Is America the greatest country in the world?

Beginning scene of the new HBO series The Newsroom answers the question: “Why is America the greatest country in the world?”

An honest three and a half minutes of television…. [strong language]

Hat tip Barry Ritholz/Doug Kass

Inflation/Deflation Face-Off: Harry Dent v. James Rickards

At the latest Casey Research conference, Recovery Reality Check, James Rickards, senior managing director of Tanget Capital Partners and author of Currency Wars: The Making of the Next Global Crisis, debates Harry Dent, founder and president of HS Dent Foundation, on the subject of which is more likely in the near-term economic future, inflation or deflation.

Authoritarian Rulers Get Subtler: Putin, Chavez, China's Chiefs – WSJ.com

WILLIAM J. DOBSON: A handful of retrograde, old-school dictatorships have managed to limp into the 21st century. They are the North Koreas, Turkmenistans and Equatorial Guineas of the world. But they represent dictatorship’s past….

Today’s smarter dictators, by contrast, understand that in a globalized world, the more brutal forms of intimidation—mass arrests, firing squads, violent crackdowns—are best replaced with more subtle forms of coercion.

Rather than arrest members of human-rights groups, Russia’s Vladimir Putin deploys tax collectors or health inspectors to shut down dissident groups. In Venezuela, Hugo Chávez ensures that laws are written broadly and then uses them like a scalpel to target groups that he deems a threat….

via Authoritarian Rulers Get Subtler: Putin, Chavez, China's Chiefs – WSJ.com.

When Austerity Fails

Austerity decimated Asian economies during their 1997/98 financial crisis and similar measures have failed to rescue the PIIGS in Europe 2012. David Cameron’s austerity measures have also not saved the UK from falling back into recession. So why is Wayne Swan in Australia so proud of his balanced budget? And why does Barack Obama threaten the wealthy with increased taxes while the GOP advocate spending cuts in order to reduce the US deficit? Are we condemned to follow Europe into a deflationary spiral?

How Did We Get Here?

First, let’s examine the causes of the current financial crisis.

Government deficits have been around for centuries. States would borrow in order to finance wars but were then left with the problem of repayment. Countries frequently defaulted, but this created difficulties in accessing further finance; so governments resorted to debasing their currencies. Initially they substituted coins with a lower metal content for the original issue. Then introduction of fiat currencies — with no right of conversion to an underlying gold/silver standard — made debasement a lot easier. Issuing more paper currency simply reduced the value of each note in circulation. Advent of the digital age made debasement still easier, with transfer of balances between electronic accounts largely replacing paper money. Fiscal deficits, previously confined to wars, became regular government policy; employed as a stealth tax and redistributed in the form of welfare benefits to large voting blocks.

Along with fiscal deficits came easy monetary policy — also known as debt expansion. Lower interest rates fueled greater demand for debt, which bankers, with assistance from the central bank, were only too willing to accommodate. I will not go into a lengthy exposition of how banks create money, but banks expand their balance sheets by lending money they do not have, confident in the knowledge that recipients will deposit the proceeds back in the banking system — which is then used to fund the original loan. Expanding bank balance sheets inject new money into the system, debasing the currency as effectively as if they were running a printing press in the basement.

The combination of rising prices and low interest rates is a heady mix investors cannot resist, leading to speculative bubbles in real estate or stocks. So why do governments encourage debt expansion? Because (A) it creates a temporary high — a false sense of well-being before inflation takes hold; and (B) it debases the currency, inflating tax revenues while reducing the real value of government debt.

Continuous government deficits and debt expansion via the financial sector have brought us to the edge of the precipice. The problem is: finding a way back — none of the solutions seem to work.

Austerity

Slashing government spending, cutting back on investment programs, and raising taxes in order to reduce the fiscal deficit may appear a logical response to the crisis. Reversing policies that caused the problem will reduce their eventual impact, but you have to do that before the financial crisis — not after. With bank credit contracting and aggregate demand shrinking, it is too late to throw the engine into reverse — you are already going backwards. The economy is already slowing. Rather than reducing harmful side-effects, austerity applied at the wrong time will simply amplify them.

The 1997 Asian Crisis

We are repeating the mistakes of the 1997/98 Asian crisis. Joseph Stiglitz, at the time chief economist at the World Bank, warned the IMF of the perils of austerity measures imposed on recipients of IMF support. He was politely ignored. By July 1998, 13 months after the start of the crisis, GNP had fallen by 83 percent in Indonesia and between 30 and 40 percent in other recipients of IMF “assistance”. Thailand, Indonesia, Malaysia, South Korea and the Phillipines reduced government deficits, allowed insolvent banks to fail, and raised interest rates in response to IMF demands. Currency devaluations, waves of bankruptcies, real estate busts, collapse of entire industries and soaring unemployment followed — leading to social unrest. Contracting bank lending without compensatory fiscal deficits led to a deflationary spiral, while raising interest rates failed to protect currencies from devaluation.

