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On America’s In Dependence Day

By Bill Frezza, originally posted in Forbes Magazine

Lamenting The Lost Legacy Of Independence Day

Why do we still celebrate Independence Day? Is it a lingering habit, a mindless bit of nostalgia, a time to indulge in fireworks and barbecues, devoid of any deeper meaning? Can anyone honestly argue that our nation still honors the values, or practices the principles, for which our Founders fought?

Today, most Americans have been trained to be embarrassed by the “extremist” individualist ethos that made the protection of liberty the primary purpose of government. They have been taught to apologize for the shortcomings of the “rich white men” who led the revolution. A majority of Americans now subscribe to an expansive view of government as both great provider and beneficent leveler. Its primary purpose is to redress unequal or unhappy outcomes, regardless of their source, through wealth redistribution on a scale so vast that it mocks the concept “private property.”

As for the causes of revolution, we’ve lost sight of them, too. King George III was a champion of laissez-faire compared to the modern cradle-to-grave entitlement state. The swollen capital city named after the man who won our freedom now claims the prize for erecting “a Multitude of new offices” bent on sending out “Swarms of officers to harass our people and eat out their substance.” If there is a field of endeavor that the federal government does not yet regulate, subsidize, or penalize, just wait. A new law is only a “crisis” away.

Have these new offices been imposed on us by some malevolent force that has undermined the workings of democracy? No. We the people ceaselessly demand new offices at an accelerating rate. The majority of Americans vote as if they believe that massive new government programs— created by incomprehensibly complex laws and administered by increasingly unaccountable bureaucrats—can solve an expanding array of “problems” which our Founders would have surely concluded were the proper province of civil society and not the sovereign state.

The King was criticized for unjustly imprisoning seamen. Today, our federal and state governments imprison more of our fellow citizens than any totalitarian regime in history—the vast majority for violating a futile prohibition on the possession, sale, or consumption of substances our Founders would not have thought twice about. Vast portions of our youth are thus rendered permanently unemployable, branded as felons and outcasts with nowhere to turn but a life of crime. And yet we persist in this folly, unable to admit that drug prohibition has been as huge a failure as alcohol prohibition.

And taxes? The Founders knew a tax when they saw one—and there were very few they could abide, with or without representation. Thanks to a Supreme Court that long ago gave up defending the Constitution, we now have a chameleon levy that is not a tax when politically inconvenient yet magically becomes a tax when seeking constitutional muster. As if we didn’t have a wide enough variety of taxes, this new tax is designed to penalize anyone who refuses to participate in a great communal project designed to make every citizen even more deeply dependent on the government.

Little by little, the home of the brave and the land of the free has become a nation of rent-seeking dependents clamoring for their share of state largess. Even before the latest entitlement blowout called Obamacare, we crossed the line where more than half of Americans receive some kind of assistance from the government every month, paid for by the fewer than half that still pay income taxes. As we move into the future and the number of dependents grows while the taxpayer pool shrinks, we call the result social justice rather than its old name: theft.

Our forefathers shed blood rather than render unto King George. Yet today we madly mortgage our nation’s future to foreign powers, piling debt upon debt without limit or thought as to how it will be repaid. These debts ensnare our children and grandchildren even as we stop having them, confident in the knowledge that the government will take care of us in our old age, so why bother with the trouble and expense?

If we were still a nation capable of shame with enough intellectual integrity to call things as they are, if we hadn’t debauched our language as badly as our currency, if we had the courage to look in the mirror and see how woefully we have squandered our Founders’ legacy, this Fourth of July would be a day not of celebration but of atonement.

Give some thought to what we have lost as we mark another In Dependence Day. May providence have mercy on our nation, lest we end up getting what we deserve.

The “European Monster State”

Wolf Richter

Rather than solving the Eurozone debt crisis once and for all, the EU summit last week gummed up the bailout process with controversy in the country that everyone is counting on to save the Eurozone, Germany—but also elsewhere—and nothing has been resolved.

There is Greece, inexorably tottering towards its more or less graceful exit from the Eurozone. So once again, the despised Troika inspectors have arrived in Athens to review the books and check on reform efforts, if any. Based on their findings, they’ll decide if Greece should get the next tranche of the bailout billions—default and/or conversion to the drachma being the alternatives.

Horst Reichenbach, the German head of the Troika inspectors, took one look at the numbers, and while he didn’t end up in the hospital nauseated and with knots in his stomach—the fate that had befallen Finance Minister Vassilis Rapanos a couple of days after being appointed—he did see that Greeks have stopped paying their bills.

