Bank of England Halts QE for Now

From Bloomberg

Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that’s succumbed to a double-dip recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King today held its quantitative easing target at 325 billion pounds ($524 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 percent. The pound erased its decline against the dollar.

With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Today’s decision signals price-growth worries are mounting even as the U.K. struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.

The double dip recession serves as evidence that the Bank of England’s (BoE) quantitative easing (QE) measures has failed to meet the goal of “stimulating” the economy.

Worst, the aftereffect has been a significant loss of purchasing power for the average Briton.

True, statistical consumer price inflation (CPI) has been lower compared to last year, but remains elevated relative to the 2009-10, as well as the average inflation rate from 1989 until 2010 of 2.72% [according to tradingeconomics.com, the source of most of the charts on this post].

So the recessionary environment along with elevated inflation rates…

…plus high unemployment rates represents an accrued symptom which characterized the 1970-1980s economic landscape known as stagflation (Wikipedia.org). In short, UK has been suffering from benign stagflation.

Also, since this BoE policy has been widely anticipated by the consensus, it does appear that today’s policy decision may have partly influenced the present weaknesses seen in the global commodity markets, as well as, in the world stock markets.

Of course, I have my doubts on the current stance of the BoE. I don’t think that they have totally abandoned the inflationist doctrine. I think that this has been more of a temporary lull.

That’s because if UK’s finance markets should endure more downside volatility, then this would have an adverse transmission effect to the balance sheets of UK’s banking system.

As this study from the BoE shows, since the introduction of the QE, prices of bonds and equity (via the FTSE all share) had been energized or the QE has provided pivotal support to their asset markets.

Yet BoE’s QEs have only added to the general indebtedness of the UK’s economy.

And like the Euro counterparts there has been no genuine “austerity” in the UK.

So unless there will be greater savings from the average British to finance government borrowing or foreign buyers step up the plate, then the BoE will have their hands full in trying to smooth out the management of government debt and the balance sheets of UK’s banking system overtime. Oh, essentially the same dilemma haunts the US and the Eurozone.

Quote of the Day: A Foolish Thing is a Foolish Thing

The following quote seems profoundly relevant especially to politics and media, and has likewise noticeable influence on the financial markets or even in social networking media such as Facebook.

If fifty* million people say a foolish thing, it is still a foolish thing.

That’s from Anatole France, French author and winner of the Nobel Prize in Literature (1921), as quoted in Listening and Speaking : A Guide to Effective Oral Communication (1954) by Ralph G. Nichols and Thomas R. Lewis, p. 74 (Wikiquote.org)

*the common attribution has been “If a million people”…

Video: How America Chooses the President (Electoral College System)

The Economist has a video explaining how Americans elect their President.

Here is the intro

THE electoral college is a relic of the 18th century that gives disproportionate weight to voters in smaller states and focuses attention on a dozen "swing" ones. Our videographic, below, explains more.

Ron Paul: Federal Reserve System is the Epitome of Crony Capitalism

Here is the gist of US congressman Ron Paul’s courageous talk before the Committee on Financial Services, Subcommittee on Domestic Monetary Policy & Technology, United States House of Representatives, May 8, 2012 (From Lew Rockwell)

Much confusion exists over what the Federal Reserve System actually is. Some people claim that is a secret cabal of elite bankers, while others claim that it is part of the federal government. In reality it is a bit of both. The Federal Reserve Board is a government agency, while the Federal Reserve Banks are privately-run government-chartered institutions, and monetary policy decisions are made by the Federal Open Market Committee, which has members from both the Board and the Reserve Banks.

The Federal Reserve System is the epitome of crony capitalism. It exemplifies the collusion between big government and big business to profit at the expense of the taxpayers. The Fed's bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them an advantage that no other business in the United States would have received. The bailouts continue today, as banks maintain $1.5 trillion worth of excess reserves at the Fed, reserves which were created through the Fed's purchase of worthless securities from banks. The trillions of dollars that the Fed has injected into the system have the goal of forcing down interest rates. But the Fed fails to realize that interest rates are a price, the price of money and credit, and that forcing interest rates down will only create an even bigger bubble and an enormous economic depression when this entire house of cards comes falling down.

The Federal Reserve is statutorily required to focus on three aims when engaged in monetary policy: full employment, stables prices, and moderate long-term interest rates. In practice, only the first two have received any attention, the so-called "dual mandate." Some reformers have called for the full employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices. But these critics ignore the fact that stable prices are not a desirable goal. After all, with increasing productivity and technological innovation, the natural trend for most goods is for prices to decrease. By calling for the prices of goods to remain stable, the Fed would have to inflate the money supply in order to counteract this trend towards price declines, pumping new money into the system and creating economic distortions. This is exactly what happened during the 1920s, as the Fed's monetary pumping was masked by rising productivity. The result was stable prices, but the malinvestment caused by the Fed's loose monetary policy became evident by 1929. There is no reason to expect that focusing on stable prices today would have a dissimilar outcome.

