The Big Picture

Posted on July 24th, 2015

Financial Crisis Signpost Showing Recession Speculation Leverage And BubbleBy Peter Schiff, President and CEO Euro Pacific Capital

The past four years or so have been extremely frustrating for investors like me who have structured their portfolios around the belief that the current experiments in central bank stimulus, the anti-business drift in Washington, and America’s  mediocre economy and unresolved debt issues would push down the value of the dollar, push up commodity prices, and favor assets in economies with relatively low debt levels and higher GDP growth. But since the beginning of 2011, the Dow Jones Industrial Average has rallied 67% while the rest of the world has been largely stuck in the mud. This dominance is reminiscent of the four years from the end of 1996 to the end of 2000, when the Dow rallied 54% while overseas markets languished. Although past performance is no guarantee of future results, a casual look back at how the U.S. out-performance trend played out the last time it had occurred should give investors much to think about.

The late 1990s was the original “Goldilocks” era of U.S. economic history, one in which all the inputs seemed to offer investors the best of all possible worlds. The Clinton Administration and the first Republican-controlled Congress in a generation had implemented policies that lowered taxes, eased business conditions, and encouraged business investment. But, more importantly, the Federal Reserve was led by Alan Greenspan, whose efforts to orchestrate smooth sailing on Wall Street led many to dub Mr. Greenspan “The Maestro.”

Towards the end of the 1990’s, Greenspan worked hard to insulate the markets from some of the more negative developments in global finance. These included the Asian Debt Crisis of 1997 and the Russian debt default of 1998. But the most telling policy move of the Greenspan Fed in the late 1990’s was its response to the rapid demise of hedge fund Long term Capital Management (LTCM), whose strategy of heavily leveraged arbitrage backfired spectacularly in 1998. Greenspan engineered a $3.6 billion bailout and forced sale of LTCM to a consortium of Wall Street firms. The intervention was an enormous relief to LTCM shareholders but, more importantly, it provided a precedent that the Fed had Wall Street’s back. Read More..

Informative Links for July 2, 2015

Posted on July 2nd, 2015

Puerto Rico Poses Bigger Threat to U.S. Investors than Greece – MarketWatch  …  “As U.S. investors have been panicking over a potential Greek collapse, Puerto Rico’s governor Sunday announced that the small U.S. territory cannot pay its roughly $72 billion in debt. Less than 24 hours later, Gov. Alejandro Garcia Padilla proposed a plan to seek a restructuring of the island’s debt, suggesting that the island is virtually insolvent. …The report concluded that the U.S. commonwealth has lost the ability to fund itself through public debt markets, while pointing to what the authors described as “a decade of stagnation, outmigration and debt.”

“But the problem is that, as per the U.S. constitution, Puerto Rico cannot file for Chapter 9 bankruptcy, like Detroit did, and neither can its public corporations and local agencies, Soto-Santoni added. So the governor is basically seeking a negotiated agreement with bondholders for a postponement of payments on the debt for a number of years. But U.S. investors would actually have much more to lose in a potential Puerto Rican default than in a Greek default. The reason is that Puerto Rico’s bonds are trading in the U.S. municipal bond market, while the vast majority of Greek debt is in the hands of the International Monetary Fund, the European Central Bank and eurozone countries.”

Obama Cuba Move Part of His ‘Legacy-Building Bucket List’ – Newsmax  …  “Two top Florida members of the U.S. House of Representatives Tuesday slammed plans by President Barack Obama and Cuban President Raul Castro to announce the re-opening of embassies in Washington and Havana for the first time in 54 years. ‘The re-designation of our diplomatic facility in Havana as an embassy means President Obama can check off another item on his personal ‘legacy-building’ bucket list‎,’ charged Rep. Carlos Curbelo. ‘It will not further our national interests and recklessly confers legitimacy ‎on an absolutely illegitimate military dictatorship.'”

“‘Our country deserves a foreign policy that puts America first and that rewards our allies — not dictators responsible for the death of American citizens and for the theft of American property,’ Curbelo said. Since Obama’s announcement of normalizing relations with Havana, “the State Department has failed to forcibly condemn the increase of repression on the island now that the Castro regime feels emboldened to continue its attacks against the Cuban people,” she said.”

Here’s What the Next Gold Bull Market Will Look Like

Posted on June 5th, 2015

UBS gold bars with mirrorsBy Jeff Clark, Senior Precious Metals Analyst

We measured every bull cycle of gold stocks and found there have been eight distinct upcycles since 1975.

