Monthly Archives: December 2009

Will Sovereign Debt Defaults Bring the End of Socialism? by James Turk

From James Turk:

Will Sovereign Debt Defaults Bring the End of Socialism?

December 19, 2009 – Socialism has come to mean many different things to many people, but regardless how it is defined, in the months immediately ahead it will be put to a rigorous test.  The test will be visible to everyone as countries around the globe run out of money and confront overwhelming debts that cannot be repaid as well as other wide-ranging financial promises that can no longer be met.  In short, the ideological bankruptcy of socialism will be laid bare by government insolvency.

It had to come sooner or later.  The reasons are not hard to understand.

The ideological bankruptcy is neatly captured by British author and advocate for individual rights, Cecil Palmer: “Socialism is workable only in heaven where it isn’t needed, and in hell where they’ve got it”.  And government insolvency is explained by famed economist Frederic Bastiat, who made this levelheaded observation nearly 150 years ago about the nascent modern socialism then emerging.  “The State is that great fiction by which everyone tries to live at the expense of everyone else.”  More recently, Margaret Thatcher, being a sensible politician, put it pragmatically: “The problem with socialism is that you eventually run out of other people’s money.”

Take Greece for example.  This past week yields on its 10-year bonds surged in the wake of downgrades by the bond rating agencies, which finally recognized that Greece does not have the financial resources needed to repay its debts, which now stand near junk levels.  Not far behind are Latvia, Spain, Ireland, the United Kingdom and almost every other country in Europe, even though they may still flog paper rated as “investment grade.”  The reality is that the rating agencies just have not yet come to grips with the breadth and depth of widespread government insolvency, or have willingly turned a blind-eye to it.  And don’t forget Iceland which of course has already collapsed.

How did we sink to this state of affairs?  Nobel Laureate Friedrich von Hayek provides the answer in his brilliantly insightful and prescient book, The Road to Serfdom, penned during the waning years of the Second World War.

Hayek’s central theme is that wars expand the power of the modern state because the national planning to fight the war continues even during times of peace.  This perennial government planning then expands the social-welfare state over time, with harmful results.  Most importantly, economic activity is impeded by the growing state as people and resources become less productive.  In other words, because the government does not create consumable goods and services, it is an economic burden to the productive sector of the economy.

Then as the government grows, interest groups become increasingly numerous and powerful, leading to political corruption.  More wars or even foreign policy tensions and economic crises can propel demagogues and dictatorial leaders to expand further state powers to the detriment of each and every one of us.  In Hayek’s words: “Emergencies have always been the pretext on which the safeguards of individual liberty have eroded.”

Hayek noted that the subtle damage inflicted upon the productive economy and the visible growth of the state arising from socialism become evident only over time. We have now reached that stage.

More people depend on the state than those who provide it with the money the state needs to meet its promises.  Most of Europe long ago passed the 50% threshold with more people depending on government than the private sector, but even in the United States – long reigning as the bastion of capitalism, free-markets and limited government – 58% of the population derives their income from government at some level.

Consequently, we are now approaching a fork in the road.  One way leads to more socialism, more demagogues and eventually a dictator who promises that he will make socialism ‘work’.  The other leads to the capitalist society that America used to be, with free-markets, limited government and the unconditional rule of law.

Hopefully, we will choose correctly.  If we don’t, we know from Winston Churchill what awaits us: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”


Hyperinflation Watch – James Turk

From James Turk:

Hyperinflation Watch

By James Turk

Free Gold Money Report

December 23, 2009 – Contrary to common belief, hyperinflation does not arise from too much bank lending. The sole cause of hyperinflation is always too much government spending. The pattern is as follows.

The government spends more money than it is receiving in taxes, which forces it to borrow. As these deficits grow, they eventually exceed the market’s capacity or willingness to lend money to the government. Invariably, the central bank steps in and provides the government with the money it needs by creating it – as the saying goes – ‘out of thin air’, or what governments today call “quantitative easing”. The central bank does this in either of two ways.

In cash currency economies, where most commerce is completed by making payments with paper-currency, the central bank cranks up the printing press. Examples are the Weimar Germany hyperinflation in the early 1920s, and just recently, Zimbabwe.

In deposit-currency economies, where most commerce is conducted by making payments through the banking system with checks, wire transfers, plastic cards, and the like, the central bank uses electronic bookkeeping made possible through computers to put the newly created money directly into the government’s checking account. There are numerous examples of deposit-currency hyperinflation in the monetary history of Latin America, like the one that devastated Argentina in 1991.

These two different ways in which hyperinflation manifests itself are made clear in the following quote by Ben Bernanke before he was appointed chairman of the Federal Reserve: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

There is of course a cost. There may not be one to the US government, but instead, the cost will be borne by everyone who holds dollars and loses purchasing power as a result of Mr. Bernanke creating as many dollars as the government wants to spend. The other word for this cost is inflation.

