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Guest Post: Nearing The End of Serfdom’s Road

Submitted by James E. Miller of the Ludwig von Mises Institute of Canada

Nearing The End of Serfdom’s Road

In France, Minister for Energy and Environment Delphine Batho recently proposed a light curfew to pertain to “in and outside shops, offices, and public buildings” between 1 a.m. and 7 a.m. beginning next July. Some merchants are up in arms as the rule adds to existing bans such as the forced closing of stores on Sunday and night shopping in general. If enacted, the illumination ban will quickly disperse Paris’s reputation as the “City of Light.”

France’s Commercial Council is criticizing the decision as being anti-business and economically damaging. However, the fact that these assumed defenders of free enterprise are surprised at such a proposal is the real puzzle. In a country run by a government that is happily bloodletting the productive capacity of the people through a hike on the income tax and a tax on financial transactions, this latest nanny-state resolve should be fully expected. It is not a power grab but a mere reassertion of the authority the central state has over the private affairs of society.

The “lights out” edict is just another piece of evidence of a disturbing truth: the road to serfdom is not ahead of the West; we have already reached its end.

Such a statement may be objected to as private property and a certain degree of freedom still exist in the West.  But this is these just a mirage. The property tax effectively nullifies the notion of private property. In many places, police brutes allow themselves into your home and on your land with little recourse possible. Billions of electronic correspondences are collected daily by the Federal Bureau of Investigation of the United States. In 1961, the United Nations released the Single Convention on Narcotic Drugs which has since served as a framework for drug prohibition in all major countries.

As William Grigg points out,

Drug prohibition is a subset of slavery – in both its philosophical premise (the denial of individual self-ownership) and its role in creating a huge and growing population of people in chains.

Ownership of one’s body and those resources to which it appropriates itself is no longer a respected law in Western society. Through years of indoctrination, it is accepted by the greater public that the individual is beholden to the state- not vice versa. Personal identity is now followed by a reference to the government. And blind patriotism is seen as a virtue instead of a demeaning attribute.

Radical individualism isn’t the only thing the nation-state has successfully crushed. The industries which have elevated man above subsistence living have all been co-opted the political machinery.

Today, there is no industry untouched by government. Each and every business must adhere to an innumerable list of erroneous, arbitrary, and contradicting regulations that makes it impossible to run in accordance with personal preference. At any given moment, entrepreneurs run the risk of being shut-down either through the breaking of a rule or at the behest of a politically-savvy competitor. The idea of “pursuing happiness” that was written so eloquently by Thomas Jefferson is no longer present in America or the West. Before happiness is pursued, the criminal class at each level of government must be paid off. If not, then a hefty fine or a jail sentence is applied. Because man’s only means of survival is production, the state holds hostage the very permission to engage. From a power-hungry perspective, the scheme is ingenious. From the perspective of natural law, the predation through which the political class coerces society is worthy of disgust and contempt.

As Albert Jay Nock so rightly put it,

In a spirit of sheer conscious fraud, the State will at any time offer its people “four freedoms,” or six, or any number; but it will never let them have economic freedom. If it did, it would be signing its own death-warrant…

It is now best to think of business as having the ever-present shadow of government lurking behind it. There isn’t a shred of legal free market capitalism to be had anywhere in the Western world. The only freedom that exists has been suppressed to the black market.  For every inspired mind that wishes to build an empire serving customers, there stands an equal number of burglars, thugs, and cheats ready to take from whatever success may be had. These practitioners of theft heartily announce their intentions as being “for fairness” when in reality they are serving their own interests.

When it comes to industries deemed valuable for the functions of a complex industrial economy, the state has all but nationalized them. Banking, health care, roads, bridges, and education are completely under government control; or in the very least, heavily regulated. The degree of competition in each of these fields is humorously low. The inevitable result has been a decrease in quality, the persistent heightening of price, and the creation of an elite class that lobbies for even greater protection.

This can be observed in the instance of radio waves. While media conglomerates broadcast over the medium, the medium itself is entirely state-owned. Austere standards must be adhered to less the privilege of broadcasting over the government-controlled medium be revoked. The so-called “private” radio broadcasting companies are, in actuality, leashed to the state and forced to do its bidding.

The news industry is more of the same. It is a sad but amusing truth that the press makes a mockery out of its own profession. To differentiate themselves from being mouthpieces for the state, it is understood that reporters and commentators should provide, not an unbiased view of government happenings, but a challenge to those in positions of power. Instead, most major news outlets are one within the ruling class and make no effort to hide it. Recently, MSNBC commentators Ed Schultz, Rachel Maddow, Lawrence O’Donnel, and Al Sharpton met with President Obama for what was deemed a “messaging session.” No one questions that the purpose of the meeting was to round up the attack dogs, pamper them accordingly and send them out to television cameras to feed the President’s nonsensical propaganda to the masses. Such a practice was once done in secret. Not anymore now that the press serves the central government instead of the people.

