Labour’s War of the Worlds

The Martians Are Coming

Spare a thought for the NZ Labour party.  If you do, you will be rewarded with a good laugh–which, as they say, is the best medicine.  Picture a headless chicken erratically racing around, with no sense of direction, flailing without purpose, until expiration mercifully transpires.  Then, there is the Labour Party.

Several commentators have observed that the party is deeply divided ideologically and personally.  And it seems we must grant their observations to be just.  Take the matter of immigration.  Labour has always cast itself as the party of compassion, with an eye to human suffering and deprivation.  Its historical belief in class warfare and the deprivations of capitalist exploitation require such a position.  But not now it seems.  Over recent weeks, Labour has decided that populist sentiment (as discerned through the headlines of our daily newspapers) is running against immigrants.  The dirty devils are coming into our country and buying up all our houses, so our own poor and disadvantaged are suffering.  Our poor are being refused the inalienable right of every New Zealander, not only to own his own home, but take out a prodigious mortgage in the process that won’t be paid off in three generations, unless housing prices continue to rise perpetually [which is fine, since everybody knows that is a natural law, a direct inverse to the Law of Gravity]. 

Every Kiwi has a right to perpetual debt servitude, and Labour is going to ensure that they get to exercise that right.  Standing for the common man, with appropriate Coplian fanfare, Labour announced a distinctly anti-immigrant policy.  It would restrict the number of immigrants coming into New Zealand, so ordinary Kiwis could get mortgaged to their eyeballs.

We must not quibble about the details of who, what, when, and how when it comes to restricting migrants.  These things will be worked out in due time–which is to say, they will be made up as one goes along.  Let’s not get sarcastic about the different  versions of the new policy and the changing details–good things take time, so button the lip.  And, yes, anyone who dares to point out that actually the data does not support the sensationalist claims of immigrants pushing up housing prices in New Zealand, will be marked down as a target for perpetual “Snowdenising” by the secretive GCSB, which hitherto Labour has steadfastly opposed–at least whenever they have been in opposition.

The point is that once Labour’s ideology cast it as pro-immigrant (“bring us your poor and hungry” etc. etc.) and a defender of the lower income earners and the legions of welfare beneficiaries camping our in our Socialist Paradise.  Now, the headless chicken has headed off in another direction entirely, away from supporting immigration to defending the rights of aspiring yuppies in Auckland, a city which a former Labour Finance Minister once condemned as a suppurating boil on the backside of the nation. 

But it gets worse.  Once Labour flirted with the idea that New Zealand should become a refugees’ paradise and our doors should be open to unlimited refugee intakes.  The flirtation occurred at a time when Australia was besieged by economic migrants out of Asia coming in leaky boats to alight upon its shores.  Australia’s hard line at the time was sniffed at by the Labour Party of New Zealand.  We, in this country, would not engage in such inhumane activities.  Our socialism was internationalist–the purest form of all socialisms.

When the current government took a different position and strengthened the law to enable the authorities to cope decisively with just such an invasion by economic migrants, the current leader of the Labour Party, David Cunliffe, sniffed sarcastically:

“. . . there is exactly the same probability of an alien invasion from Mars as there is of boat people from Indonesia or ‘Wogistan.” [Stuff]

Only a few days ago, credible reports have been received of actual voyages being planned by economic migrants out of Indonesia to New Zealand. 

Fairfax followed a bid by about 50 asylum seekers from Afghanistan, Pakistan, India and Bangladesh to reach New Zealand after they holed up in a villa south of Indonesia’s capital Jakarta for weeks waiting to board a boat. . . . No asylum boat has ever made it to New Zealand but the current operation is the third attempt in recent months. In March, four men were arrested in Jayapura, West Papua on their way to link with a boat, and last month asylum seekers gathered in West Sumatra for a proposed voyage down Australia’s west coast that was cancelled.

Once Labour would have welcomed them with open arms.  Now, maybe not so much, unless of course they promised not to buy houses for a decade or more, and certainly not in Auckland.   But what is far more concerning is the pronouncement by David Cunliffe that the exact same probability exists of an invasion from Mars as of a boatload of economic migrants sailing to New Zealand.  So, now we expect the headless chook will change direction yet again and call for armed readiness to face the imminent invaders from Mars. 

But every sober analyst will be moved to ask, What has Labour got against Martians?  After all, they may be poor too.  Why has Labour become the Discrimination Party all of a sudden? 

Letter From Australia (About a Ruinous Government)

Cleaning Up The Unlucky Country

In hindsight it will likely be told that Australia, of all the developed countries, handled the Global Financial Crisis (GFC”) the worst–and that, dear friends, from a country which went into the crisis positioned far better than most.  What caused the manufacture of such a crisis?

• A grandiose Prime Minister who cast himself in a Churchillian role
• An insecure Prime Minister who wanted to be seen as the Barack Obama of the Asia-Pacific Region
• An economically ignorant Prime Minister who thought that money could be borrowed ad infinitum.

The name of the one who is arguably Australia’s worst Prime Minister?  Kevin Rudd.

Paul Sheehan, Sydney Morning Herald correspondent, fills in the details.

Unusually, history offers a precise time and place, right down to the day, to appreciate why Australia has gone, seemingly suddenly, from a land of boom to a nation facing an austerity budget with sacrifices expected of all. The date was February 4, 2009.

On that day, for the first time in the 15 months since the Howard government had been defeated, a spontaneous upsurge of genuine unity, concern and outrage came from the opposition. It crossed all factions and cliques. It fused Liberals and Nationals.  The cause of their collective alarm was the size and scale, and haste and dubious design, of six appropriations bills that Kevin Rudd’s government was about to ram through Parliament. These bills would transform the budget.

The catalyst for this was the 2008 financial crisis that had thrown the United States and western Europe into recession and come close to fusing their banking systems. The crisis had not, however, affected Canada or most of Asia. It was countries running big government debt and deficits that were in crisis control.

At the beginning of the GFC, Australian banks were rated the best and strongest in the world; the government was running a fiscal surplus and had done for years; mining and its downstream industries were booming due to strong demand from the developing world.  But either Rudd panicked, or his vaunting ambition saw an opportunity to paint his inflated ego into history’s portrait gallery, or he was just plain economically ignorant. 

Rudd said Australia needed decisive action to avoid a recession. When the opposition caught a glimpse of what he intended it saw immediately that Rudd’s grandiosity was dangerously at work. We are now discovering in great detail, via the Royal Commission into the Home Insulation Scheme, the extent of dysfunction of Rudd’s management vision.

Joe Hockey, who was about to become shadow treasurer, opened the attack on February 4. “We have not seen the six bills that are going to be introduced, debated and voted on in this place today,” he said. “These six bills will take us into $100 billion of debt.”

Malcolm Turnbull, then opposition leader, followed soon after. “In four years, net debt will be $70 billion … and the government has asked for the right, just a moment ago, to borrow up to $200 billion, or $9500 for every man, woman and child in Australia,” he said.  “The plan reeks of nothing more than panic … We do not reject the need for a stimulus at this time. Our judgment is that $42 billion is more than is appropriate right now. The government is looking increasingly like a frightened soldier who fires off all his ammunition in a panic in the first minutes of an engagement … Our judgment is that a more appropriate level of stimulus is in order, 1 to 2 per cent of GDP, or between $15 billion and $20 billion.”

All night, Coalition members, 57 in the House and Senate, rose to speak. Former treasurer Peter Costello, silent on the back bench for a year, was moved to genuine outrage.  “When you inherit an economy which has a budget in surplus and no net debt, which has unemployment at 30-year lows, where the credit rating has been restored to a AAA rating on foreign currency bonds, where you have a Future Fund of $61 billion and a Higher Education Endowment Fund, when you inherit an economy in that condition you have to find a fault somewhere,” he said. “If you cannot find a fault somewhere, what problem have you got to solve? So the Labor Party, naturally enough, looked for a problem. The trouble is, it was the wrong one.”

The problem lay with a minor matter called government debt.  Borrow in haste, repent in leisure.  It will take decades for the fiscal damage done by Rudd to be repaired–and it will inflict pain upon at least two generations of Australians.  Or, they will cave, and kick the can down the road for their grandchildren to face up to. 

When debate was finally guillotined it was 4.45am. For the opposition it was a new dawn. It did not need to wait for opinion polls or focus groups. Typical was this from former minister Bruce Billson. “The Coalition is seeking to ensure that the nation does not sleepwalk into a poorly designed, irresponsible and unsustainable package dreamt up by a panicked government,” he said. “The only certain outcome of this package is waking up to the nightmare of decades of excessive debt and deficit.”

