90 seconds at 9 am: Bernanke says recovery frustratingly slow and Fed ready to act, but no green light for QE III yet; NZ$ firms with Dow; Milk powder price down 0.9% in Fonterra auction

It seems there is worldwide a new habit developing: Major Court Cases. Even here in New Zealand. I’m wonder how much taxpayer contribution is involved - billions ??

http://brucekrasting.blogspot.com/2012/07/words-of-war.html?utm_source=…

http://brucekrasting.blogspot.com/2012/07/words-of-war.html?utm_source=…

Still no QE3.....eh..? Bernake as I pointed out is adopting a new position of targeted injection rather than the flood and hope method........plus he is, I think, more than a little tired of being cannon fodder for 1st and second rate economists.

Fonterra drops again ..? well there's a shock.....crikey , two drops post the convenient spike just before the TAF vote, who woulda believed that....?

 The good thing about stupidity is.... there's always demand for it....with what appears to be an inexhaustible supply. 

sigh....: >(

The Trade Off To Record Corporate Profits: Your Miserable Salary

Not much chance of recovery in the housing market or any other sector if this dynamic has engulfed NZ, as it seemingly has in other economies. Except, possiblty the stockmarket? But only if one trades dollars for shares in the diminishing pay packet.

I see Fran O'Sullivan - has waded into the intergenerational dispute by preferring,  like many others, to treat symptoms rather than causes.

Let's face it, the two graphs in the top highlighted link depicting the contrasting fortunes and current plight of labour's share of the capitalist pie is where our attention and subsequent corrective actions should be directed.

This is long and I cannot find a link, Im pasting it here as this thread is quite about now

BASTIAT FORUM

Wednesday 6 June, 2012

THE DIMMING OF DEMOCRACY

Speech given by

Maurice L Newman AC

 Chairman of Australian Broadcasting Corporation, 2007-2011

I'm delighted to be invited to speak to you tonight at this Bastiat Dinner.  Of course, if Frederic Bastiat was alive today and if enough good people followed his enlightened

teachings, there would be no need to talk about the dimming of democracy we see around us. 

Sadly this is not the case and for that reason we owe Peter Brun a deep debt of gratitude for continuing to promote Bastiat's philosophy.

In today's post modernism world, Peter and people like him are doing work of incalculable value.  If it wasn't for them, Bastiat, Smith, Hayek, von Mises, and other champions of liberty would simply become footnotes to economic texts.  Their wisdom and insights would probably be lost.  Post modernism economics has little time for free markets and property rights.  It is about government intervention and today's academics have forged close relationships with governments, who in turn fund them.  This cosy oligopoly is mutually reinforcing.  To them, free market economics has become little more than a curiosity.

Post modernism economics has roots in Marx and is concerned with nebulous concepts

like quality of life and standards of living.  It leans towards the collective rather than

individual initiative and competition.

All this explains why Keynes is the favoured son of economists these days.  He plays to

today's political narrative of redistribution and government intervention which allows the

political class to claim credit for saving us from a fate worse than death.  The counter

factual is always difficult to mount because it is open to the charge of post facto

rationalisation.  However, we now have enough evidence coming from Britain, Europe and the United States, to demonstrate the consequences of sustained, undisciplined, procyclical government spending, combined with income redistribution and the imposition of rigidities in labour markets and trade.

Now that nations are suffering the unintended consequences, we are told that the solution

to too much debt is to borrow more.  The answer to ever growing deficits is to spend more.

While private investors are prepared to fund this recklessness, the damage is hidden from

view.  However, in the end, as Margaret Thatcher famously observed, you run out of other

people's money.  This is when the markets exact a huge price, a price which invariably

was not reflected in risk premiums.  This inevitably leads to the cost of adjustment

exceeding expectations both financially and socially.  We are at that place now. 

Contrary to conventional wisdom, Keynes may not be the solution, but the problem.

The immediate reaction of the political classes to the recent crises is to defend themselves and their policies.  In a demonstration of hubris that authority can overcome markets, debts and deficits continue to grow and central bank balance sheets have exploded. 

We have had QE1 and QE2.  We've had Operation Twist and the LTRO in Europe. 

