The Loss of Faith, Part II

This story is gaining significant traction recently.  I commented on this just two weeks ago, with a Pew Research poll documenting the loss of faith of many Europeans in the project that is Europe.

Now there is concern among the European political elite regarding the impact that continued high youth unemployment will have on this centralizing scheme (emphasis added):

Francois Hollande, the French president, warned on Tuesday that failure to offer these people hope risks destroying the EU altogether. “We must act urgently. Six million youths are out of work in Europe,” he said.

“Unemployment is reaching unsupportable levels in a number of countries. Imagine all the hatred, the anger. We’re talking about a complete breakdown of belief in Europe. What’s really at stake here is that citizens are turning their backs on the European project,” he said.

I maintain it will not come to this.  Default on sovereign debt will be the answer, if it is all that is left between the people and their faith in regulatory democracy.

French statesman Jacques Attali told the Elysee forum that EU leaders are running out of time. “If I was 20 years old today, I would face a choice between exile and revolution,” he said.

Neither answer is a good answer for the elite.  These possibilities come with the risk of loss of control.  The elite, above all else, value control.  Control is best exercised through regulatory democracy.

There will be sovereign defaults in order to save the primary tool of control.

In Honor of Memory

For commemoration of this holiday, I offer the following.  These are articles previously posted here at this site, some additionally at LRC.

World War Two: The Good War?

In this post I examine the Second World War from two angles:

1)      Lies, deception, treachery, genocide, and potentially treason.  Can anything associated with such actions be called “good”?

2)      I propose the underlying objectives for the war: The U.S. replaced Britain as the tool for the elite to work through for continued global domination; the communists were strengthened, creating a credible enemy for perpetual war; the wealth of two productive nations was made accessible to the elite.  These three outcomes were realized.

What War Really Is

This, one of the many posts I wrote covering Herbert Hoover’s wonderful volume, Freedom Betrayed, describes war as it is – not romantic, but costly:

Some people (tragically too few) count the cost of war. Cost in lives, cost in injuries both physical and mental, cost to the family, cost in wealth destroyed. But what of the cost of the unseen? We are regularly told that those who go overseas to fight the wars are the best and the brightest of America’s youth. If so, what of the cost of what those same youth are NOT producing while fighting overseas – or worse, if they are killed or permanently injured?

In this post, I link to a most wonderful scene from The Americanization of Emily.  If you have not seen it, I strongly recommend it.  When Mrs. Barham exclaims that after the war, it will be all the generals and statesmen writing books saying how it could have been avoided, Charlie explains that he doesn’t blame the generals and statesmen. He blames the mothers! The mothers make heroes out of their dead sons; they are the first to walk in the parade. Charlie explains that his own mother did this regarding Charlie’s brother. And now Charlie’s youngest brother can’t wait to enlist.

The Moral Bankruptcy of WWII

The hypocrisy by political leaders, especially Roosevelt, before, during, and after the Second World War made such immoral practices acceptable in future generations

They know they are lying when they are lying.  This cannot help but be seen by the public at large, and it cannot help but lead toward the moral decay and cynicism of the society at large.  I do not know if this turning point was as significant as Chamberlin states – I have not looked into this question at all.  However, there is little doubt that the hypocrisy of Roosevelt and then Truman was complete and thorough when cost is measured in all aspects.  I believe it is safe to say never before was the country lied into such a horrendous calamity.

This is one of the greatest costs of the war and of Roosevelt’s (and Truman’s) actions.  It is a cost that continues to plague America and the world today. 

I have written much more on the subject of war, but for today, this is enough.

Ambrose, You Asked For It

Ambrose Evans-Pritchard has written a blog post regarding the inflationary efforts of the BOJ, the resultant spike in JGB yields, and the battle that will take place between markets and Japan’s central bank.  In this post, he notes the accurately predictive statements of Kyle Bass regarding this chapter of the worldwide grand experiment:

Kudos to Kyle Bass at Hayman Advisers for warning that the Bank of Japan would lose control of its ¥70 trillion bond buying blitz. The spike in the 10-year yield to 1pc on Thursday was certainly shocking to behold.