We also discovered something exciting: Only one was less than a double. (A second was 99.9%.)

Even more enticing is that the biggest one—a 601.5% advance in the early 2000s—occurred just after a prolonged bear market.

And our current bear market is longer than that one. Read More..

OPEC Going Broke, Dumping Dollars. Is That Good Or Bad?

Posted on April 27th, 2015

OPEC over a barrel from # 59119By John Rubino

When oil prices fell out of bed last winter there was much hand-wringing over the fate of the former beneficiaries of high-priced crude. Trillions of dollars of junk bonds issued by frackers, for instance, might default, oil field services companies could fail, and layoffs in the oil patch might swamp the nascent employment recovery.

Some of this has happened, though not on the apocalyptic scale the worst-case scenarios suggested. More might be coming, but right now it’s not headline news in North America.

For OPEC, however, the sudden 50% diminution in export revenue is a clear and present danger, and the response is noteworthy: Read More..

The Return of the Debt Limit

Posted on March 17th, 2015

Debt Ceiling

By Romina Boccia

It’s March 16, 2015, and it is the day the debt limit returns—with a vengeance.

Since Congress suspended the debt limit for more than a year last February, the debt subject to the limit has grown by nearly $1 trillion, from $17.2 trillion to more than $18.1 trillion. A $900 billion increase in the national debt adds more than $2,800 in additional government debt for every American.

Over the past 13 years, the debt subject to the limit has increased by nearly $12 trillion. The largest share of this debt is called U.S. public debt. This is the debt the government has sold in credit markets to investors in the U.S. and abroad, including China, Japan, and European nation countries.

Public debt doubled since before the Great Recession, and is now at levels not seen since right after World War II. Now it’s at $41,000 for every American, and a child born in 2015 will be faced with a public debt of $142,000 by the time he or she leaves college, absent budget reforms.

The other part of the debt subject to the limit is debt that government agencies have borrowed from each other, like payroll taxes borrowed from the Social Security trust fund to fund other government spending. As these debts come due, the federal government sells more treasury securities in credit markets and over time more and more of the intragovernmental debt will become public debt.

Congress Should Cut Spending

Why does the debt matter? Extensive research shows that excessive debt burdens harm job growth and ultimately lower Americans’ personal incomes. Unless America changes course soon, younger and future generations will inherit a massive national debt and a less prosperous nation.

To help all Americans understand what our nation’s spending, debt, and taxes mean for them and their families—as well as what solutions can point the way forward—The Heritage Foundation’s Federal Budget in Pictures, released today, offers a unique tool to learn about these vital issues in a clear, compelling way.

In 21 easily accessible and downloadable charts, the Federal Budget in Pictures lays out who pays how much in taxes, where every federal dollar goes, which programs are growing and which are shrinking, and how high the debt will grow if Congress fails to reform the budget in time.

The 2015 Federal Budget in Pictures helps Americans understand the severity of the nation’s current fiscal situation. Lawmakers must make the tough choices to cut government spending, just as American households have trimmed back their own unnecessary spending in recent years.

As the new Congress debates its fiscal year 2016 budget it should seek to change the nation’s dangerous fiscal course, support a budget based on real constitutional priorities, and unshackle the enormous power of free people to create jobs, wealth, and prosperity.   (my emphasis)

By Romina Boccia for The Daily Signal

By permission The Daily Signal

Romina Boccia focuses on federal spending and the national debt as the Grover M. Hermann fellow in federal budgetary affairs in the Roe Institute for Economic Policy Studies at The Heritage Foundation.

Disaster Ahead for the Humpty Dumpty Economy

Posted on March 12th, 2015

Titanic Sinking

By Monte Pelerin

Anyone with an ounce of intelligence should be able to see the disaster ahead for this country. It should be noted that the US is not alone. Other developed countries are heading for the same tragedy. Governments everywhere are little more than Mafia, draining their productive citizens dry.

Economics has not failed but it might as well have. It was co-opted by the Mafia Class and turned into Statist policies to exploit the productive. A pact between the financial classes and government created a myth about Central Banking that made the entire scheme possible.