Other reformers have called for changes to the composition of the Federal Open Market Committee, the body which sets the Fed's monetary policy objectives. On Constitutional grounds, the FOMC is undoubtedly problematic, as government appointees and the heads of the private Federal Reserve Banks work together to set monetary policy objectives that directly impact the strength of the dollar. While all of the members of the FOMC ought to be confirmed by the Senate, debates about the size of the FOMC or whether Reserve Bank Presidents should make up a majority of the members or whether they should even serve at all are largely a sideshow. While the only dissent to monetary policy decisions in recent years has come from Reserve Bank Presidents, there is no reason to think that expanding the FOMC to include more Reserve Bank Presidents would lead to any greater dissent or to any substantive changes to the conduct of monetary policy.

Another proposal for reform is for outright nationalization of the Fed or its functions. No longer would the Fed create money; that function would be taken up by the Treasury, issuing as much money as it sees fit. No longer would the Treasury issue debt to cover fiscal deficits, it would just issue new money to cover budget shortfalls. If what the Fed does now is bad, allowing the Treasury to print and issue money at will would be even worse. These types of proposals hearken back to the days of the first greenbacks, which the U.S. government began issuing in 1863. A pure fiat paper currency, unbacked by silver or gold, the greenbacks were widely reviled. Only once the greenbacks were made redeemable in gold were they accepted by the American people. The current system of Federal Reserve Notes is even worse than the greenback era in that there is no hope that they will ever be redeemable for gold or silver. The only limiting factor is that the Federal Reserve System only creates new money when purchasing assets, normally debt securities. Allowing the federal government to print money without at least a nominal check on the amount issued would inevitably lead to a Weimar-like hyperinflation.

So what then is the solution? The Fed maintains that a paper standard can be adequately managed without causing malinvestment, inflation, or other economic distortions. If the Fed were omniscient and knew the wishes, desires, and future actions of all Americans, this might be possible. But the Fed cannot possibly aggregate or act on the information necessary to engage in monetary policy. The actions of hundreds of millions of individuals, all seeking to better their position in life, acting purposefully towards that aim, cannot possibly be compiled into aggregates or calculated through mathematical equations or econometric models. Neither a single person, nor the members and staff of the FOMC, nor millions of people with millions of computers working in a new Goskomtsen will ever be able to accumulate, analyze, and act upon the information required to create a centrally planned monetary system. Centrally planned fiat paper standards such as the one currently in place in this country are doomed to failure.

This brings us to the question of the gold standard. The era of the classical gold standard was undoubtedly one of the greatest eras in human history. For a period of several decades in the late 19^th century, largely uninterrupted by war, the West made enormous advances. Economic productivity increased, art and culture flourished, and living standards rose so that even the poorest citizens lived a life their forebears could have only dreamed of.

But the problem with the gold standard is that it was run by the government, which exercised a monopoly over monetary affairs. The temptation to suspend gold redemption, so often resorted to by governments throughout history, reared its head again with the outbreak of World War I. Once the tie to gold was severed and fiscal restraint thrown to the wind, undoing the damage would have required great fiscal austerity on the part of governments. Emancipated from the shackles of the gold standard, the Western world proceeded to set up a gold-exchange standard which lasted not even a decade before the easy money policies it enabled led to the Great Depression. While returning to the gold standard would certainly be far better than maintaining the current fiat paper system, as long as the government retains the power to go off gold we may end up repeating the same mistakes that occurred from 1934 to 1971 as the government went first off the gold coin standard and finally off the gold bullion exchange standard.

The only viable solution for monetary stability is to get government out of the money business permanently. The way to bring this about is through currency competition: allowing parallel currencies to circulate without any one currency receiving any special recognition or favor from the government. Fiat paper monetary standards throughout history have always collapsed due to their inflationary nature, and our current fiat paper standard will be no different. The Federal Reserve is currently sowing the seeds of its own destruction through its loose and reckless monetary policy. The day of reckoning may still be many years in the future, but given the lack of understanding on the part of the Federal Reserve's decision makers, it is quickly coming upon us.

Incidentally and ironically archrivals Ron Paul and Fed Chair Ben Bernanke had a face to face breakfast meeting the following day.

Here’s the Wall Street Journal Blog reporting on what transpired.