With this background, the US government’s financial position makes clear that it is heading toward an Argentine-style deposit currency hyperinflation. The first two months of the US government’s current fiscal year have resulted in a record $296.7 billion deficit. During this period, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt. These purchases clearly show the Fed’s policy of “quantitative easing”.

The following chart illustrates that the difference between the US government’s monthly receipts and expenditures remains at record highs in November.

Unless this gap between receipts and expenditures is closed, there will be hyperinflation. Policymakers seem to believe that they can close this gap by jumpstarting the moribund US economy, so that government receipts can again begin to grow and eventually catch-up to, and perhaps exceed expenditures. But they are pursuing a dangerous path because the rising expenditures by the federal government are increasing its debt, causing more quantitative easing by the Federal Reserve, which in effect is pouring more fuel on the potential hyperinflationary fire.

Much has been made of the huge bank excess reserves “sitting idle” at the Fed. It has been said that hyperinflation is not possible when the banks are sitting on such huge reserves, instead of lending them into the economy. This thinking is flawed because it ignores that there are two sides to the Federal Reserve’s balance sheet. Those reserves are not just sitting there, as if they were in a vacuum. These reserves have funded the Fed’s purchase of US government debt, putting it and the US dollar on the road to hyperinflation.

2010 could get ugly

From ZeroHedge:

Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold… Or Else
By: Tyler Durden   Saturday, December 26, 2009 12:52 PM

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our ‘intellectual superiors’ and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 – the biggest ever bonus season (forget record bonuses in 2010… in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) – the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math… And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to “drain duration” from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.


No one owes you anything

A Harry Browne classic:

A Gift for My Daughter
by Harry Browne

December 25, 1966

I hope so, for I want more than anything else for you to understand this simple truth that can set you free: no one owes you anything.

(This article was originally published as a syndicated newspaper column, dedicated to my 9-year-old daughter.)

It’s Christmas and I have the usual problem of deciding what to give you. I know you might enjoy many things books, games, clothes.

But I’m very selfish. I want to give you something that will stay with you for more than a few months or years. I want to give you a gift that might remind you of me every Christmas.

If I could give you just one thing, I’d want it to be a simple truth that took me many years to learn. If you learn it now, it may enrich your life in hundreds of ways. And it may prevent you from facing many problems that have hurt people who have never learned it.

The truth is simply this:

No one owes you anything.


How could such a simple statement be important? It may not seem so, but understanding it can bless your entire life.

No one owes you anything.

It means that no one else is living for you, my child. Because no one is you. Each person is living for himself; his own happiness is all he can ever personally feel.

When you realize that no one owes you happiness or anything else, you’ll be freed from expecting what isn’t likely to be.

It means no one has to love you. If someone loves you, it’s because there’s something special about you that gives him happiness. Find out what that something special is and try to make it stronger in you, so that you’ll be loved even more.

When people do things for you, it’s because they want to because you, in some way, give them something meaningful that makes them want to please you, not because anyone owes you anything.

No one has to like you. If your friends want to be with you, it’s not out of duty. Find out what makes others happy so they’ll want to be near you.

No one has to respect you. Some people may even be unkind to you. But once you realize that people don’t have to be good to you, and may not be good to you, you’ll learn to avoid those who would harm you. For you don’t owe them anything either.

Living your Life

No one owes you anything.

You owe it to yourself to be the best person possible. Because if you are, others will want to be with you, want to provide you with the things you want in exchange for what you’re giving to them.

Some people will choose not to be with you for reasons that have nothing to do with you. When that happens, look elsewhere for the relationships you want. Don’t make someone else’s problem your problem.

Once you learn that you must earn the love and respect of others, you’ll never expect the impossible and you won’t be disappointed. Others don’t have to share their property with you, nor their feelings or thoughts.

If they do, it’s because you’ve earned these things. And you have every reason to be proud of the love you receive, your friends’ respect, the property you’ve earned. But don’t ever take them for granted. If you do, you could lose them. They’re not yours by right; you must always earn them.

My Experience

A great burden was lifted from my shoulders the day I realized that no one owes me anything. For so long as I’d thought there were things I was entitled to, I’d been wearing myself out physically and emotionally trying to collect them.

No one owes me moral conduct, respect, friendship, love, courtesy, or intelligence. And once I recognized that, all my relationships became far more satisfying. I’ve focused on being with people who want to do the things I want them to do.

That understanding has served me well with friends, business associates, lovers, sales prospects, and strangers. It constantly reminds me that I can get what I want only if I can enter the other person’s world. I must try to understand how he thinks, what he believes to be important, what he wants. Only then can I appeal to someone in ways that will bring me what I want.

And only then can I tell whether I really want to be involved with someone. And I can save the important relationships for those with whom I have the most in common.

It’s not easy to sum up in a few words what has taken me years to learn. But maybe if you re-read this gift each Christmas, the meaning will become a little clearer every year.

