Tuesday, 19 June 2012

Don’t sell the power companies—throw money my way instead [updated]

_NOrman"Selling our power companies is the worst way to go,” says Green co-leader Russel Norman. “ They should instead be supercharged,” says Norman, “so they can develop clean, green energy technology we could sell around the world."


Dr Norman says “"smart, green economics" is the way to go because the international market for sustainable products and clean energy technology is growing rapidly.”

Really? Is that right?

Well, no.  It’s not. Like virtually everything else the Ginger Whinger says, it’s not right. Not right at all. The international market for “clean energy” is bankrupt.  Not just struggling. Not just a little bit bankrupt. It’s completely, wholly and abjectly bankrupt.

imageIt’s bankrupt in Spain where 12 billion Euros were spent in 2009 alone, €571,138 creating each “green job,” and with each “green” megawatt installed destroying 5.28 jobs on average elsewhere in the Spanish economy.

It’s bankrupt in Germany, where even with subsidies 300% higher than conventional electricity generation consumers pay nearly ten percent more—and carbon abatement costs at $1,000 per ton for solar power are roughly fifty times the European price for carbon.

It’s bankrupt in the Netherlands, the home of the windmill, where after billions of euros of subsidies, most going outside the Netherlands, Prime Minister Mark Rutte now recognises today’s “windmills turn on subsidies.”

It’s bankrupt in the United Kingdom, where it raises the cost to consumers by £1.1billion; where for every job created in the United Kingdom in “renewable energy” 3.7 jobs are lost; and in winter (when they’re needed most) Britain’s forest of wind turbines consumes more power than it produces.

So where is Norman getting his news from? Certainly not from Europe. And not from the States either, where despite the combination of Obama’s windy rhetoric and billions of dollars of subsidies “sustainable energy” is still not sustainable--where the White House sank half a billion taxpayer dollars into Solyndra, a company it knew was failing, and did--where the companies Ener1 and A123 Systems floundered after sucking another half-billion from taxpayers--which are dwarfed by the failure of company Solar Trust of America, which failure on its own leaves US taxpayers on the hook for a further $2.1billion!

And these are  just the headline failures. Sterling Burnett lists the whole sorry mess of America’s green energy’s bankrupt blackout, first, the bankruptcies:

    • Beacon Power Corp: Received $43 million in federal loan guaranteed in 2009 and also received $29 million in PA grantsBankrupt in October 2011
    • Ener1 (parent company of EnerDel): Received $118.5 million in federal loan guaranteesBankrupt in January 2012 – has since exited bankruptcy
    • Evergreen Solar: Received $58 million in MA loan guarantees (an undisclosed portion sourced from federal ARRA block grant)Bankrupt in August 2011 with $485.6 million in debt
    • SolyndraReceived $535 million in federal loan guarantees in 2009 and $25.1 million in CA tax creditBankrupt in August 2011
    • SpectraWattReceived $500,000 in federal loan guarantees in 2009Bankrupt in August 2011
    • Babcock and Brown: Received $178 million in federal grants in December 2009 (4 months after it went bust)Bankrupt in early 2009
    • Mountain Plaza Inc.: Received $424,000 in federal grants through TN Department of Transportation in 2009Bankrupt      in 2003 and again in June 2010
    • Solar Trust of America (parent company: Solar Millennium from Germany): Received $2.1  billion loan guarantee in April 2011Bankrupt in April 2012

And the other subsidized “Green Energy” companies in decline:

    • A123: Received $300 million in federal grants and $135 million in MI grantsDeclining orders and have forced multiple layoffs
    • Amonix, Inc.: Received $5.9 million in federal tax credits in 2009 through  ARRALaid off 2/3 of work force
    • First Solar: Received $3 billion in federal loan guaranteesBiggest S&P loser in 2011, CEO fired
    • Fisker Automotive: $529 million in federal loan guaranteesMultiple 2012 sales prediction downgrades for first car release, delivery and cash flow troubles;Assembling cars in Finland
    • Johnson Controls: Received $299 million in federal grants in 2009Low demand caused cancellation of a new factory, operating at half capacity
    • Nevada Geothermal: Received $98.5 million in federal loan guarantees in 2009Defaulting on long-term debt obligations, 85% drop in stock value
    • Sun Power: Received $1.2 billion in federal loan guaranteesDebt exceeds assets; French oil company took over last fall
    • Abound Solar: Received $400 million in federal loans in 2012½ work force laid off
    • BrightSource Energy: $1.6 billion federal loan approved in April 2012 – loan obtained through political connections with the administration; absent the loan, Brightsource’s solar power purchase would have fallen through.

That’s the record so far, and by year’s end once tax breaks on this madness lapse fully one-half of the industry’s jobs will be gone—gone because without the special favours these “green energy” “innovators” absorb more resources than they produce.

So that’s how well “green energy” is doing.  This really is “the worst way to go.”

“Sustainable energy” is not sustainable—not even with subsidies. “Renewable energy” is not renewable—not even by  leaving the taxpayer on the hook for billions.

So why does the media not challenge Russel Norman for continuing to pretend he owns the source to some economic magic bullet?

UPDATE: Liberty Scott makes an excellent point about the Ginger Whinger’s taxpayer-funded referendum:

If the parties that lost the last election can demand that the Government seek an additional electoral mandate to implement the policies National stood on in its 2011 manifesto, then surely the same applies in reverse.
Every time the state buys something with taxpayers' money, it should ask permission…

Scarcity and Intellectual Property, 3: Empirical Evidence of Adoption/Distribution of Technology

Guest post by Dale Halling from the State of Innovation blog.

A NUMBER OF ALLEGED SCHOLARS suggest the logical basis for property rights is scarcity[1], since property rights efficiently allocate these resources and avoid conflicts.  These alleged scholars argue that ideas and inventions are not subject to scarcity and therefore intellectual property rights should not exist.  These arguments seem to be particularly prevalent among Libertarians, particularly those at the Cato Institute and Von Mises Institute, and among the open source community.

In this third article we will examine whether there is a lack of scarcity in the adoption and distribution of new technology.