We have seen the Bank of Japan and the People's Bank of China inject massive stimulus into their economies.  Much of it was globally co-ordinated.  These responses, to extrapolate from a piece by Ron Paul in a recent FT article, suggest that the current crisis is a problem of liquidity.  In fact, it is a problem of poorly allocated investment caused by improper pricing of money and credit, pricing which is distorted by the inflationary actions of central banks.  Indeed, he says, "Control of the world's economy has been placed in the hands of a banking cartel, which holds great danger for all of us".

So, after all this intervention, what has been achieved?

The official line is that the world escaped a 1930's type depression.  But has it and, if so, at

what cost?

The fact is, and despite all that has been thrown at it, this has been the weakest recovery

ever.  Dave Rosenberg, one of America's top economists, asks the obvious question about

the US economy.  "After almost four years of $1 trillion-plus fiscal deficits, near 0% policy

rates, and a Fed balance sheet that is pregnant with triplets (QE3), how can we not have

some growth, any growth? If 1-2% is all we get in the year which is generally the best in

terms of growth for the cycle, then that is a very sad commentary indeed."

The same, of course, can be said for Britain and Europe.  They are in recession. 

The €1 trillion LTRO liquidity boost has disappeared without trace.

Ordinary people around the world are becoming increasingly suspicious of politicians and

central bankers whose primary objective is to kick that proverbial can further down the

road.  They sense that at best their policies are based on nothing more than the 'Micawber'

principle, that eventually, something will turn up.

In Europe, to enable the political classes to save face and investors to save money,  

even prime ministers and governments have been changed without a popular mandate. 

This action has been justified on the grounds of holding the Eurozone together. 

Yet, despite how the bailouts have been dressed up, who are the real beneficiaries?

For Germany, being able to trade at an exchange rate which is more attractive to its

export oriented economy than reverting to the Deutschmark, brings significant benefits. 

So valuable are they that German taxpayers have contributed hundreds of billions of Euros to keep the peripheral economies inside the EMU.  But while it may suit Germany and some of its northern neighbours, does anyone really believe that the interests of Greeks, Portuguese, Spanish, Irish and Italians now living in misery because of austerity measures imposed as a condition of bail-out funds, are best served by having an overvalued exchange rate? Austerity can't reduce Greek wage rates to below those prevailing in Germany without a further disastrous rise in unemployment, or, reduce Spanish property prices to market clearing levels without inflicting catastrophic defaults.

Fiscal consolidation is now being explored as the alternative to an exit by the peripherals.

This is a tall order.  This is not six sovereign states, ruled by a single monarch, bound by

a common language and culture and of the same heritage, federating as Australia did in

1901.  The Eurozone consists of seventeen member countries.  There is no common

heritage or language.  Economic arrangements and cultures vary greatly and in some

cases old enmities and rivalries remain.  To cede economic sovereignty and democratic

process to Brussels is a tall order no matter how good the argument for sound German

style fiscal and monetary management.

The Greeks have had a taste of this.  Mr and Mrs Economou, having had democracy

snatched from them by creditors who installed George Papademos, a non-politician

technocrat, as prime minister, (How easy was that?) are still waiting for a PM who they

elect themselves.  The former prime minister, George Papandreou, was dumped for

announcing he would ask the Greek people to vote on whether Greece should accept a

new austerity deal.  Letting the people decide was considered too risky by the Eurocrats,

so Papandreou was replaced before the people could exercise their democratic right.

When the Economous' time came on 6 May to cast their vote, the low turnout reflected

disenchantment with the major parties which allowed a good showing by the minority

extremes.  The support for the minorities was a rejection of the austerity measures with

which the unelected Prime Minister has saddled them.  Whether succession from the Euro

will follow remains to be seen on June 17, when voters may finally deliver their verdict. 

In the meantime, an interim government of technocrats has been appointed.

Greece has a history of wanting its cake and eating it too and that tradition continues

especially for as long as a low cost Schwartzwalder Kirschtort is on offer.  But the

Bundestag may now demand too a high price for new cakes.  If so, then default would be

quite consistent with the Greek behaviour of 150 of the past 200 years.  But in the

meantime, large helpings of German cake are being smuggled out of Greece, back into

Germany.  Despite measures to stop this cash outflow, this fear of the future, based on the

past, is putting serious liquidity pressure on Greek banks.

