Continue reading Israeli Society in Five Sentences or Less >>>.
An Icelandic volcano erupted on April 15, creating a black cloud that threw Europe's airline industry into chaos: Two thirds of all flights have been canceled over the past weekend, and Europe's largest airline, Lufthansa, cancelled all of its flights. The movement of people and goods in and out of the continent is severely hampered, bringing many industries to a virtual halt. The eruption is far from over, and experts are still unable to predict the end of it. The volcano's last eruption, in 1821, lasted for two years.(!)
Continue reading Iceland's Volcanic Cloud is Europe's Black Swan >>>.
I have been writing about China's role in creating the current crisis for a long time. And still, I think it is wrong to blame China for America's pains - namely, a collapsing credit bubble, rising unemployment, and a ballooning government debt.
Yes, the Chinese are manipulating their currency. By doing so, they make it easier for Americans to buy Chinese goods for less and make it harder for Chinese citizens to increase their purchasing power. They are also making it more difficult for Chinese companies to move up in the global supply chain and produce better, more innovative products for higher prices. China's currency manipulation, on its own, damages no one other than the Chinese people.
Continue reading America's Debt is not China's Fault >>>.
'There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.'The above quote from Ludwig von Mises's Human Action (1949) pretty much sums up where we are and where we're headed. There are two ways out of this mess: Allowing bad banks and bad companies to go bankrupt and take some pain in the short term; or bail them out through government "creation" of more money and cheap credit. Looks like the world has opted for the second option.
This means we will experience a period of illusionary recovery, mostly in real estate prices and equity markets, powered by the huge amount of new money created by government(s). This illusionary recovery can last anywhere between 6 months to 10 years - depending on the amount of money being printed and on external triggers - but will eventually come to a painful stop, when all governments are deeply in debt and there's no one left to bail them out.
Once we reach that point, governments are most likely to choose the only way out that allows them to divert public attention from their failure and get everyone to work together towards a common goal - war. Until then, enjoy the ride.
Roberts points out that unlike most sciences - in which progress is steady and concrete - in Economics 'theories that were once discredited surge back into favor' and since it is impossible to control for all the relevant factors in an economic experiment, each effect can be explained by a variety of causes, or a combination of causes. This, in turn, means that the explanations for economic phenomena change in line with the political climate.
Continue reading The Politics of Economics and the Biology of Sociology >>>.
'Google News is a computer-generated news site that aggregates headlines from news sources worldwide, groups similar stories together and displays them according to each reader's personalized interests...
Our articles are selected and ranked by computers that evaluate, among other things, how often and on what sites a story appears online....
As a result, stories are sorted without regard to political viewpoint or ideology and you can choose from a wide variety of perspectives on any given story.'
We often read about the explicit ways in which those in power use the media to manipulate public opinion through censorship, 'spinning', and news management. However, each type of media (TV, the Internet, the Newspaper) affects political consciousness and ideology, even in the absence of any editorial control.
Continue reading Agnostic News: Conformity and Diversity in a New Media World >>>.
'The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.'
Paul Samuelson died this week. Samuelson was the first American economists to win the Nobel Prize in 1970, and was one of the most influential proponents of Keynsian economics. His introduction to the field sold millions of copies and was used to train a generation of economists.
Samuelson was a big fan of government management of monetary affairs (printing money, setting interest rates), and so it is no surprise that the list of economists that saw him as their mentor includes contemporary "superstars" such as Ben Bernanke and Larry Summers.
The above quote is taken from the 13th edition of Samuelson's introduction to economics, published in 1989. A few months later, the Soviet Union collapsed.
Samuelson lived with the times and his error is excusable. The real question is why, twenty years later, contemporary economists still preach soviet-style policies. May Samuelson rest in peace. Communism, for now, is still alive and well.
Back in the middle of 2008, many publications, most prominently The Economist magazine, suggested that a downturn in developed countries might not have any significant effect on developing economies, since the latter have already "decoupled" and are no longer heavily dependent on demand from consumers in rich countries.