To understand the full implications of the criminal takeover of government, the words of Thad Beversdorf are enlightening:

But we are failing to deliver on our obligations as Americans, that is undeniable.  We are allowing the political class to plunder our wealth, negate our freedoms and desecrate our Constitution.  Sadly we have become the immoral populace our founding fathers warned all future generations not to become.  As the ‘Founding Father of Scholarship and Education’, Noah Webster, put it in 1832,

“if the citizens neglect their duty and place unprincipled men in office, the government will soon be corrupted; laws will be made, not for the public good, so much as for selfish or local purposes; corrupt or incompetent men will be appointed to execute; the public revenues will be squandered on unworthy men; and the rights of the citizens will be violated or disregarded. If a republican government fails to secure public prosperity and happiness, it must be because the citizens neglect the Divine commands and elect bad men to make and administer the laws”

The duty and obligation is ours and so too then are the failures and successes of our society.  Unfortunately ours will be the first generation to have failed at being American.  Yet regrettably more unfortunate is that it will be the innocent generations yet to come that will bear the full costs of our failures.  We are 15 years in to what is absolute denial regarding the competence of our nation’s policymakers.  Their failures in taking us to a false war in Iraq, in making a mockery of our rights as Americans and in destroying our economic opportunities are our failures.  Yet here we sit, silent and indifferent to our own demise; so completely antithetical to the character of a true American.

Mr. Beversdorf article goes into detail to generously support his conclusion.

Humpty Dumpty Economics

Humpty Dumpty

Mother Goose authored a nursery rhyme about Humpty Dumpty:

Humpty Dumpty sat on a wall,

Humpty Dumpty had a great fall;

All the king’s horses and all the king’s men

Couldn’t put Humpty together again.

Statist economists may have forgotten this nursery rhyme but their harmful economic policies, begun almost a century ago but accelerated recently, have pushed Mr. Dumpty (the economy) off the wall. Hubris or academic goupthink coupled with government largess prevents them from seeing that Humpty is irreparable. The media don’t have the requisite ounce of intelligence nor the willingness to report the truth if it were explained to them. They are truly “all the king’s horses and all the king’s men” trying to put Humpty together again or at least hide the incident with Humpty and the wall.

After six years of proclaimed “recovery” accompanied by rigged statistics and Pravda-like reporting, it is apparent that there has been no recovery. The average man knows that things are bad and not getting better. However our governing intellectuals and their pawns in the media continue the propaganda about a recovery. There is none, nor can there be one with current policies.

The stock market has done well over this period. But that is a result of the Federal Reserve flooding the system with liquidity, most of which has inflated financial asset prices. This chart, from Zerohedge, shows the divergence between stock prices and GDP growth:

Stock Econ Divergence

Among the several charts in Beversdorf’s article are some that support the ridiculous over-valuation of the stock market. Here is one:

Stock Market Valuation

These markets are not based on your father or grandfather’s valuations. Financial markets can be looked at as akin to a Ponzi scheme. So long as liquidity continues to be added, they may continue to climb. Participating in this game where value is dependent on government schemes rather than underlying economic value is akin to playing Russian roulette. Unfortunately, financial repression (the holding down of interest rates) has forced many people into the stock market who should not be taking these risks.

Damage and distortion is not restricted to financial assets. Mis-pricing of interest rates and other price signals ensures improper capital allocation. When the tide recedes, these improper decisions will become apparent with abandoned projects, closed plants and bankruptcies.

Humpty Dumpty economics is flooding the system with liquidity and encouraging additional debt. This approach cannot avoid the tragedy it has already created, but it may be enable to defer the economic reckoning a bit longer. The pain of correction is avoided in the same fashion as more heroin works for the addict. Additional harm is inflicted to avoid the necessary correction. At some point death results.

Ultimately, there will be another Great Depression. The levels of debt are not sustainable nor serviceable. That pertains to both public and a lot of private debt. Debt will decrease, but it will decrease via massive defaults.

Whether we get the high inflation that the government is targeting (to have a surreptitious default on debt) is moot. The Mafia is truly desperate at this point. They have little control over the path to the Greatest Depression. There is a chance that their policies get out of control on the inflation front, producing a hyperinflation. Regardless, there is no chance of current policies returning the economy to normal. Regardless of the path, there is massive disaster ahead. Debt defaults and the Greatest Depression seem inevitable. Only the timing is difficult to predict.   (my emphasis)

By Monte Pelerin for Economic Noise

By permission Monte Pelerin

Preparing for the Next Debt Fight

Posted on March 9th, 2015

Kicking the can debt by Rick McKee, The Augusta Chronicle from # 138859

By Doug Bandow

While the Obama administration lectures Europe about the latter’s fiscal policies, Washington continues to run deficits. The problem is bipartisan. When George W. Bush took office the national debt was $5.8 trillion. When Barack Obama took over it was $11.9 trillion. Now it is $18.2 trillion.