With law, the state has not only claimed absolute command over its authority but has also perverted its meaning to the point of being useless and hollow. Through the outlawing of non-crimes, the locking up of millions of individuals followed. Again, this was easily anticipated. Without a law based on the natural organization of mankind, society devolves into shambles. Today’s rule of law isn’t defined by reason but simply the whims of the political class. There is no longer a concrete method to determine if one of the hundreds of thousands of state-issued edicts becomes broken. This is especially so in America. As former National Security Agency employee William Binney describes it, most Americans,

…think they are not doing anything that’s wrong, they don’t get to define that. The central government does, the central government defines what is right and wrong and whether or not they target you. So, it’s not up to the individuals. Even if they think they aren’t doing something wrong, if their position on something is against what the administration has, then they could easily become a target.”

This is not the rule of law; it is the absence of law. When government reaches a point where it unilaterally decides what is legal and illegal outside the constraints of basic decency, there no longer exists a check on its propensity to expand. In other words, it is the final sign of supreme state rule and the unstoppable degeneration of civilization.

The West has reached the point of full state dominance. Whether this continues to be accepted or is blessedly defied remains to be seen. This writer finds little hope in the latter. Humanity appears to be adept at two things: protecting itself while simultaneously working toward its own demise. Its self-imposed destruction is almost fascinating to watch unfold. As the Roman Emperor Marcus Aurelius once observed, “in the ripe olives the very circumstances of their being near to rottenness adds a peculiar beauty to the fruit.”

Many people still believe they are free even though virtually every movement they make is affected in some fashion by the state. Sooner or later, it will be realized that in return for the feedings at the government trough, the West has thrown away what promise it had in constructing a free society. The freedom most think about in modern times is typically in reference to the right to voice an opinion or work for whomever they wish. This is false. Freedom today is represented only by the distance between skin and chain.

In the end, knowing full well the challenges which stand between man and liberty can be comforting. It means that the ills of society are easily diagnosed and it is accompanied by a feeling of predictability. The state will continue to swallow up large swaths of civilization until it can’t anymore. Then perhaps, God-willing, a free society will show its face.

The fact remains that liberty is far behind us. There is hardly a soul left on Earth that experienced life without the gargantuan state. The prospect of changing the impeding course is not impossible but increasingly slim. Fooling yourself into believing otherwise is an exercise in futility. A reminder of the central government’s endless reach will eventually cross your path.

As Garet Garrett wrote in his great polemic “The Revolution Was

There are those who still think they are holding the pass against a revolution that may be coming up the road. But they are gazing in the wrong direction. The revolution is behind them. It went by in the Night of Depression, singing songs to freedom.

Investor Sentiment: More Issues

Add extreme selling by corporate insiders to last week’s list of worries. This “smart money” is selling to a degree last seen February 18, 2011. Following this signal, the SP500 spent the next 6 months going sideways before falling 18% over a 4 week period in August. Of course, the market was “saved” by Operation Twist. Last week’s issues included: 1) only modest extremes in investor sentiment at the recent bottom; 2) lack of consensus amongst the various sentiment data; 3) the lack of both bulls and bears in this market; in essence and by our measures, investors are just moving to the sidelines. The problem with this market is that it can’t seem to sell off enough to produce a sustainable rally.

Continue reading Investor Sentiment: More Issues

Preview Of The Key Events In The Coming Week

The upcoming week is comparatively less loaded with policy events, though the ongoing fiscal cliff negotiations in the US remain one of the key developments to follow. Important is also the FOMC meeting on Wednesday, where Goldman and everyone else now expect the Fed to increase their monthly asset purchase target under the QE3 program to $85bn per month, up from $45bn per month; this will keep the pace of asset purchases constant after the Operation Twist expires at the end of December, as Zero Hedge predicted the day QE3 was announced. There are is a handful of other central bank meetings in emerging economies (Russia, Indonesia, South-Korea, Philippines, Chile) although consensus expects no change to the base-rate in most cases. On the data front industrial production numbers for October will be released around the world including in the Euro-area, US and China. We also get the US retail sales number and December flash PMIs for the Euro-area and China.

The Week Ahead

Monday December 10

  • Russia MPC: We and consensus expect the overnight auction-based repo to remain unchanged at 5.50% from November.
  • Also Interesting: Japan GDP, Turkey GDP, Sweden IP, France & Italy IP, Italy & Spain GDP, Czech CPI, Norway CPI, China Trade Balance, Israel MPC Minutes.

Tuesday December 11

  • US Trade Balance (October): Consensus expects -42.5bn for October, a slight worsening from -41.5bn in September.
  • Indonesia MPC: Consensus expects no change to the reference rate currently at 5.25%
  • Also Interesting: Turkey CA, Hungary CPI, Japan Machinery Orders.

Wednesday December 12

  • UK ILO Unemployment Rate (October): Consensus expects 7.9% up from 7.8% in September
  • US FOMC Meeting: We expect that the FOMC will increase the monthly QE purchases to $85bn per month from $40bn per month to keep pace with the purchases under the Operation Twist program which expires at the end of December.
  • Also Interesting: India IP, Germany HCPI, Euro Area IP, UK employment growth, Israel trade balance, Russia trade balance, Mexico IP, Brazil monthly GDP.