That is exactly what happened. Rudd was worse than Whitlam. In the six years Labor was in government, the growth in Australia’s real federal expenditure was close to highest in the Organisation of Economic Co-Operation and Development – even though Australia was a resource economy with a sturdy banking sector and no housing bubble, and thus not susceptible to the financial shock in the US and much of Europe.

It is difficult to move the macro-economic needle quickly in a $1.5 trillion economy that is the 12th largest in the world (larger than Spain, which has 47 million people). In 2009, Rudd managed to jolt the needle, ramping up federal spending as a percentage of GDP.

He was also more profligate than Julia Gillard and she was no prize, loading future budgets with the Gonski education program, the national disability insurance scheme and the multibillion asylum seeker debacle without seeming to have a Gonski about how it would all be paid for.

Now that the bills are coming due, neither Rudd nor Gillard are around. It is the morning after. The clean-up. The payment due date. And the demographic challenge has loomed into focus. So let’s not confuse who did the spending and who is having to pay. . . .

A clean-up is not a crisis. We’ve already had a false crisis and are about to pay for it.

All That Glitters is Not Gold

A Confusion of Cause and Consequence

Paper money is inherently risky.  So is electronic money.  Authorities (politicians and bureaucrats) can create it out of nothing.  Monetary economists call it “fiat money”.  It is created by fiat of the authorities.  Every newly created item of currency, which adds to the stock of currency on issue, marginally devalues the existing stock.  The abiding risk of paper and electronic currency is not just inflation–the gradual erosion of value of the currency–but hyper-inflation.  The price of goods and services rises because the value of money is falling by the day.

We have all heard the horror stories of hyper-inflation.  Germany in the 1930’s.  Zimbabwe several years ago.  Venezuela now.  Money being trucked into a shop in a wheelbarrow to buy a loaf of bread.  That sort of thing. It evidences and portends horrendous economic collapse and an inevitable looming depression.  

The government more often than not has a vested interest in devaluing the currency and inflating the money supply.  That interest lies in the public debt.  As public debt grows through reckless governments spending more than they can raise in taxation, the temptation to inflate the currency (that is, print more money or create it electronically) rises.
  Politicians and their bureaucrats are under constant temptation to inflate the currency to pay back the national debt with cheap money–a rort known as “monetising debt”.  The lender, naturally, takes a hiding because he/she/it is being repaid in money worth less than what it extended in a loan in the first place.  It represents theft on a grand scale.

It is these realities which underlie the case for gold as the basis of a nation’s monetary system.  Gold meets the four attributes necessary to serve as a currency: it is rare; it is durable; it is transportable; and it is divisible.  Its rarity means that it is less subject to political manipulation.  It just cannot be created by the roll of the printing press, or the strokes of a computer keyboard.  And that is a huge plus.  It skirts the moral risk of venal politicians.  Peter Bernstein provides an anecdote which aptly sums up the issue:

In 1928, George Bernard Shaw, no conservative, summed up this attitude perfectly in The Intelligent Woman’s Guide to Capitalism and Socialism: “You have to choose between trusting to the natural stability of gold and the honesty and intelligence of members of the government.  And, with due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”  [Peter L. Bernstein, The Power of Gold: The History of an Obsession (New York: John Wiley and Sons, Inc, 2000),  p. 369.]

The great benefit of a gold standard as the basis of a nation’s money is that it helps keep corruptible politicians and officials honest.  It represents a standard they cannot manipulate to their own advantage through devaluation–or at least it represents a monetary standard less easy to manipulate.    

Herein, however, lies the reason why gold, or any other “objective” monetary standard fails to deliver at the end of the day.  Gold is like any other good or commodity.  It has no “natural” price.  The price of gold on any given day is simply an objectified corporate abstraction representing the price transactions of millions upon millions of gold traders–people buying and selling gold–on a market “floor”, whether virtual or real.

But when governments run a monetary system based on gold (or silver, or platinum, for that matter) historically the government has fixed the price.  A gram of gold represented (by fiat declaration) so many units of paper currency as set by government authorities.  But there is no science behind such a price control declaration–any more than there is behind the government declaring that the price of a house will be “x”.  If it reflected market value yesterday, it certainly won’t tomorrow.  Value is always subjective: one man’s bargain will be another’s “rip-off”.

Bernstein documents the distortions, imbalances, and economic crises that occurred through the years when gold standards were applied.  He cites with approbation Benjamin Disraeli’s assertion to a group of Glasgow merchants in 1895:

It is the greatest delusion in the world to attribute the commercial preponderance and prosperity of England to our having the gold standard.  Our gold standard is not the cause, but the consequence of our commercial prosperity.  [Bernstein, ibid., p. 258.]

To which Bernstein adds,

The notion that gold would make everything come out all right was a notion that was upside down: gold would make everything come out all right only when everything was all right in the first place.  That was the real meaning behind Disraeli’s assertion in 1895 that Britain’s gold stand was the consequence, rather than the cause, of her commercial prosperity.  [Ibid., p. 326f. Emphasis, author’s.]

How, then, can the venality and corruptibility of politicians and monetary authorities be controlled?  Gold cannot do it.  When made the basis of a monetary system, it merely represents yet another politicised corruption of price and value.  It turns out the best defence against fiat money and currency corruption is to subject money itself to free market pricing–which is what substantially exists today.  Every day, millions upon millions of currency traders on global markets express their perception of the value of a particular currency and the relative economic strength of the nation represented by that currency.

Simplistically speaking, if the “market” perceives over time that a currency’s value is eroding through excessive fiat money creation, the price of that currency will decline on global markets.  Over time, monetary authorities and venal politicians will be exposed and punished for their monetary duplicity.  Over time, hard money will drive out soft money. 

In summary, the market of free floating currencies provides a far more exacting daily discipline upon monetary corruption and fiat currencies than a gold standard was ever able to provide. 

Letter From America (About A Country Being Crushed)

Obama’s Wreckovery

Obama knowingly lied about “shovel-ready” projects — and the press covered up.

By Michelle Malkin

February 14, 2014 12:00 AM 

National Review Online

February 17, 2009, President Obama promised the sun and the moon and the stars. That was the day, five years ago, when he signed the $800 billion American Recovery and Reinvestment Act. President Modesty called it “the most sweeping economic-recovery package in our history.” He promised “unprecedented transparency and accountability.” He claimed the spending would lift “2 million Americans from poverty.” Ready for the reality

The actual cost of the $800 billion pork-laden stimulus has ballooned to nearly $2 trillion.
At the time of the law’s signing, the unemployment rate hovered near 8 percent. Obama’s egghead economists projected that the jobless rate would never rise above 8 percent and would plunge to 5 percent by December 2013. The actual jobless rate in January 2014 was 6.6 percent, with an abysmal labor-force-participation rate of 63 percent (a teeny uptick from December, but still at a four-decade low).

Five years after the Recovery Act, 10.2 million people are out of work. The number of able-bodied Americans who have simply given up looking for work or are “not in the labor force [but] who currently want a job” has exploded. By some estimates, a record 90 million–plus people are hopelessly sitting on the sidelines.

The unemployment rate for black Americans is 12.1 percent — nearly double the national rate. The Obama campaign excoriated President George W. Bush when it exceeded 10 percent on his watch. The jobless rate for black teens is now a whopping record 38 percent. Some 50 million Americans remain below the poverty level. And 47 million are now on food stamps, a third more than when Obama first took office in the halcyon days of Hope and Change.

After $150 billion in stimulus and other spending on green-energy boondoggles, what does the White House have to show for it? According to the Green Corruption Files blog, 32 Obama-backed environmental firms have gone bankrupt as of February 2014. These include crony-clogged Solyndra, at a cost to taxpayers of $535 million; Beacon Power, $240 million; Abound Solar, $400 million–plus; Fisker Auto, $529 million; A123, $250 million; ECOtality, $100 million; and Ener1, $118.5 million. In addition, 22 other Obama green-energy projects are now in dire financial trouble.

Unprecedented transparency? Section 1513 of the Recovery Act required the White House to submit a progress report every three months. Last year, blogger Doug Powers noted: “Under their own guidelines, the administration should have released 14 of these reports by now, but they’ve only submitted eight of them for public review.” Whatever.

