Monty Pelerin's World

Economics, Finance and Politics Through The Prism of Classical Liberalism

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Hope Has Changed — It Died

hopeless-13552Hope is dying in the US.

The performance of financial markets affects everyone. For savers and investors, these markets represent the means to an improved life, at least as they define it. Savings and wealth provide options and opportunities, the quintessential aspect of being an American. These options and opportunities differentiated an American from someone who was born and destined to die in a hut or remain locked in a societal class from which there was no hope of escape.

Bonds and stocks were the primary means for savings and investments for generations of Americans. When these do not perform up to expectations, lives are changed. Plans and dreams are dashed. College educations, retirements and similar major events are deferred or never happen.

We are twelve years into this new century and Americans are losing their hopes, dreams and aspirations. Hard reality has crushed the optimistic spirit that once drove the country. The first decade rivaled the 1930s in terms of stock market performance. Twice, stock market wealth was halved in this ten-year period. Twelve years in, the S&P 500 has returned a total of 14%. That puny return has not come close to covering the decline in purchasing power of the dollar during the same period. Worse, a generation or two, has lost probably 33% of their wealth-producing years. 

College graduates come out of school under-educated and buried in debt. Most cannot find a job commensurate with their education or aspirations. Taxes rise and will accelerate in the future as the federal debt and social promises become more binding. Young people find it difficult to imagine getting out from underneath their student loans or buying a home. 

Outcomes in the housing and stock markets have affected millions. Equity in homes has dropped dramatically. Some have lost their homes as a result. Savings and wealth that were reasonably expected based on historical precedents did not materialize. 

These outcomes are explained away in terms of markets "underperforming." To speak of housing and stocks as if they are independent entities that suddenly somehow turn bad is to miss what is really happening. Markets" are nothing more than millions of us making individual decisions intended to improve our lives. Markets do not under or overperform. It is people, the millions of buyers and sellers, that drive markets. When markets "underperform" it is because people have "underperformed" or more properly, bought less common stock or fewer homes.

People are acquisitative by nature, wanting more rather than less. When they "underperform" in terms of purchasing decisions it is because they had to. Unlike the federal government, people cannot print money or spend beyond their means, at least for extended periods of time. Eventually they hit budget constraints. That is what is being reflected in stock prices and home values. They are reflecting the lower standard of living of the country.

The feel-good spending of the prior two decades caught up with the American consumer. He was never as rich as he believed. Now, as a result of having to service this debt binge, he is poorer than he should be. That is why markets are underperforming. That and the fact that fewer people have jobs. 

A recent article, "You Haven't Made Any Money In The Stock Market This Century," struck a nerve with some readers. Reader Chugar submitted comments that expressed the general sentiment of many (my emboldening added):

I am still in the stock market and hate it daily.

The feeling of it being a wise investment left long ago. I watch the flash crashes, read about HFT, the endless blabber on business shows about "buying opportunities" have grown old.

Since all these talking heads have a vested interest in keeping the game going, if we aren't buying their products they make no commission or their advertisers are not kept happy. It isn't hard to figure out.

With that said we are trapped, for my working career I was told, buy and hold, dump money into the 401k/457/ROTH or Traditional IRA. Not to mention an underfunded pension, which may run out of money before I can even draw.

I lost track of firms and brokerage firms over the years who not only had ethical problems but legal problems. So much for confidence in what appears to be a grand scam run by well-dressed crooks.

My local credit is advertising a 3 year CD for 0.7%……Thanks ZIRP and Mr. Bernanke

I was just reminded I never really own my home with a year end property tax bill.

Taxation,user fees, access fees on and on are coming our way to finance a government that will never get enough, whether its local,state or federal.

Its criminal what is taking place in this country.

