The wages of public control of the economy

From today's Open Europe news summary:

German Energy Minister warns that there is “no reasonable alternative” to Russian gas
German Minister for Economic Affairs and Energy, Sigmar Gabriel, yesterday warned that there is “no reasonable alternative” to Russian gas imports, but suggested that “scaremongering” around a potential cut off was not warranted as Russia is likely to honour its contracts. His comments seem to run counter to German Chancellor Angela Merkel’s calls for a “new inspection” of Europe’s energy policy.

All nations seem to assume that a public energy policy will bring their citizens and industries cheaper and more stable energy.  The opposite, of course, always happens.  This is just the latest example of government meddling in a key sector of the economy.  Germany's government has chosen to close its nuclear plants.  It subsidizes windmills.  Germany's green movement is very powerful and exerts a negative influence on Germany's ability to exploit domestic energy supplies through new techniques, such as fracking.  As a result, energy prices in Germany are approximately double those of the US and it is dependent upon supplies from political dictatorships like Russia.

In a free market for energy firms would rush to fill energy orders when a rival supplier appeared to be unreliable.  In a free market for energy a Russian cut off of natural gas would result in a permanent loss of customers to rival suppliers.  The current situation is made worse by US law that prohibits exports of natural gas.  In an unhampered market, US firms would be free to sell gas to the highest bidder and there is little doubt that Europe would negotiate alternative sources with a threatened Russian supply cutoff.  A Russian embargo would permanently damage its natural gas industry by proving it to be an unreliable supplier, costing it the loss of business for many, many years.

Unfortunately, all nations use the economic output of their citizens and firms as weapons of national policy, even in the absence of war.  The result is the opposite of their intentions, which should surprise no one.

What can we expect from new Fed Chairman Janet Yellen?

No change.

Oh, you want more?  Well, OK, I suppose I can give more of an explanation than that.  Groucho Marx used to tell a joke on himself that "I wouldn't want to belong to any club that would admit me as a member."  That pretty much sums up why we shouldn't expect much from the new chairman of the Federal Reserve System.  This administration and this congress will never admit anyone that is not of the Keynesian school of economics persuasion.  As long as this mentality resides in the political halls of power, our nation will not get another Paul Volcker.

That means that we should anticipate a continuation of policies that assume that monetary expansion can spur economic growth.  It cannot.  Monetary expansion can spur phony economic growth; i.e., fooling entrepreneurs to invest capital in projects that will not return a profit.  GDP may go up...temporarily.  Employment may go up...temporarily.  Janet Yellen and her fellow Keynesians believe that the Fed can print software engineers, doctors, nurses, steel mills...in other words, real resources.  What nonsense, yet that is what they believe.  They may couch this error in highfalutin terms, but that is what they mean on a fundamental level.  In the end capital will be destroyed, resulting in an economic bust, and the nation will have wasted years and resources that it can never recover. 

Now, Yellen may preside over a gradual "tapering" of the unprecedented "quantitative easing" program begun under Bernanke.  But this does not mean that she is different.  Remember, that program was unprecedented; everyone knew at its beginning that it could not continue forever.  Whoever occupies the Fed chairmanship would have to end that program at some point...we hope.  There is no guarantee, however.  If rates start to rise, unemployment rises, and businesses start to go bust, the Fed could jump right back into the program, because that is all it knows how to do--print money.  The real question is whether Yellen and her fellow travelers will accept a recession that most likely will occur as QE ends.  The Fed likes to think of QE as a jump start, a one-time boost, a helping hand, etc.  But these are false analogies.  QE funds projects that cannot exist in its absence; therefore, when QE ends or even slows down, these projects will be revealed to be unprofitable.  No amount of cost cutting will make them profitable.  They were born of QE and they will die when QE ends.  The only question is whether the Fed will accept the necessary recession or will jump right back into money printing.  If it does the latter, we can expect an even greater bust in the future.

The Fed has painted itself into a corner.  There is no way that the nation can avoid either a recession or the collapse of the value of the dollar.  We should prefer the recession, then insist on an end to monetary expansion, regardless of the howls from the politicians that the government cannot continue its many programs otherwise.  At bottom this is a political problem.  Only a radical change in the mindset of government can end the monetary madness.

Kevin Williamson of National Review channels Jean Baptiste Say

Dear Sirs:

In his recent essay, "To Work Is to Live", Kevin D. Williamson gave about as nifty an explanation of Say's Law as you will find anywhere.  We buy goods with other goods, and money is merely the indirect medium of exchange.  What we produce is important, because others place the value, in money terms, on our production and thereby establish our standard of living.  John Maynard Keynes tried to refute Say's Law in his General Theory of Employment, Interest and Money, but he failed miserably despite what his admirers think.  Digging holes and filling them back up, as Keynes famously recommended, will not produce a good that anyone values; therefore, printing money and paying people for doing this worthless task is a violation of Say's Law.