Thursday December 13

  • South Korea MPC: Consensus expects no change to the 7-day repo rate currently at 2.75%.
  • Philippines MPC: Consensus expects no change to the overnight borrowing rate currently at 3.5%.
  • US Retail Sales (November): We expect 0.6%mom, Consensus expects 0.5%mom, up from -0.3%mom in October
  • BOJ Tankan (December)
  • Also Interesting: Swiss CB meeting, Poland CA, Spain HCPI, Czech CA, Italy HCPI, Poland CPI, Brazil Retail Sales, US Initial Jobless Claims, Chile MPC

Friday December 14

  • US CPI (November): We expect 0.26%mom, consensus expects -0.2%mom down from 0.1%mom in October
  • US IP (November): We and consensus expect 0.2%mom up from -0.4%mom in October
  • Also Interesting: China Flash PMI, Japan IP, Euro-area Flash Manufacturing PMI, Euro-area CPI, Israel CPI, Argentina CPI, Mexico MPC Minutes, India Wholesale Prices.

Source: Goldman Sachs

The Historic Inversion In Shadow Banking Is Now Complete

Back in June, we wrote an article titled “On The Verge Of A Historic Inversion In Shadow Banking” in which we showed that for the first time since December 1995, the total “shadow liabilities” in the United States – the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) – were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.

In other words, in Q3 total shadow liabilities, using the Zoltan Poszar definition, and excluding hedge fund repo-funded, collateral-chain explicit leverage, declined to $14.8 trillion, a drop of $104 billion in the quarter. When one considers that this is a decline of $6.2 trillion since the all time peak of $21 trillion in Q1 2008, it becomes immediately obvious what the true source of deleveraging in the modern financial system is, and why the Fed continues to have no choice but to offset the shadow deleveraging by injecting new Flow via traditional pathways, i.e. engaging in virtually endless QE.

What is more important, the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector, or even in the household sector (credit cards, net of the surge in student and car loans of course) and is the biggest flow drain in the fungible credit market system in which the only real source of new credit continues to be either the Fed (via QE following repo transformations courtesy of the custodial banks), or the Treasury of course,via direct government-guaranteed loans.

And while the chart that is the topic of this post is the following, which shows that the red line – traditional bank liabilities – have once again overtaken shadow…

… The most important chart of the modern monetary system, and hence the one which you will see nowhere else, continues to be the one below, showing that on a blended notional basis, total traditional and shadow liabilities have not budged at all in the last three years despite the massive injections from the Fed!

Translated, the Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging – be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits – in the shadow banking system.

And a notable tangent continues to be that between the peak of the credit bubble and the most recent data, there continues to be a $3.7 trillion credit hole on a consolidated financial credit basis, which is precisely the reason for the ongoing Economic Depression from a simple Austrian money supply perspective, why the Fed and the government are forced to misrepresent the true state of the economy (far worse than current economic “data” represent), and why should the Fed ever halt its monthly flow into markets which is now $85 billion each month, there will be a dramatic stock market crash… and Bernanke knows it.

However, the bigger problem as more and more deposit-based liabilities take place of deposit-free shadow equivalents, is that the systemic propensity for runaway inflation rises with every quarter in which Fed reserve conceived deposits -prone to spilling over into the broader market based on the irrationality of individual psychology -serve to offset delevering shadow conduits. As explained in July, shadow banking was nothing more than a massive inflation buffer whose historic build up allowed the Fed to inject trillions without this money leading to a collapse in the USD value, now that it is actively deleveraging. But with every “shadow dollar” that is taken out of the system, said buffer gets smaller and smaller…

Finally, those curious which components in the shadow banking system were responsible for the most recent deleveraging in Q3, the chart below sums it up:

And the shadow deleveraging on a consolidated quarterly basis in all its glory:

To summarize, the Q3 change in shadow liabilities:

  • GSE & Agency Mortgage Pools: ($16.2) billion
  • Asset Backed Securities issuers: (39.3) billion
  • Funding Corporations: ($49.5) billion
  • Repos: ($33) billion
  • Open Market Paper ($4.8) billion
  • Money Markets: +$39 billion: the only net addition in Q3

How was this drop offset? Simple – by a $177 billion increase in the liabilities of U.S.-Chartered Depository Institutions, which rose to a record $12.224 trillion in Q3, primarily due to a rise of $140 billion in Small time and Saving Deposits, a topic discussed previously here.

In summary: the shadow banking collapse continues, and is offset via the Fed “excess reserve” injection pathway entering M2 thanks to the ~4.5x M1 to M2 conversion pathway. Remember Fed’s excess reserves are a component of M1: these then get “fractionally reserved” into M2 as per the multiplier shown below:

To summarize: all hope abandon ye who think the Fed will stop monetizing debt, and thus injecting flow, at some point in the next several years.

* * *

For more on the topic of Shadow Banking, we suggest the following reading material:

Source: Z.1