Still, Wednesday’s breakfast brought together two figures who publicly agree on very little. A longtime critic of paper currency and fan of the gold standard, Mr. Paul’s fiery Fed-bashing has enthused his campaign trail supporters, who often start rallies with loud chants of “end the Fed!”

Mr. Bernanke, meanwhile, dedicated a significant chunk of his first lecture at George Washington University in March to enumerating the flaws associated with a system in which the dollar is valued at a fixed price per unit of gold.

So did Wednesday’s meeting overturn any deep-set beliefs?

“He’s for the gold standard now,” joked Mr. Paul.

End the Fed. End Central Banking. End the politicization of money.

The Unraveling of Europe’s Wonderland

Dr. Ed Yardeni at his blog, has a superb and eloquent piece on the problems besetting the Eurozone which he calls as Europe’s wonderland (bold emphasis mine)

The Europeans have had the best governments money can buy. Their elected leaders have provided them with all sorts of wonderful social welfare benefits. Many Europeans are employed by their governments to provide those benefits to their needy fellow citizens. Those who cannot find a job, or are too depressed to look for one, are provided with extremely generous unemployment benefits. Retirement benefits are great, and early retirement is the norm. Life has been very good in Europe.

Of course, that all costs lots of money. That’s why income tax rates are so high in Europe. On top of those rates, Europeans pay significant value-added taxes on the goods and services they buy. Yet there has been an ever-widening gap between government spending and revenues. That’s partly because Europeans have responded to their exorbitant tax rates with widespread tax avoidance.

The spending of European governments has ranged between 40% and 60% of GDP for many years. The revenues collected by these governments have ranged between 30% and 50% of GDP. The resulting deficits have led to rapidly rising ratios of government debt to GDP.

Attempts to bring back some fiscal sanity, led by Germany’s Chancellor Angela Merkel, are now widely caricatured as fiscal “austerity.” In my opinion, the only way to fix Europe is to slash government spending, reduce tax rates, enforce tax collection, and deregulate labor markets. Instead, enraged European voters are rising up against austerity and voting for the status quo. They haven’t indicated who they expect will pay the bills. However, they must be counting on either the Germans to pick up the tab or the ECB to implement more rounds of the LTRO.

European politicians who signed on to the “fiscal pact” promoted by Germany late last year are losing their jobs. Those favoring a “growth pact” are winning support, though they have no specific plan yet and certainly no way to finance it once it is specified. Also gaining support are various left- and right-wing fringe groups that tend to promote anarchy as the most effective way of overthrowing the established order and replacing it with their disorder.

Europe is at risk of devolving from an economic and monetary union into a disunion of failed states. The Greeks are unable to form a coalition government after the two major parties lost significant support to fringe parties over the weekend. They may need to have another round of elections. The remote chance of Radical Left leader Alexis Tsipras forming a coalition faded on Tuesday when New Democracy leader Antonis Samaras promptly rejected his demand to scrap Greece’s bailout plan, warning such a move would drive Greece out of the euro: "Mr. Tsipras asked me to put my signature to the destruction of Greece. I will not do this. The country cannot afford to play with fire."

(According to Greek mythology, Prometheus stole fire from Zeus and gave it to mortals. Zeus then punished him for his crime by having him bound to a rock while a great big eagle ate his liver every day only to have it grow back to be eaten again the next day. During the Greek War of Independence, Prometheus became a figure of hope and inspiration for Greek revolutionaries.)

The above is simply commonsense economics which shows that we can NOT spend ourselves to prosperity or that there is NO such thing as a free lunch.

This implies that reversion to the mean would be the natural order from previous overspending that produced high levels of debt. And the logical and commonsensical solution to such predicament would either be to raise revenues by making the economy more competitive or to reduce government spending, or more optimally, having to apply both approaches. The ECB can only kick the can and even worsen the scale of the imbalances.

Unfortunately many people live in dreams. Politicians and their academic and institutional backers pander to such utopianism by imposing the same policies that got them there. They do this by whipping up public’s sentiment by peddling half truths to the gullible and uninformed. A good example is media’s baloney over so-called “austerity” which in reality has been a gross perversion of semantics. Mr. Yardeni’s chart above reinforces my earlier assertions.

Yet Sweden’s anti-Keynesianism policies should serve as a wonderful counterexample where commonsense economics--economic freedom, genuine austerity and tax cuts--have been driving real growth.

Politicians and (parasitical) voters would like to make permanent a life of abundance, by living off someone else’s labors. Unfortunately the reality says that we are bounded by the laws of scarcity, and people’s efforts are constrained by such limits.

Thus when the proverbial rubber meets the road, delusions over Europe’s desired perpetual state of wonderland has been in the process of being unmasked.

Reality, says Libertarian author Robert Ringer, isn't the way you wish things to be, nor the way they appear to be, but the way they actually are.