According to this theory, property rights inhere only in the tangible property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it can only be owned by one person at a time and it takes resources to create.  According to this theory however, intangible or intellectual property such as patents and copyrights (and software in the case of the open source community, is not scarce) so is not property.  Multiple people may own intellectual property without excluding others from the property.  According to Tom G. Palmer a proponent of the scarcity theory of property:

It is this scarcity that gives rise to property rights.  Intellectual property rights, however, do not rest on a natural  scarcity of goods, but on an “artificial, self created scarcity.”[2]

If Mr. Palmer is correct we would expect that in the absence of intellectual property rights new technologies would be instantly and universally adopted. Let’s examine that.

SCIENTIFIC PRINCIPLES ARE NOT subject to intellectual property rights.  Calculus was discovered over 300 year ago and is not the subject of intellectual property rights.  Despite this even in the most advanced economies only a small percentage of the population understands it.  Even though books on the subject can be reviewed for free at many libraries, those people that do understand calculus generally paid an instructor to learn this area of maths.  Almost everything a student learns through formal education, even in graduate school, is information that is readily available.  Even if the text book is copyrighted, the information is usually available in a non-copyrighted form or available for free from a library.  Despite this the U.S. spends over $500 billion a year on all forms of education.  Clearly, the cost of adopting and distribution ideas including inventions is not free and is subject to scarcity.

According to venture capitalists, most start-ups will spend 2-10 times the amount on marketing their inventions than on developing them.  If the distribution of ideas was free, not subject to scarcity, this would clearly be unnecessary.

University professors, doctors, lawyers, engineers, judges, marketers, sales people and computer scientists are mainly in the business of distributing or implementing known information.  If distributing information is free, not subject to scarcity, then all these people should either be thrown in jail for fraud or paid less than the average day laborer.

The U.S. has historically provided the strongest legal protection for inventions.[3]  The U.S. is not only the leader in the creation of new technology, but has had the fastest adoption and diffusion of new technologies.  Countries that had or have weak patent laws are associated with the slowest adoption and diffusion rates for new technologies.  This is in complete contradiction to the expected result predicted by advocates of the scarcity theory of property.

Those libertarians and open source advocates are clearly incorrect that inventions and ideas are not subject to scarcity.  This scarcity is not artificially induced, since strong patent laws are associate with greater rates of technology adoption and diffusion, not less.

Advocates of the scarcity theory of property are correct that two people can understand the same idea (calculus) without diminishing the supply of the idea.  However, this is not the same thing as both people being the inventor of or discover of the idea.  Just because I understand calculus does not make me the discoverer of calculus any more than understanding how a steam engine works makes me the inventor of the steam engine.  If I were to conceive special relativity without any knowledge that Einstein had already discovered special relativity, this would not make me the discoverer of special relativity.  I did not add any information to the store of human knowledge by my independent discovery.  The same is true of inventors, just because someone independently comes up with an idea after the inventor, does not make them an inventor.  An inventor is the person who adds to the store of human knowledge.  Being second, even without knowing that you are second, does not add to the store of human knowledge or make you an inventor.  The patent laws require the inventor to be the first in the world to create an idea.

THE DEBATE OVER WHETHER property rights are conceptually based on scarcity or based on the right of a person to their labor both physical and mental is not just an academic exercise.  Failure to provide strong legal protection to inventors has severe consequences for our wealth and well-being.  The U.S. in particular does not have the luxury of just adopting other countries’ technology to produce an increasing standard of living for its citizens, it must innovate.  By denying the value of intellectual labor, libertarians have more closely aligned themselves with Marx’s labor (physical) theory of value than with the free market. 

Adopting their approach will result in the same disastrous consequences as has occurred to countries that have adopted Marx’s ideas in other realms.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book “The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.”
Read his regular thoughts at his
State of Innovation blog.

[1] Kinsella, Stephen, Against Intellectual Property  and Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, pp. 817- 865.
[2] Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, p. 865.
[3] Khan, Zorina B., The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, Cambridge University Press, 2005, p. 298.

Monday, 18 June 2012

ECONOMICS FOR REAL PEOPLE: “The Incredible Bread Machine”

Yes, it might be exam time, but our friends at the Auckland Uni Economics Group still have a light programme over the exam period. Here’s what’s on offer tonight:

Hi Everyone,
This week we will view and discuss a short film that a former US Treasury Secretary once called "probably the finest effort at explaining in lay terms the economic facts of life..."
This short film, The Incredible Bread Machine, slays a number of economic myths that still exist today, 40 years after the film and book were released, and integrates a number of the ideas we have already looked at this year.
Where: Case Room 3, Level 0, Business School Building
When: Today- Monday, 18 June.
Time: 6pm
Look forward to seeing you there.
Check us out on the web at Facebook & our blog.

Principals Association concedes on league tables for schools?

I found it fascinating this morning listening to Principals Association head Patrick Walsh decrying that parents are taking their children out of “lower decile” schools in favour of “higher decile” schools--with the implication being parents if parents are going to act “selfishly” by using the “decile” rankings to avoid doing as they are told by zoning regulations, then the “decile” ranking should be abandoned.

This is the same Principals Association that objects to the “blunt instrument” of league tables being drawn up by the media based on National Standards. Yet Walsh was willing to concede that if parents are going to have the temerity to judge where they send their own children for eight hours a day, the best thing on which to rely is schools’ reviews by the Education Review Office.

So perhaps now he’s given his imprimatur, league tables could be drawn up by the media based on schools’ ERO Reports? Except, of course, that the ERO Reports are full of mush.

Now that’s what I call a test match!

Some questions arise from that great test match on Saturday night:

How much better is a proper three-test series than yet another round of same-as Tri-Series boredom?

Is that the first time you’ve seen someone felled by a meathead’s challenge (come in Israel Dagg) get up and smile?

If Jonathan Sexton had nailed that last kick, would he ever have had to buy himself a pint again?

Why do coaches feel the need to substitute players just when the team is in the groove and those substituted are going well?

Does Ali Williams have a brain? And how does he still get a game?

Does Piri Weepu have a pass? And why does he deserve a game?

Can Sonny Boy Williams ever tackle with his arms?

How good was it to see a losing captain absolutely gutted, instead of smiling and laughing and talking up “things we can work on”?

Was that one battle enough to redeem Brian O’Driscoll after his disgraceful whinging when he was here as Lions captain?

How many more test matches does Richey McCaw have in him?

If the game was played in the afternoon instead in sub-Arctic conditions at night, would more players manage to hold on to the ball?