Before signing the Recovery Act, Obama promised an avalanche of “shovel-ready” jobs to build vital infrastructure. Instead, stimulus money went to wasteful makework and nonwork, including: bridges to nowhere, a California project to photograph ants, a University of North Carolina computerized dance program, a privately owned martini bar and Brazilian steakhouse in Missouri, a bogus New Hampshire beauty school, and renovations to Vice President Joe Biden’s favorite Amtrak train station in Delaware.
Somehow, stimulus “Sheriff” Biden overlooked the hundreds of millions in stimulus money steered to General Services Administration junkets in Las Vegas and Hawaii, ghost congressional districts, dead people, and those ubiquitous stimulus-propaganda road signs stamped with the shovel-ready logo.

In 2012, Ohio State University economics professor Bill Dupor reported that more than three-quarters of the jobs created or saved by the stimulus were government jobs. Dupor and a colleague also concluded that the massive wealth-redistribution scheme “destroyed/forestalled roughly 1 million private sector jobs” by siphoning tax dollars “to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment.”

In 2011, at a rare meeting of his Jobs and Competitiveness Council, Obama turned his “shovel-ready” vow into a punchline: “Shovel-ready was not as, uh, shovel-ready as we expected,” he cracked with a sheepish grin. The dog-and-pony Jobs Council, led by GE’s Jeffrey Immelt, giggled and cackled at Obama’s snark.
More forgotten insult to grievous injury: the telling moment when New York Times columnist David Brooks giggled on Jim Lehrer’s PBS show that Obama had told him off the record in 2009 that the shovel-ready promise was a crock, but that he sat on the truth until the Times’ Peter Baker reported the admission more than a year later, in October 2010. The transcript:

Jim Lehrer: Off the record? So, then you can’t talk about it. [Laughter.]
David Brooks: Yes, because Peter Baker is a better [reporter] than I am, because I couldn’t get him to go on the record with that thing. (Laughter.)
Jim Lehrer: He said this to you a year ago?
David Brooks: It was obvious. I mean, you are trying to build a stimulus package. And when they were trying to build it, believe me, they would have loved to have filled it with infrastructure jobs. But the projects just didn’t exist.

While the lapdogs of the Fourth Estate snicker along with the White House about their lies and cover-up, the Wreckovery Act wreckage continues to pile up. And now the White House wants more money to burn for Porkulus Redux.

Retiring senator Tom Coburn (R., Okla.) was right when he warned five years ago that the “morally reprehensible” stimulus represented “the worst act of generational theft in our nation’s history.” It’s no joke.

It’s a $2 trillion travesty built on criminal government malpractice. Take that and shovel it.

— Michelle Malkin is the author of Culture of Corruption: Obama and his Team of Tax Cheats, Crooks and Cronies (Regnery, 2010). Her e-mail address is malkinblog@gmail.com.© 2014 Creators.com

 

Slow Learners

Bribery and Electoral Suborning

Since we have entered an election year, political bribery is in full swing.  At his first major announcement, the Labour leader, David Cunliffe announced new government spending that will cost well over $1 billion dollars per year.  Will the electorate be seduced by this bribe?  We will have to wait and see. 

New Zealand is just emerging from a long, dogged recession.  In the early days of the Global Financial Crisis (which hit just after our recession began in earnest) we were at risk of having a run on our banks.  The country was in a dangerous position of rapidly rising fiscal deficits at a time when no-one was lending.  Credit had dried up.  How come?  Because the previous Labour government had spent all the fiscal surplus and had committed to spending way beyond that in various electoral bribes, middle class welfare and unaffordable programmes, so that our deficit was inevitably going to become a black necklace around the nation’s throat. 

We can still hear the gleeful tones of the then Minister of Finance, Dr Michael Cullen as he taunted the Opposition with a peculiar channelling of Mother Hubbard  that the fiscal cupboard was now bare.  He had “spent it all”, he chortled.
  Apart from his reckless spending on Kiwi Rail, buying it back at a price no-one with a smidgen of financial prudence would have ever approved, the biggest new spending was upon Early Childhood Education (also known as over-engineered, gold plated, daycare centres) and Working For Families (a middle class welfare programme). 

They say that socialism eventually runs out of other people’s money.  Election bribery was in such full swing that not only had Labour run out of other people’s money, it had started spending money no-one had, thereby debt-enslaving our children and grandchildren. 

Through the last six difficult years the government has worked to reduce wasteful spending, increase its effectiveness, and return the nation to a fiscal surplus (before starting to pay down the billions of accumulated debt).  We are now just on the cusp of a surplus.  Economic growth is picking up pace.  Employment is starting to rise.  The hard and difficult climb is coming to an end. 

Labour’s response?  Reckless bribes of new spending to drive the country back into deficit and to start the cycle of spend, boom, bust, recession/depression all over again, making the struggles of the last six years a waste of time.  The question before us now is, Has the electorate learned its lesson, or will it be seduced and suborned by the bribes?  We will see. 

Cunliffe is denying that his bribery will increase the deficit.  His reckless new spending is going to be paid for by raising taxes, he says.  Oh, don’t worry.  It’s only the “rich” who are going to pay these new, higher taxes–but we won’t talk about that until after the election.  Two problems: Cunliffe has already defined households earning $150,000 per year as being worthy recipients of his new welfare bribes–so clearly, they are not rich in Cunliffe’s world.  So, a very, very small percentage of taxpayers are going to have to pay huge tax increases to pay the bill for the new spending.  And then there is the airily announced and long promised Labour capital gains tax, which is a fig.  Such taxes are very costly and complex to administer, and raise relatively little revenue.  We already have capital gains tax in New Zealand, but it is rarely enforced for those very reasons. 

Here is the most odious of the egregious bribes:

Most parents of newborns will get $60 a week until that baby turns 1, while those on middle and lower incomes will continue to receive the payment until the child turns 3.  Mr Cunliffe said the party had set the income threshold relatively high so that it would be near-universal, although its primary aim was to help address child poverty. (NZ Herald)

Cunliffe is either too dumb to consider, let alone understand, the perverse consequences of ill-conceived government policies, or he is too reckless to care.  The worst poverty occurs in the underclass, which is ridden with solo-mothers, dependant upon government welfare.  One of the easiest ways for such folk to achieve an increase in income is to fall pregnant and have another child. You get more of what you pay for.  Under Labour’s bribe, every new child born will increase a household’s income by over $3,000 per year. 

The perverse outcome?  A rapid increase in the numbers of solo mothers with four or more children with multiple anonymous fathers leading to further social dislocation and much worse child poverty, suffering, and degradation.  Cunliffe’s policy will exacerbate child poverty, not alleviate it.  He appears ignorant of human nature and its motivations–or, more likely, he foolishly tells himself that, “this time, it will be different”. 

The real issue is whether the electorate is going to be seduced or offended by such crass, reckless bribes.  We will see.

Encouraging Signs

Not Yet Living Within Our Means, But Progress Nonetheless

And now, a good news story.  One of the things that has bedevilled the New Zealand economy for decades is the dearth of capital.  As a nation which has practised “socialism without doctrines”, as historian Michael Bassett put it, we have not saved, nor valued, nor husbanded sufficient capital.  Why save, when the state taxes and distributes, with the goal of creating cradle to the grave security? 

Consequently, the Balance of Payments has run at a deficit for a long, long time.  This econometric statistic measures whether NZ Inc is trading at a surplus or deficit, whether as a nation it is making more than it spends, or whether it is relying upon others outside New Zealand to fund our lifestyles in aggregate.  The perpetual deficit is a record of our having become accustomed to living standards way beyond our national means. 

Gradually this situation is changing.
  New Zealanders are starting to save.  In particular, they are investing not just in New Zealand, but offshore.  In the long run this has to be a very good thing. In recent decades, particularly since the deregulation of the economy in the nineteen eighties, New Zealand institutions and the government has borrowed offshore to fund deficits and compensate for the lack of available domestic savings.  Whilst initially getting us out of a hole, it has had a long term perverse effect.  Our Balance of Payments has become more and more difficult to keep in surplus due to the cost of servicing offshore borrowing and investment in New Zealand.  Funds remitted offshore every quarter in profits or interest payment made it harder and harder to live within our means. 

Now, however, the Balance of Payments (still in deficit) is starting to take a different shape.  According to the NZ Herald

New Zealand’s investments overseas increased by about $5 billion over the past year, while the amount of money flowing into the country also lifted.  Statistics New Zealand released data today showing New Zealand had money invested in about 100 different countries as at the end of March this year.  Those investments amounted to $163.9 billion, up from $158.4 billion in the year to March 31, 2012.