The frustration and anger is apparent in these comments. It should be. When one thinks about what has happened, it is difficult not to become angry. The stock market is not the problem. It is merely a scorecard that reflects what is happening to the country. Here are but a few of the factors:

  • Freedom as a concept is praised, while government actions designed to reduce it for ordinary citizens continue.
  • Working longer and harder produces less wealth than was possible for your parents.
  • Living standards will be less for your children and grandchildren than they were for you.
  • Leisure (going on the dole) is now a choice unaccompanied by either shame or hardship.
  • Politicians have made dependency a tool to gain votes and power.
  • As freedom decreases, government becomes increasingly more violent in order to achieve the behavior it demands.
  • Laws are enforced selectively in favor of the political class and their cronies. No bigger rape of justice has ever been committed than the unwillingness to prosecute the banksters, regulators and legislators  responsible for the looting of taxpayers.
  • Government lies with impunity with respect to the true condition of the country. This behavior is obvious with respect to economic statistics but also spills over into all other areas, like personnel decisions.
  • Cover-ups like "Fast and Furious" and Benghazi are ignored by a corrupt and compliant media. Lesser problems (Watergate) were cause for removing a president in simpler more honest times.
  • Government's insatiable spending has decimated the private sector economy. Capital and talent increasingly flee to other countries to avoid economic persecution.
  • Eventually this spending will cause much of the economy and all of the government to collapse. Massive debt defaults, impoverishment and social unrest lie ahead.
  • The phrase "government ethics" is little more than a comedian's tool for generating laughter.
  • The Mafia has far better ethics. It treats its customers better than government. The key word is "customer" which they must attract. Government does not have customers; it has "slaves." That is how government views private enterprice. 
  • Compare the payouts on illegal gambling to those of government sanctioned lotteries for a simple comparison between the two methods of organized crime. You do much better dealing with the Mafia.

The country's financial condition is deplorable and cannot continue much longer. So, too is virtually everything else the government has touched whether it be education, Amtrak, the post office, Social Security, Medicare, ad nauseum. Nothing government has done has not been a Ponzi scheme dependent upon additional theft from taxpayers to keep going.

The system is now broken. There is no one to blame for this other than government. Despite this obvious conclusion, government is still seen to be a savior by a large proportion of the country.

IS LIBERALISM DOOMED?

liberalismsmokeIs liberalism doomed? That is a question posed by John Hinderaker in a Powerline article (reprinted below). There is little new in his article that has not been said here before, however Mr. Hinderaker brings some style and additional credence to the topic.

My resounding answer to his question is "Of course!"

Liberalism is based on feeling, not reason. Unbounded compassion in a world of limited resources can only go so far. Lady Thatcher described the problem:

The trouble with Socialism is, sooner or later you run out of other people's money.

My favorite line in Mr. Hinderaker's piece is "The left’s real enemy isn’t Republicans, it is arithmetic." That is his way of expressing the Thatcher limitation. 

The closing sentence in Hinderaker's article should be of concern. Those who cannot wait for the death of liberalism may not realize that its demise contains its own version of Dr. Strangelove's doomsday machine. The danger arises from the conditioning of millions of citizens to the view that they are entitled to live at the expense of others. When the arithmetic finally closes the book on liberalism, these people will be angry. Many will never understand that government is not Santa Claus. Many have known no other life. Taking their "benefits" away may be more difficult to explain to them than taking away the promises made by Social Security, supposedly an insurance and not a welfare program. 

Few will likely be convinced that this "theft" is unjustified. It will be easy for the demagogues to jump on this bandwagon and arouse the populace. Many recipients have no skills and have come to believe that their way of life is natural and deserved. Many will turn on whomever they believe took their "stuff." 

It is becoming obvious that we cannot live with liberalism. What may have been overlooked is that we might not be able to live without it. The doomsday machine aspects of its discontinuance will make its termination a threat to civilized society. 

Here is Hinderaker's article:

Liberals are feeling triumphant these days, but in the backs of their minds there must be a sense of foreboding. They won this year by demonizing Republicans and by bribing various demographic groups with government largesse. But the Left’s tactical victory can’t conceal the fact that its ideology is bankrupt. The left’s real enemy isn’t Republicans, it is arithmetic.