His point is that the BoJ faces a “rational investor paradox”. The authorities are trying to drive up the inflation to 2pc and therefore to devalue Japanese government bonds (JGBs), so why on earth would you want to own them?

“If JGB investors begin to believe that Abenomics will be successful, they will ‘rationally’ sell JGBs to buy foreign bonds or equities,” he told Bloomberg

He says the scramble to sell has “overwhelmed” buying by the BoJ. Governor Kuroda will now have double down with a huge increase in the scale of QE.

He notes similar criticism, from Nomura’s Richard Koo, although Koo approaches the problem from the viewpoint of an “arch-Keynesian.”

Does Ambrose believe it is game-over for Japan?

Au contraire. Monetary policy should take the strain, pursuing a nominal GDP target of 3pc and later 4pc to turn the vicious circle of the “denominator effect” (ie a rising debt load on a shrinking nominal base) into a virtuous circle.

What?  Are you surprised?  The answer is for more interventions – target nominal GDP, that favorite macro-economic measure that includes all government spending as good spending, therefore any reduction in (or slowing in the growth of) spending automatically impacts negatively on this nonsensical macro-statistic.  A self-reinforcing government-interventionist statistic if ever there was one, one that ensures the economic house will be built on sand.

Ambrose views that what the BoJ has done so far is miniscule, and aimed at the wrong target:

The BoJ meddled on the margins with pinprick purchases of short-term debt, buying from the banking system, and merely pushing up the monetary base. Of course it failed. Who cares about the monetary base. It is irrelevant.

What they should have done is to conduct old-fashioned open-market operations, à la Friedman, Fisher, Hawtrey, Cassel, or Keynes himself, buying long bonds from non-banks to force up the M3 money supply. That works, as Ben Bernanke discovered when he finally alighted upon the policy by accident late in the Fed’s QE efforts.

Apparently, Bernanke has it right.  To complete his statement of faith in central bankers, Ambrose declares these individuals larger and more powerful than markets:

I stick with my view that the BoJ has the means to crush all resistance, and should do so. This may require financial repression.

Financial repression.  Use the force of the state to disallow markets from acting rationally – “crush all resistance.”  The power-mad talk of the power-mad. 

Central planning, central planning, and when that fails, more central planning.  This is the world of Ambrose.  He suggests Japan cap interest rates along the entire maturity curve, as the Fed apparently did in the 1940s.

It certainly worked. It allowed the US to whittle away its wartime debt through inflation and negative real rates. The creditors paid the price. It was an “inflation tax”, or covert debt restructuring.

Of course, one could argue this is what the US has been doing for going on six years now.  The shallowness of the so-called recovery bears witness to the shallowness of the policy.

Ambrose realizes this will require further interventions, not just monetary interventions, but likely with capital controls as well.  More repression, more central planning. He suggests this is worth a try:

But all this is clearly “doable”, and if the alternative is a spiral into mayhem and debt default, you can hardly blame Mr Abe for wanting to try. There was always a “Hail Mary” element to this massive reflation experiment, a last-ditch effort to avert a debt compound spiral.

Worth a try.  They do not know what they are doing; they do not know what to do.  You can hardly blame them for trying….

There are, of course, other means by which this problem could be tackled.  None painless; but yes, other means.  Will we find these possibilities raised by Ambrose?

The critics are right to say it may fail. But are they suggesting that the previous status quo was tenable?

It will fail.  Central planning has always failed, of that history has delivered a resounding and repetitive verdict of guilty.  But this does not leave the only option as the previous status quo – after all, it was heavily laden with central planning as well.  It, too, was not tenable.

If Mr Bass happens to read this blog, I would like to know what he would do if he were prime minister of Japan.

I am not Mr. Bass, but what the heck.  Here you go: Default.