In the long term this has to be a good thing–provided, of course, our offshore investments are sound rather than speculative–which appears to be the case.

Some examples of offshore investment include Kiwis buying shares on foreign stock exchanges and Kiwi companies setting up overseas subsidiaries.  Of New Zealand’s total investment abroad, 64 per cent was into five countries – Australia, US, UK, Japan, and the Netherlands.

Australia held its position as New Zealand’s biggest trading partner, with investment there rising by $2.5 billion to reach $48.2 billion at March 2013.

The returns from these overseas investments will help reduce our Balance of Payments deficit and eventually (hopefully) bring it into surplus—not just occasionally, but structurally.  There is a long way to go.  International investment in New Zealand is presently twice the amount we have invested offshore.  Eventually this needs to be reversed.  There are many things which could derail this advance.  But we will take this small victory and press on, hopefully to even bigger and better things. It will be good for our grandchildren and our great grandchildren.

The Calibre of the Modern Politician

Behold the Wonders

The calibre of politicians leaves much to be desired.  We suppose in democracies a society tends to get the politicians it deserves, but nevertheless we tire of our representative pontificating with sonorous solemnity about things they know very little.

In New Zealand the independent Reserve Bank (made independent to prevent politicians meddling with the money supply in a self-interested attempt to garner public support) is charged with the integrity and solvency of the banking system.  To that end it has recently stipulated that mortgage lending banks require house buyers to put down equity of 20 percent of the purchase price or more, for 80 percent of their mortgage books. This effectively stops reckless lending by banks in its tracks.

New Zealand escaped the worst of the debt and housing crisis in the global financial crisis of 2008 and onwards.  But its housing market is overvalued now by prudent measures, and the market is showing signs of overheating in large population centres.  Some banks have been behaving recklessly.  Hooray for the RB.

Enter stage left the empty principled, void minded politician.  They realise immediately that this new policy will hurt some people–in the sense that an injection at the doctor’s might hurt.  It causes some pain to prevent much worse afflictions in the future.  Hah–time to whip up some electoral support.

Labour leader David Cunliffe ramped up pressure on the Government with a public meeting with Kanik Mongia, 23, an IT consultant, who had mortgage pre-approval for a 90 per cent loan cancelled by ASB because of the LVR changes. He was seeking $450,000 for an investment property.

Cunliffe said there was need to cool the property market, especially in places like Auckland, but the new lending rules would have “unintended consequences” on first home buyers. “Unfortunately they are taking it out on the hide of first home buyers like Kanik, and that’s not what we want. We want young people to be able to get into their homes and we don’t want young speculators driving prices through the roof,” he said.(Stuff)

Lots of commentators have mocked the stupidity of choosing a “first home buyer” as poster boy who actually wanted to make a speculative investment, not purchase a house to live in.  But if banks were allowed to continue their reckless lending of requiring only a 10 percent deposit from house buyers, it is precisely the “first home buyers” who would likely end up with negative equity and forced mortgagee sales when the housing market turned down–as it eventually will.  What then would Cunliffe turn to?

Would he let the speculative home purchasers watch their houses being repossessed by mortgagee sales?  Would he nationalise the banks?  Would he doll out socialist dollars to inject fresh equity into houses underwater with debt?  Would he scrap the Reserve Bank Act and make the Reserve Bank once again subject to the whims and venal lusts of politicians?  All of the above, no doubt, would be on the table.

And all this, because Cunliffe failed to exercise basic moral precepts of integrity and demonstrate true leadership when it was needed.  Why has he thus failed?  Because of his lust for power, and because his moral compass is not calibrated so as to direct him away from bribery and corrupting the electorate, and because he does not have the smarts to realise that he would risk turning New Zealand into Spain, or Italy, or Greece.

Ignorance and corruption.  Behold the modern politician.  What wonders secular humanism has wrought.

Integrity in the Bank

Populist Hogwash

The Reserve Bank of New Zealand has moved to restrict speculative lending by banks.  The predictable backlash has seen high dudgeon from the Commentariat which has been speaking up for those poor erstwhile “first home buyers” who are going to be shut out of the market because they cannot marshal the (now) requisite 20 percent deposit.  Populist rubbish.  But it sells newspapers and stirs the pot.

Spare a thought for the Reserve Bank.  It is charged with maintaining the solvency and stability of the New Zealand banking system.  It can only do this if the banks continue to maintain prudent practices with respect to lending.  And therein lies the rub. 

During the global financial crisis–largely precipitated by reckless housing lending in the United States, the UK, and Europe–the New Zealand government was moved to guarantee bank deposits for a time.  Without such a guarantee, it was argued, international creditors would no longer be willing to stump up capital to pay for the country’s foreign borrowing.  A precedent was set and a moral hazard was unleashed.  We all learned that in a systemic credit crisis the government would bail out the banks. 

The government is now trying to back off that implicit state guarantee of bank liabilities.
  One key strategy is for the independent Reserve Bank to ensure that bank credit ratios are prudently maintained.  But banks also have learned the underlying lesson.  Why bother to be prudent when in the end the government will bail you out with taxpayers’ funds?  After all, banks are required by shareholders to make profits; moreover market share considerations mean that each bank must compete against others to get the punter’s business.  Thus, if one bank is requiring a 20 percent deposit for lending on a house purchase, one can hoover up business if one’s offer is to require only a 10 percent deposit.  Consequently, New Zealand has seen a rush by some banks into low equity loans, way beyond the constraints of prudence. 

No wonder the Reserve Bank is forcing banks to be less reckless and more prudent.  All the populist rhetoric in the world is worth diddley squat when a systemic banking collapse looms.  And, to be sure, if it were to eventuate those same populists would be screaming about the recklessness and imprudence of  the banks, baying for blood, railing against fat corporate greed, and so forth.

In a more perfect world, senior managers and directors of banks would put prudence ahead of profit.  Nor would there be a moral hazard of an implicit government guarantee of bank deposits.  There would be no need for Reserve Bank preventative intervention.  Full marks to the RB for taking the steps it has.

Will it “cool down” the housing market?  Unlikely.  Will it force banks to be more prudent?  Yes.  That is the real objective–and it is a worthy one. 

As to those first-home buyers who cannot amass the requisite 20 percent deposit in a housing market already showing signs of overheating, we have three pieces of advice.  Firstly, be prepared to purchase a less-than-dream-home in less desirable suburbs.  There are plenty of less expensive homes available, if folk are prepared to compromise.  Secondly, be patient–and in the meantime, keep saving. Thirdly, be willing to consider moving to less expensive cities.  While there may be fewer job opportunities, the competition for positions is much less than the bigger, more popular cities.   

Douglas Wilson’s Letter From America

A Drunk Trying to Make the Next Lamp Post

Posted on Friday, July 19, 2013  

by Douglas Wilson 

The old Bobby Bare song, Detroit City, has a refrain that centered on the desire to “go home.” Unfortunately, everywhere else is turning into Detroit City. Pretty soon there will be no home to go to.
Detroit’s bankruptcy, announced yesterday, gives us an opportunity to go over a few fiscal realities, always a good idea if you are careening toward a whole series of fiscal reality checks.

The first thing we must grasp is that we are dealing with levels of municipal debt, state-level debt, and federal debt, that mean a necessary default is coming. If our problems are left untended, we will default. If we wake up in time, and address the pending problem, we will default. This is another way of saying that every genuine solution to the problems created by our fiscal irresponsibility will be a form of default. The only solutions now are defaulting solutions.

The only thing we don’t know is what kind of default it will be. The only thing we don’t know is who the unlucky victim of our defaulting will be.

Government does not make wealth.
If government has wealth, then this means it was taken. The only way that the government can acquire the means to pay its obligations and debts is by taking it. The only question left before the house is “who will they take it from?” There are a limited number of options.

When a politician says that we cannot allow our government to default on its solemn obligations, he either believes what he says, and is a fool, or he knows what he is saying is false, and wants us to believe that we must avoid Default A, which is what he is really talking about, and must select from defaults b, c, d, and e, which he does not really consider defaults “technically,” because the people who are going to get hosed by them are not part of his constituency.

The government does not make, and in order to have, must therefore take. Here are the basic ways in which such a taking can happen. The government can wage war on other countries, and take from them. The government can raise taxes, and take that way. The government can debase the currency, and take that way. The government can run up a big debt which it finds itself unable to pay, and take that way. And of course, given the realities of the ongoing political circus, the government can stagger between these options, like a drunk trying to make it to the next lamp post.