Pirate Island: More Dreams of a Government Free Community

Dreams of getting government off their backs are being put into reality through chartered cities, free cities, seasteading and now the Pirate Island.

From the register.co.uk (hat tip Bob Wenzel)

Over 100 international tech companies have registered their interest in the floating geek city, Blueseed, which will be launched next year in international waters outside of Silicon Valley.

The visa-free, start-up friendly concept launched late last year aims to create a fully commercial technology incubator where global entrepreneurs can live and work in close proximity to the Valley, accessing VC dosh and talent as required.

A new research report released by Blueseed reveals that the bulk of registered demand germinated from the US at 20.3%, Indian start-ups rank second at 10.5% and Australians third at 6%.

The research found that international start-ups nominated living and working in an “awesome” start-up- and technology- oriented space; proximity to Silicon Valley's investors and an alternative to having to get US work visas for company founders or employees as the key reasons for getting on board.

The Blueseed model budgets for around 1,000 live-in entrepreneurs on deck with costs ranging US$1,200 to $3,000 per month, per person for living quarters and office space.

It is most likely that Blueseed will revamp a decommissioned luxury cruise liner which the founders estimate would cost between $10 -$25 million to fit out.

The Disadvantage of having an American Citizenship

The US government seems to be applying a pincer movement—or a military maneuver where the flanks of the opponent are attacked simultaneously in a pinching motion after the opponent has advanced towards the center of an army which is responding by moving its outside forces to the enemy's flanks, in order to surround it (Wikipedia.org)—to its own citizens, by imposing repressive tax laws that restricts capital movements outside the US.

Now even wealth management firms are advocating wealthy Americans to FLEE the US.

From Bloomberg,

Go away, American millionaires.

That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.

“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

“In the long run, if Americans have less and less opportunities to invest overseas, it would be a disadvantage,” Marc Faber, the fund manager and publisher of the Gloom, Boom and Doom report, said last month in Singapore.

The almost 400 pages of proposed rules issued by the U.S. Internal Revenue Service in February create “unnecessary burdens and costs,” the Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, one of more than 200 submitted to the agency. The IRS plans to hold a hearing May 15 and could amend how and when some aspects of the rules are implemented. It can’t rescind the law.

Obviously the Obama administration’s ploy has been to coercively capture resources of Americans through more policies of financial repression channeled through inflationism (negative real rates and QE), taxes, bank regulations, anti money laundering laws and capital controls

More from the same article…

“Bank accounts, investment accounts, mortgages and insurance policies are being refused to American clients, and those with accounts are seeing them closed or have been threatened with closure,” Marylouise Serrato, executive director of American Citizens Abroad, a Geneva-based organization, wrote in an e-mail.

U.S. citizens who live in countries that aren’t served by U.S. banks may find themselves unable to bank at all, and implementation of the law in its current form could cause collateral damage to American businesses abroad, she said.

“Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations,” Serrato wrote. “The extensive reporting requirements of Fatca will be destructive to those who wish to do business internationally as well as to those Americans who are legitimately living and working overseas.”…

While that may be easy for Americans in Singapore, those who live elsewhere face obstacles. Before Fatca, U.S. citizens in Bangkok or Manila could find investment opportunities through non-U.S. banks such as HSBC. Now their only option is to fly to cities where U.S. firms operate.

Limited Choices

If Americans choose to bank with a non-U.S. firm such as HSBC, their investment choices are limited. At the HSBC branch in the bank’s Asia regional headquarters in Hong Kong, Americans can hold only savings deposits. They’re prohibited from opening accounts to trade local stocks or buy products available to non- U.S. customers, including 45 equity funds investing in China or other geographies and industries. There’s only one comparable emerging-markets equity option available on HSBC’s U.S.-based investors’ website.

Financial institutions that choose not to accept American customers still must determine whether new or existing clients are so-called U.S. persons in order to comply with Fatca, according to Michael Brevetta, director of U.S. tax consulting at PricewaterhouseCoopers LLP in Singapore.

The definition includes citizens, green-card holders and non-Americans deemed U.S. residents by being present in the country for at least 183 days over a three-year period, which makes them subject to U.S. tax on their worldwide income, according to the IRS.

Compliance Costs

The compliance costs for banks, asset managers and insurance companies “could stretch into the billions of dollars,” Brevetta said. Private-banking firms in Hong Kong and Singapore already have operating costs between 88 percent and 90 percent of their revenue, compared with 70 percent at Swiss banks, PricewaterhouseCoopers estimated in a September report.