Although swapping euros for drachmas is legally complicated by the fact that there is no

mechanism for an exit, the Eurozone is a political experiment and a political solution for

an orderly departure will be found.  The FT reported recently that a British firm was printing drachma notes presumably to keep Greek options open.

Greece is not alone in experiencing a suspension of the democratic process.  In Italy,

Mario Monti was appointed prime minister from outside of the parliament.  He formed

a government without a single politician.  His administration is made up of bankers, lawyers and academics and is introducing a series of austerity measures designed to win back market confidence.  In the meantime, democracy is suspended until 2013 at which point Italian citizens will get their chance to vote on these initiatives.

Time will tell, but while Germany and France have been paying the piper and calling the

tune, since the French elections, Berlin has lost its neighbour's support.  M. Hollande is

opposed to many of the austerity measures introduced by Nicolas Sarkozy and is

advocating the reversal of some of them.

Even at home, Chancellor Merkel is feeling the pressure.  She has recently suffered a

crushing election defeat in North Rhineland Westphalia, Germany's most populous state.

Her CDU recorded its worst result since the war.  It is believed opposition to the austerity

measures imposed on Greece, Spain and Portugal is a factor in the poor showing.  German taxpayers must also be feeling bail-out fatigue.

Across Europe the anti-austerity paranoia is gaining momentum as voters increasingly

exact their revenge on the technocrats.  Already France, Ireland, Spain, Portugal and the

Netherlands have voted for relief, while Finland and Austria are among a diminishing

number still supporting Angela Merkel.  The movement for secession from the monetary

union may pick up as the recession bites deeper and as unemployment, particularly youth

unemployment, grows.

The increased uncertainty sparks renewed volatility in the markets, heightened by

awareness of the accumulated baggage of failed fiscal and monetary policies and the

diminishing policy options that are available.  And, on cue, as economic activity recedes,

and social unrest escalates, the political class and the intelligentsia will wring their hands

and ask, "Who knew?", just like they did in 2009.

This is the climate which leads to vague party platforms and tentative leadership. 

It is toxic for mainstream parties and ideal for extremists.  Within the constraints of tight budgets the political process falls prey to vocal well organised lobby groups and minorities.  Populist policies which favour redistribution and green outcomes are given priority over those which encourage entrepreneurship and productivity.  Incentive structures are turned upside down and entrepreneurship is squashed.  The cost of doing business continues to escalate as laws and their introducing bills become more complex and lengthy.  Many members of parliament don't even read them, let alone understand them.  Ministers must increasingly rely on their public servants to help ensure they do not stray too far from the narrative.  Sir Humphrey is in his element in this situation and in the end it is unclear who makes the bullets and who fires them.

In a world where government's heavy hand, not the market, inexorably determines

resource allocation and, where regulation controls every activity, the consequence is a

decline in the number of businesses and the concentration of economic power into fewer

but larger groups followed by an unhealthy collusion between big government, big

business and big labour.  This is the fertile soil into which too big to fail is planted.

The widening gap between the people and those who govern them, is posing a threat to

democracy itself.  As the resilience and productivity of the market economy flags under the weight of government and as populations age, more voters, when making choices between their jobs and their personal freedom, are forced to become dependents of the state in order to survive.  Learned helplessness is rewarded.  Like a drug, once hooked on welfare, the recipients crave more and resist attempts to withdraw it.

For the autocrats, decades of centralising power has made governing easier and

opposition harder.  As government power concentrates, so does individual freedom erode.

This then, is the sad state of Western democracies in 2012 with Europe in the vanguard.

After decades of pro-cyclical Keynesian policies the end game is now in sight.  Some

countries have clearly reached a tipping point.  For example, Spain has an unemployment

rate of 24%.  Greece 22%.  Their youth unemployment rate is near 50%.  Their banking

system is insolvent and their treasuries are bare.  The New York Times carried an article

recently, As Athens Woes Grow, Neo-Nazis Gain Clout.  Every day there is a demonstration in Spain.  Some commentators are saying France is now where Spain was eighteen months ago.  The stakes for us all are significant and the possibilities concerning.