And these numbers will look like the “good ol’ days” when the entitlement tsunami hits in coming years. Interest alone ran $431 billion last year. As interest rates rise to more normal levels, debt payments will be one of the big spending boulders, alongside Social Security, Medicare, Medicaid, and military. Worse, economist Laurence Kotlikoff figures total unfunded liabilities today run about $200 trillion. But who’s counting? Certainly not the president!

It long has been obvious that the American political system is biased toward spending. (Actually, looting would be the more accurate term, but such honesty is frowned upon in Washington.) Public choice economics explains how government agencies have interests and why spending lobbies so often prevail over the public. Congress demonstrates a “culture of spending” in which members tend to back higher expenditures the longer they serve. Washington culture richly rewards legislators for “growing” in office and joining the bipartisan Big Government coalition. In particular, the famed “revolving door” provides lavish financial rewards for those who ally with well-heeled special interest groups.

Some analysts still hope that electing the “right people” will fix the system. But that is unlikely. Spending has continued ever upward under Republicans and Democrats, conservatives and liberals, saints and scoundrels. Without creating some institutional barriers to political plunder the system will continue to produce the same overall results, despite slight differences in exactly how much is spent on whom and when.

Over the years advocates of fiscal responsibility have offered various proposals to contain Uncle Sam’s voracious fiscal appetite. Many systems were complicated and subject to manipulation, being based on estimates of GDP, for instance. In contrast, the late William Niskanen proposed a measure that was simple and impossible to game. Niskanen, a UCLA economist, served as Ford Motor Company’s chief economist until the firm decided to lobby for protectionism. He was acting Chairman of the Council of Economic Advisers under President Ronald Reagan and left that position to become Chairman of the Cato Institute. He was principled, blunt-spoken, dedicated to liberty, and a friend.

Two decades ago Niskanen proposed a simple 125-word amendment requiring a three-fifths vote to increase the debt limit or raise taxes and federal compensation to states and localities for any mandates. These provisions would be suspended in the event of a declaration of war. Nothing has changed in the interim to render Niskanen’s proposal obsolete or impractical,” noted Lawrence Hunter of the Social Security Institute in a new study for the Carleson Center for Welfare Reform.

The measure would put taxing and borrowing on a level playing field, eliminating the current bias for piling up debt and more debt. Moreover, the three-fifths requirement would make it easier for legislators to reconsider outlays than to collect more money to waste. This would create a useful corrective for the pervasive pro-spending bias built into the system today. As Hunter explained, “Niskanen has constructed two jaws of a fiscal vice on spending (one on debt, one on taxes), with the default position set at ‘closed’—i.e., no room for deficits.”

However, Niskanen was writing in far more innocent times. When he left the Reagan administration three decades ago the national debt was $2.7 trillion. One then might imagine electing a few more Republicans could solve the fiscal problem. After all, under President Bill Clinton the GOP Congress slowed growth in the national debt to a relative crawl. Alas, the six years of President George W. Bush and a GOP Congress demonstrated that Republicans could be even more fiscally irresponsible than Democrats. The Senate filibuster, with a three-fifths rule, was only a limited impediment to the growth of government, and it could be ended by a simple rules change, as has been done for many judicial nominations.

Thus, the required super-majority should be two-thirds. Wrote Hunter, experience makes clear that the three-fifths requirement is “not sufficiently stringent to overcome the enormous bias in the legislative process compelling Members of Congress to spend more money, borrow more money and raise more tax revenues to pay for it.” Consequently the ramparts of fiscal responsibility should be raised even higher and made even stronger.

Moreover, Hunter noted that Congress has subverted the debt limit by effectively setting a floating number “suspended” to accommodate whatever amount Congress ends up spending. As a result, “in order to enforce the hard statutory debt limit that was in place before the suspension period took effect, Congress would actually have to extinguish almost a trillion dollars of outstanding debt to be in compliance with its own law—unimaginable.”

