hint that they “may contain traces of nuts”. For the same reason, irons nowadays often bear the request to please not iron things while one is wearing them. Who would have thought?”

 

The above is from a recent report in the Austrian press. German best-seller author and journalist at “Der Spiegel”, Alexander Neubacher notes in his new book “Total Beschränkt” (“totally restricted”) that this “over-protective policy” actually creates the very helplessness which it ascribes to citizens. He asserts: “Prohibitions are triumphing over reason – the more restrictions, the more morons” (in the German language, the sentence lends itself to word play: “je mehr Beschränkungen, desto mehr Beschränkte”).

He points out that “the State wants to wean us from thinking with ever more regulations, and makes us into idiot citizens who have to be saved from themselves”. The paternalistic infantilization of citizens by the Nanny State is nothing new, but it has become such a scourge in Europe that it has actually spawned an entire literary genre of complaints by now, one that is apparently selling extremely well.

 

wmiccjCitizen, you clearly need help: the image Europe’s bureaucrats have of their fellow men

(Photo via taringa.net / Author unknown)

 

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Addressing the SNB’s Concerns

The Swiss will vote on a referendum on November 30th that would ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign stored gold holdings to Switzerland, and mandate that gold must comprise a minimum of 20% of central bank assets. The SNB does not usually comment on political referendums. However, in this case it has done so quite vocally.

Why has the central bank decided to step into the political fray and oppose this initiative? What are its concerns? Are they valid or motivated by other factors?

The SNB’s primary objections to the gold initiative are three fold. 1) It claims that gold is “one of the most volatile and riskiest investments”, 2) that a 20% gold requirement will lower the “distributions to the confederation and the cantons” since gold does not pay interest like bonds and dividend paying stocks, and 3) that the 20% gold holding requirement will interfere with its ability to conduct monetary policy and complicate efforts to maintain “the minimum exchange rate”, the “temporary” policy of pegging the Swiss franc (CHF) to the Euro (EUR) it initiated in 2011 and continues to enforce to this day.

The first two concerns can quickly be addressed and discounted. Gold is indeed a volatile asset at times but so are bonds and equities. In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile than gold. The SMI, the Swiss stock index, lost over 50% of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.50% over the same period.

Regarding the second concern, the distribution of proceeds derived from financial speculation and paid to the confederation and cantons, one has to question whether or not it is really appropriate for the SNB to re-brand itself as a hedge fund instead of remaining focused on its core responsibilities as a central bank.

To properly address the third SNB concern requires a historical context and a more detailed analysis. Prior to the change in the Swiss constitution, the CHF was backed by a minimum amount of 40% gold. Despite this constraint, Swiss monetary policy at the SNB was unhindered and functioned properly during the post World War II period.

The SNB is correct in implying that today a partial gold backing, as required by the referendum, would make its policy of weakening the CHF against the EUR more difficult. Although the SNB has raised the currency peg as a reason for voting against the referendum the issue has not been directly addressed by the “YES” camp. Is the peg necessary? Does the population in Switzerland benefit as a whole from a weak EURCHF exchange rate? Why does the SNB feel compelled to continue a policy that it characterized over 3 years ago as “temporary”? How did “the minimum exchange rate” policy come to be? Why hasn’t there been a public debate about it?

 

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The Divinely Appointed and the Elected

US stocks hit new highs last week. Gold fell back below the $1,200-an-ounce mark…

… and MIT economics professor Jonathan Gruber came dangerously close to committing truth.

The ancient Egyptians believed Pharaoh was divine. They called him a god. That gave him the right to tell people what to do.

This belief persisted in ancient Rome. The Romans referred to the first Roman emperor, Augustus Caesar, as Divi Filius – “Son of the Divine.” Later, the emperor Caligula declared himself a god. (After announcing he would leave Rome to live in Alexandria to be worshiped as a god, his guardsmen assassinated him.)

And in Britain up until the Revolution of 1688, and in France up until its revolution a century later, people believed their king was divinely appointed. He wasn’t a god. But God had given him the divine right to tell others what to do.

Now people believe that God has nothing to do with it. Voters elect their leaders, who do what the public wants them to do.

 

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Malcolm McDowell as Caligula (1979)

 

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A Fount of Bad Ideas

We have previously reported on the EU’s new digital commissar Mr. Oettinger, who has recently announced he wants to make an EU case against Google a “model case” for the EU’s approach to large companies serving the inter-tubes. Naturally, the entire convocation of busybodies in Brussels is all for this bizarre idea.

The today still widely accepted theory of monopoly has been throroughly refuted in its entirety by Murray Rothbard’s contribution in “Man, Economy and State” (pdf; see chapter 10: “Monopoly and Competition”). Naturally, this contribution has been widely ignored in spite of its originality and importance, mainly because it implies that there is no cause for government intervention to “rein in monopolies” whatsoever. In other words, the EU’s “competition commission” is really superfluous.

The idea to break up Google is moreover based on the utterly absurd notion that EU companies that don’t even exist need to be “protected”.

 

google_breakup-home

 

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Kremlin Factions and the Enemies of Socialism

Well, isn’t that a shocker. With Russia’s economy under serious threat from Western economic sanctions and falling oil prices, a major Kremlin faction has quite unexpectedly gotten some wind behind its sails.