Within a few months, the "decoupling" theory proved to be false: The downturn in the developed world had a significant impact on China's economic well-being, causing a dramatic rise in unemployment and a sharp slowdown in economic growth. The Chinese government, just like the American one, responded with massive stimulus spending and expansion of cheap credit.
Continue reading China's Economy: Decoupling from what? >>>.
My friend, who agreed with me in principle, defended Obama's policies by saying that Obama is conducting the bailouts 'under the guidance of... Bernanke, Summers, Geithner' and that he merely 'continued the bailout started by Bush'. This is a common argument. The gist of it is that things are bad, we need to fix them, but there is no need to hurry. In addition, it justifies the errors of the current president by claiming that similar errors were committed by his predecessor.
For the purpose of this analysis, we can ignore the fact that Geitner, Bernanke, and Summers were appointed by Obama himself. If someone believes that bailing out financial institutions in this way is a good policy - that's fine. What piques my curiosity is that people who think it is a bad policy are nonetheless willing to accept it and even justify it, and do not see any urgency in eliminating it.
Continue reading Violent Materialism: AIG, Guantanamo, and The Tyranny of Images >>>.
"People are always shouting they want to create a better future. It's not true. The future is an apathetic void of no interest to anyone. The past is full of life, eager to irritate us, provoke and insult us, tempt us to destroy or repaint it. The only reason people want to be masters of the future is to change the past"
History is written by the winners. The above is taken from Milan Kundera's Book of Laughter and Forgetting and refers to the consistent efforts of Soviet officials in Eastern Europe to rewrite history. Soviet communism is a thing of the past, but the battle to control the future in order to rewrite the past is far from over.
In the midst of a global financial crisis, it is interesting to see how our understanding of the Great Depression, 80 years ago, shapes current attitudes. It is even more interesting to examine the discrepancies between actual facts and the history currently taught at elementary schools and published in mainstream newspapers.
We can summarize the common view of the Great Depression as follows:
Continue reading The Great Depression and the Battle for Public Memory >>>.
"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some... As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.John Meynard Keynes wrote the above in 1919, in an essay about Inflation and Deflation. This is the same Keynes whose theoretical work and policy recommendations serve to justify current calls for increased government spending, money printing, and cheap credit. How does one reconcile his views on the peril of inflation with the solutions that are being proposed in his name? More on this next time.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauce the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.Frederick Bastiat wrote the essay That Which is Seen, and that Which is Not Seen in 1850. Today, as government is increasing its involvement in economic matters in unprecedented ways in order to "cure" the economy of its ails, it is important to remember that the goals of politicians - producing "measurable" and "communicable" results - are not necessarily the goals of society, especially when it comes to economic policy. The "recovery" we see in the newspapers today, is the foundation for the bigger, longer crisis of tomorrow. More on this soon. (I am traveling for the next couple of weeks)
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. "
"Has it ever occurred to you, Winston, that by the year 2050, at the very latest, not a single human being will be alive who could understand such a conversation as we are having now?...The whole climate of thought will be different. In fact, there will be no thought, as we understand it now. Orthodoxy means not thinking--not needing to think. Orthodoxy is unconsciousness."
In 1984, George Orwell introduced Newspeak, a new language being gradually adopted by citizens of a fictional country called Oceanaia. As Orwell notes, the intention was that once Newspeak had been fully adopted, 'a heretical thought should be literally unthinkable, at least so far as thought is dependent on words'. This was done through the invention of new words and, more importantly, by 'eliminating undesirable words and by stripping such words as remained of unorthodox meanings.'
Words, of course, don't change their meaning by coincidence. As Orwell points out in his 1946 essay Politics and the English Language, the 'decline of a language must ultimately have political and economic causes'. Of course, if we think foolish thoughts, our language would become full of foolish words, but the effect becomes a cause and the new language encourages more foolish thoughts. But what exactly does it mean that the decline of language has political and economic causes? Well, since the civilized world happens to be in the middle a severe ideological crisis, we can use a contemporary example to show how this process works.
Continue reading Inflation, Deflation, and the Politics of Language >>>.