Which is logical. They’re hanging on to their euros under mattresses or in foreign accounts, assuming that they will soon be able to pay their bills with devalued drachmas. The deal of a lifetime. At least €6.5 billion is past due, owed to Greek industry, Reichenbach said. Everyone is doing it. Hospitals stopped paying for medication, individuals stopped paying for electricity, the government stopped paying for construction work.

“Greece can’t and doesn’t want to make it,” said Bavarian Finance Minister Markus Söder. The economy is broken and cannot restart anew with the euro. And if Greece were to become insolvent today, while it would be tough for the country, “for the rest of Europe, risks would be manageable.” Thus he echoed Dutch Prime Minister Ben Kapen who’d said that the Eurozone is “technically” prepared for Greece’s exit.

“The patience of the public has been exhausted,” said Robert Fico, Prime Minister of Eurozone member Slovakia. His country would no longer be willing to help if debt sinner countries didn’t implement sufficient structural reforms. And the number of bailout candidates continues to grow: in addition to the five that have already requested aid—Greece, Portugal, Ireland, Spain, and Cyprus—Slovenia is now discussing it. Number six. Italy is at the brink. Number seven. Out of seventeen.

And they’re all going to get bailed out by the temporary EFSF, which has a limit of €250 billion, and later by the permanent ESM, which has a limit of €700 billion. Of course, there is the old ESM, that doesn’t exist yet, the one that was passed Friday by the German parliament; but it had already been obviated by the new ESM that emerged from the EU summit, the one that everyone interpreted differently, the one that has run into a wall of opposition in Northern Europe. And of course, it doesn’t exist either.

Finland and the Netherlands quickly expressed their opposition to an essential feature of the new ESM—buying sovereign bonds of debt sinner countries to force down their yields and make borrowing cheaper. They could torpedo it; decisions must be made unanimously. But there would be a way around: if the ECB and the EU Commission decide that this is an emergency, only 85% of the votes, as determined by capital contributions, would be required. But no one can override Germany which contributed 27% of the capital.

And there was a veritable tsunami of actions at the German Constitutional Court. They came from all sides: from the left, from conservative Peter Gauweiler (CSU), and from the association More Democracy, which was joined by 12,000 citizens and by the Association of Tax Payers. They want a rush decision to stop President Joachim Gauck from signing the ESM and Fiscal union laws until the court hands down its final decision.

According to the plaintiffs, the Bundestag, in passing the ESM, gave up its parliamentary “budget autonomy”—its rights to create and control the national budget. These rights would be transferred to organizations that were not democratically legitimized, thereby limiting the rights of voters to participate democratically in budget decisions. The fiscal union pact violates similarly German democratic fundamentals, they claim.

However, Justice Minister Sabine Leutheusser-Schnarrenberger, believed that the court wouldn’t stop the ESM and the fiscal union pact. In prior challenges, the justices reigned in certain planks of the law, she said, “but fundamentally they had no problem with the aid measures.”

And Chancellor Angela Merkel caught a broadside from her coalition partner. Horst Seehofer, chairman of the conservative CSU, lashed out at her concessions and threatened to let the coalition government collapse if further concessions were made. “My greatest fear is that the financial markets ask: can Germany support all that?” He was worried that the markets would attack Germany and put it in the same spot as Spain. He wouldn’t tolerate the transfer of any additional power to the “European monster state” and promised he’d turn the next elections into an election on Europe. “We will put this question to the people,” he said, which so far, amazingly, no one has done in Germany.

The onslaught of criticism put the government on the defensive about the summit decisions, where Merkel had blinked just a bit in face of Spain and Italy. The fundamental principles of the German policies had been confirmed in Brussels, said Merkel’s spokesman Steffen Seibert, and the assertion that money would flow freely and without conditions was “completely wrong”—thus negating what Spain and Italy had loudly proclaimed.

After the EU summit, markets soared in Asia, Europe, the US, everywhere. The euro jumped. Yields on Spanish bonds fell to the lowest level of the week. A miracle had happened. Read…. The Big Blink?

And to put some humor into the dogged Eurozone drama, here is “Merkel at Wimbledon 2012,” a funny video on her control of the debt crisis as she is playing Spain and Italy. By down-under comedians Clarke & Dawe.

The Many Ways Banks Commit Criminal Fraud

The Libor scandal seems to be waking people up to manipulation and fraud by the big banks.