And, in case you think it is only European countries which are faced with serious economic and social issues, one has to look no further than the United States.  According to Rosenberg, the labour force participation rate in the US has plunged to a 30 year low.

New York Magazine claims only 55.3% of Americans aged 16 to 29 are employed,

the lowest percentage since the Second World War.  It says one in five young adults live below the poverty line. 

The number of people on food stamps, disability benefits and the number that have withdrawn completely from the labour force has never been as high as it is today. 

A recent census confirms nearly half of the people in the US live in households that receive at least one government benefit.  And the share of households with no savings at all has risen to 23.4% from 18.5% in 2009 when the recession was coming to an end.

What is more, America's per capita government debt at US$44,216 is worse than Spain,

Portugal, France, Greece, Italy and Ireland.  By comparison, Greece is a paltry US$ 38,937

per head.  According to the Senate Republican Budget Committee, under President

Obama's plans, this number will grow to US$75,000 by 2022.

So why should the markets take such a hard line against Greece and the other European

peripherals?  Some will tell you it is because the US has never defaulted.  This is untrue.

The US defaulted on its debt obligations in 1790 and 1933.  In 1790 redemptions were deferred for ten years, while in 1933 a pledge which allowed investors to redeem their

bonds in gold was dishonoured.

That said, American banks have been recapitalized, the US dollar is still, for the time

being at least, the world's only reserve currency and, despite all, investors still maintain confidence in the United States economy.  But trust in America's currency and its

economy is not ordained and with each passing day that the debt and deficits grow,

so ordinary Americans forfeit some part of their right to determine their destiny. 

No matter who you are, at some point when you borrow too much, lenders take control.  As of May 2012, approximately 50% of the debt held by the public was owned by foreign investors.  Just over 50% of that debt is held by China.

Now the horse has bolted, rather than acknowledging the reality of how the world arrived at this position, lawmakers and bureaucrats across the world are seeking to rewrite history.  The global financial crisis, we are told, was due to greedy bankers,

not reckless politicians and central bankers.  Yet, without the pro-cyclical debt and deficits, government policies which turned lending practices on their head, (the US and Spanish governments both outlawed applying established lending criteria to minorities) and the irresponsible monetary policies pursued by central bankers, the world would not be contemplating an economic collapse.  After all, who encouraged the carry trade where speculators could arbitrage interest differentials across borders without fear the money supply would be cut?  Who underwrote the dot com bubble?  Who validated the moral hazard implicit in the Greenspan and Bernanke puts?  Who encouraged households to forget their day jobs and leverage their home equity?  From where did the the liquidity come which allowed this?  How was it possible for Spain to overbuild 800,000 holiday homes, or, Ireland to construct 300,000 dwellings, equivalent to 15 million homes in

the US?  How could the sub-prime mortgage market have exploded as it did?  

Who introduced subsidised green policies which massively increased Spain's costs, reduced competitiveness and destroyed job opportunities?  Who was supervising these excesses?  And, who today still uses QE and other monetary measures to give comfort that government will save you from yourself?

These questions are rarely asked, let alone answered.  But when the blame game is exposed for what it is, when all the excuses and distractions are cast aside, there is only one possible answer:  GOVERNMENTS and their CENTRAL BANKS.  They, and they alone, committed the original sin which created the conditions that allowed the private sector to behave like unsupervised children.  None of this excuses the criminal practices of bankers, the obscene compensation arrangements that rewarded bad behaviour, nor the reckless leveraging of balance sheets or the imaginative products which were essentially valueless on creation and which remained that way.  But without the original sin, none of it, none of it, would have been possible on a scale which posed, systemic risk.

Rather than learning from their mistakes, governments and central banks compound them

by continuing to rack up huge deficits and flooding the world economies with liquidity,

thereby underwriting speculative trades and perpetuating moral hazards as they go.

Instead of letting banks go under, they are endlessly bailed out or nationalised.  Investors

receive mixed signals on pricing for risk.  Rather than lose their money, the losses are often

socialised.  Anything that will avoid pain today is done to maintain office.  But by building on the excesses of the past, to postpone the evil day, means the market's ultimate adjustment is likely to be even more painful when the day comes.

Of course, regulations and regulators have been strengthened, rules around bank compensation have been tightened, and a Tobin tax on bank transactions has been proposed.  These are government's answers to prevent a recurrence of the GFC. 