The EU Cannot be Reformed, Because It Disregards the Rule of Law

From today's Open Europe news summary:
 

Swidlicki: Clegg/Farage debate risks establishing false ‘all-or-nothing’ choice and ignoring public appetite for EU reform
Writing on Liberal Democrat Voice ahead of the first EU debate between Nick Clegg and Nigel Farage tonight, Open Europe’s Pawel Swidlicki argues that a “binary, ‘all-or-nothing’ debate over Europe is fundamentally flawed as it does not speak to where the majority of the British public are at. Polls have consistently shown that when respondents are offered options beyond staying in on the current terms or leaving altogether, the option of staying in a reformed/slimmed down EU proves the most popular across the political spectrum.” In his Independent column, Nigel Farage argues that “at the heart of this debate is the question of identity: are we ‘European’ or ‘British’?”
LDV: Swidlicki Mirror: Clegg Independent: Farage Independent Times: Leader

With all due respect to Mr. Swidlicki, the EU cannot be reformed, because it does not answer to the rule of law.  It ignores treaties, which become law when ratified, whenever it feels that circumstances demand.  The illegal (by treaty) actions of the ECB are a case in point.  According to the Maastricht Treaty the ECB is not allowed to finance sovereign debt, yet that is exactly what it does.  So why do so many believe that carefully negotiated reforms will not be abridged in the future, when there have been absolutely no consequences to such abridgements in the past?

Eventually even the Germans and the Finns succumb to the siren call of expediency.  A case in point can be found in this same issue of Open Europe:

 

Bundesbank President Jens Weidmann told news agency MNI yesterday that large-scale ECB asset purchases – known as Quantitative Easing – to tackle low inflation in the eurozone were not “generally out of the question”...Finland’s Central Bank Governor Erkki Liikanen cited a negative deposit rate as another possible tool the ECB could use in future.
Open Europe blog FT WSJ Irish Times

Remember Barron's maxim: "An organization that CAN print money WILL print money."  The political pressures to do so are overwhelming, especially in organizations such as the EU and the ECB that suffer from a "tragedy of the commons" construction.

Creating Unemployment and Poverty

From today's Open Europe news summary:

In an interview with Die Welt, Jean-Claude Juncker, the EPP’s candidate for European Commission President, argues, “As Europeans we have been active in many areas except for social policy where we have taken a back seat…I would like that in the EU we would agree on minimum standards for employment law, employment protection and the tackling of poverty.”Welt: Juncker

Rather than make Europeans more employable and increase their standard of living, policies such as those advocated by Herr Juncker will have the opposite effect.  Employment laws always mean more costly regulations on employment, plus minimum wages which price out of the labor market many of the young and those with few skills.  Employment protection means that once a business hires a person, it will find it difficult to end employment and must continue paying for labor services that are no longer desired.  The consequences of such laws are not lost on business.  And, finally, tackling poverty always means redistributing wealth.  That wealth will be withdrawn from the nation's capital base or it will never enter the capital base due to excessive taxation.

This is the reality of the situation, which, of course, no vote-buying politician wishes to acknowledge.

Anthropomorphizing the Banking System

Re: European Officials Reach Deal on Failed-Bank System

The European Union's attempt to create one bank regulator with the power to shut down and bailout problem banks will fail, because it does not address the cause of generalized bank failures.  For one thing, a bank is not a person.  It does not contaminate other banks, so all references to "contagion" are as inappropriate to Europe as they were to the financial crisis in the US.  The US crisis of 2008 was not caused by the failure of Lehman Brothers, and Lehman Brothers did not "infect" other banks.  The 2008 banking crisis in the US and the subsequent one in Europe were both caused by central bank money printing.  Subsequently, both central banks have flooded their markets with even more money created out of thin air, creating the very crisis that the centralized resolution mechanism supposedly will prevent or at least short circuit.  All this legislation accomplishes is a further socialization and centralization of the European banking system, creating moral hazard on an international scale and probably the complete nationalization of banking after the damage of central bank credit expansion has been revealed.  Nothing can prevent the next bust, and no centralized resolution mechanism will cure it.  In the future, if Europe truly wants to avert another banking crisis, it must cease printing money and refrain from even hinting that any governmental body will bail out failed banks.  Then there will be no generalized banking crisis and rogue bank losses will be limited to the parties involved.

Politicians Prevent Cooperative International Exchange

From today's Open Europe news summary:

Speaking in the Bundestag this morning, Chancellor Angela Merkel warned that due to the complexity of the negotiations over the EU-US free trade agreement, the risk of failure had to be taken seriously, although she added “It must be possible to achieve it."

