Economic History

     

 

 

Introductory Remarks

As we have often pointed out in these pages, to our mind the euro area crisis is not a currency crisis. It is primarily a debt crisis; a crisis of the bloated European welfare states and the fractionally reserved and way overextended   banking systems they harbor. Due to the supra-national status of the central bank it is no longer possible for member nations to simply 'paper over' their economic policy mistakes and so their errors have been revealed for all to see. Instead of being able to surreptitiously impoverish the citizenry by means of inflation and devaluation, the political classes have been forced to face facts.

In this sense, the euro is a great success: it has so far averted an inner-European outbreak of 'beggar-thy neighbor' devaluations. The usual robbing of savers had to be at least partially shelved.

It is entirely mistaken to argue that the monetary union can only work if a so-called 'fiscal union' is established. It is true that the monetary union will work better if its members were to adhere to the rules of the fiscal  pacts they have signed – be it the Maastricht treaty or the latest iteration of the 'fiscal compact'.

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Sucking Up to Power

You know, you would think that after the exquisitely ill-timed Bob Woodward screed 'The Maestro', which feted Alan Greenscam as an infallible central planner who had showered us with unending prosperity just as the bubble his policies had created was about to collapse would have taught journalists a lesson.

Hailing the successes of central planners and bureaucrats is a tricky business – as noted above, the timing quite often turns out to be problematic.

There is a good reason for that: these paeans are only written when it is finally deemed 'safe' to do so. This is usually when a prevailing trend in financial asset prices has become so extended, entrenched and seemingly unstoppable,  that even aunt Imogen and her blind dog in the sticks know about it.

In other words, these screeds are good markers of the social mood and can usually be brought into context with the stock market's recent performance streak. 

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Shooting At the Wrong Target

We were quite surprised, to say the least, when a friend pointed us to a recent article at Marketwatch, entitled „Grantham wonders if Marx was right after all“, sub-titled „Capitalism will gladly sell the rope used to hang itself“, which is a reference to one of Lenin's often quoted bon-mots (which went along the more active line of: 'The capitalists will sell us the rope which we will hang them with').

The article also contains a link to the letter to investors (pdf) in which Grantham is engaging in all the aforementioned wondering. Ominously it is called the 'Longest Letter Ever'.

Al Lewis, the author of the Marketwatch article, leads off by pointing out the differences between the recent letter Warren Buffett sent to Berkshire Hathaway shareholders and Grantham's more pessimistic missive.

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Paul Krugman on Keynes

As a friend of ours remarked when sending us the link to Paul Krugman's December 29 editorial, 'he's trying to get in the last word for the year'. The editorial is entitled 'Keynes Was Right' and it is at least somewhat reassuring that it appeared on the NYT's 'opinion pages', because that is all it amounts to – an opinion.

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A Historical Mistake

There once was a time when the science of economics – based on sound reasoning –  concluded that economic liberalism was the best way to achieve lasting and growing prosperity. Classical economists may have been stumped by the theory of value, a problem satisfactorily solved by Carl Menger in the 1870's,  but on the whole, their teachings were conducive to the adoption of free market capitalism. This ushered in an age of unprecedented capital accumulation and prosperity.

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Marshall Auerback on the ECB

Hedge fund manager Marshall Auerback has come up with a plan of what the ECB should do in order to resolve the euro area debt crisis. The outline of this plan was posted at Naked Capitalism as 'The ECB vs. Germany'.

Auerback begins by recounting that Germany's central bankers are isolated at the ECB. Their desire to keep monetary policy strictly outside of the realm of fiscal policy has led them to oppose the interventions in government bond markets, and since they were outvoted at the ECB, two of them (Axel Weber and Jürgen Stark) ultimately resigned because they didn't want to be associated with the policy.

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Germany's Institutional Memory

We have often argued that Germany was a likely stumbling block for inflationary initiatives by the ECB in order to rescue wobbly sovereign debtors, a view that was confirmed by the serial resignations of Axel Weber (who stepped down as chief of the Bundesbank) and Jürgen Stark (who resigned from the ECB). Both men, it should be recalled, stepped down over disagreements with the ECB's bond buying program, in spite of the fact that this program has been fully sterilized.