Given the means by which the last-second victory was achieved, wouldn’t it have been good to have some brains around the ball in the last few minutes just a few Quarter-Finals ago?

Are you tempted now to try and get hold of a ticket for the last match in Hamilton?

Greeks, French, vote for Germans to keep picking up their tab

Do you want an opinion on the second round of Greek elections?

Oh, go on then.

Well, with two-thirds of the vote counted it seems the New Democracy Party can command about 130 seats in the 300-seat Parliament.  New Democracy is for bailouts and the Eurozone and living beyond their means, but wants to “renegotiate” what it owes and to slow down what it pays back.

New Democracy could technically go into coalition with any of the other top four, either Pasok, Syriza or Independents. Pasok also wants to stay in the Eurozone, also wants to live beyond its means, and also wants to renegotiate the bailouts. But Pasok won’t go into a coalition without Syriza (who oppose bailouts, oppose paying anything back, and want to the Eurozone to keep paying them to stay in), and Syriza won’t go into coalition with New Democracy.


Which seems to mean that there will be a third round of elections sometime not very soon (and maybe a fourth or never-ending round), and all the while and whatever the result Greece’s debts will continue growing, its repayments will continue shrinking, and the Eurozone will continue its collapsing. But by the time of that third election (and maybe fourth) election, there will be bigger disasters that Greece for Europeans to worry about.

They’re called Spain and Italy.

And maybe France, if the newly elected Socialist government really does pursue its own policy of faking reality and sending German taxpayers the bill.

And why wouldn’t they, since it’s worked so well for Greece.

The problem with socialism, as Margaret Thatcher famously observed, is that eventually you run out of other people’s money. But when other people’s money is offered to voters, especially the money of another country’s taxpayers, why wouldn’t taxpayers vote to keep taking it?


imageThis Saturday the 16th of June was Bloomsday—a commemoration and celebration of the trail taken around Dublin by the characters in James Joyce’s novel Ulysses, the events of which all take place in the day and evening of 16th June 1904, mostly through the eyes and interior monologue of Joyce’s greatest creation, Leopold Bloom.

Hence, Bloomsday.

There were celebrations this year from Montreal to Buenos Aires,

imageeven Bloomsday breakfasts featuring Bloom's favourite, "grilled mutton kidneys which gave to his palate a fine tang of faintly scented urine.”
    Manager of Dublin's James Joyce Centre Mark Traynor said tourists would be descending on Dublin to follow in the footsteps of Joyce's most famous protagonist. "What people really want to do on Bloomsday is dress up, read aloud and drink lots of Guinness," just like Bloom himself, who enters a Dublin pub with the words: "I was blue mouldy for the want of that pint. Declare to God I could hear it hit the pit of my stomach with a click."

James Joyce once said his novel Ulysses was meant to provide a picture of Dublin so complete that if the city suddenly disappeared, it could be reconstructed through the book. But Joyce said many things, only some of them seriously.

Ninety years after its first appearance (and seventy after its last ban), Joyce’s novel still divides opinion.  Defending one of my own favourite novelists, Ayn Rand, Objectivist intellectual Harry Binswanger  calls it “trash,”

Joyce's style [alternates] between gibbering wordplay ("mellow yellow smellow") and ponderous, woozy abstractions ("tentative velation"), the style conforming to Plato's dichotomy between perceptual concretes and ineffable abstractions.

Yet another of my favourite novelists, Anthony Burgess, reckons Joyce wrote it “not just to rival classical achievement but to contain it.” Not to dismiss romanticism but to extend it. Not to give meat to cloistered pedants and “bloody owls,” but

to entertain, to enhance life, to give joy… Ulysses is a great comic novel..it is part of a total, cosmic laughter that takes in drains, love, politics, and the deathless gods, and feels guilty about nothing.  Joyce…accepts the world as it is and relishes man’s creations (why, otherwise, glorify and art or science in every chapter except the last?). 

imageIt is ultimately an affirmative journey (the book ends with a "yes", indeed a whole series of them).  Burgess maintains Joyce offers us a challenge, and as Ulysses’s Molly Bloom asserts at the end of the novel, part of being fully aware, fully alive, is saying “yes” to that challenge: “when we have read Joyce and absorbed even one iota of his substance, neither literature nor life can ever be quite the same again. We shall be finding an embarrassing joy in the commonplace, seeing the most defiled city as a figure of heaven, and assuming, against all odds, a hardly supportable optimism.”

A challenge  like that I found too hard to resist, and too resolving the apparent contradiction between the opinions of Burgess and Binswanger, both of whom I respect. So a few years ago I took it up.

It’s not a quick read. And nor would you want to hurry. One reader recounts the challenge:

I first started reading Ulysses in the late 1990s, as an undergraduate at University College Dublin. It seemed so vast to me, like something I'd never be able to crack. There it was with its sepia and green cover, with an image depicting the River Liffey. It was almost as if its size and physicality were mocking my love for the instant gratification provided by frivolous computer games (and my comically short attention span).
    But I dived in. I read it with expert annotations, read it with friends, read it alone, gave up, started again, laughed, cried, and then gave up once more. It became like a friend, though. One I felt I partially understood, and yet would probably never fully know. To this day, I have not read it through over a continuous period. Instead, I have digested it in parts over about five years.

But I have to say, having just started a similar journey, I’m with Burgess. Ulysses I’ve discovered is nine-hundred pages of brawling, sprawling, fabulous, crapulous, life-giving reflection and rambunctiousness.  I hope, like Atlas Shrugged, to enjoy reading and re-reading it for the rest of my life. 

And I look forward to joining a Bloomsday celebration somewhere next year—maybe like the one I missed this year. Bugger.

Friday, 15 June 2012

Cunliffe fails history again

Labour’s aspiring would-be leader David Cunliffe continues to head around the country pretending he knows what he’s talking about,  disgracing himself in his first speech with his lack of learning and absence of economic nous, an experience he repeated in front of yesterday’s audience of receivership and liquidation lawyers—reciting history that wasn’t so and economics that never could be.

I still maintain his future lies in poetry.

Let’s see however if we can’t correct some of his latest error-ridden diatribe. He begins with cloth-cap boiler plate before settling into his main theme:

Anyone who seriously believes that the economy can somehow heal itself by being left alone, hasn’t read a newspaper for the last 12 months.