In essence, there are two economic viewpoints that are supported in the Kremlin: one is represented by the former KGB types who have seen their political fortunes revived under Putin. Many of Russia’s so-called oligarchs have aligned themselves with this faction, which is not surprising: owners of large established businesses often tend to support statism, because it ensures the suppression of competition from upstarts. This is also the main reason why many big businesses in the West are supporting the regulatory State and the ever increasing pressure on economic and individual freedom it stands for.

We may thus call this the “statist” faction. The other faction is represent by people aligned prime minister Dimitry Medvedev – this is the pro-liberty, pro-economic liberalization faction, which has seen its fortunes alternately waxing and waning since the collapse of the Soviet Union, but which has never been fully rooted out. This is not least due to the fact that many economists in the former Eastern Bloc are acutely aware of the failure of socialism, and have eagerly studied the arguments forwarded against it. Today there are probably more economists in the former Eastern Bloc who are aware of and have understood the Misesian critique of economic calculation under socialism, than one can find in the West.

 

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Evil Russian grand poobah goes for more economic freedom.

(Image via ilbe.com)

 

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A Republic – If You Can Keep It

As the famous story goes, when Ben Franklin left Independence Hall after the Constitutional Convention in 1787, Mrs. Powel of Philadelphia had a question she wanted answered.

“Well Doctor, what have we got, a republic or a monarchy?”

Franklin replied, “A republic, if you can keep it.”

No one today (well, seemingly other than the current president) wants a monarchy. However, too many call our once-Republic a “democracy”. They love the idea of the will of the people, directly determined by vote and imposed by force of law.

The primary argument against this form of government is that it’s tyranny. A majority has no right to take away the rights of any individual, no matter how unpopular he may be. However, that is precisely the consequence of giving the people the power to vote for anything, with no constitutional limits to the power of government.

 

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Benjamin Franklin: founding father, prolific inventor, and frequent purveyor of political wisdom.

(Painting by David Martin, 1767)

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Mr. Gono, Are You on the Line?

The Dow is still pushing higher. Gold is back below $1,200 an ounce. The US economy appears stable. The stock market – which is supposed to know all, see all and understand nothing – tells us it is clear sailing ahead. We are fools to believe it; perhaps we are fools if we don’t.

We can almost hear former governor of the Reserve Bank of Zimbabwe Gideon Gono’s phone ringing. He quiets his wives so he can hear. It is a voice with a strange accent … speaking from far away.

 

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“Can you come give us some advice?”

Once again, the Japanese economy has slipped into a coma. And once again, the stimulus policies of the central bank… and the Ministry of Finance… have failed to revive it.

New York Times columnist and Nobel laureate economist Paul Krugman has gone to advise Shinzō Abe on how to deal with its latest crisis. Could Abe find anyone worse to give him counsel? That would be the aforementioned Mr. Gono.

 

ZIMBABWE-BANK-ECONOMY-CURRENCYZimbabwe’s former central bank governor Gideon Gono, who eventually printed several hexillion Zimbabwe dollars every week … until the currency ceased to function as a medium of exchange.

(Photo credit: JEKESAI NJIKIZANA / AFP)

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Money Supply Growth Accelerates, Credit to Private Sector Still in Decline

While money supply growth is slowing down in the US, it has recently continued to accelerate somewhat in the euro area. The effects of the ECB’s “QE”-type debt monetization activities in the form of covered bond and ABS purchases have not yet impacted aggregate money supply data much as of yet, but the 12-month growth rate of the narrow money supply aggregate M1 (currency and demand deposits, essentially equivalent to money TMS-1) has nevertheless continued to increase:

 

1-M1, euro area,annThe 12-month growth rate of the euro area’s money supply supply has recently accelerated from an interim low of 5% to approx. 6.5% – click to enlarge.

 

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Negative Interest Rates and Capital Consumption

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about.

At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road.

However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action.

Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:

 

 

If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment.

Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

 

(emphasis added)

 

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Ludwig von Mises: he warned that the abolition of interest payments would induce the owners of capital to consume rather than invest it. Society would soon be impoverished as a result.

(Photo via Wikimedia Commons)

 

Of course today’s central bankers to a man seem to believe that what makes the economy grow is “spending” and consumption. This is putting the cart before the horse. Since the accumulation of capital threatens to go into reverse due to their policies, there may well come a time period during which reports of aggregate economic statistics appear to indicate that “economic growth has returned”, while all they reflect in reality is the fact that scarce capital is in the process of being consumed. This process is also known colloquially as “eating one’s seed corn”.

 

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TMS-2 Growth Rate Declines Further

The U.S. money supply as represented by TMS-2 (True “Austrian” Money Supply), our broadest and preferred U.S. money supply aggregate, posted a year-over-year rate of growth of 7.7% in October, down from an 8.3% rate in September. Now down 880 basis points (53%) from the current boom-bust monetary inflation cycle high of 16.5% posted in November 2009, this is the lowest year-over-year rate of growth in TMS2 since the 6.9% rate seen in November 2008 (month 4 in this 75 month long and counting inflation cycle). As a result, although we are not yet ready to declare that the economy is staring at an imminent bust in the face, this decelerating trend in the rate of monetary inflation is bringing us ever so closer to one. To investors and speculators alike, we say time to be especially cautious.

Here’s the current growth rate in TMS2 in the context of the last 20 year experience …

 1-TMS-2, long termUS true money supply TMS-2, total and 12-month growth rate. Decelerating further – click to enlarge.

 

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

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