The Recession is over – pass it on

The Command Economy

From Whiskey and Gunpowder:

The Command Economy
Dec 23rd, 2009 | By Charles Goyette |

America is transforming itself, without forethought, debate, or pause, into a command economy. A command economy is a top-down, state-controlled economy directed by planners and bureaucrats, boards and bodies, administrators and authorities. A command economy is not characterized by mutuality of interest and agreement between parties. It relies on edict. A command economy, as the name implies, orders the affairs of a nation by coercion. In a free economy goods and services are bought and sold by consent; business transactions are based on agreement; contracts depend upon a meeting of the minds of the parties involved. In a command economy government sets prices, controls and directs resources, and oversees production and consumption. Free economies produce prosperity; command economies produce poverty. The transformation of America is already taking place at breakneck speed, even before the current economic crisis is full blown. Historical precedents insist that as conditions worsen, the transformation into a command economy will accelerate.

It is astonishing that this should be taking place, especially at a time in which three billion people around the globe have rejected the poverty, want and shortages of their command economies to begin the experience and blessings of abundance. It is not as though object lessons are wanting. China’s stunning economic growth, its modernization and rising living standards are the result of nothing more complicated than freeing the command economy. Although lessons abound, Americans are choosing—or perhaps failing to choose and therefore letting the choice be made for them—to go in much the same direction as the command economy of postwar Great Britain. That period saw the nationalization of entire sectors of the British economy, a currency crisis and prolonged economic decline including crippling unemployment and choking inflation. The reasons that the United States would choose to follow a pattern that hollows out economies the way it did the British are many. But as a symptom, although not a cause of this self-inflicted harm, look to the modern American politician. For today’s breed of politician, power is their very passion. Their every concern and the entire public debate about politicians centers around the use of power. How may power best be exploited and aggrandized? Who is to be bailed out, who is to be plundered to pay for it? Who is to be subsidized, who penalized? Who shall be taxed and who shall be paid? In contrast, the founders looked upon power very differently: How can it be kept in check? In yielding to the former and to their command economy, the current generation of Americans, blessed with so much, will be the shame of the ages.

Anyone believing the evidence for the looming command economy is being overstated need look no further than the speed at which American finance has been nationalized in the current crisis. Legislators voted an initial $700 billion bailout package, but in no time the taxpayers ended up with more than eighteen times that, $12.8 trillion in loans, spending, and guarantees. And to make clear who is really in charge, the giveaways are accompanies by a refusal of the authorities to disclose who is getting what and what kind of collateral, if any, is being given. The trend was dramatically illustrated in October 2008. In a development that played out like a scene from The Godfather, the CEOs of the nine largest banks in America, dealmakers and negotiators in their right, were ushered into a room at the Treasury Department in Washington and handed a one-page document agreeing to sell preferred shares to the government. They were told by Henry Paulson, according to the New York Times account, that they must sign it before leaving. The chairman of Wells Fargo protested that his institution didn’t have problems with toxic mortgages and didn’t need a bailout. Too bad. “It was a take it or take it offer,” said one insider. An online writer for The Wall Street Journal favorably likened Paulson’s commandeering of the banks to Reagan at the Berlin Wall. “History often carries an air of inevitability,” he gushed.

If there is inevitability to America’s becoming a command economy, it is a sorrowful day for human freedom. The Central Plan of the command economy is incompatible with dissent, disagreement, individual preferences, and your own plan, whatever it may be. If the Central Plan is to prevent foreclosures on homeowners who can’t pay, then the plans of individuals whose resources will be used to prevent those foreclosures must give way. If your individual plan and the Central Plan are in conflict, you will have to give up your plan. As we have noted, a free economy rests on agreement, but a command economy is constructed of coercion. One of the reasons (among many to which I refer in my book The Dollar Meltdown) that a command economy produces poverty has to do with the diversion of productive human effort. In a free economy people provide services that are sought by others and they are rewarded for doing so. Each individual’s own wants and needs are met to the extent he finds ways to serve others. But in a command economy enormous amounts of human effort are expended in attempts to influence or control the Central Plan. This activity produces no new wealth. It only seeks to divide what wealth already exists.

The command economy is not the exclusive province of either the left or the right, Republican or Democrat, Communist or Fascist, Stalinist or Nazi, Pol Pot, Mao, Chávez, or Ahmadinejad. It is what they all have in common. Just as war is the health of the state, economic turbulence is the state’s opportunity for self-advancement. As the unseen and destructive consequences of each new command and initiative unfold, new plans are created and commands issued to undo the latest harm. In the current sequence, the Fed used its monetary monopoly to create artificial credit conditions; the cheap money fueled a housing boom, which, like all bubbles, popped; the monetary and fiscal authorities rushed in to bail out the banks; the only means they have of bailing out the banks is to borrow or print more money.

Charles Goyette

December 23, 2009

The Something for Nothing Personality – by Ty Andros

(Disclaimer:  Mr. Andros offers a commercial service and our link to his post is not to be construed as an endorsement.   He is an excellent social commentator with a distinct Austrian Economic viewpoint and we find his postings valuable.)

Click to read:

The Something for Nothing Personality
by Ty Andros