We live in a time of immense confusion. Words that used to mean one thing suddenly mean another. The values which made us prosperous and free are being questioned and trampled on. We are in a mess, and our instinctive reactions seem to make things worse.
In 1989, following the collapse of the Soviet Union, Francis Fukuyama declared "The End of History" and noted that 'The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism'. Twenty years later, the ideological appeal of classic liberal values - free markets, property rights, civil liberty, and individual responsibility - is in decline, following an economic meltdown in developed countries and the perceived success of the authoritarian-socialist model, most notably in the People's Republic of China. Capitalism as we know it is dying. Some say it already died a long time ago.
Continue reading Capitalism: A Postmortem Examination - Part I >>>.
Every now and then, a natural storm destroyed a few houses, disrupted the supply of fish for a few days, and sometimes even drowned a few of the locals. The islanders knew that the world is full or surprises, so they were careful - they always saved part of the fish they caught in special reserves for a rainy day, appointed lifeguards to sit on the most dangerous beaches, kept themselves in good shape, and taught all their children how to swim.
One day, a bunch of local businessmen came to the island's government with a proposition: Give us a license to manage the ocean and we'll save you all these unexpected troubles! This way, you can spend more time on productive activities, and make long term plans. We can build a perimeter around the island to control the flow of waves. In addition, we can make sure that all of the fish in the special reserves are protected and well-nourished, and regulate the number of fish who reach the coast every day".
Continue reading A Short Story about People, Water, and Fish (First Draft) >>>.
'One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.'The above was not written by the speaker of China's Communist Party; it was not published on China Daily or the Global Times. It was written by Thomas Friedman and appeared in yesterday's New York Times. Friedman is so in love with central-planning, that he is willing to give up his so-called liberal ideology and dismiss China's ruthless and violent control mechanism - which holds 20% of the world's population under considerable oppression - as a system with some "drawbacks", led by "enlightened people".
Just to recap, Friedman is talking about a country in which people do not have the freedom to decide how many kids to have, which city to live in, where to spend their holidays, or which web sites to visit. They are also denied the right to voice their opinion on a variety of issues, and are required to register with the authorities if they wish to publish a blog, leaflet, or spend 30 minutes in an internet cafe.
Continue reading PRC 2009 = USSR 1929? >>>.
Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, called for the establishment of a new global reserve currency to supplant the US Dollar. Zhou suggested that the new currency will be super-sovereign. That is, not belonging to any state. The actual exchange value, according to Zhou, will be determined through discussion between different countries. Zhou claims that his new plan would 'secure global financial stability and facilitate world economic growth'. Sounds like a good idea? In addition, if China wants to undermine the US Dollar's supremacy, why not use it's own currency, the Yuan, as a replacement? Let's put things in context.
Over the past 60 years, The US Dollar has been the reserve currency of choice for most of the world's major economies. This means that governments chose to hold significant amounts of their currency reserves in US Dollars, and the that Dollar was the main currency used in international trade. It still is.
Continue reading Global Reserve Currency: Calling China's (and America's) Bluff >>>.
Chinese banks gave out more than USD 1 billion during the first 6 months of 2009. This is equal to 25% of China's total GDP. The plan is to boost the economy by sponsoring viable projects that will create new jobs and increase productivity. However, even according to Chinese government sources, about 20% of these new loans already found their way to the stock exchange. Prof. Michael Pettis from Beijing University, estimates that 20-33% of these new loans go directly to the stock exchange, real estate market, or even the gaming tables in Macau.
This means that a big chunk of the loans are not even going to the projects they are supposed to sponsor and are instead used to inflate prices in other parts of the economy. It is not surprising, then, that the Shanghai stock market went up about 70% since the beginning of the year, and that real estate prices in many Chinese cities are going up, despite declining occupancy rates.
Continue reading Where are China's New Bank Loans Going? >>>.
But, can money be created just like this? Yes. Can it maintain its original value? No. So... all the people who are saving in USD were essentially taxed by the US government (through diminishing the value of their savings).
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