Beware of those reforms that hide the reality of the defaulting. Those kinds of reforms are probably the best way of proceeding, but only if they are honestly embraced as the least destructive way of defaulting. But don’t hold your breath. The government lies. The government cheats. The government welshes. The government steals. The government defaults, and hides it.

For example, if the retirement age for Social Security is extended by two years, this does make the program viable longer on paper. It does this by unilaterally changing the terms of a contract — by defaulting. It may be better than doubling down on the current lunacy and having the whole thing go up in a sheet of flame, but it is not better because it isn’t defaulting. It is just as much a default, but it may be less damaging to the recipient.
If you pay your creditor 50 cents on the dollar, that is a default. It does less harm to him than paying him 10 cents on the dollar, which in its turn is not as bad as paying him nothing at all.

Detroit is now defaulting on its bond holders, its pension holders, et al. Look at it straight on — it is hard to make out, but a line has formed and we are trying to make out who is next. Is it California? Illinois? New York? There are municipalities in there too. And if this spectacle becomes too grim, and a demand arises for the federal government to “do something,” this will just be an example of people opting for the coast-to-coast sheet of flame default, instead of the piecemeal approach.

One last thing. I would like to address a few words to those evangelicals who have been seduced by leftist economics, or who are in some way flirting with leftist economics. You may have cannonballed into the deep end, like Jim Wallis, or you may just be sidling sheepishly in that direction, with some cover provided by distributist literature. You think that the language of compassion is more biblical, and the idea of communitarian sharing makes you feel warm all over. You think that businessmen who know how to add and subtract are those who are in the grip of mammon-lust. You don’t like the hard lines of clear thinking, and the blinking sums on their calculators do nothing but harsh your mellow.

Do me a favor, and look at Detroit. Look at the failure of all the compassionate nostrums. Look at the collapse of real integrity. Look at the grasping and demented idiocy of the unions. Look at the abandonment of government’s true functions. Look at the wreckage of human lives. Look at the ruin of a once great city. Look at what aching greedlust does. Behold the handiwork of your compassion.

Look at what mammon in sheep’s clothing can do.

Reality Checks

Taking the Hit

Detroit has filed for bankruptcy.  To those who have followed such things it will come as no surprise.  It is not the first and it will not be the last–but it is notable, just the same.  It is the biggest US city ever so to file.  According to The Guardian,

The filing sets a new record for municipal bankruptcies and dwarfs the previous record filings by Jefferson County, Alabama, and Stockton, California. No other city of Detroit’s size has ever gone bust.

The causes of this final act are strikingly obvious.  But because the end has come after a lingering terminal decline folks assumed that because it did not happen quickly, it would never happen.  The bigger fools of the next generation would always be there to take the accumulated burdens of their predecessors.  What was the problem?  Municipal overspending led to growing debt which the city can no longer service, nor repay.  It was passed on to bigger fools.  It is like every bankruptcy.
 

There are two major classes of creditor: municipal bond holders (who lent the city money) and workers who are “owed” pensions.  Neither will ever see much, if any, of their money again.  The buck passed to others for decades has finally stopped with them.  They will take the fall.  Then, possibly, a new city will emerge.  But only if lessons are learned, and learned well.
 

[Michigan Governor] Snyder said he hoped the bankruptcy would be the beginning of the end of Detroit’s woes. “This decision comes in the wake of 60 years of decline in the city, a period in which reality was often ignored. I know that many will see this as a low point in the city’s history. If so, I think it will also be the foundation of the city’s future,” he wrote.

Where has the problem lain?  Clearly and most obviously, the US auto industry has been challenged by cheaper, better vehicle competition, particularly from Asia.  But the auto-industry is heavily unionised and has resisted change.  Competing auto companies preferred to set up manufacturing plants in states where unions could not dominate.  The resulting lower wage costs meant lower costs of production, which meant a growing market share for Toyota, Honda and the like.  The city of Detroit could no longer count on the Big Three US automakers being the geese to lay golden eggs for the city.  Repeatedly the US auto industry has gone begging to the taxpayer for handouts and bailouts.  Venal politicians, with eyes upon the next election and their career, were willingly complicit.  

But in the meantime, the city had committed to golden handshake payouts to municipal workers, along with high remuneration.  Retirement at middle age, with golden pensions, became the norm for police, firemen, and other municipal employees.  This has been the result of a city’s work force controlled by labour unions over decades.  The strike-threat system worked a treat.  The city began to run deficits.  Its losses had to be funded by borrowing.  Spend, borrow, hope became a way of life. 

Meanwhile, the city began to shrink as citizens migrated to other cities and other states for work.  But the costs, being locked in through labour contracts, did not diminish much.  Result?  Lower tax revenue, bigger deficits, more borrowing.  The circling, downward spiral became vicious.  No way out. 

All of this was easily predictable.  It was foreseen by many.  But only fools and horses think they can defy financial and fiscal common-sense forever.  If the city and the unions and the politicians had acted responsibly and sooner, it would never have come to this.  But ultimately the folly and irresponsibility was sanctioned by the citizens themselves.  Debt is a form of slavery.  Perpetuating debt is perpetual slavery.  Detroit and its citizens were perpetually enslaved a long time ago.  But the chains were invisible to them, such has been their moral torpor.  No longer.  They are now clearly visible.  They are heavy.  They cannot be unshackled–at least, not without gnawing, lingering pain. 

But for Detroit’s poor, bankruptcy is likely to make life even harder in the short term. About 60% of Detroit’s children live in poverty. Orr had planned to bus creditors to some of the city’s poorest areas so they could see what was at stake. Armed security would have gone along for the ride.

“If they can see what it’s like for Detroiters, what they endure every day in this city, I think they’ll begin to understand what’s at stake,” Orr told the Detroit Free Press. The tour was canceled as bankers became worried about the PR impact of captains of finance touring the city’s poorest neighbourhoods.

Detroit screams out to us all: “Look on my works, you mighty and be afraid.” 

Progress

Fairness Ethic Has Its Good Points

The New Zealand government is starting to crack down on some beneficiaries who have their cake and want to eat it too.  The hapless left describes this as “beneficiary bashing”.  But the measures are showing up as well supported by the electorate.  This is because New Zealanders don’t like “unfairness”.  It’s a cultural value which has ill-served the nation of often, but at times it proves helpful. 

The first group being targeted by the government is student loan beneficiaries who refuse (or wilfully neglect) to repay their loans.  The worst offenders are those who have gone overseas for extended periods and have declined to repay their loans.  They have effectively skipped town.  The government announced recently that the worst offenders–the hardened recidivists–risk arrest when they return (even temporarily) to New Zealand.  This means they are effectively exiled from their home country. 

It is reported that this has prompted a flurry of activity on the part of some of the overseas negligent payers to start to make appropriate “arrangements” and commence repayments.  It is also reported that a majority of the electorate in New Zealand supports the move.

A hardline Government policy to recoup student loan debt by arresting serious defaulters at the border has proved popular in a Herald-DigiPoll survey.  The policy of arresting the most non-compliant borrowers was introduced in Budget 2013 as part of greater efforts to claw back money from overseas-based ex-students, who were responsible for most of the $500 million in default.

Asked whether they agreed with a Government proposal to arrest the worst defaulters on student loans at the border when they tried to re-enter the country, 56.8 per cent of respondents agreed and 39.6 per cent disagreed.  Tertiary Education Minister Steven Joyce said the poll was in line with expectations. He said the policy was designed to target borrowers who were repeatedly asked to repay their loans but refused to do so.

The second group being targeted is those with outstanding arrest warrants.  There are on average about 15,000 people with outstanding warrants.  About half of these are also social welfare beneficiaries.  The government is moving to reduce or cancel beneficiary payments to those folk.  Clear the warrant, or face reduced or cancelled financial handouts.  This from a government press release:

People who fail to clear outstanding arrest warrants could see their benefits stopped as the next stage of welfare reforms comes into effect this month.  “Taxpayers overwhelmingly say they don’t want to fund people to actively avoid the Police and this Government agrees,” says Social Development Minister Paula Bennett.  From July 15, beneficiaries with outstanding warrants will have their benefits stopped if they fail to come forward and clear their warrant within 38 days.  Those with children will have their benefit reduced by no more than half.

Once again the general public believes this is “fair”.  If people are going to accept welfare payments they need to be law-abiding, like the vast majority of everyone else in the country.