Thus, he proposed that the Niskanen Amendment be updated to explicitly restrict any suspension to no more than 30 days per Congress, and require the same super-majority vote to suspend the limit. If the constitutional change was enacted Congress could set a realistic but hard debt ceiling for use about a year after the provision took effect. Then the “fiscal vice” would be in place and could work its magic.

Hunter proposes one final legislative piece to complete the fiscal puzzle. Congress should prioritize spending in the event that borrowing hits the debt ceiling. Hunter proposed setting repayment of the national debt, both principal and interest, as the top priority. That would eliminate any possibility of default. Then Washington should repay Social Security recipients. The reason is politics rather than principle, since doing so would eliminate the transfer payment version of the “Washington Monument Syndrome,” by which any push for serious budget cuts is met with proposed reductions in the most sensitive and popular government programs. Today big spending politicians respond to opposition to higher borrowing, despite the availability of abundant tax revenues, by threatening retirees’ livelihoods. Instead, Uncle Sam should first cut off clamorous interest groups which fill the nation’s capital.

Congress must again address the debt limit by the Ides of March. Despite the fact that Republicans have taken control, the congressional leaders can be expected to play the same tricks as in the past. They will allow outlays to move ever upward without hindrance while giving “the impression they are not ‘caving’ on raising the debt ceiling,” warned Hunter.

Advocates of fiscal responsibility should use the debt battle to push the Niskanen Amendment. Everyone but the most committed redistributionist admits Uncle Sam has a spending problem. Niskanen’s proposal is easy to understand and enforce. It complements other budget amendments, whether balanced budget or spending limitation. Simply proposing the measure would enable the Republican majority to highlight Washington’s pervasive bias toward special interests and against common taxpayers.

Equally important, any increase should include language prioritizing payments with existing funds. The Republican House previously approved a similar measure, the Full Faith and Credit Act of 2011, which was rejected by the Democratic Senate. There’s no excuse for Congress not to decide what bills to pay first in the event of a shortfall. Congressional spendthrifts should not be able to hold everyone hostage for political purposes. Indeed, any definition of good government requires setting priorities. Let President Barack Obama threaten to veto a debt measure because it includes language requiring him to pay the most important claims first.

As the American people previously discovered, electing a GOP Congress is no panacea for Washington’s fiscal woes. However, Republican legislators typically behave far better when in opposition—compare the dramatically different experiences of the Republican Congresses under Bill Clinton and George W. Bush. Thankfully, Republicans have a similar partisan incentive to oppose President Obama’s more grandiose fiscal dreams.

While it would be hard to reject a debt limit increase for spending already approved, congressional Republicans should begin preparing for the next debt fight. That means introducing the Niskanen Amendment and approving legislation setting payment priorities. The only hope for reducing the growth in federal debt is to create institutional barriers to its growth. Otherwise the red ink likely will rise until Uncle Sam is both insolvent and bankrupt.     (my emphasis)

By Doug Bandow for The American Spectator

By permission The American Spectator

Mr. Bandow is a member of the Carleson Center’s Policy Board.

Rand Paul Slams Federal Reserve’s Secrecy, Reintroduces Bill to ‘Audit the Fed’

Posted on March 3rd, 2015

Background concept wordcloud illustration of financial audit

By Ben Smith

Sen. Rand Paul is reviving his push to audit the Federal Reserve.

The Kentucky Republican and presumptive 2016 presidential candidate said he wants to bring several of the Fed’s monetary activities under congressional oversight.

In a statement, Paul said it was time to end the secrecy behind the Fed. He believes an audit is the best way to do it.

“[An] audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington.” Paul said.

He slammed the Fed’s current operating practices, saying it works “under a cloak of secrecy and it has gone on for too long.”

Paul concluded that “the American people have a right to know what the Federal Reserve is doing with our nation’s money supply.”

Calls for a Fed audit increased after the 2008 financial crisis. The ensuing collapse in the housing market and financial industry sparked an ongoing effort to bring more sunlight to the agency.

Norbert Michel, a research fellow in financial regulations at The Heritage Foundation, told The Daily Signal he agreed with the senator.

“There is no justification for secrecy,” Michel said. “They should have a full policy audit and the Federal Open Market Committee’s full transcript, not just the minutes, should be released.”

Although the main goal of Paul’s legislation is to have a full audit of the Fed, completed within six months, there are several other reforms he’d like to implement. They include eliminating restrictions on the Government Accountability Office’s ability to conduct oversight and giving Congress oversight of Fed policies like quantitative easing.