Note the presumption that private German and American citizens may not engage in mutually beneficial, cooperative exchange without the authorization and, one may presume, proper tribute being paid to politicians and their sycophantic bureaucrats.  If Merkel really wanted to help her people, she would simply declare Germany to be a free trade nation, willing to accept any goods that its citizens wish to import and not standing in the way of its citizens exporting any goods that its citizens produce.  This is such a simple concept that only a politician cannot understand it.  But I say that in jest, for politicians DO understand that they are nothing more than shake down artists.

A Typical Day in Europe: Either desiring a handout or more autonomy

(My comments in italics below the news reports.)

From today's Open Europe news summary:

The Greek government reached a deal with the EU/IMF/ECB Troika yesterday, paving the way for the next disbursement of €10bn in bailout funds, which Greece hopes to secure at the informal meeting of eurozone finance ministers on 1 April. Separately, Piraeus bank yesterday issued €500m in bonds, the first Greek bank to do so since 2009.
Kathimerini Kathimerini 2 FT City AM WSJ City AM 2 Kathimerini 3 Bloomberg

This so-called "deal" for Greece to get whatever money it wanted was a foregone conclusion.  The people making this decision to give Greece more money--the equivalent of $1,206 per Greek citizen--are not spending their own money.  Ludwig von Mises explained a hundred years ago that there can be no rational economic decision making absent ownership of private property.  Which means that no one can decide whether to spend, on whom to spend, or how much to spend with other peoples' money.

 

From BBC News Europe:

Re: Venice votes in referendum on splitting from Rome

It seems to me that rather than Europe moving to become more united, as is the goal of the euro-elite, the average citizen wants less unity and more regional autonomy.  This referendum may not be "legal", but it certainly represents what the people of Venice really want.  The Venetians have joined the Scots, the Basque's, the Catalans, and even the Bavarians in desiring more self-determination.

More Insanity from the European Union

Fascinating excerpts from the March 14, 2014 Open Europe news summary in italics and my comments below each:
 

All mobile phones and some other electronic appliances on the European market will have to come with a standard charger by 2017 following a vote by MEPs yesterday. The new rules could save around 51,000 tonnes of electronic waste annually.
EurActiv Welt

The costless regulation!  What geniuses are these European Members of Parliament!  (Uh...just what is "electronic waste" anyway?)

Data released yesterday showed that Greek unemployment rose to 27.5% in the final quarter of 2013, a 0.5% rise from the previous quarter and 1.5% increase on 2012.
Kathimerini ELSTAT press release

Greece cheats on its financial reports in order to join the Eurozone, which allows it to borrow more money at lower rates.  Years later it is a huge EU success story!

At a joint press conference with German Chancellor Angela Merkel, Czech Prime Minister Bohuslav Sobotka said, “We want to make clear that the Czech Republic is a country at the heart of Europe that works very intently with eurozone countries.” Merkel congratulated Sobotka for his decision to sign the ‘fiscal treaty’ on budgetary discipline.
AFP

It seems to me that seventy-five years ago another German head of state congratulated the Czechs on doing the right thing.  Does anyone else find this scene even slightly disgusting?

Data released yesterday showed that Ireland’s economy surprisingly contracted by 2.3% in the final quarter of 2013, meaning the economy contracted by 0.3% for the year as a whole, well below expectations of 0.4% growth. Just before the data was released, Ireland sold €1bn in ten year bonds at auction for the first time since September 2010.
FT City AM EUobserver

Aren't the Irish lucky that their government gave them a second chance to join the EU?  The Irish voted it down the first time, but their politicians saw that the people really didn't know what they were doing.  So the Irish were forced to keep voting until they got it right.  Miracle upon miracle, it passed the second time!  Now, after raising its taxes to EU levels, which put an end to the Irish boom in high tech industries, Ireland enjoys all the benefits of the euro and the EU.  It gets to stand in line behind a dozen other EU countries and beg for a handout.

Our Unrepentant Fed

Re: Fed nominee Fischer says easing still needed amid unemployment

The above Bloomberg article on Stanley Fischer as the Fed's nominee for its number two person bodes ill for America and the world.  Fischer has spent his entire adult life as an apparatchik with the World Bank, the IMF, and as head of the Bank of Israel and vice chairman of America's premier crony capitalist bank, Citigroup.  His statements represent the complete capture of America's monetary system by Keynesian money printers, who see more fiat money printing as the solution to every problem.  His reference to the unemployment rate is especially repugnant in that it ignores the fact that America's labor participation rate is at historic lows, especially for Americans in their 20's.  Millions have simply given up hope of ever finding a real job.  It is obvious to any economist of the Austrian school that no Fed nominee will be considered who criticizes the Fed's program, under whatever silly name ("quantitative easing", for example), of monetizing the US government's massive annual deficit.  American savings and capital are being plundered, because its government refuses to live within its means and dare not increase taxes or borrow honestly in the bond market.