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Charles 'Gutenberg' Evans

If Charles Evans (president of the Chicago Fed) were Fed chairman, we'd probably be halfway on the road to the abolition of the dollar and its replacement with the new 'territorial Mandat'. This is without a doubt the man who could deliver a Havenstein moment in the shortest time possible. There are several notable 'doves' at the Federal Reserve (Evans' colleague at the Boston Fed, Eric Rosengren is also well known for his dovish views for instance), but Evans is without a doubt the one intellectually most strongly invested in the idea that the central planning by the Fed – which in the final analysis most of the time amounts to little more than suppressing the interest rate below its natural rate and printing lots of money, either by passive accommodation or active monetization – can somehow 'save' the economy.

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Nouriel Roubini,  Re-Animator

We're not sure if there actually ever was a plot for Nouriel Roubini to lose. In case you haven't noticed yet, he's a fairly typical Keynesian establishment figure. In spite of having been one of the few mainstream economists who correctly predicted that the housing bubble would end in tears, he is otherwise never straying very far from the officially accepted economic orthodoxy. As an aside, that was not really a particularly difficult prediction to make. However,  the vast bulk of mainstream economists didn't make it, so it is a bit like the story about the egg of Columbusbecause so few mainstream economists saw the trouble coming that should have been obvious to anyone with eyes, ears and an abacus (ten fingers would have done in a pinch), Dr. Roubini's timely pre-2008 calamity pronouncements of doom have become his rightful claim to fame.

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The Growth of Leviathan

We didn't want to overdo it in the title to this piece. The world's regulatory democracies are not totalitarian states by a long shot. The fact that we can post this article with relatively little fear of being molested for it certainly proves that contention. Alas, it would be a grave mistake to confuse life in a modern-day regulatory democracy with 'freedom'. It is anything but and it evidently becomes less so by the day. And yet, we must also acknowledge that globally, there is trend toward more, rather than less freedom if one views developments over a sufficiently large time frame. Certainly there are frequent ups and downs in this trend, and given the limited human life span any particular setback may not be viewed as being much different from a permanent regression. Alas, as we recently told someone: 'don't forget that only 150 years ago, there were still serfs in Russia'.

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Chief Hooligan Shows Up

The Russian press just reported that Russia's prime minister and former president Vladimir Putin has a rather low opinion of the policies of  the Federal Reserve and the people running it. Reports RIA Novosti:


„Russian Prime Minister Vladimir Putin accused the US of hooliganism on Monday over the US government's efforts to ease its financial problems by injecting hundreds of billions of dollars into the economy.

"Thank God, or unfortunately, we do not print a reserve currency but what are they doing? They are behaving like hooligans, switching on the printing press and tossing them around the whole world, forgetting their main obligations," Putin told a meeting of economic experts at the Russian Academy of Sciences.“

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A recent poll suggests that public support for the free market has markedly declined all over the world. The question is though, what do people consider the \'free market\' to be? Most associate the modern-day state-capitalistic system with the term free market, but obviously that is not what it is. Meanwhile, the political establishment and the mainstream media have pawned off the crisis as an alleged \'market failure\' - even a superficial examination of this claim should reveal it as nonsense, but many people apparently believe it to be true. Ironically, Germany is the country where support for the free market is currently deemed the highest. Color us suitable baffled by this revelation. In France, disdain for the market is by now a well-worn tradition. Alas, no French refugees from evil capitalism have as of yet shown up at the border of Stalinist North Korea, so maybe they\'re not really serious about it. However, the French government - nominally \'conservative\' - attempted to introduce price controls for agricultural commodities earlier this year. It had to be lectured by Brazil and Argentina on the merits of such interventions, which inter alia brought down the Roman Empire\'s economy. We would term the French plan the \'Road to Famine\'. Oil market manipulators get \'caught\' - really? Apparently two oil futures traders managed to do what OPEC - a cartel controllig 40% of global oil output - has failed to achieve in many decades - namely manipulate the biggest commoditiy market in the world. The accused traders are rather perplexed by the suit. They bought and sold oil, which is what everybody in the oil market does. So what? According to the CFTC, the bureaucrats have detected that their actions were \'economically irrational\'. It would be laugh-out-loud funny if it didn\'t represnt a serious assault on economic freedom. Contrary to the story the witch-hunting political class is trying to sell, countless studies confirm what we already know from economic theory: the activities of speculators are beneficial. Without them, there would not be a market economy. Read the rest of this entry »

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