Penalties for not complying will be stiff. Non-U.S. firms that don’t make required disclosures will be subject to 30 percent withholding of certain dividends, interest or proceeds from the sale of assets they or their customers receive from U.S. sources, according to Baker & McKenzie’s Weisman, who has conducted workshops and seminars on the proposed rules for current and potential clients in Hong Kong and Singapore.

Wow. The above essentially signifies as the proverbial “writing on the wall” of the growing desperation by the US government over her unwieldy state of finances due to a bloated and unsustainable welfare-warfare economy.

Not only will US citizens be restricted access to foreign financial institutions, such tax laws are subtle manifestation of protectionism as overseas investments from US investors will be severely limited. [As one would note, foreign banks have been in retaliation to the encroaching protectionist US tax laws by denying Americans access]

President Obama’s nationalist-protectionist rhetoric over BPOs is apparently being realized via arbitrary tax laws. Yet protectionism will only compound to the nation's fragile economic conditions.

F. A. Hayek once warned that Americans are headed towards the road to serfdom. His admonitions appear as becoming a reality with the deepening of America’s police state aside from snowballing political and economic fascism, signs of which the US could be in a slippery slope towards dictatorship.

Yet such laws will have adverse consequences. This should incentivize, not only more tax avoidance measures, but also prompt wealthy Americans to consider giving up on their citizenship.

True, US government has made the exit option a burden. There have been reported incidences where the US government has denied applications by Americans wishing to renounce their citizenship (Sovereign Man).

Limiting people's actions increases political destabilization. Again all these seem to square with record gun sales, polls where gold seen as the best investment option, ballooning sales of home safe and even a report where the US government has been preparing for a “civil war”.

Political risks has certainly been mounting in the US as political and economic repression suggest that the US has been increasingly at war with their citizens.

I recall that after college graduation, a relative who is a resident of the US encouraged me to emigrate to the US and apply for American citizenship. Now I realize that this decision of mine to say NO may have seemed worthwhile or the right decision.

Remembering Hayek’s 113th Birthday

Yesterday was the 113th birthday of the great Austrian economist Friedrich A. von Hayek. (born May 8, 1899- died March 23, 1992)

I would like to commemorate his special day with a word of wisdom from him

A society that does not recognize that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom.

False Flag: Underwear Bomber was a CIA Double Agent

From the Globe and Mail

The would-be suicide bomber dispatched by the Yemen branch of al-Qaeda last month to blow up a U.S.-bound airliner was actually a double agent who infiltrated the terrorist group and volunteered for the suicide mission, U.S. and foreign officials said Tuesday.

In an extraordinary intelligence coup, the agent left Yemen, travelling by way of the United Arab Emirates, and delivered both the innovative bomb designed for his air attack and critical information on the group’s leaders to the CIA, Saudi and other foreign intelligence agencies.

This accounts for another example of what could be a false flag (Wikipedia.org)

operations are covert operations designed to deceive in such a way that the operations appear as though they are being carried out by other entities.

And this is why I staunchly adhere to the great Frederic Bastiat’s doctrine that aims to distinguish the seen and the unseen

Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.

Visible ‘terrorism’ effects, as illustrated above, can be manufactured for political reasons—example to justify the existence and or the expansion of government bureaucracies (such as US Homeland Security) or to promote interests of the military industrial complex or both.

Or seen at another angle, maybe the war on terror may have spawned their own monsters.

Quote of the Day: Gold as Insurance against Uncivility

Civilized people should buy gold when uncivilized people are in charge. They should also buy it when civilized people in power adopt the economic policies of uncivilized people.

That’s from Professor Gary North rebutting Warren Buffett’s alter ego Charles Munger on gold.

Sweden Secret Recipe: Austerity, Tax Cuts and Economic Freedom

From Spectator.co.uk [bold emphasis mine] (hat tip Professor Mark Perry)

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

All this has taken Borg from curiosity to celebrity. The Financial Times recently declared him the most effective finance minister in Europe. When we meet in his Stockholm office on a Friday afternoon (he and his aide seem to be the only two left in the building) he says he is just carrying on 20 years of reform. ‘Sweden was a textbook case of European economic sclerosis. Very high taxes and huge regulatory burden.’ An economic crisis in the early 1990s forced Sweden on the road to balanced budgets, and Borg was determined the 2007 crash would not stop him cutting the size of government.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

In contrast to the phony austerity, as presented by media and the left, supposedly plaguing the crisis affected EU nations, Sweden’s fiscal conditions seems to validate the above report. (following 2 charts from Tradingeconomics.com)

Government debt to GDP has been in a material decline

While Sweden’s government budget has even posted surpluses.

And because of these truly pro-growth (economic freedom) measures, the chart above (from Professor Mark Perry) shows how Sweden has outperformed the US.