And anyone who thinks the economy has been left alone hasn’t read a newspaper—or a history book—for some time. But this is the level of his flawed analysis, in which virtually every sentence is either a lie, or spin, or just frankly mistaken. He either believes it, or he’s even stupider than the cat’s arse he looks like. [Cunliffe’s drivel appears below in italics, followed by my comments.]

No one these days [he says] seriously believes that a totally unregulated economy will work. Just as important, no one seriously believes that a totally regulated economy will work. It’s a question of getting the balance right.

This is three canards in one, isn’t it: Two straw-men coupling with an attempt to posture as a man of balance. (“Look at me, I’m a moderate!”)  But the fact is, while there are any number of ridiculous regulations that helped cause the crash and that still burden the recovery,* despite his posturing Cunliffe doesn’t suggest removing any burden—but only adding more. 

imageHe talks  of “Lessons Learned From the Great Depression”—and it’s clear on reading further he’s learned none. Perhaps because all of what he appears to know about the Great Depression is not true.**

The Great Depression [he says], for those who haven’t studied history, was caused by a lack of government regulation.

Well, it’s clear Cunliffe has never studied history. The Great Depression—America’s  Great Depression (which was where it began and where it took longest to recover) did not persist for lack of any regulation; it was spun out and spun out by an endless series of regulations pouring out of the White House—regulations to keep wages high, to keep prices high, to cartelise industries, to confiscate gold, to confiscate agricultural produce, to pick winners and subsidise losers, to create a business environment of such complete “regime uncertainty” that no-one (not even the President) knew from one day to the next what what would happen the day after tomorrow.

The 1929 stock market crash triggered an economic tsunami that all but flattened America. Just like now, it was the ordinary people that bore the brunt of the crash and the depression that followed it.
    And, as if the crash itself wasn’t bad enough, the government still refused to intervene, so the situation got worse.

The 1929 crash was not the biggest economic crash in history.  It was not even the biggest crash in that decade. In 192o the stock market fell further and faster than in 1929—and the collapse in the monetary base during 1920–1921 was the largest in U.S. history—yet within eighteen months recovery was complete.

Further, and for a variety of reasons (some of them involving a sick and lame-duck president and a Fed still reluctant to destroy their currency) in 1920-21 neither government nor Federal Reserve Bank “intervened”—in fact in every sense they did the very opposite of  what Cunliffe now recommends:  the government slashed its budget, the Fed hiked interest rates, and the Consumer Price Index dropped like a stone. And the situation rapidly got better, mostly because costs came down as prices came down and businesses had the certainty and lower costs within which to redirect production into new and more profitable ventures.

Things got better, and fast.

So that’s what happened when there was no “intervention.”  And like a laboratory experiment we can contrast it with the prescription tried a decade later, because what was tried there was virtually the diametric opposite with results as grim as described by Cunliffe:

Bank after bank collapsed, along with the millions of families who had entrusted those bankers with their life savings.
By 1933, 11,000 of the United States’ 25,000 banks had failed. That’s nearly half.
People had no money…And so it went on, and on, and on, until, by 1933, nearly 13 million Americans were unemployed. That was a quarter of the total workforce.
And what was the government’s response: nothing.

imageYes, bank after US bank collapsed. 9,646 in all (Cunliffe’s figure is just made up for effect.) They collapsed because the government was doing something: with regulations on branch banking and gold holding it was getting in the way. When nearly half of US banks were failing, how many banks do you think were failing over the border in Canada, where the same regulations weren’t imposed? Answer: not one. The government’s own banking regulations amplified the problem.

And do you know why 1933 was the nadir for banks? Because the incoming president, Franklin Roosevelt, had put it about for months since his election (it taking months for the new president to be inaugurated) that upon his inauguration he would devalue the dollar and confiscate gold, rumours he put about that caused the biggest run on the banks since the Civil War.

And what was the government’s response? Well, it was far from nothing. From 1929 to 1933 Hoover did the exact opposite of sitting on his hands. He was virtually Keynes-Lite, as he himself boasted in his 1932 presidential campaign:

We might have done nothing [said Hoover]. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

imageFeatured in Hoover's plan were increased taxes, lowered interest rates, huge deficits, public dams, public works, restrictions on immigration and trade, and government regulation of banking, finance, industry and labour markets—even his 1932 opponent Franklin Roosevelt accused him (accurately) of “reckless and extravagant” spending, of thinking “that
we ought to center control of everything in Washington as rapidly as possible,” and of
presiding over “the greatest spending administration in peacetime in all of history.”  It was all of it—all the spending, all the alleged “stimulus”—all an attempt to keep up wages and prices and keep the engine ticking over in the manner to which Cunliffe suggests we do today.

It failed.  It failed spectacularly.

By 1933, nearly 13 million Americans were unemployed. Yet when the Second World War began, after eight years of further intervention by Franklin Roosevelt (whose advisers conceded their New Deal was based on the “Hoover New Deal”) , nearly 12 million were still unemployed (unemployment had never dropped below 20% for the whole of the decade) and Roosevelt was to embrace a world war as a way to get the unemployed out of his hair.

Cunliffe '”quotes” Hoover’s Treasury Secretary Andrew Mellon (“by curious coincidence, one of the wealthiest men in America” sneers Cunliffe) who was supposed to have advised Hoover to “liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system.” Fact is, it would have. But the “quote” was actually Hoover’s, and it was him contrasting the “liquidationist” programme of the type followed in 1920 with the “interventionist programme” followed by Hoover and Roosevelt from 1929 to 1933, and 1933 to 1945 respectively.

Cunliffe neither knows nor cares about the truth. He says

the voters threw out Herbert Hoover and voted in Franklin D. Roosevelt. Roosevelt heavily intervened in the economy, regulated the banks and the stockbrokers, and set America on the path of its longest period of economic growth in history.