The only hope of a return to reality lies with Europe or possibly China.  The European Central Bank is following in the lead of the Fed, but many of its members are growing increasingly worried, especially Germany.  Germany could lead the world to monetary sanity by leaving the Eurozone and reinstating a sounder deutschmark.  This would set in motion a cascade of virtuous events that eventually would force the Fed to strengthen the dollar or lose its premier position as the reserve currency of choice.  Likewise, China is importing and hoarding gold, which leads many to believe that it sees the coming crash of the dollar and may offer the world a gold-backed yuan.  Either action, by Germany or China, would be nothing more than rational self-interest and would eventually be seen as beneficial for all the world.

Three examples of EU madness

From the Open Europe news summary of March 10, 2014:

Eight leaders of the European People’s Party (EPP), including German Chancellor Angela Merkel, have backed a call for students to be given a “European Union education” to tackle growing euroscepticism and “ignorance”

If you are a patriot who believes in the sovereignty of your nation and the foolishness of Euro-socialism that marches forward under the EU banner, then obviously you are ignorant and sorely in need of a good "European Union education".

 

Writing in Die Welt, Marcel Fratzscher, Head of the German Institution for Economic Research (DIW) urges the ECB to embark on a multi-billion euro bond purchase programme, buying government and private bonds in all eurozone countries (up to a value of €60bn per month), to increase monetary stimulus and temper the risks of eurozone deflation.

This is what passes for mainstream economic science today--advise your own central bank to mimic the Fed and print money in massive amounts.  After all, it has worked so well in America that the addition of trillions of dollars of monetized government debt to the Fed's balance sheet has resulted in the lowest labor participation rate in decades.

The ECB is following the Barron maxim that "an organization that can print money will print money."  It was foolish of early supporters of the ECB to think that its powers could be kept within its treaty limitations as merely the honest provider of an international currency and would not be captured by corrupt politicians and their sycophantic advisors to be used as an engine of inflation.
 

British Prime Minister David Cameron and German Chancellor Angela Merkel have pledged to work together to lead an EU internet revolution, ahead of a joint-appearance at the world’s biggest IT fair CeBIT, co-sponsored by Britain, in Hannover today. The two leaders met for a private dinner yesterday, where they discussed Anglo-German relations, the need for uniform rules in the EU’s digital industry, and the Ukraine crisis.

Pardon my skepticism, but what do David Cameron and Angela Merkel know about the internet?  Does anyone really believe that getting oneself appointed as leader of a victorious political party bestows business and scientific acumen?  Of course not!  All Cameron and Merkel can do in a positive manner is prevent their two nations from passing legislation that would in some way hinder the free market development of the internet and the various beneficial tools that have developed around it.  But when two politicians of this high rank get together, that is very unlikely to happen.  What is likely to happen is that they will try to guide future internet development into channels that benefit special interest groups.  Of course, any new regulatory framework would create governmental compliance costs that would have to be funded by taxes on the industry.  This is the ultimate goal of all regulation of any successful industry--the draining of honest profits to dishonest, politically connected parasites.  At that point the internet will cease its spectacular innovations.

Multiple examples of what is wrong with the EU

From today's Open Europe news summary:

1. Brussels proposes revamped €11bn aid package for Ukraine

2. The European Commission yesterday released its in-depth review into macroeconomic imbalances, in which it called for “policy action” on the German current account surplus, but accepted that steps were being taken.

3. Greece seeking debt guarantees to aid return to market

4. The ECB will hold its monthly meeting today with expectations split over whether the bank will take further action to fight low inflation. Recent stronger data, on inflation and economic activity, may potentially allow the ECB to avoid taking drastic action, according to the WSJ.

 

5. Discussions between member states and MEPs are at a deadlock over the plans for a banking union and in particular the single bank resolution fund. Negotiations were called off last week but MEPs will present a compromise proposal to member states next week.

Europe is bankrupt, yet it will give eleven billion euros to a country that is not a member of the EU.  Germany is criticized for producing goods that people want to buy and is willing to accept ever depreciating pieces of paper (actually ever depreciating TARGET2 credits at the ECB) in return.  Greece wants to borrow even more from the credit markets using the rest of Europe as guarantors.  The ECB is determined to debase the euro and not allow prices to fall, which would be a blessing to the average European citizen.  And, finally, the EU is determined to socialize bank risk continent-wide, which will elevate moral hazard in order to further deplete Europe's capital base.