More Signs of Political Turmoil in China

From Reuters,

China's ruling Communist Party is seriously considering a delay in its upcoming five-yearly congress by a few months amid internal debate over the size and makeup of its top decision-making body, sources said, as the party struggles to finalize a once-in-a-decade leadership change.

The two most senior posts, of president and premier, are not considered in much doubt. But any delay in the congress, no matter the official reason, would likely fuel speculation of infighting over the remaining seats in the nine-member politburo standing committee which calls the shots in China.

The makeup of those remaining positions could in turn influence the ability of the incoming new president, Xi Jinping, to forge a consensus among those immediately below him on how to run the world's second-largest economy and a military superpower.

Delay could also further unnerve global financial markets whose perception of Chinese politics as a well-oiled machine has already been shaken this year by the extraordinary downfall of an ambitious senior leader, Bo Xilai, in a murder scandal.

Again one possible way of diverting the public’s attention from increasing signs of internal political squabbles could be to concoct external friction—the gunboat diplomacy over the territorial claims dispute.

Quote of Day: The Last Hurrah of Socialist Welfare States

Today’s main quote of the day comes from Brian S. Wesbury, chief economist at the First Trust

The Social Welfare State is dying. Like the Berlin Wall and the Iron Curtain, the cradle-to-grave social welfare experiment must eventually collapse. A system of taxing work and profits, while subsidizing leisure, sloth, and retirement, must eventually fail.

The end of the Social Welfare State is painful for many, and it will not end quickly or quietly as the elections of this past weekend prove. Francois Hollande, a Socialist, was elected president of France, while Greece saw a surge in votes for “anti-bailout” political parties in parliament.

These elections are described as blows against “austerity.” They are also seen as anti-German. Germany resisted bailouts and pushed spending cuts.

In theory, a rejection of austerity could be a good thing. Some people include tax hikes in the concept of austerity and avoiding tax hikes would be a good thing for Europe. France has a top income tax rate of 45%, a wealth tax of 0.5% and a Value Added Tax (VAT) of 21.2%. Greece has a top income tax rate of 45% and a VAT of 23%. These burdensome tax rates hinder growth, investment and work effort and still don’t cover all the spending.

To solve the deficit problem, Francois Hollande wants to raise France’s top income tax rate to 75%. Greece’s “anti-bailout” parties, mostly on the left, also want higher taxes on the upscale, plus defense cuts. The Greek military helps break up domestic riots, so this is a self-serving demand.

So, in reality, French and Greek rejection of austerity does not mean policies that would enhance long term economic growth. Instead, it means they want to temporarily pull the wool over their own eyes, resist the obvious need to reduce government spending, and just hope for the best.

This chapter of the French story will not end well. The country has already gone much further along the road to socialism than the US, with general government spending equal to about 56% of GDP, very near the highest of any advanced or emerging market in the world. Greece, at 49%, is not far behind. Yet, voters are doubling down.

“Doubling down” simply means accelerating the pace of degeneracy that leads to an eventual collapse which will be marked by government bankruptcies and the dissolution of the EU via a series of debt default or through hyperinflation. As James Turk of goldmoney.com wrote (for the second related quote of the day),

the ideological bankruptcy of socialism will be laid bare by government insolvency

How US Federal Reserve Policies Stimulates the Public’s Speculative Behavior

In a book review, Douglas French, president of the Mises Institute, explains the physiological and psychological dimensions of how US Federal Reserve policies whets people’s appetite for speculation and gambling.

For the average Joe, the mere idea of making money fires the dopamine neurons in his brain, and because (crazy) people tend to herd, this leads investors to pile into the same investments at the same time, which happen to be investments that have done well in the past. Or in other words, investors gravitate en masse to investments that are overpriced. Merely watching the green arrows on CNBC stimulates dopamine.

So when the Fed hit the monetary gas in 2001, interest rates plunged and the lumpen investoriate collectively plunged into housing only to be massacred by the end of the decade. Before that, Greenspan's Fed lubricated the financial system thinking all kinds of things would go wrong at Y2K. The money sloshed into Internet stocks and investors piled in just in time to lose their shirts.

Dopamine neurons are stimulated only if the rewards exceed the expectation. If investments work as planned, even if the result is good, there will be no rush at reward. And when results are less than expected, dopamine neurons are depressed — creating immense regret.

As a real-estate developer told me in the early 2000s, "interest rates are so low, I have to do something." His brain was already feeling the dopamine tingle of anticipated profits by hearing of the lower rates. As Pavlov's dogs salivate at a bell that reliably signals food, low interest rates transformed investors into Greenspan's and now Bernanke's dogs.