But as Roosevelt’s own Treasury Secretary Henry Morgenthau summarised for a 1939 Treasury meeting the results of this heavy intervention and regulation

“No, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. ...I say after eight years of this Administration we have just as much unemployment as when we started…Mr. Doughton: And an enormous debt to boot!
HMJr.: And an enormous debt to boot! We are just sitting here and fiddling and I am just wearing myself out and getting sick. Because why? I can’t see any daylight. I want it for my people, for my children, and your children. I want to see some daylight and I don’t see it…

From Cunliffe neither do we see daylight, only dishonesty. For it is from shibboleths and myths like this he hopes to assemble around himself a braindead mob of zealots eager to accept him and his word as sufficient unto itself to lead him to Prime Ministerial glory—for make no mistake, that is his ambition.

There is more, much more in his speech that challenges both the historical record and the patience of his audience. But since he is going to continue going around the country stirring up ignorance, might I suggest just four questions you might ask from him if you have the misfortune to find yourself in a room with him and a microphone up front.  Ask him,

  • Why did the US economy recover so quickly in 1920-21 by following the opposite of his prescription?
  • How was it that England. Australia, Canada and New Zealand followed more conventional, less interventionist policies than the US and were out of Depression by 1934/45?
  • Why was it that no Canadian banks failed in 1929-33, while US banks were falling over like so many houses of cards?
  • Why was it that when US government sending plummeted in 146 and deficit spending ended, and 10 million US servicemen came home from the war, why was it that instead of the economic disaster predicted by Keynesians at the time this was instead the beginning of real prosperity?

Because the answer to every single one of those simple questions undermines the whole premise on which Cunliffe’s Five Year Plan rests.

* * * * *

* Indeed, the three most regulated parts of the US economy were housing, mortgages and banking; no surprise then that the crash happened at the intersection of all three.
The question is not regulation or not. It’s about what governments can and must do to protect individual rights, property rights and contracts—to protect actions chosen voluntary and production about the separation of state and economics , and after a century of ever-increasing government regulations and spending, do Americans think the obvious solution is to increase government regulations and spending? Why, when companies in the least regulated industries prosper and those in the most heavily regulated industries struggle and fail, do people blame failures on capitalism and free markets?a large number of quite smart people understand it is not a matter of regulation per se

** The best, most concise debunking of what many people think they know about the Great Depression can be gleaned from Larry Reed’s short ‘Great Myths of the Great Depression,’ online in a 28-page PDF.

Thursday, 14 June 2012

How This Bear Market Could Last Another 18 Years… Just Like Japan’s

_Kris_SayceGuest post by Kris Sayce from Money Morning Australia, who looks at the country that most famously began following the “stimulus” prescription more than twenty years ago.

Last week, Bloomberg News reported:

‘Japan’s Topix Index (TPX) entered a bear market, with stocks plunging to a level not seen since 1983 as Europe’s debt crisis spurs a global flight from risk assets, driving up the yen and threatening exports…
‘In 1983, the Topix was in the sixth year of a 12-year advance that ended when an asset bubble burst, ushering in an era of deflation and economic stagnation. The gauge has lost 76 percent since peaking on Dec. 18, 1989.’

It has been a rough time for Japanese stock investors.

An entire generation of Japanese have lived through a bear market. Japanese investors who were 18 when they bought their first shares in 1989 are now 41 years old.

And so, as the Aussie market nears the end of its fifth year as a bear market, the question on every investor’s lips should be: Will Aussie stocks fall for another 18 years?

We’ll give you our take on it now…

Until recently, most people thought asset prices always went up.

This was mostly the view among stock and housing investors.


Because it was what they had seen during their lifetime. Even when house and stock prices fell, it wasn’t long before they recovered and went higher again.

Take the 1987 and 2001 stock market crashes. Or the early 1990s housing bust. Soon prices stopped falling, levelled off, and then soared higher.

What the Japanese Bear Market Tells Us

But as the Japanese experience shows, stock and housing prices don’t always go up, and they don’t always recover after a crash.

Look at that quote from Bloomberg again. The Topix Index ‘has lost 76 percent since peaking on Dec. 18, 1989.′

And the important thing is, if Japanese stock market history tells you anything, over time the impact of the crash gets worse, not better. As this chart of another Japanese index, the Nikkei 225 shows:

chart of another Japanese indexSource: Wikipedia

Following the 1989 peak, the index halved over the next four years. Then it steadied into a range, before continuing to fall.

The Japanese stock market is an important lesson for any investor about the impact of credit-fuelled bubbles. We won’t go into the history of the Japanese bubble, except to remind you of how the 3.41 km2 of land containing Tokyo’s Imperial Palace was valued at ‘more than all the real estate in California’ during the 1980s boom (Edward Jay Epstein, 2009).

What it tells you is that rather than stock and housing prices always going up (in the long run), they behave more like a bouncing ball.

In Japan during the 1980s, the credit-fuelled boom threw the ball high into the air. It began to fall in 1989. The ball hit the floor in the early 1990s…bounced until the mid-1990s…fell and hit the floor again by the mid-2000s…and so on.

You get the point.

But why should this happen? And what can it tell us about the future direction of the Aussie market?

Following Japan’s Bear Market Lead

The Japan experts will tell us Japan is unique. The usual spiel is that Japan owns all its own debt and so it’s different to the debt picture in the US, Europe and elsewhere.

Maybe that’s true. And maybe it isn’t. Or maybe Japan’s economy is just a few years ahead of the game. Consider these two charts from the latest Banque de France Financial Stability Review:

Holders of government debtClick here to enlarge
Source: Banque de France

Right now, Japanese residents and the Bank of Japan hold 94% of all Japanese government debt.

Compare that to 52% of US government debt held by the Fed and private residents. In fact, US Fed and government (including government agencies) hold USD$6.328 trillion…about 40% of all US debt.

And according to a 28th March report by the Wall Street Journal, ‘The Federal Reserve is propping up the entire US economy by buying 61 percent of the government debt issued by the Treasury Department…’

The report concludes that this is ‘a trend that cannot last’.

But what if it can last?

What if the US Fed keeps buying US debt?

Who’s to say that in 10 or 15 years, US residents and the Fed won’t own 94% of all US debt?

It doesn’t seem likely now, but then, four years ago it didn’t seem likely that the US government would own 40% of its own debt today.

With so much money flowing into government coffers, investors need to face the facts: the era of financial asset growth is over.

No government will ever choose to cut spending. Remember that all the talk of austerity is false. Government spending in the US, UK and Australia will go up over the next few years…even though the politicians claim they’re making savage cuts.