There are many other types of fraud they’ve engaged in as well …

Here is a partial list:

  • Engaging in mafia-style big-rigging fraud against local governments. See this, this and this
  • Laundering money for drug cartels. See this, this and this
  • Engaging in unlawful “Wash Trades” to manipulate asset prices.  See this, this and this
  • Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide.  Details here, here, here, here, here, here, here, here, here, here, here and here
  • Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this
  • Bribing and bullying ratings agencies to inflate ratings on their risky investments
  • Singing the glories of investments which they knew were terrible, and then betting against the same investments to make money for themselves.  See this, this, this and this
  • Participating in various Ponzi schemes. See this, this and  this

But at least the big banks do good things for society, like loaning money to Main Street, right?


  • The big banks have slashed lending since they were bailed out by taxpayers … while smaller banks have increased lending.  See this, this and this

"So What Can Go Wrong"

Despite economic miss after miss, the momentum players in the market continue unfazed, dodectupling down on Bernanke Put Double Zero, pushing stocks to new highs simply on continued hopes that something in Europe may have changed with Merkel’s so-called defeat last week, even as Merkel’s key CSU coalition partners voiced an open threat earlier today to no longer support Eurozone aid if there is no conditionality – supposedly Mario Monti’s biggest victory (ignoring that the German constitutional court is also faced with a barrage of demands to undo the ESM), and on hopes that tomorrow the ECB will announce something more drastic than the now widely expected 25 basis point cut. In other words a hope rally, even as bonds, and FX have now diverged dramatically with the hope gripping the global stock market. And hope is good, however if it becomes an investing “strategy” total loss is virtually guaranteed. That said, perhaps for the first time ever, bonds are wrong, and stocks are right, and all the bad news has been priced in (unlike all those other times when everyone said the same, and when everyone was certain they would sell first ahead of the herd). Which brings us to the question that Citi’s Steven Englander has just asked himself: “So what can go wrong?” Here is his answer (in five parts).

  1. Finland and the Netherlands seem to be saying that they will not approve the use of EFSF or ESM funds in the secondary market. Finland also wants collateral on any loans to Spanish banks
  2. The line-up of countries seeking similar terms to Italy and Spain keeps growing
  3. IMF’s Lagarde says with respect to Greece “I am not in a negotiation or renegotiation mood at all
  4. Investors seem increasingly to be counting on ECB action beyond the policy/deposit rates to ease the soveregin debt market
  5. There is a gap between indicators of economic conditions and market appetite for risk. The average of US, China and euro zone economic surprises is at its lowest level ever, other than in the immediate aftermath of the Lehman bankruptcy (see Figure 1 below).  investors either believe additional stimulus will be coming or that positive sentiment is right and economic data are wrong. Additional stimulus means the Fed doing QE3, the ECB doing something more effective than cutting short-term rates and China taking a much more aggressive policy stance than it has so far. It is possible but there are hurdles, especially if the policy tools are not as potent as they were earlier in the rebound.

And while we have discussed four of the five topics above previously, #4 is still open, and will be fully answered early tomorrow when the US is sleeping during its national holiday. Here is what Englander thinks will happen:

ECB – What is enough?


The strong expectation in markets is that the ECB will do a refit cut and some reduction in deposit rates, but if this is all they do we think investors will walk away disappointed and sell the euro.


Our economists are expecting the ECB to cut the refi rate by 25 bps and move the deposit rate down to 10bps.The Bloomberg consensus has 46 forecasters expecting a refi move to 75bps, 5  to 50bps and 11 staying flat at 100bps. Of the forecasts time-stamped after the summit 30 expect a move to 75bps, 1 to 50bps and 6 for the ECB to stay flat. Money market rates have come down both since the Summit and over the last month but the moves have been modest, reflecting the low effective overnight EONIA rate (around 34bps) that have been in place for some months (Figure 1).  So while the BBG forecasts may point to a slightly more hawkish post-Summit distribution of outcomes, we would go with the market pricing that points to some further easing.


The tightening of euro zone GDP-weighted average CDS (SOVCDS) and run-up in euro zone bank stocks (SX&E) also point to a continuation of the post-Summit optimism (Figure 2). If anything, the EUR is lagging the tightening of CDS and the bank stock gains.