All good stuff.   

Letter From Australia (About Profligate Privileges)

No dragons live in PM’s perilous fiscal fantasy 

Miranda Devine
Tuesday, April 30, 2013  
The Daily Telegraph

‘IMAGINE a wage earner, John, employed in the same job throughout the last 20 years.  “For a period in 2003 to 2007 every year his employer gave him a sizeable bonus. He was grateful but in his bones knew it wouldn’t last. The bonuses did stop and John was told his income would rise by around five per cent each year over the years to come. That’s the basis for his financial plans.

“Now, very late, John has been told he won’t get those promised increases for the next few years but his income will get back up after that to where he was promised it would be. What is John’s rational reaction?”

This was Julia Gillard’s patronising attempt to explain her government’s latest budget crisis. In a speech this week the Prime Minister used “John” to explain why it’s the fault of everyone but her feckless spendthrift government that there will be a $12 billion revenue shortfall in the year she promised a surplus.

“John” appears to be the human embodiment of her government, two weeks before Wayne Swan hands down his fifth Budget, complete with its fifth deficit.  In the real world, a man who found his income reduced would tighten his belt. His family would look at the household budget and figure out what luxuries to give up.
Lamb might be off the menu, for instance, as would the Foxtel subscription, and the HCF membership. The holiday overseas might become a trip to the Forster caravan park. Private schools would have to wait until Year 11.

This is the sort of thrift Australian families have practised as a prudent response to global economic uncertainty, job insecurity, and a mercurial government, with household savings tripling in two years.
But the Prime Minister scoffs at such parsimony.  In “John’s world” – that arcadia of protected jobs, plenty of cash and government benefits that flow like water, when John’s income is cut, he doesn’t curb spending.
Eat two-minute noodles for dinner? Take his kids out of private school?Perish the thought, says the PM.
He borrows money to keep his “family and lifestyle intact” because tomorrow is always another day of free money.

You can only understand John’s behaviour if, like everyone in government, the public service, academia and a good deal of the media, he has a protected job sheltered from the disciplines of the market. In the real world, mistakes have consequences, dad loses his job, incomes fall, people can’t pay their mortgages, kids are pulled out of private school and belts are tightened by necessity.

The division in Australian society exploited by Gillard and Swan is not between left and right, haves and have-nots or even insiders and outsiders. It’s between those who have protected incomes and those who are exposed to the real economy – the small business owners who create wealth, the PAYE employees who work for the wealth creators.

In John’s world, an 18-year-old working as a “glassie” on Anzac Day in a Balmain pub earns $550 for 11-hours work, because his employer is obliged to pay double time and three quarters under the Fair Work Act. The result is that youth unemployment has skyrocketed to an average of 18 per cent and students can’t find casual jobs once taken for granted by their parents. Only pizza delivery and off-the-books labouring is immune from the new harsh economic realities.

In the real world, bustling suburban high streets have become ghost towns on Sundays because shop and restaurant owners can’t afford to pay penalty rates. In John’s world this is a “fair go” for workers.

The ABC lives in John’s world, which is why it received an extra $10 million this year and reflexively spruiks for the federal government. Take, for example, Four Corners’ belated discovery of more than 1000 asylum seeker children in detention, after five years of see-no-evil journalism.

During the Howard era it couldn’t focus enough on detention centres. But apart from once in 2011, it hadn’t touched the subject since 2008 when it featured the reminiscences of detention centre guards in the Howard era, starring special guest villain Philip Ruddock, who had not been immigration minister for five years.

Meanwhile, the actual Rudd government was dismantling border protection policies, with the result that a trickle of two boats per month has exploded to more than 2000 people a month – and hundreds of asylum seekers have drowned. The cost to the taxpayer is more than $2.2 billion a year.

In John’s world, this is a good policy. In John’s world, $6 billion thrown at schools to please militant teacher unions will fix our children’s declining performance in reading and maths, when evidence around the world shows little correlation between money and educational outcomes.

In John’s world, the financial woes of the federal government are the fault of John Howard and Peter Costello.  In the real world, Howard and Costello inherited a budget in deficit in 1996 and left $22 billion in surplus in 2007, plus a $60 billion future fund.

Spending has blown out by 35 per cent a year since Labor came to office. Eighty cents in every dollar of income tax goes to social welfare and the government keeps promising to spend more.

Only in John’s world is this sort of profligacy sustainable. In the real world it is the road to ruin.
 

Reactions From the Hive

Swarms Over Stockman

We published several days ago an extended argument by David Stockman about the economic catastrophe looming in the United States.  Until recently Stockman was a Washington insider, but now not so much.  The establishment has turned upon him.  No surprises there. 

What is interesting to note is the style of argumentation and rebuttal Stockman has faced.  The upshot is that he stands unscathed and the establishment reveals itself to be as intellectually bankrupt as it has made the country fiscally bankrupt.

The Financial Times reviews the reaction:

It takes a lot for an official who served at the heart of the White House to go beyond the pale in Washington, but a diatribe against all economic policy since 1933 – attacking everyone from Franklin Roosevelt to Milton Friedman – is one way to manage it.  David Stockman, budget director for Ronald Reagan from 1981 to 1985, is the man who will be short of dinner party invitations after becoming the most mainstream figure to argue that all America’s economic problems stem from the welfare state and the end of the gold standard.

Here is a (more gentle) reaction from the establishment Left:

The reaction, left and the right, was scathing. Jared Bernstein, former economic adviser to vice-president Joe Biden, gave one of the gentler liberal critiques. Mr Stockman, he said, was “about 11.8 per cent absolutely and totally on target” with his criticisms of crony capitalism. But the other 88.2 per cent was “a horrific screed, an ahistorical, dystopic, Hunger Games vision of America based on debt obsession and wilful ignorance of macroeconomics and the impact of market failure”.

Stockman had written an “horrific screed”, was a victim of a “debt obsession” and guilty of “wilful ignorance”.  The poor chap is near mentally unstable and deliberately ignorant.  Ad hominem near its worst.  So far, Stockman’s argument stands unscathed.

And here is a a reaction from the establishment Right:

The right was not much more impressed. David Frum, a speech writer for former president George W. Bush, called it “primitive” as economics, “silly” as advice, and diagnosed Mr Stockman with a mild case of elderly depression.  “As an insight into the gloomy mindset that overtakes us in older age, it’s a valuable warning to those still middle-aged that once we lose our faith in the future, it’s time to stop talking about politics in public,” he wrote.

Frum’s “argumentation” represents ad hominem close to its worst: condescending drivel.  But on those who are alert, the irony will not be lost.  These utterances come forth at a time when Europe and the UK is reeling. punch drunk from exorbitant debt.  But the mindset of the Washington establishment is that such calamities would never happen in America. This is American Exceptionalism at its highest and most stupid.  The realities of ordinary mortals and nations do not apply to us.  We are too big, too wonderful, too exceptional to be thus snookered.

The die is cast.   

Letter From America (About Capitalism, Part III)

State-Wrecked: The Corruption of Capitalism in America–Part III

 By DAVID A. STOCKMAN
New York Times

Published: March 30, 2013

. . . While the Fed fiddles, Congress burns. Self-titled fiscal hawks like Paul D. Ryan, the chairman of the House Budget Committee, are terrified of telling the truth: that the 10-year deficit is actually $15 trillion to $20 trillion, far larger than the Congressional Budget Office’s estimate of $7 trillion. Its latest forecast, which imagines 16.4 million new jobs in the next decade, compared with only 2.5 million in the last 10 years, is only one of the more extreme examples of Washington’s delusions.

Even a supposedly “bold” measure — linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index — would save just $200 billion over a decade, amounting to hardly 1 percent of the problem. Mr. Ryan’s latest budget shamelessly gives Social Security and Medicare a 10-year pass, notwithstanding that a fair portion of their nearly $19 trillion cost over that decade would go to the affluent elderly. At the same time, his proposal for draconian 30 percent cuts over a decade on the $7 trillion safety net — Medicaid, food stamps and the earned-income tax credit — is another front in the G.O.P.’s war against the 99 percent. 

Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion, will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today.

Since our constitutional stasis rules out any prospect of a “grand bargain,” the nation’s fiscal collapse will play out incrementally, like a Greek/Cypriot tragedy, in carefully choreographed crises over debt ceilings, continuing resolutions and temporary budgetary patches.

The future is bleak. The greatest construction boom in recorded history — China’s money dump on infrastructure over the last 15 years — is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too. 

THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown “seems likely to be contained.” Instead of moderation, what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation. 

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net. 

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending. 

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms. 

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism. 

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is. 

David A. Stockman is a former Republican congressman from Michigan, President Ronald Reagan’s budget director from 1981 to 1985 and the author, most recently, of “The Great Deformation: The Corruption of Capitalism in America.”

Letter From America (About Capitalism, Part II)

State-Wrecked: The Corruption of Capitalism in America–Part II

 By DAVID A. STOCKMAN
New York Times

Published: March 30, 2013

The culprits (of the coming collapse of capitalism) are bipartisan, though you’d never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry. 

Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed. 

Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar.

That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman’s penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the “Greenspan put” — the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash — was reinforced by the Fed’s unforgivable 1998 bailout of the hedge fund Long-Term Capital Management. 

That Mr. Greenspan’s loose monetary policies didn’t set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia. By offshoring America’s tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspan’s pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust. 

Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They — China and Japan above all — accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve been living on borrowed time — and spending Asians’ borrowed dimes. 

This dynamic reinforced the Reaganite shibboleth that “deficits don’t matter” and the fact that nearly $5 trillion of the nation’s $12 trillion in “publicly held” debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy. 

The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable “hot money” soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history. 

There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding. 

Instead, the White House, Congress and the Fed, under Mr. Bush and then President Obama, made a series of desperate, reckless maneuvers that were not only unnecessary but ruinous. The auto bailouts, for example, simply shifted jobs around — particularly to the aging, electorally vital Rust Belt — rather than saving them. The “green energy” component of Mr. Obama’s stimulus was mainly a nearly $1 billion giveaway to crony capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent. 

Less than 5 percent of the $800 billion Obama stimulus went to the truly needy for food stamps, earned-income tax credits and other forms of poverty relief. The preponderant share ended up in money dumps to state and local governments, pork-barrel infrastructure projects, business tax loopholes and indiscriminate middle-class tax cuts. The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster. 

But even Mr. Obama’s hopelessly glib policies could not match the audacity of the Fed, which dropped interest rates to zero and then digitally printed new money at the astounding rate of $600 million per hour. Fast-money speculators have been “purchasing” giant piles of Treasury debt and mortgage-backed securities, almost entirely by using short-term overnight money borrowed at essentially zero cost, thanks to the Fed. Uncle Ben has lined their pockets. 

If and when the Fed — which now promises to get unemployment below 6.5 percent as long as inflation doesn’t exceed 2.5 percent — even hints at shrinking its balance sheet, it will elicit a tidal wave of sell orders, because even a modest drop in bond prices would destroy the arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about eventually, gradually making a smooth exit, the Fed is domiciled in a monetary prison of its own making. . . .

(In Part III, Mr Stockman reviews the most recent developments and what we can expect over the next five to ten years.)

 

Letter From the UK (To British Expats in Europe)

Ukip urges Brits to withdraw their money from Spanish banks

Nigel Farage has urged British expatriates in Spain to pull their money out of the country’s banks. 

By Robert Watts, Deputy Political Editor

4:57PM GMT 23 Mar 201
The Telegraph

The UK Independence Party leader said that the European Union had “crossed a line” by trying to extract funds from savers under the terms of the abandoned Cypriot bail-out.Mr Farage said: “Even I didn’t think that they would stoop to actually stealing money from people’s bank accounts.

“There is going to be a big flight of money and that flight of money won’t just be from Cyprus, it will be from the other eurozone countries, too. There are 750,000 British people who own properties, or who live, many of them in retirement, down in Spain.  Now that we see the EU are prepared to resort to anything to keep alive their failing euro project, our advice to expats living down in the Mediterranean must be, ‘Get your money out of there while you’ve still got a chance’.”

Mr Farage urged George Osborne, the Chancellor, to rule out any such levy on British savers.

In a wide-ranging speech yesterday, Mr Farage also said that no immigrant should be able to claim benefits until they have lived, obeyed the law, worked and paid taxes in the UK for five years.He also said that Ukip would not form a pact with the Conservative Party under Mr Cameron’s leadership.

Mr Farage added that his party was drawing in support from all voters, not just Conservative supporters.
“Please don’t just think that it is just tired Conservatives that are coming to Ukip,” he said.  Ukip has enjoyed a surge in popularity after coming second in the Eastleigh by-election ahead of the Conservative Party.

He admitted that some of the party’s new voters were eager to “stick two fingers up to the establishment”. But he added that a vote for Ukip is “far more powerful than a protest vote”.  Mr Farage insisted his party could win votes from across the political spectrum as their success in Eastleigh had been about more than protest votes. He added there has been a “wholesale rejection of the career political class”.

Douglas Wilson’s Letter From America

Amen to the Seventeenth Power 

Money, Love, Desire – Wealth and the Christian
Written by Douglas Wilson
Monday, 18 March 2013

We have gotten to the point where raw power has become the foundational principle of governance — the ruling class does whatever they can get away with, which is quite a bit. A picture of a monster stack of all the Obamacare regulations was recently circulating on the Internet, and I think it was Jonah Goldberg who made the observation that such rule is indistinguishable from lawlessness. I have trouble expressing my level of agreement here, but I think it would be something like amen to the seventeenth power.

Then the Cyprus debacle happened. The European Union demanded that bank accounts in Cyprus take “a haircut” in exchange for the next bailout, though they are now signaling “flexibility” on the issue because their stealing appeared to be stealing to too many people. We shall see what happens. I suspect that flexibility simply means slippery. Now bank accounts used to be private property, pure and simple, but not any more — whatever happens.

And you probably don’t need to be reminded that the money that was going to be used to bail out Cyprus was money that was stolen from somebody else, oh, weeks ago, and so we will not let that detain us. So the Cypriots wanted this bailout, see, paid for by some German sap or other, and they had a bunch of plump bank accounts of their own just sitting there. What did you expect?

When you attempt to govern a society of thieves with an elite corps of thieves trying to manage the whole affair, sooner or later a fight is going to break out over the swag. We are probably past the point of no return, and Europe most certainly is.

And so what we are seeing are the finishing touches being put on all the preconditions of a robust underground economy. There are two elements of this that should concern us — the first is the establishment of the economic incentives for a strong underground economy, and the second is for the lawlessness of the ruling class to become so apparent that even evangelical Christians start to participate in that underground economy, with Romans 13 remaining in their Bibles.

By underground economy, I mean things like undeclared income mysteriously not showing up on tax forms, paying contractors in cash, barter systems developing, and so forth. With the new Obamatax registering in paychecks over the last few months, look for the expected revenues to (unexpectedly) drop. It may take a little bit for the adjustments to be made, but they most assuredly will be made. It used to be that it was only to the advantage of a recipient to be paid under the table, with a much higher risk being taken by the one who paid him. But now it can easily be to the clear advantage of the one who pays him as well. It used to be that a business owner would put his whole business at risk if he made illegal payments. But now his business is at a much greater risk if he doesn’t. Under such circumstances, what could possibly happen? Put on your thinking caps, children.

Someone might say that this will be countered by robust law enforcement, with IRS agents fanning out over the country, auditing as they go. But in the new order auditing will be for political enemies and for settling scores, not for those who simply break the law.

This is because when a nation descends into Third World levels of corruption, it descends all the way into that kind of corruption. The society grows into a new shape, one that needs the corruption in order to survive. The rulers who make this nickel and that dime illegal know that they need large numbers of people to disregard them in order for them even to survive. But because their public discourse is now so riddled with envy, they cannot afford to say so. So they denounce the wealthy as a sop to their public constituency, and they wink at those running the illegal economy — the one that is keeping them all afloat.

And so it was that Hugo Chavez, champion of the downtrodden, died with two billion dollars in his pockets. That was quite a surprise for the nurse who had to go through his things. What a shock. No idea.

Leviathan Stirs

Tithing in the West

There is no such thing as private property  in the West any longer.  Not really.  There is only property given to you by society for a time, which may be expropriated at will now, or some time in the future.  In the secular Marxian west the State is the fundamental owner, the real owner of everything.  All private property, so called, is only owned in a form of leasehold, via the condescension of the State. 

Of course it has to be this way.  The reason the state’s power to expropriate, seize, and control the property of its citizens is that it has replaced God Himself.  In the biblical world-view, only God is the ultimate owner of all property.  He is the creator and sustainer of everything.  The cattle on a thousand hills belong to Him.  Men only possess property as a leaseholder in God’s estate.  But–and here is the point–what God has granted to a man, his family, a business corporation, or to a charitable trust let no man (or government) expropriate or steal.  The wrath of the eternal, ultimate Owner will be kindled.  In the Christian worldview, then, private property rights are sacred and real.  What God has granted, let not another man or human institution expropriate.