Just how effective are these moves likely to be?  Well, already in this brave new world,

JP Morgan has blown $2.0 billion in six weeks without really trying.  The roots of the loss lie in credit default swaps, but this time, not involving mortgages.  But again, the monetary macro of plentiful credit unadjusted for risk, provided the where with all. 

Even the new focus on bank compensation failed to change behaviour.  The desk manager walked away with $32 million.  A good return for him, but a pity about the shareholders.

The lesson from this episode is the futility of micro regulating.  Markets should be allowed

to operate in a macro environment which is responsibly managed.  Micro policy settings

should concentrate on ensuring financial institutions are adequately funded and supervised, keeping prescription to a minimum and efficiency to a maximum.  Investors should be reminded that risk and failure are part of the system.  Returns should be risk adjusted, not by the government, but by the market.  The days of capitalising profits and socialising losses should end.

But base political motives will ensure that capitalism rather than sustained policy failure is

seen as the cause of the GFC and the crisis in Europe. 

This anti-capitalistic push is gaining ground with the support of biased journalists and

a sympathetic academy and judiciary.  While conceding that capitalism can deliver material wellbeing, the argument runs that only government, through redistribution of incomes and endowment of the arts and education, can bring security and lasting happiness to ordinary people.  This is one of the justifications for the expansion of government and government programmes.  It matters not that the decades long pursuit of socialist policies has left the western world on the brink of financial bankruptcy.

In 2000, David Henderson, who was formerly head of the Economics and Statistics

Department of the OECD, co-authored a pamphlet for the Institute of Economic Affairs which holds true a decade on.  He argued that anti-liberal forces, new and old, are at work

"which make disinterested people receptive to interventionism".  He identifies new elements as anti-market NGO's, a wider circle of perceived 'victims of injustice',

the spread of labour market regulation and, an 'alarmist consensus' about globalisation and environmental degradation.  The combination of old and new ideas results in 'new millennium collectivism' which provides the main impetus behind the anti-liberalism of today.

Henderson could also have emphasised the role of our teaching institutions whose mission seems to be to indoctrinate students with the romance and moral righteousness of socialism, while devaluing the equity and wealth creation of free markets, private property rights and, individual action.

Is it any wonder that journalists, judges, church leaders and others in our nation, having been immersed in an anti-capitalistic environment during their most impressionable years, so readily embrace the omnipotence of the state, this despite the ever increasing contrary evidence which surrounds them?

How astonished Frederic Bastiat would be if he was alive to see how deeply entrenched

anti-liberalism is today.  To quote von Mises when observing Bastiat's day, "The ideal of liberty seemed so firmly rooted that everyone thought that no reactionary movement could ever succeed in eradicating it.  It is true, it would have been a hopeless venture to attack freedom openly and to advocate unfeignedly a return to subjection and bondage", he said.  "But anti-liberalism got hold of peoples' minds camouflaged as super liberalism, as the fulfilment and consummation of the very ideas of freedom and liberty."

It seems to me we have come full circle since the time Adam Smith wrote The Wealth of Nations.  To quote James Buchanan in his 1990 Bonython Lecture, "With no overriding

principle that dictates how an economy is to be organised, the political structure is open to

maximal exploitation by the pressure of well-organised interests which seek to exploit the

powers of the state to secure differential profits.  The special interest rent seeking, churning state, finds fertile ground for growth in this environment.  And we observe quite arbitrary politicised interferences with markets, with the pattern of intervention being dependent strictly on the relative strength of organised interests".

That is the world we now inhabit.  Political and economic freedoms are declining as organised interests increasingly have their way with law makers leaving the rest of us ever

more marginalised.

The final word should go to von Mises.

"Socialism is unrealisable as an economic system because a socialist society would not

have any possibility of resorting to economic calculation.  This is why it cannot be

considered as a system of society's economic organisation.  It is a means to disintegrate

social co-operation and to bring about poverty and chaos."

You'd have to agree.  So far, so good.

Thank you.

Here's a  wee story on China Natural Gas while I'm still looking for info on the brotherhood...

http://www.sec.gov/litigation/complaints/2012/comp-pr2012-92.pdf