The bill has already gained popularity in the Republican caucus with 30 co-sponsors, including Sens. Ted Cruz, R-Texas, and Marco Rubio, R-Fla., potential presidential rivals in 2016.

“The Fed has expanded its balance sheet fivefold, yet economic growth is still tepid, businesses are sitting on cash, and median income and household wealth are depressed,” Cruz noted in a statement.

Cruz also slammed the Fed for its secrecy.

“Enough is enough,” Cruz said.  “The Federal Reserve needs to fully open its books so Congress and the American people can see what has been going on. This is a crucial first step to getting back to a more stable dollar and a healthy economy for the long term.”     (my emphasis)

By Ben Smith for The Daily Signal

By permission the Daily Signal

Ben Smith is currently a member of the Young Leaders Program at The Heritage Foundation.

Europe’s Move in the Direction of More Monetary Mischief

Posted on February 25th, 2015

Thin Air

By Richard Ebeling

The European Central Bank has announced its intention to create out of thin air over one trillion new euros from March 2015 to September 2016. The rationale, the monetary central planners say, is to prevent price deflation and “stimulate” the European economy into prosperity.

The only problem with their plan is that their concern about “deflation” is a misguided fear, and printing money can never serve as a long-term solution to bring about sustainable economic growth and prosperity.

Europe’s High Unemployment and Economic Stagnation

The European Union (of which the euro currency zone is a subset) is experiencing staggering levels of unemployment. The EU as a whole has 10 percent of the work force unemployed, and 11.5 percent in the eurozone.

But breaking these numbers down to the national levels shows just how bad the unemployment levels are in the different member countries. In Greece it is nearly 26 percent of the work force. In Spain, it is 24 percent; Italy and Portugal are both over 13 percent. France has over 10 percent unemployment, with Sweden at 8 percent. Only Germany and Austria have unemployment of 5 percent or less out of the 28 member countries of the European Union.

Youth unemployment (defined as those between 16 and 25 years of age unable to find desired work) is even more catastrophic. For the European Union as a whole it is an average of over 22 percent, and more than 23 percent in the eurozone.

In Greece, it’s almost 60 percent of those under 25; in Spain, it is nearly 55 percent, with Italy at 43 percent and over 22 percent in both France and Sweden. Only in Norway and Germany is youth unemployment less than 8 percent. Almost all the other EU countries are in the double-digit range.

At the same time, growth in Gross Domestic Product for the European Union as a whole in 2014 was well below one percent. Only in the Czech Republic, Norway and Poland was it above 2 percent among the EU members.

Consumer prices for the EU averaged 0.4 percent in 2014, with most of the member countries experiencing average consumer price increases between 0.2 and 2 percent for the year. Only in Greece was the average level of prices calculated as having absolutely declined by a minus 1.3 percent. Hardly a measured sign of dramatically suffered price deflation in the EU or the eurozone!

Fears of Price Deflation are Misplaced

The monetary central planners who manage the European Central Bank are fearful that the eurozone may be plagued by a prolonged period of generally falling prices if they do not act to push measured price inflation towards their desired target of around two percent a year.

(It is worth pointing out that if the eurozone monetary central planners were to succeed with their goal and maintain 2 percent average annual price inflation, this would mean that over a 20-year period, the purchasing power of a euro would decline by around 50 percent.)

Many commentators inside and outside of the European Union and the eurozone have insisted that price deflation needs to be prevented or reversed at all costs. The implicit premise behind their arguments is that deflation equals economic depression or recession, and therefore any such decline in prices in general must not be allowed.

In all these discussions it is often ignored or forgotten that annual falling prices can well be an indication of economic prosperity and rising standards of living. For instance, between 1865 and 1900, prices in general in the United States declined by around 50 percent, with overall standards of living in general estimated to have increased by 100 percent over these 35 years. This period is usually recognized as America’s time of rapid industrialization in the post-Civil War era that set the United States on the path to becoming the world’s economic giant through most of the 20th century.

Falling Prices and Improved Standards of Living

A hallmark of an innovative and competitive free market economy is precisely the never-ending attempt by entrepreneurs and enterprisers to devise ways to make new, better and less expensive goods to sell to the consuming public. The stereotypes in modern times have been pocket calculators, mobile phones, DVD players and flat-screen TVs.