But when a society comes to believe that God to be a figment of ignorant superstition no such constraints exist upon the state.  Consequently, the state has reached out to take what it regards as its own–all property–when it has a need for it.  The protections against an overreaching, thieving state exist in most Western countries, but they are plastic and pliable, provided the “emergency” be real enough.      

This is what the people of Cyprus have just found out.  That country is in financial trouble–it has caught a very bad case of the European disease.  To keep going, having run out of its own money, the government of Cyprus needs to plunder the treasuries of other European countries.  But, as always, the borrower becomes enslaved to the lender–in this case the EU in general and Germany in particular.  They are prepared to stump up with the money, but have demanded a 10 percent money grab upon all private Cypriot bank accounts.  This, from Reuters:

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of their deposits in return for a 10 billion euro ($13 billion) bailout for the island, which has been financially crippled by its exposure to neighboring Greece.  The decision, announced on Saturday morning, stunned Cypriots and caused a run on cash points, most of which were depleted within hours. Electronic transfers were stopped.

The nation of Cyprus, deeply in debt due to national folly, speculation, waste, fraud, graft, and corruption has finally run out of money.  Like all socialist countries its next move is to look for a bigger fool to borrow from.  As a result, Cypriots woke up one morning to find that their government had agreed in principle to a forced expropriation of 10 percent of the assets in all private bank accounts. 

When governments start going into debt to fund the demands of socialized programmes spending other people’s money on health, education, welfare and endless social programmes, calamity lurks around the corner.  Eventually, the money will run out.  The people will suffer massive losses, whether through forced expropriation of their property (as in Cyprus) or in some other way, such as the collapse of jobs, businesses, and government services.  The ownership prerogatives of government trump and override all else.  Government is the new deity–the secular Unbelief’s version of religion.  Its demands and appetites are relentless.  You and all you possess exist only at its pleasure. 

Welcome to the West’s modern version of Leviathan. 

A New Kind of American Exceptionalism

Money, Debt, and Borrowing Can Be Infinite

History has presented us with numerous gadflies, but few so spooky as Nero who played his fiddle while Rome burned in a great conflagration.  Presumably he was amused and entertained by the spectacle of such destruction.

But when it comes to spooky “gadflyness” the recent, sage pronouncements of New York Mayor Bloomberg rival Nero’s inanity.  Whatever other inadequacies Mayor Bloomberg might labour under, profound ignorance of the history of human civilisation must rank right up there.  Assuming the media report is accurate, it is hard to credit such folly to the man.

In the first place Mayor Bloomberg was attempting to assuage the fear of an impending collapse due to the US government cutting back on some government spending.  Apocalyptic fears had to be calmed.  Enter Mayor Bloomberg:

At midnight tonight, a bevy of steep spending cuts will hit the federal government unless Congress and the White House agree to an alternative deficit-cutting proposal. Although the national media has been relentlessly focused on this deadline, Mayor Michael Bloomberg said it will only affect New York City if the so-called “sequestration” continues for a significant length of time.

“It depends on how long,” Mr. Bloomberg said on his weekly WOR radio show with John Gambling. “If it lasts a few weeks, no. If it does, yeah. We get 10 or 12 percent of our budget from the federal government, not all of that is going to be cut back, but there would be effects–not good effects. But in the context of, ‘Is anything going to change tomorrow? Are we going to run out of money tomorrow?’ I’m sure I’ll get that question at the [next] press conference. No.”

OK, no need to panic.  At least not immediately.  Thanks, Mayor.  Great to know that you are standing proudly at the helm of the great ship of state, not out on the veranda fiddling with glee.

Or maybe he is.  Bloomberg went on to cast more of his oleaginous balm on troubled waters.  The huge US fiscal deficit was no problem.  Not really.  Why?  Because the supply of other people’s money was infinite and the US government could owe an infinite amount of money.  

. . . .  Mr. Bloomberg argued the United States could owe “an infinite amount of money” and there is no specific amount that would cause the country to default.

Really.  So a hundred trillion dollar debt would not bring the country to ruin.  No.  Not at all.  Other nations would continue to lend us money forever, with no limitation, infinitely. Try that argument with your local bank.

Oh, but that’s not a fair comparison.  National accounts are different from household accounts, the Sage of New York gravely informs us.

“We are spending money we don’t have,” Mr. Bloomberg explained. “It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money.”

Why, according to this gadfly, would people, corporations, and other nations continue to lend money to the United States, forever without limitation?

… Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.”

Mmmm.  Did that argument work for Greece, Spain, Italy, Ireland?  Oh, but we are different, Mayor Bloomberg intones.  We are the wonderful, big, most-wonderful-nation-on-earth United States.  We are as big and important as Rome, back in the day.  Our debts can mount up without limit because the lenders have no option but to continue to lend.  It’s all a merry party.  Let’s all  go play our violins.

We suspect Mayor Bloomberg knows that he has just mouthed a barrow full of old cobblers.  Anything to keep the people calm.  But if he really believes such tosh he must be one of the gaddiest gadflies on the planet.  Either way he makes spooky Nero look like an amateur. 

Let us never forget: in a democracy the people deserve such foolish leaders.  They were stupid enough to put them there in the first place. 

Letter From America (On The Real State of the Union)

The Broke, Retreating State of Our Union 

The Editors February 13, 2013
NATIONAL REVIEW ONLINE    

. . . . In reality, the state of our union is this: The United States is today $6 trillion deeper in debt than it was before Barack Obama was first sworn in as president. That represents an increase of 57 percent in just four years. Put another way: Out of every dollar the country owes in government debt, 36 cents was acquired under the Obama administration.

The state of our union is this: Today there are more than 4 million fewer Americans working than there were when Barack Obama was first sworn in as president — not including those who have retired. The work-force-participation rate is at a historic low. Never before have so many Americans simply abandoned the hope of a job.

The state of our union is this: Economic growth is weaker than it has been during any recovery in recent memory; in fact, the economy shrank in the last quarter. Those figures may be revised, but in any case growth is so weak that the difference between what President Obama calls a recovery and what economists fear is the beginning of a new recession is within the margin of measurement error.

The state of our union is this: Incomes are lower today than they were when Barack Obama was first sworn in as president. True, he became president during a recession, and incomes dropped 2.6 percent during the recession. Since the end of the recession, they have dropped another 4.8 percent — which is to say, incomes have fallen almost twice as fast during President Obama’s so-called recovery than they fell during what he (inaccurately) called “the worst economic crisis since the Great Depression.”

How strange, then, that the president declared during his annual address: “A growing economy that creates good, middle-class jobs — that must be the North Star that guides our efforts. Every day, we should ask ourselves three questions as a nation: How do we attract more jobs to our shores? How do we equip our people with the skills needed to do those jobs? And how do we make sure that hard work leads to a decent living?” That is a remarkably brass-faced assertion for a president whose policies have neither achieved strong growth nor attracted more jobs to our shores nor improved the ability of workers to secure high-skilled jobs nor strengthened the relationship between hard work and a decent living. Barack Obama is incapable of grappling with his own record.

He further promised that his policies would not add “a single dime” to the national debt when he already has added some 60 trillion dimes to it, and while the Congressional Budget Office estimates that the president’s 2013 spending blueprint would add another 64 trillion dimes to the deficit in the coming years. That on top of the tax increases he already has demanded and secured.

But there is more to the state of our union than the feeble state of our economy. The president boasted that a decade of war is coming to an end. It is, and a new decade of war is beginning. He boasted that al-Qaeda is decimated, but that news has not reached Bengazi or most of North Africa. So the state of our union also is this: North Korea sets off nuclear weapons with impunity. Iran seeks them without fear. Islamists slaughter our diplomatic personnel while the president’s national-defense team keeps bankers’ hours. Our allies are unsure, our enemies are emboldened. Our troops may be coming home, but it is not clear that we have secured the objectives for which we dispatched them. It is even less clear that President Obama has any intention of doing so.

The president’s confrontational, hectoring, and highly ideological speech ought to be a wake-up call to the country. The Republican majority in the House is the only real check on his power. Supplementing that check with a Republican majority in the Senate is imperative. Even through all of President Obama’s obfuscations, that much is clear.