(All they’re doing is cutting the spending growth rate, not the nominal rate. In other words, if the previous forecast was to grow government spending by 5% next year, but it only grows 4.5% they call it a spending cut…even though spending has risen.)

We’re afraid things are the same for Australia.

The Boom is Over, Get Used to a Long Bear Market

Australia has benefited from a decade of the China resources boom. But that boom is over. US and European private spending is falling. And as Europe and the US are China’s two biggest export markets, any problems in those economies will impact China…and therefore Australia.

That’s despite what the mainstream media told you when they claimed Europe is ‘so far away’. That growth was in Asia…where we are. That’s only true if Americans and Europeans kept spending.

The problem facing Australia over the next few years is the problem that the US and Europe face now. How to pay for an expensive welfare system when tax revenues fall?

The answer will be to look to Japan, Europe and the US… print more money and have the central bank buy the government’s debt.

Anyone who thinks Australia or New Zealand is different due to the lower levels of government debt is kidding themselves. It only takes a few years of budget deficits and suddenly the government and taxpayer are running just to stand still.

So, far from being an exception, Japan is more like the blue-print for governments and central bankers everywhere. Get ready for this bear market to last another 18 years…at least.

Posted by permission of Money Morning Australia, where
this post first appeared.

Wednesday, 13 June 2012

Bring back capital controls? It’s already happening!

You may have noticed in recent months a growing chorus of economic morons, from Jane Kelsey to Bernard Hickey to NZ Manufacturers and Exporters Association CEO John Walley, calling for the imposition of capital controls—or to put it in real English, for the government to put bans, restrictions and prohibitions on the use, storage and movement of your money and valuables.

What would that be like?  Don’t just wonder: look. Look at the places where capital controls have already been imposed—in Italy, in Greece, in Ireland, in Iceland, in Portugal, in Spain…

Simon Black from the Sovereign Man blog summarises today’s frightening re-impositions of what we thought we’d seen the last of in NZ in 1985 (and in rest of the developed world in the late 70s), before which we “enjoyed” fixed exchange rates, extensive controls on capital flows … and the “Polish shipyard” economy presided over by Robert David Muldoon.

It starts: the government’s plan to steal your money.
    THERE ARE CONSEQUENCES TO being flat broke.
    There are consequences to investing any level of confidence in a financial system underpinned by debt and the creation of paper currency.
    There are consequences for ignoring reality and pretending that everything is normal.
    This is one of them: European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe's borderless Schengen area.
    Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy's bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.
    In Greece, the government has taken to simply pulling funds directly out of its citizens' bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification.
    It's no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.
    European political leaders aim to put a tourniquet on this wound in the worst possible way.

    Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation's borders. They can take a variety of forms, including:

  • Setting a fixed amount for bank withdrawals, or suspending them altogether
  • Forcing citizens or banks to hold government debt
  • Curtailing or suspending international bank transfers
  • Curtailing or suspending foreign exchange transactions
  • Criminalizing the purchase and ownership of precious metals
  • Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people's hard earned savings and their future income within a nation's borders.
    This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation... both of which soon follow.
    The thing about capital controls is that they're like airline baggage fees; ultimately, all governments want to do it, they're just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame 'industry standards.'
    Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It's been a long time coming for governments to return to that model.
    Since the inception of this letter, it has been a constant theme for us to talk about the increasing threat of capital controls. Your money, your savings, your livelihood are all under attack by insolvent governments, and it's critical to take steps to reduce your exposure.
    When European financial leaders all openly admit that they're making plans to establish continent-wide capital controls, it really begs the question-- what additional warning sign does one need?
    The dominos have already started falling. Iceland. Ireland. Greece. Spain. Portugal. Italy. Cyprus. Soon even France and the rest of Europe.

And it will come to New Zealand as well. There are well over 50 billion reasons why—and know-nothing cheerleaders like Hickey, Kelsey and the well-named Walley to talk it up.

If you don’t start fighting back now, it might be too late.

PS: In that same article linked to above, Simon Black concludes with things you can do when the government comes for your money.

No power? How about no Greens.

What’s the definition of humbug? I’m not sure exactly, but it’s something involving Russel Bloody Norman and his Green Party. Who are on Red Radio this morning arguing that the country needs security of electricity supply!

Excuse me, this is Russel Bloody Norman from the Green Party arguing for security of electricity supply!?

It just makes your jaw drop.

This is the Green Party who partied when the coal-fired Meremere Power Station was mothballed and protested when it wanted to re-open transforming waste to power. Who celebrated when Marsden A closed and Marsden B was disallowed from opening—and whose protesting helped to make the closing necessary and the opening impossible.  Who cheered when power stations closed in New Plymouth, Palmerston North and Te Awamutu.  Who help to throttle every proposed expansion of every existing power plant, and who helped to kill new generation from Project Hayes, Project Aqua, Mokihinui Hydro, Tongariro Hydro and hydro using the Whanganui River, Wairau River, Matiri River, Makititaki River or the Arnold River;  any further hydro on the Clutha River; any possible gas or tidal generation around the Kaipara; and who even as we speak are helping to delay new generation projects at Dobson, Castle Hill, Hurunui, Matiri, Mill Creek, Mokau, North Bank, Puketoi, Rotoma, Stockton, and Wairau.

They’ve protested every coal-fired power-station that has been opened—and every gas-fired and oil-fired power station proposed—and they’ve resisted every coal mine, gas field and oil field being explored, coming on stream or being exploited. They’ve argued against every wind project—and helped to spearhead resistance. They’ve helped to stop every new hydro scheme proposed –and every oil or gas-fired plant dreamed up. They helped to promote the Kyoto Protocol and the related Emissions Trading Scam, which serve to strangle coal, oil and gas-fired power stations, and the Resource Management Act, which helps to kill off hydro, wind and thermal power stations.

If we have no power, and we’re perilously close to that unhappy state, then it is they and their fellow travellers will have played the largest part in making that happen.

And now they have the cheek, they have the effrontery , to complain that selling state-owned power generators is going to threaten the security of electricity supply!

I’m staggered.

The only thing worse than the absolute bloody hypocrisy is the abject bloody acquiescence of the journalists who didn’t bother to ask Russel Norman how he looks in the bleeding mirror in the morning without vomiting.

