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'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 >>>.
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 >>>.
As China absorbs the decline in exports created by the global financial crisis, the government is emphasizing the need to increase domestic demand and expedite the development of a local consumer culture. To put it simply - the Chinese government wants local consumers to spend more money in order to reduce the country's dependence on consumers from other countries. China's ability to shift from a production to a consumption-based economy depends on a variety of social and economic factors.
In 1949, China had a population of 450 million; by 1980, it was close to 1 billion; today, it is over 1.35 billion. The UN's World Population Prospects, updated last year, estimate that China's population will continue to grow slowly during the next two decades and then begin to decline. The number of young people joining the workforce each year is expected to decline from 2010 (see Michael Pettis' blog for more on this).
China's population is getting older and might soon begin to get smaller as well. Plenty of commentary is published about the implications this has for China's social security network and economic growth. In addition, it is worthwhile to consider the impact such demographic changes might have on local consumption patterns.
Continue reading Consumer Culture and China's Population Growth >>>.
Looks like the world is going crazy. Yesterday, the Chairman of the Federal Reserve, Ben Bernanke, gave a testimony to the US Senate panel on Fed policy.
As you may remember, the Fed has a monopoly on printing money and fixing interest rates. Mr. Bernanke tried to explain to the Senators how the Fed would eventually 'let go' of its current policy of 'near-zero' interest rates and flooding the market with newly-printed cash. He noted that things are getting better and that already "many markets are functioning more normally".
Bernanke openly talks about his policy of (i) manipulating interest rates in order to increase borrowing, (ii) printing more and more cash in order to create inflation and 'growth', and (iii) using public money to bail out banks and other companies that made the wrong choices, instead of letting them pay for their mistakes and go bankrupt. At the same time, he mentions that "markets are functioning more normally". What "market" is there when so many parts of the economy are centrally controlled and manipulated by the Fed?
Continue reading America is Officially Bankrupt >>>.
I often write about the importance of free markets and the dangers of
big government. There seems to be a lot of confusion these days about the
meaning of those two concepts, especially when seen through the prism
of traditional political left/right divisions.
Yesterday, a friend of mine pointed out that the current crisis was created under George W. Bush. If free markets and small government are really the solution, how come a "right-wing" president who "reduced taxes" brought us into this mess?
That's a great question, and president Bush is a perfect example of all the misconceptions people have about economic policy and the right-left division in US politics. How so? Let's look at the numbers.
Bush may have reduced (some) taxes, but federal spending during his two terms went up 19.7% and 25.3% respectively, not including defense spending. If you include spending on security and other adventures, the growth is almost 50%.
Yesterday, a friend of mine pointed out that the current crisis was created under George W. Bush. If free markets and small government are really the solution, how come a "right-wing" president who "reduced taxes" brought us into this mess?
That's a great question, and president Bush is a perfect example of all the misconceptions people have about economic policy and the right-left division in US politics. How so? Let's look at the numbers.
Bush may have reduced (some) taxes, but federal spending during his two terms went up 19.7% and 25.3% respectively, not including defense spending. If you include spending on security and other adventures, the growth is almost 50%.
"Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion....To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression."Karl Marx once wrote that every historical occurnce happens twice: first as a tragedy, second as a farce. Above is an excerpt from an essay published by F.A. Hayek in 1933, at the height of the Great Depression. It is based on an essay he published in German in 1928. Not much has changed.
"But certainly for the present age, which prefers the sign to the thing signified, the copy to the original, fancy to reality, the appearance to the essence, this change, inasmuch as it does away with illusion, is an absolute annihilation, or at least a reckless profanation; for in these days illusion only is sacred, truth profane. Nay, sacredness is held to be enhanced in proportion as truth decreases and illusion increases, so that the highest degree of illusion comes to be the highest degree of sacredness. "Ludwig Andreas Feuerbach, The Essence of Christianity, 1841.
China is considered by many to be the ultimate example of successful central planning. It is run by a ruthless and totalitarian government and exhibited strong economic growth for three consecutive decades. Previously, I wrote about the assumptions outsiders make when looking at Chinese economic indicators, and the way in which such assumptions affect decision making. However, even those who visit China in order to get a "real idea" of what's going on are often misguided by what they see. Visitors to Beijing, Shanghai, and other cities are impressed with the beautiful airports, highways, and central business districts and deduce that the country is developing well.
"People are prepared to obtain order and tranquility by giving up other values such as democracy and freedom. This dangerous temptation has not disappeared, even today." (Mikhail Gorbachev, 1993)
Continue reading Buying into Communism: China's Change, 20 Years After Tian'anmen >>>.
Twenty years ago, (some) Chinese people took to the streets and demanded the freedom to speak against corruption, to buy western goods, and to manage their lives without interruption (see Wasserstrom's summary ). Twenty years later, the world is in the midst of a financial crisis, waiting for Chinese consumers to pick up the slack of international demand and drive the global financial recovery.
On the surface, most Chinese people have little interests in the events of 1989. However, taking into account China's role in creating the current crisis, those events might have a bigger influence on current economic matters than we realize.
Continue reading 1989 and the Financial Crisis of 2009 >>>.
A Wave user can comment, chat, and share photos and links (virtually) anywhere on the web. At the same time, his friends can follow this activity on his Wave page. For example, it allows you to leave a comment on a Blog and see your friend's response to this comment on the same page OR within your Wave page. You can then continue the conversation on a different blog page, or invite other contacts to join (watch the video presentation, it will make more sense). Wave allows you to do everything you ever wanted, online, using a single account and with remarkable ease of use.
Continue reading Google is the New Facebook: All Your Thoughts (are) Belong to Us >>>.
Foreigners often describe China as "different"; a mysterious land whose people have a perplexing way of getting things done. Yet, when it comes to economic data, foreign "experts" look at China as they would look at any other country. I am not talking about those who ignore the fact that China's government tweaks economic indicators to fit pre-defined goals. Enough has been written about that (here, here, here and here, for example). I am talking about the way in which well-regarded western publications look at real indicators, and the assumptions they make in the process.
This morning, for example, I received a newsletter from RGE Monitor, Nouriel Roubini's consultancy firm. Reading it, I learned that 'unlike many global markets, the residential property market in China is showing some signs of stabilization'. The facts are correct. The free fall in residential prices has stopped, and in some places there are even slight increases. A sign of recovery? not necessarily.
Continue reading China's Growth in Western Eyes >>>.
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