And then allow markets to do their cleansing work.  Sooner or later the markets will do this anyway; why not get it over with, and before even more of the productive capacity of the remnants of the free portions of the economy are destroyed. 

Yes, pensioners and others will be hurt by this, but you recognize they are being hurt by financial repression yet recommend repression as your preferred solution.

As for the countless readers demanding an apology from me for backing QE, Abenomics, and all the sins of monetarism: I defy you all.

Your cockiness will not survive the verdict of history.  Markets are larger than any central planner.  Markets are having quite a difficult time of making their voices heard today – this only speaks to the levels of sophistication in the central-planning tools. 

It speaks to the levels of repression already occurring.  It also speaks, qualitatively, to the level of the upcoming crash.

Markets will win.  Always.

Supporting War

From Daniel McAdams:

Today the US Senate voted unanimously in favor of a Lindsey Graham resolution, S.Res.65, which "[s]trongly support(s) the full implementation of United States and international sanctions on Iran and urg[es] the President to continue to strengthen enforcement of sanctions legislation."

Iran has not invaded another country.  Based on credible reports, Iran has violated no treaty.  Iran most certainly does not pose a threat to any of the 50 states of the United States.

I will keep this brief:

1)      The clearest line delineating libertarian non-aggression is seen in the view on war.

2)      It was unanimous, Rand Paul included.

Rand Paul is not a libertarian – no news here, he says so himself. 

This vote isn’t simple window dressing.  McAdams points out the meaning of this vote, very simply: “This is an important vote.”  He suggests that every Senator that voted “Yea” will have little choice but to support US military involvement if / when that time comes.

It is safe to say that Rand Paul is not only not libertarian, he is in favor of big government.  There is no more intrusive government program than war, and this unanimous statement is most certainly supportive of war.

Not-so-free Banking: The Dialogue

Warning: this is a post brought forward from frustration.  If you don’t want to live through my venting, don’t read further. 

It would be frustrating if it wasn’t so predictable.  This is a continuation of the discussion referenced here.  In the comments section, you will find the actual interaction.

Sound Money Steve posted a comment, equating fractional reserve banking with fraud.  In response, I asked the following:

1) define fraud.

2) apply your definition to a contract the terms of which are a) agreed to by both parties, and b) are being met by both parties. In other words, today's typical bank contract.

3) Do this without resorting to strawman, red herrings, etc. For example, don't tell me that one party really doesn't understand the contract, or that the same party *believes* his deposit is being held, untouched.

From Steve, silence…crickets chirping in the dark (as of this post, 20 hours and counting).  But Inquisitor stepped in, not addressing any of the questions I raised, but introducing a totally unresponsive element (shocking, I know):

If a deposit is "lending", why do banks call it a deposit and where in a bank's contracts will I find the terms outlined explicitly stating this is a loan to the bank?

To which I replied (turning his question around):

...where in a bank's contracts will I find the terms outlined explicitly stating this is a deposit, always and everywhere instantly available upon demand and under all conditions?

Followed with a link to one part of my work on the deposit contract. 

Inquisitor came back, either not having read anything of the link, or just acting a troll: if it is commonly referred to as a deposit, it must be contractually a deposit.

To which I offered the following:

Your approach is consistent with others on this issue - ignore the contract and pretend it is something other than what it is.

"But, your honor, it is called a deposit. Why isn't my money there?"

"Son, did you read the contract that you signed."

"No, why should I? The bank teller that never graduated from high school told me it was a deposit. He even gave me a toaster."

"Next case."

Silence…and crickets…(15 hours later)

Forgive my venting, because that is all this is. 

It would be refreshing if issues were addressed directly.  That they are not convinces me even more of the shallowness of the views on the other side, and therefore my views on this subject.


Update:  There has been further dialogue.  Where I address fraud, the responses suggest that there is less-than-open disclosure.  With this, I have no disagreement.  But it isn't fraud - this was my point.  And given the countless shades of gray between less-than-open disclosure and fraud, I feel even more certain that the best regulation is to leave this entire topic to the market to resolve.