The same failed policies are being pursued today, simply because continuing fiscal deficits and ballooning public debt are a frightening alternative.

The Lesser of Two Evils

At some point political leaders are going to realize the futility of further austerity measures and resort to the hair of the dog that bit them. Bond markets are likely to resist further increases in public debt and deficits would have to be funded directly or indirectly by the central bank/Federal Reserve. Inflation would rise. Effectively the government is printing fresh new dollar bills with nothing to back them.

The short-term payoff would be fourfold. Rising inflation increases tax revenues while at the same time decreasing the value of public debt in real terms. Real estate values rise, restoring many underwater mortgages to solvency, and rescuing banks threatened by falling house prices. Finally, inflation would discourage currency manipulation. Asian exporters who keep their currencies at artificially low values, by purchasing $trillions of US treasuries to offset the current account imbalance, will suffer a capital loss on their investments.

The long-term costs — inflation, speculative bubbles and financial crises — are likely to be out-weighed by the short-term benefits when it comes to counting votes. Even rising national debt would to some extent be offset by rising nominal GDP, stabilizing the debt-to-GDP ratio. And if deficits are used to fund productive infrastructure, rather than squandered on public fountains and bridges-to-nowhere, that will further enhance GDP growth while ensuring that the state has real assets to show for the debt incurred.

Not “If” but “When”

Faced with the failure of austerity measures, governments are likely to abandon them and resort to the printing press — fiscal deficits and quantitative easing. It is more a case of “when” rather than “if”. Successful traders/investors will need to allow for this in their strategies, timing their purchases to take advantage of the shift.

FedEx CEO on China's Effect on Global Market – WSJ Online

FedEx CEO Frederick W. Smith talks about how exports to China remain stagnant given China’s recent protectionist policies and its focus on “indigenous innovation.” He speaks with WSJ’s Alan Murray at Viewpoints West.

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End of the Age of Entitlement | Joe Hockey

THE END OF THE AGE OF ENTITLEMENT

JOE HOCKEY’S SPEECH TO THE INSTITUTE OF ECONOMIC AFFAIRS, LONDON

…Let me put it to you this way: The Age of Entitlement is over.

We should not take this as cause for despair. It is our market based economies which have forced this change on unwilling participants.

What we have seen is that the market is mandating policy changes that common sense and years of lectures from small government advocates have failed to achieve.

via The Age of Entitlement | Institute of Economic Affairs.

Hat tip to Houses and Holes

Bill Gates investing in nuclear power

Bill Gates talks about his investment in Generation IV nuclear power.

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Playing Pyongyang's Games – WSJ.com

MICHAEL AUSLIN: It took barely two weeks for North Korea to play its old game of bait and switch, this time gutting the Feb. 29 “Leap Day Agreement” with the Obama administration that promised a moratorium on nuclear and missile testing. In an Ides of March announcement, Pyongyang revealed it would conduct a “satellite launch” on April 15, which coincides with the 100th anniversary of the birth of Kim Il Sung, founder of the North Korean regime.

….In a sense, the Obama administration has only itself to blame for this mess. For three years, it wisely avoided playing Pyongyang’s games. Unlike the Bush administration, which became increasingly desperate to patch holes in a flawed policy of making ever more concessions for little in return, the Obama team kept contact with former leader Kim Jong Il at a minimum, and refused to enter the Alice in Wonderland world of reaching agreement with the North only to face provocation and demands for more concessions.

via Michael Auslin: Playing Pyongyang's Games – WSJ.com.

You can't borrow yourself out of debt: The Secret of Oz

“You can’t borrow yourself out of debt any more than drink yourself sober.”

Bill Still on the on-going debt problem and the solution proposed by L. Frank Baum in the Wizard of Oz.

Comment:~ The solution proposed is not a magic bullet. Money printed by Treasury, whether in the form of banknotes (“scrip”) or tally sticks, is still Treasury debt; Treasury effectively borrows when the currency is issued in payment and settles when the notes are presented in payment of taxes. It also debases the currency, though not as fast as debt created by the banks. This video serves as a reminder that we still have not solved the global debt problem — merely postponed the inevitable by issuing further debt.