Bernanke's zero-interest-rate policy has investors lunging for yield, buying junk bonds and junk houses. "The rally in junk bonds extends an advance that began in early 2009 and can be traced largely to the Federal Reserve's policy of keeping benchmark interest rates near zero," writes the Wall Street Journal's Matt Wirz. "A pretty robust cottage industry has developed and is absorbing [single family homes] at an incredibly fast pace," Richard Smith, chief executive of Realogy Corp., tells the WSJ.

To add insult to injury, Burnham points out that people are "systematically overconfident. We are bad at doing the calculations required to analyze investments, and simultaneously we are unaware of our shortcomings." And if this isn't bad enough, Burnham points out that numerous studies show that people "reveal themselves to be proud. They are willing to lose money to retain their self-esteem."

Of course this all flies in the face of the efficient-market hypothesis, which claims all market participants are rational, and therefore all news is priced into particular investments at any one time, and there is no such thing as a speculative bubble.

As he wound up his Atlanta speech, Burnham had some sobering thoughts. "Financial markets are the watering hole of society," he quipped. Like thirsty animals on the African Savannah, humans are attracted to the speculative gains that financial markets promise. But, stopping for a drink is likely hazardous to our financial health.

Incentives drives people’s actions. Yet policies plays a substantial role in influencing people’s incentives. What some see as inappropriate behavior (such as “speculation”) driven by individual character flaws, is in reality, mostly a reflection of people’s responses to such policies.

This simply shows that inflationism is immoral.

Bank of Japan Hearts the Stock Market

From the Marketwatch.com

The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date, though the move failed to prevent a sharp fall for the Tokyo equity market.

The Japanese central bank said it spent 39.7 billion yen (about $500 million) buying up stock ETFs as part of its ongoing asset-purchase program, breaking a previous record of ¥28.5 billion, set on April 16.

In addition to the ETF buys, the Bank of Japan also acquired ¥2.3 billion in real-estate investment trusts Monday.

Since the 2008 collapse of Lehman Brothers and ensuing global crisis, central banks around the world have embarked on a spree of asset-buying meant to avoid deflation and, to a certain extent, support the markets.

But Japan’s monetary authority is almost unique among its peers in the major developed economies in its high-profile purchases of ETFs, which it began in December 2010 as part of aggressive easing measures.

Since then, the Bank of Japan has bought almost ¥1 trillion worth of ETFs — along with another ¥78.9 billion in REITs — and has an additional ¥642 billion to spend on the stock funds after raising the program’s size at it last policy meeting in April.

The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

The Bank of Japan (BoJ) has shown that they have been true and blue disciples of US Federal Reserve chair Ben Bernanke, who once preached that

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Yet the real reason why the BoJ has been transferring resources from their economy to stock market investors, via the Bernanke doctrine, have been to provide support to the banking system which has substantial exposure on the equity markets through the interlocking shareholdings relationship.

As this paper from the faculty of Hirosaki University explains,

In Japan, interlocking shareholdings among firms have its own peculiar character, and they have contributed to accumulating the enormous amount of hidden profits in firms by adapting the accounting system based on cost and realization basis. A feature of interlocking shareholdings is that firms hold each other’s shares as stable shareholders. Stockholding relations between banks and its client firms are present in any main bank relationship. On another plane, the large securities appraised loss arises by such system every year, and it has became one of factors that make the finance of firms and banks more unhealthy with non-performing loans. On the other hand, there will be few merits in contributing to enhancement of competitiveness and economic development, while the relationship between firms and banks gives the incentive, which commit long-term investments to the management of firms through interlocking shareholdings.

Of course, not only did interlocking shareholdings play an important part in the implementation of stable shareholding arrangements and maintaining of trade relation but also became institutional measures to avoid the threat of international capital markets, i.e. take-over bid (TOB), mergers and acquisitions (M&A) etc.

In any case, the mechanism of interlocking shareholdings delicately influences the relationship between banks and firms.

See how the BoJ promotes the interests of their politically favored institutions or cronies?

Video: Corporate Taxes Hurt the People

Professsor Steve Horwitz in the following video explains how corporate taxes hurt the people, and not the rich. (Thanks to Michael Moroney of LearnLiberty.org and George Mason University for sending this)

Here is the prologue from LearnLiberty.org

Corporations are not monoliths -- they are made up of individuals, including workers and non-wealthy shareholders. So are corporations distinct from the people that comprise them? When corporations are taxed, who pays the tax? Economics professor Steven Horwitz shows why a tax on corporations is not the equivalent of a tax on the wealthy. Instead, workers and consumers will pay these taxes. A tax on a corporation is also a tax on the workers who work at the corporation, the consumers who buy from the corporation, and the shareholders who own the corporation as part of their retirement fund.