Tuesday, 12 June 2012

Let’s deal with the sackings first, and leave the repairs ‘til later

I see Judith Collins, under pressure about the shambolic setup that is ACC, has chosen a scapegoat. She’s sacked the Chairman.*

That this will do nothing to change the setup that is ACC is immaterial.** Action was called for, and action has been taken. And action is what Collins is all about—or at least the appearance of action.

After all, who cares about actually changing ACC when you can get the same headline for a quick sacking.

* * * * *

* Well, actually, he’s headed for a nice sinecure as chairman of the ANZ Bank. But I’m sure “sacking” will be the spin.

** No more will it change the setup that is ACC than the sacking of IRD Commissioner Graham Holland after the inquiry into the corrupt culture of the IRD changed that organisation. But it looks mighty impressive, doesn’t it.

The dingo wasn’t innocent

Dingo killed Azaria, coroner finds
A dingo was responsible for the death of Azaria Chamberlain in 1980, a Northern Territory coroner has found.

It’s taken virtually thirty years to confirm that Michael and Lindy Chamberlain, as was, didn’t kill their baby. A dingo did.

The last time the issue was canvassed was in 1995 when a coronial inquest returned an open verdict—about which feelings were running hot. How hot? Well, let me tell you. A couple of years after that verdict I was in Darwin playing footy with a New Zealand team.

We headed into town one day, all wearing our team shirts to encounter a rally demanding Justice For Lindy Chamberlain. Thinking it would be funny, one of our number yelled out “The Dingo Was Innocent!”  As you do. (Did I tell you we were all wearing the same shirt as this idiot?) Well, it was funny back home, and might have been funny at any other time and place.  But I can tell you, you’ve never seen 22 blokes move so quickly. This crowd were pretty much the opposite of amused, and only our own agility avoided a few of them not being guilty of something more serious than purveying a bad dingo joke.

This case has been a running sore for Australian justice for thirty years. Thank goodness it can finally and conclusively be put to bed.

Tank man [updated]

enhanced-buzz-wide-4701-1338497429-4Source: AP/Je1ff Widener

The image of a defiant man stopping a column of Chinese Red Army tanks heading towards the 1989 Tiananmen Square massacre has become iconic.  Two recently unearthed photos give greater context—the uncropped photo is frankly terrifying.

enhanced-buzz-wide-6951-1338324627-11Source: AP/Terrill Jones


See also "40 of The Most Powerful Photographs Ever Taken"—and scroll down to comments for other contributions and suggestions.

[Hat tip Geek Press and Jason Erik Lundberg]

UPDATE:  Video here of the massacre and the confrontation, when for one moment the honour of one billion people rested on the shoulders of one man. [Hat tip Riko S.]

Scarcity and Intellectual Property, 2: Empirical Evidence for Inventions

Guest post by Dale Halling

A NUMBER OF ALLEGED scholars[1] suggest the logical basis for property rights is scarcity—that property rights efficiently allocate scarce resources and so avoid conflicts.  These alleged scholars argue that ideas and inventions are not subject to scarcity and, therefore, intellectual property rights should not exist.  These arguments seem to be particularly prevalent among libertarians, particularly those at the Cato and Mises Institutes and among the open source community.  In this article we will examine whether there is a lack of scarcity in the creation of ideas.

According to this theory, tangible property rights include only real property rights in land and buildings and personal property rights in things like cars and furniture.  Tangible or physical property is scarce since it takes resources to create and can only be owned by one person at a time.  According to this theory however, intangible or intellectual property such as patents and copyrights (and software according to the arguments of the open source community) is not scarce, which means multiple people may own intellectual property without excluding others from the property.  According to Tom G. Palmer a proponent of the “scarcity theory” of property:

It is this scarcity that gives rise to property rights. Intellectual property rights, however, do not rest on a natural scarcity of goods, but on an “artificial, self created scarcity.”[2]

Scarcity however is neither the historical nor the logical basis of private property rights.

PATENTS, ONE OF THE TYPES of intellectual property rights, are based on creating new ideas or inventions.  The number of potential inventions appears to be almost limitless.  For instance, Paul Romer, a professor of economics at Stanford states:

On any conceivable horizon — I’ll say until about 5 billion years from now, when the sun explodes — we’re not going to run out of discoveries. Just ask how many things we could make by taking the elements from the periodic table and mixing them together. There’s a simple mathematical calculation: It’s 10 followed by 30 zeros. In contrast, 10 followed by 19 zeros is about how much time has elapsed since the universe was created.[3]

Someone might object that Paul Romer has overstated the number of possible chemical inventions, since not all elements are able to chemically bind to each other.  On the other hand, this calculation only includes one of each element.  Some of our most important chemical compounds contain long chains of carbon and silicon atoms.  In addition, the elements can bond to each other in multiple ways, ionic bonds, covalent bonds, polar covalent bonds and hydrogen bonds.  Elements may also have double, triple and quadruple bonds.  When you add in all these variations, Dr. Romer probably underestimated the number of possible chemical inventions.  And this calculation is only for chemistry.  When you consider computer networks or electronic circuits with millions of transistors or nodes the number of different possible connection is n(n-1)/2 or easily equal to the number of combinations described for chemistry.  This does not begin to name all the possible number of inventions.  This would seem to argue for a lack of scarcity on the conception of ideas or inventions.

That’s not the whole story, however.

Although there are an unlimited number of potential inventions, this does not mean that creating them is free.  The U.S. spends over $300 billion a year on research and development to discover inventions.[4] Either these people are wasting a tremendous amount of money on a fraud, or producing inventions really is subject to scarcity. 

The fact is that conceiving inventions takes scarce resources.  Researchers are scarce. The availability of research facilities and research equipment are all subject to scarcity.  Each researcher’s ability and their time to pursue various inventions and discoveries is limited. 

Clearly, the proponents of the scarcity theory of property are incorrect on this and much else: the development of inventions and innovations really is subject to scarcity.

Dale Halling is an American patent attorney and entrepreneur, and the author of the book The Decline and Fall of the American Entrepreneur: How Little Known Laws are Killing Innovation.
Read his regular thoughts at his
State of Innovation blog.

[1] Kinsella, Stephen, Against Intellectual Property and Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, pp. 817- 865.

[2] Palmer, Tom G., “Are Patents and Copyright Morally Justified? The Philosophy of Property Rights and Ideal Objects”, Harvard Journal of Law & Public Policy, Vol. 13, No. 3, Summer 1990, p. 865.