Welfare states are collapsing all around the world. Ours is on the same course. It is commonly observed that America’s entitlement programs are Ponzi schemes, which is correct. What is less often noted is that federal government spending in general is a Ponzi scheme, sustained only by influxes of new money–real money from China and a handful of others, and fake money from the Fed–that cannot long continue.

It is characteristic of any Ponzi fraud that the people who get in on the ground floor do well. That makes the scheme popular; people clamor to get in. This is what has happened with Social Security and Medicare here in the U.S. Past and current beneficiaries are receiving benefits that are entirely disproportionate to what they paid in. This obviously cannot continue indefinitely. Every Ponzi fraud inevitably crashes when its exponential growth cannot be sustained because there is not enough new money–not enough suckers, to put it bluntly. In the context of entitlements, “new money” means young people. That point is now approaching rather rapidly.

This is why the Democrats cannot adopt a budget. A budget requires arithmetic, and arithmetic demonstrates that the welfare state must either come crashing down, or be exposed as the terrible deal it is for those who didn’t get in on the ground floor.

A frequent correspondent points out this post by Walter Russell Mead titled “Illinois’s Blue Robin Hoods Stealing from the Young to Give to the Old,” which relates to another instance of the same phenomenon.

After pension reform went down in flames last week, Illinois moved to Plan B: war on the young. Governor Pat Quinn’s administration claims that the upcoming budget will include major cutbacks on state services to make room for a $1 billion increase in pension spending. Most notably, education spending will decrease by $400 million, which would make 2013 the third straight year in which education spending has dropped. …

Sticking it to either group, the young or the old, isn’t appealing, but the boomers are politically organized and better positioned to fight for their interests, particularly because powerful unions are on their side. The young, by contrast, are among the least politically active groups in the country, making them much easier for politicians to ignore. Illinois has obviously chosen the path of least resistance.

If there’s a clearer illustration of the blue war on the young, we have yet to see it.

Our correspondent adds:

Just wait until the Occupy kiddos find out that they’re totally screwed by the entitlement state and its appendages–specifically, public sector unions and their unfunded pensions. Especially when the entire, ever-expanding middle class non-means tested entitlement regime is based on a Ponzi type lie, viz., that the current beneficiaries deserve and have actually “earned” their benefits. Wait until young people find out that THEY are the suckers in this Ponzi scheme, and that any minor tweaks to the cash flows to sustain the scheme still leave them with an incredibly lousy deal.

Do you think that the increasingly brown, progressive young New America will enjoy being serfs to preserve the benefits of the reactionary old white middle class?

The Progressive project is at its strategic end-state, doomed by its internal contradictions and deceptions, and Obama, the left and the Dems are trapped. He can’t do any meaningful entitlement reform; the whole New Deal framework unravels if you tug on one string (payroll taxes, e.g.). The left will go bonkers if He tries. They didn’t elect Him to end the New Deal “tax and tax, spend and spend, elect and elect” machine. And He cannot be for tax reform: it just hammers His limousine liberal base in the blue states. And, crucially, He cannot, for obvious reasons, get enough tax revenue to support all the spending. Any significant revenues must come from the middle class. Heh. Good luck with that!

Whatever temporary wedges He has against conservatives are weak in comparison to the many that we have against the left in the long term.

Heighten the contradictions, comrade!

I think it is clear that Progressivism is doomed; what is not clear to me is whether America is doomed to collapse along with its misbegotten Left.

Bank Runs?

In March of 2010, I discussed the possibility of another bank holiday. We had one during the Great Depression where banks were ordered to close:

One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.

The nature of our fractional-reserve banking and the current state of the financial markets make such an event more likely now than it was in early 2010 when I first warned about it. To understand banking mechanics and how they enhance the possibilities of such an event, I suggest you read the earlier article.