In Pictures: The Eurozone’s “Austerity” Programs

I’ve been saying that whatever politicians, media and their zealot followers label or lay claim as “austerity” programs has been a blatant canard.

The precious deck of graphs below from tradingEconomics.com give us the perspective

First the Eurozone’s Government Debt to GDP

Ok, one might argue that the steady ascent of government debt relative to GDP has been happening because of recessions or economic growth slowdown.

So the second set of graphs which exhibits their respective fiscal conditions is meant to give us a better understanding.

Note, reference points of comparisons are very important and sensitive to making claims.

It is TRUE that government spending in the aforementioned countries above has somewhat been reduced compared to, or when based from 2010.

But except for Portugal, whose authorities have admitted that government spending does NOT work, spending levels have substantially been elevated compared to, or based from 2000-2007 for most of the Eurozone, especially the crisis afflicted nations. Add to this the ballooning balance sheets of the ECB.

From the above, we can see that whatever claims of “austerity” have been representative of half-truths, and which in reality, signifies as terminological prestidigitation.

So the return of pro-welfare governments will only exacerbate their current woes based on unsustainable political economic conditions and amplifies the transmission of the many risks (credit, currency, inflation, interest rate and etc...) to the world.

Results of European Elections Points to More Inflationism

From Bloomberg,

Francois Hollande, who defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity and more growth in the region.

“Europe is watching us,” he told supporters in Tulle, France, last night after he won about 52 percent of the vote. “Austerity isn’t inevitable. My mission now is to give European construction a growth dimension.”

Hollande inherits an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load that makes France vulnerable to the financial crisis that has rocked the euro region the past two years. Sarkozy became the ninth euro leader to fall in that time and the first French president in more than 30 years to fail to win re-election.

Hollande’s comments were echoed in Greece, where voters flocked to anti-bailout groups, leaving the two main parties, New Democracy and Pasok, a seat short of a majority if they govern together, an Interior Ministry projection showed. His victory may sharpen tensions with key allies with Hollande advocating a more aggressive European Central Bank role in spurring growth -- a measure opposed by Germany.

As I earlier said politics has always been about gross distortions of reality and the manipulation of the public.

There really has been no “austerity” going on in the crisis affected Eurozone economies. Just look at how ECB’s balance sheets have been exploding…

chart from mybudget360.com

As I wrote earlier,

What has been really happening has been a transfer or a redistribution of resources from both the private and the public sectors into the politically privileged banking system. Taxes have been increased or are in the process of being raised to pay for the bailouts of the banks.

In genuine austerity programs, resources would be made available for the productive use of the private sector. This means growth in the private sector relative to a reduction of government expenditures.

So with the so-called “pro-growth anti-austerity” governments in power, the policy options likely to be taken by them will be 1) to stop the bailouts of the banking system and to resume welfare spending or 2) have the ECB finance both the banking system and the welfare state. [As an aside, the pro-growth and or anti-austerity is actually a mislabel, which in reality, should be called “pro-welfare” governments]

Cato’s Dan Mitchell has a fitting description,

the new political parties are pro-bailout. They are quite happy to mooch off German taxpayers, American taxpayers, and anyone else who is stupid enough to send money (after all, somebody has to finance critical functions of government, such as collecting stool samples from people who want to set up online companies and subsidizing pedophiles).

What gets them upset is the notion that they should do anything in exchange for these handouts. Perish the thought!…

And given the current budgetary mess they are into and given the market’s reluctance to finance them, both options imply more reliance on the ECB to backstop their proposed spending.

Said differently, if the pro-welfare governments act to fulfill on their campaign platform promises of more welfare spending, then I expect increased pressure on the ECB to finance their spending splurges. And if the ECB complies, then we are likely to see even more bailouts mostly through inflationism.

Of course I expect the US Federal Reserve to work behind the scenes to assist the ECB as they have done so, like in the recent past.

Also if these governments will insist on imposing policies based on the Santa Claus (Free Lunch) principle, and refuse to see the reality through lens of the law of scarcity, then we may see defaults to occur soon, or if not, the EU may die a natural death either from internal political dissension or hyperinflation.

Worst is that instead of achieving the objectives of an EU integration which in part has been meant to avert perennial wars of the past, more political redistribution will mean more discord that raises the risks of war.

Writes Professor Philipp Bagus

The EMU provokes conflicts between otherwise peacefully cooperating nations. Redistribution is always a potential cause of social stress. The monetary redistribution in the EMU was not understood by the bulk of the population and, thus, did not cause conflicts. The bailouts, the rescue fund, and the interventions of the ECB that were ultimately caused by the setup of the EMU have made the redistribution between countries more obvious.