When pocket calculators first came on the market in the 1980s, they were too big to fit in your shirt pocket, basically performed only the most elementary arithmetic functions and cost hundreds of dollars. Within a few years they fit in your shirt pocket with space to spare, performed increasingly complex mathematical functions and became so inexpensive that many companies would give them away as advertising gimmicks.

The companies that made them did not proclaim their distress due to the lower and lower prices at which they sold the devices. Cost efficiencies were developed and introduced in their manufacture so they could be sold for less to consumers to expand demand and capture a larger share of a growing market.

In a dynamic, innovative and growing free-market economy there normally would be a tendency for one product after another to be improved in its quality and offered at lower prices as productivity gains and decreased costs made them less expensive to market and still make a profit.

Looking over a period of time, a statistical averaging of prices in general in the economy would no doubt show a falling price level, or “price deflation,” as one price after another experienced such a decline. This would be an indication of rising standards of living as the real cost of buying desired goods with our money incomes was decreasing.

Europe’s Problems are Due to Anti-Market Burdens

Relatively stagnant economies with high rates of unemployment like in the European Union and the eurozone are not signs of deflationary forces preventing growth and job creation. Indeed, since 2008, the European Central Bank has increased its balance sheet through monetary expansion by well over one trillion euros, and prices in the eurozone, in general, have been rising on average between 0.5 and 2 percent throughout this period. Hardly an indication of “deflationary” forces at work.

The European Union’s problems are not caused by a lack of “aggregate demand” in the form of money spending. Its problems are on the “supply side.” The EU is notorious for rigid labor markets in which trade unions limit worker flexibility and workplace adaptiveness to global market change.

Above market-determined wages and benefits price many who could be gainfully employed out of a possible job, because government policies and union power price these potential employees out of the market. Plus, the difficulty of firing a worker once hired undermines the incentives of European companies to want to expand their work forces.

Even a number of international organizations, usually culprits in fostering anti-free-market policies, have pointed out the need for European governments to introduce workplace reforms to free up labor markets in their countries, along with general reductions in regulations on business, rather than hamper entrepreneurial incentives and prevent greater profit-oriented competitiveness.

Creating a Trillion Euros Will Only Imbalance Europe More

Creating a trillion more euros cannot overcome or get around anti-competitive regulations, cost-price mismatches and imbalances due to government interventions and union restrictions, or the burdensomeness of taxes that reduce the willingness and ability of businessmen to undertake the enterprising activities that could lift Europe out of its economic malaise.

Furthermore, to the extent to which the European Central Bank succeeds in injecting this trillion euros into the European economy it will only set in motion the danger of another future economic downturn. Not only may it feed an unsustainable financial and stock market run-up. The very manner in which the new money is introduced into the European-wide economy will inevitably distort the structure of relative prices and wages, wrongly twist the patterns of resource and labor uses and induce forms of mal-invested capital.

Thus, the attempt to overcome Europe’s stagnant economy through monetary expansion will be the cause of a misdirection of labor, capital and production that will inescapably require readjustments and rebalances of supplies and demands and price relationships that will mean people living through another recession at some point in the future.

A Market-Based Agenda for Growth and Jobs

What, then, might be a “positive” pro-market agenda for economic recovery and job creation in the European Union – and in the United States, as well, for that matter? Among such policies should be:

  • Significantly reduce marginal personal tax rates and corporate taxes, and eliminate inheritance taxes; this would create greater incentives and the financial means for private investment, capital formation and job creation;
  • Cut government spending across the board by a minimum of 10 percent more than taxes have been cut so to move the government in the direction of a balanced budget without any tax increases; this would take pressure off financial markets to fund government deficits, and end the growth in accumulated government debt, until finally government budgets would have surpluses to start paying down that debt;
  • Reduce and repeal government regulations over the business sector and financial institutions to allow competitive forces to operate and bring about necessary adjustments and corrections for restoring economic balance;
  • Institute real free trade through elimination and radical reduction of remaining financial and regulatory barriers to the competitive free flow of goods among countries;
  • End central bank monetary expansions and manipulation of interest rates; interest rates need to tell the truth about savings availability and investment profitability for long-run growth that is market-based and sustainable. Monetary expansion merely sends out false signals that distort the normal functioning of the market economy.