With the situation in Europe deteriorating and the increasing recognition that there is no solution, capital will leave these banking systems as well as flee the countries involved. If you fear bank failure, you take your cash out. If you fear currency failure, you put your money into safer currencies, preferably outside of the country.

Some European pundits have talked of a bank walk rather than a bank run. That is, there are signs that some people are beginning to remove funds from the banking system. Panic is the biggest fear of fractional reserve banking systems because they don’t have enough money to redeem but a small percentage of deposits (probably 5 – 10%). Thus, any fear renders banks illiquid and unable to honor withdrawal requests.

Will this happen in Europe? I suspect it will and much more. If this panic hits in Europe it is apt to start a bank walk or worse in the US. The Economist deals with these possibilities.

For those who are fortunate enough to have savings left, it might be prudent to keep a month or two of expenses in cash outside the banking system. The opportunity cost for doing so is virtually zero because you do not earn any return on cash in the banks. It might provide a reasonable resource, should our banking system be forced into another bank holiday.

Long-term, as most regular readers know, I am not a fan of cash because I think fiat currencies will be driven to what Voltaire described as their intrinsic value — zero.

 

House of Cards Around The World

The video below is probably the best reporting I have seen on CNBC for a long time. It puts the financial system of the world in perspective.

The rating agency, Egan-Jones, is not beholden to the US or any other government. It works solely for clients with the purpose of protecting them and their assets.

The European and US situations are disastrous. H/T to The Market Ticker for the following, including the video:


The Market Ticker – US Downgraded: Egan-Jones

by genesis
Here it comes… yeah, I know, Egan-Jones isn’t one of those firms people think is important.

Oooook!

http://video.cnbc.com/gallery/?video=3000033600

It should be noted that this downgrade comes after Weiss Ratings reduced the US government to “near junk,” a “C-” rating. An analyst from Weiss stated:

the U.S. has debt and deficit problems whether or not the debt ceiling is raised.

The debt ceiling issue is merely a sideshow. Resolving it, does not resolve the underlying problem with the US.

Welcome To The End of The Age Of Paper

John Rubino comments on the woeful state of the world:

  • This was inevitable because “extend and pretend” is by definition a temporary strategy. It works for a while but only for a while. And now it’s ending everywhere, all at once.
  • We’ve entered a new phase of the global financial collapse that began in 2000. Any one of these capitulations — a Greek default, followed inevitably by either more PIIGS defaults or EU bailouts of surreal size, the admission that the US government will run trillion dollar deficits essentially forever, and a massive new Fed stimulus plan — would by itself be enough to destabilize the global economy. Toss them all into the mix at once and you get chaos.
  • “Chaos” in this case would mean spiking prices (oil is up today and gold and silver are soaring), wild interest rate volatility as bond vigilantes finally wake up and do to the US what they’ve recently done to Greece and Portugal, and crashing economies as rising uncertainty leads businesses to stop hiring. Welcome to the end of the Age of Paper.

The Ryan Budget is More Game-Playing

Bob Murphy discusses Paul Ryan’s proposed budget. According to Lew Rockwell’s test for judging budget seriousness, it is woefully inadequate:

The politically painful budget slashing is deferred to the future. As Lew Rockwell has said of any would-be budget hawks, tell me how much you want to cut spending this year — not ten years from now when someone else will be in office. (On that score, Rand Paul’s proposal is far more serious than Paul Ryan’s.)

To be fair, Murphy acknowledges that Ryan’s attempt is much better than the competing proposal:

S&P’s downgraded outlook for US debt is one of many objective signs that those of us warning of a fiscal crisis aren’t crazy. The federal government is digging itself deeper and deeper into debt at an alarming rate. Although the budget proposal put forth by Paul Ryan is better than that of President Obama, it is nowhere near a solution.

The sad part is that we have no room left for good intentions and political compromise. We need dramatic action NOW! We should be removing $4 Trillion in four years, not ten!

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