[3] Bailey, Ronald, “Post-Scarcity Prophet: Economist Paul Romer on growth, technological change, and an unlimited human future”, Reason, December 2001.

[4] Kao, John, Innovation Nation: How America is losing its Innovation Edge, Why it Matter, and What We Can Do to Get it Back, Free Press, 2007, p. 39

Monday, 11 June 2012

ECONOMICS FOR REAL PEOPLE: “Meltdown,” or, the complete story of the GFC in sixty minutes

Our friends at the Auckland Uni Economics Group report they’re regurgitating nonsense enduring exams this week, but the hardy souls are meeting this evening nonetheless.  Here’s their announcement:

imageTonight, we will be watching a video presentation by economic historian Thomas Woods, based on his 2009 book Meltdown (subtitle: “A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse”). Including:

  • How the government and the media created the myth that this crisis is so complicated that people should not question the government's response but leave it up to the "experts."
  • That no amount of government regulation or "brilliant" politician can fix a broken system—a new system is the best solution.
  • How politicians and the media refuse to talk about the role of the Federal Reserve in this crisis, but it is at the heart of the problem.
  • The media has created the myth that we need a "new New Deal" to get out of this crisis.
  • The cold truth that capitalism isn't the culprit—the government is.

Join us, and join in the discussion afterwards:

WHAT: “Meltdown,” vidoe presentation by Thomas E Woods, followed by Q&A
WHEN: Tonight, Mondy, at 6pm
WHERE: Case Room 3, Level Zero, University of Auckland Business School

All welcome.
See you there!

SCHIFF: “Damn The Torpedoes” [updated]

_PeterSchiffGuest post by Peter Schiff

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for ratings agency Moody’s, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated.

When asked about the recent deterioration in the global economy, Zandi said that “the worst possible scenario” at present would occur if Greece were to leave the Eurozone. He claimed that the economic gyrations and liquidations of bad debt that would result from such an exit would be sufficient to create a vicious cycle that could drag the global economy back into recession. As a result, he urged policy makers to take whatever steps necessary to maintain the current integrity of the 17 nation Eurozone.

Given what most economists now know, few would actively argue that Greece’s entrance into the Eurozone back in 2001 was a good idea. In fact most concede it was a terrible idea based on bad forecasting and outright fraud. There is little disagreement over the fact that Greece grossly misrepresented its financial position in order to gain initial entry into the monetary union. It is also widely agreed upon that in the ensuing decade Greece exploited its monetary advantages to borrow irresponsibly.

Much has been written about how the fundamental misfit between Greece’s economy and currency gave birth to a deeply flawed system that was destined to run off the rails. Most also agree that the countries like Greece and Germany are too economically and culturally disparate to exist under the same monetary umbrella. But despite all this, Zandi wants to maintain the status quo. In his opinion, it is so imperative to prevent the deflationary consequences of an economic restructuring that it is preferable to prop up a failed system, perhaps indefinitely, rather than allow a newer, healthier system to replace it. In the process, the moral hazard created not only assures that Greece will become an even greater burden on Europe, but so too will other nations whose leaders will be emboldened in their profligacy by the anticipation of similar help.

imageFrom Zandi’s perspective (and he is certainly in the majority on this point) the goal of economic policy is to keep GDP growing. It follows then that he will oppose large-scale debt liquidations which drag down GDP in the short term. But sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once economies stop throwing good money after bad, capital is freed up to flow into more economically viable purposes. But economists and politicians never look at the long term. Their job seems to be to manage the economy for the next election.

The same “damn the torpedoes” mentality dominates economic thinking with respect to the U.S. economy as well. Years of artificially low interest rates, and government subsidies that direct capital towards certain sectors and away from others, has created an economy with too little savings and production, and too much borrowing and consumption. The ultra-low interest rates currently supplied by the US Federal Reserve serve to perpetuate this unsustainable artificial economy. Higher rates would work quickly to redirect capital to the more productive sectors. But high rates could bring deflation and liquidation, which few economists are prepared to risk.

The US has too many shopping malls selling stuff, but not enough factories making stuff. It has too many kids in college studying liberal arts, and not enough in the workforce acquiring skills that will actually increase their productivity. Banks are loaning too much money to individuals to buy houses, and not enough money to entrepreneurs to buy equipment. There are too many tax-takers riding in the wagon, and not enough taxpayers pulling it. The list is long, but the solutions are short.

The US needs interest rates to rise to market levels, and the economy to restructure without government interference—to stop beating a dead horse and hitch its wagon to an animal that can really pull. The process will be painful for many, but like ripping off a band-aid, the pain will be over relatively quickly. However, since a painful restructuring means recession, politicians resist the cure with every fiber of their beings. So instead of a genuine recovery, one that will provide productive jobs and rising living standards, we see only a phony recovery that produces neither.

Preserving a broken system merely to avoid the pain necessary to fix it only makes the situation worse.  Propping up sectors that should be contracting prevents resources from flowing to other sectors that should be expanding. Keeping workers employed in non-productive jobs prevents them from gaining productive employment elsewhere. Encouraging activity or behaviour the market would otherwise punish discourages alternatives that it would otherwise reward.

Unfortunately, leaders on both sides of the Atlantic put politics above economics, and economists like Mark Zandi provide the cover they need to get away with it.

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Capital and host of the internationally syndicated Peter Schiff Showwww.schiffradio.com. First posted Friday, June 8, 2012 at Europacific Capital

UPDATE: Meanwhile…

imageImage from Zero Hedge

And in Ireland they’re not just mourning their team’s embarrassing non-performance on Saturday night. Like iwi off to the trough for a new payout on the same claims,  the Irish government demands renegotiation of its bailout terms to match Spain:

            Congrats Germany: you have now opened the Pandora's box of infinite moral hazard, bailout renegotiations
         and unconditional rescues. Anything less than a pari passu bailout to Spain's, which the economy minister 
         touted as having no political strings attached, will incite a revolution.
         Oh, [but in the good news], the IMF has just been made obsolete.

And the three-quarters of Ireland not off work mourning Saturday night’s loss are over at Euro 2012 celebrating further losses by the German taxpayer:

Image from The Daily Capitalist