A market-based set of policies such as these would serve as the foundation for a sound and sustainable real “stimulus” for the European and American economies. It would also be consistent with the limited government and free-enterprise principles at the foundation of a free society.   (my emphasis)

ByRichard Ebeling for The Daily Bell

By permission The Daily Bell

Now Watch Denmark

Posted on February 11th, 2015

Obverse side of a 1000 Danish kroner banknote from the 2009 series

EDITOR’S COMMENT: Every time that I hear or read about the various countries having to devalue their fiat currencies, while other more stable countries are struggling to defend their own fiat currencies from soaring relative to others, I keep wondering what would happen, if one of these countries would introduce a gold-backed currency. There are many theories as to what would happen, but I believe the results for that particular country would be better than what they may be facing in the very near future.

By John Rubino

One of the reasons we’ve all heard of George Soros is that back in 1992 he pulled off an epic financial coup by “breaking” the Bank of England. At the time the UK was trying to maintain a loose peg with the German Deutsche Mark, despite the fact that the two countries had very different rates of inflation (UK’s high, Germany’s low).

To Soros’ practiced eye, this imbalance was clearly unsustainable and would eventually force the UK to devalue its currency to reflect the fact that it was living beyond its means and printing way too many pounds. Soros placed a big bet against the pound and sat back while the fundamentals won out. When Britain gave in and devalued, Soros made a billion dollars and became a household name.

Ever since, currency traders have dreamed of such conjunctions of government mismanagement and central bank cluelessness, hoping for their own Soros-level killings. But during the past couple of decades such sure things have been rare because currencies have floated more or less freely, which prevented huge imbalances from building up.

Now, however, thanks to the mess that is the eurozone and several other countries’ ill-advised dollar pegs, the world is once again a target-rich environment for speculators. The Swiss, for instance, have been going a little crazy trying to decide whether and/or how to peg the franc to the euro. And China, which runs a loose peg to the dollar, is looking like it might have to adjust its thinking in the not too distant future.

But right now the juiciest target is Denmark. A generally well-run country, it finds itself on the wrong side of the currency war, with the European Central Bank actively devaluing the euro against which the Danish krone is pegged. Capital has been flowing into Danish bonds seeking the relative safety of low inflation and stable state finances, which is pushing up the value of the krone. Maintaining the peg thus requires the Danes to create a lot of new kroner and use them to buy euros.

A soaring supply of national currency is inherently inflationary and destabilizing, which is the opposite of “well-run”. So just as the Swiss did last year, the Danes are both promising to maintain the peg and stressing out over the cost of doing so. Now the speculators smell blood:

Speculation Against Danish Euro Peg Proving Relentless

(Bloomberg) — Less than a week after Denmark resorted to its deepest rate cut ever amid historic currency interventions, forward rates suggest some traders and investors still aren’t convinced the central bank can save its euro peg.

SEB AB, the largest Nordic currency trader, says capital flows into AAA-rated Denmark forced the central bank to dump about $4.6 billion in kroner in the first three days of February alone, almost a third the record amount it sold in all of January. Nordea Bank AB, Scandinavia’s biggest lender, says Denmark will need to deliver another 25 basis-point cut to fight back demand for kroner, bringing the benchmark deposit rate to minus 1 percent.

“The pressure on the krone hasn’t eased yet,” Jens Naervig Pedersen, an economist at Danske Bank A/S in Copenhagen, said by phone. “We can see from the forward rates that the market views the current upward pressure on the krone as the greatest ever.”

Governor Lars Rohde addressed speculators last week in what he characterized as a verbal intervention to persuade them he won’t let the krone’s peg to the euro collapse. Such a scenario is “unthinkable” and the central bank will do “whatever it takes” to avoid it, he said after delivering a fourth rate cut in less than three weeks.

Denmark’s largest institutional investor, ATP, sent a clear message of trust in the peg the same day, revealing it hasn’t bothered to hedge its $110 billion in assets against the possibility that the nation’s currency regime might break.

Make no mistake, the Danes are the victims here. They’re behaving the way a country should behave, with an eye to long term stability. But the rest of the world — the eurozone in particular — is so indebted that its only choice is to inflate or die.

Which leaves solid countries like Denmark and Switzerland with a similar choice: inflate and throw decades of prudent management out the window, or watch their currencies soar against those of a profligate world, causing their export sectors to go extinct and their economies to slip into Depression.

The speculators, meanwhile, are not the villains in this story. They’re just pointing out the truth with their capital. And their honesty will be rewarded very soon.     (my emphasis)

By John Rubino for Dollar Collapse

By permission John Rubino

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