With effective rates trading well below the policy rate it is very difficult to gauge exactly what the market is expecting from the ECB. Clearly the cut to 75bps is a strong consensus view and there probably is some deposit rate cut also expected. In practice these would amount to little more than showing the flag – were the euro zone’s sovereign debt issues solvable via policy rate cuts, those would have been put in place long ago.

Finally for all those who say nothing bad can happen (in the now generic bipolar phase shift from two short weeks ago when the market could not catch a bid) all of a sudden, we leave you off with the following Englander quote referencing Coolidge, and his own post script.

Calvin Coolidge said  “If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.” and he was probably right but he didn’t give any advice on what to do about the tenth.

Icelandic Miracle or Mirage? Round 2

By EconMatters

Paul Krugman has long been an advocate of Keynesian economics, and a proponent of aggressive and expansionary fiscal policy drawing parallels between Japan’s decade-long deflation and the current Great Recession.  Krugman also has also been writing quite extensively using Iceland as the poster child on the benefits of currency devaluation.     

Krugman’s latest endeavor on the so-called ‘Icelandic Miracle’ was when he posted on his NYT blog last month with the following chart showing the seemingly much better GDP growth from Iceland compared to Ireland, Estonia, Lativa, and Lithuania, the countries either in Euro or has a currency pegged to the Euro.  He then rhetorically remarked:   

“Looking at this, would you have expected that Latvia would be lionized as the hero of the crisis?”  

Chart Source: NYT/Paul Krugman, June 14, 2012



That was quickly rebuffed by the CFR (Council on Foreign Relations) with Washington Post and The Economist also weighing in and stirred up a debate on twitter.  The following are the two key charts in the CFR rebuff–the main point is that Iceland looks a lot less impressive than Krugman claims if one shifts the chart starting period around:   



Chart Source: CFR, July 2, 2012

Chart Source: CFR, July 2, 2012


This actually is the second round of the ‘Icelandic Miracle’ debate between Krugman and CFR.  Round one took place in June 2010.  Two years ago, Krugman used a similar chart showing a much higher GDP growth of Iceland relative to IrelandLatvia, and Estonia since the 4th quarter of 2007 to support his declaration that Iceland is a “Post-Crisis Miracle.” (We are not quite sure why Krugman dragged Lithuania in his 2012 post except the country has the Euro-pegged currency and fits Krugman’s story.)  

CFR at the time quickly pointed out that 
“It is an illusion created by the starting date Krugman chose for his figure.” [R
ead here for More detail on round one between Krugman and CFR]

In this second face-off, CFR laments:   

“…Once again, Krugman has relied on a Potemkin-Village graphic to illustrate his wider claim, which is that Icelanders derive unambiguous net benefits from their government obliging them to hold and transact in a national currency that their trading partners will not accept. (80% of Greeks consistently reject going back to such a state.)” 

Meanwhile, Washington Post completely endorsed Krugman, and in a somewhat self-contradictory post, The Economist, on one hand, seems to support Krugman’s view that [emphasis ours]  

“….the Baltic economies remain substantially poorer than Iceland and most euro-zone members and should therefore be expected to have a much faster rate of underlying growth thanks to the potential for catch-up. That they’ve essentially kept pace with rich Iceland rather than catching up points to the advantage of adjustment via devaluation, as does Iceland’s good performance relative to Ireland.” 

On the other hand, The Economist also appears to say it was all but a number’s game depending on the comparative elements involved with the following conclusion [emphasis ours

“….. it is telling that to spin a story of growth via internal devaluation one has to resort to citing emerging markets—notably, ones that have managed very little catch up over the past 5-6 years at a time when other key emerging markets were marking enormous gains.”

We say the bottom line is that regardless which country or starting year you pick to compare and chart, fundamentally, Iceland is definitely NOT the “fiscal role model” that Krugman intends for people to believe.  

You might recall, Iceland suffered the biggest banking collapse in history by any country relative to its economic size in 2008 when its highly leverage banks lost access to the funding market.  The tiny Nordic nation was eventually bailed out by the IMF and other Nordic countries, partly because too many Europeans had deposits into Icesave.  


Afterwards, the value of the Icelandic króna currency plummeted (down 80% against the Euro since 2008), and does not even have a regular official exchange rate any more.  Inflation soared (41% in about four years), while people’s savings and pensions got wiped out, and real wage and home value fell off a cliff.  The country has been held together mostly by IMF loans, “technical defaults” and capital control ever since.   [Check <a href="" target="_blank" style="text-decoration: underline; color: #000000;”>here for more of the economic horror story of Iceland.]   

Now, four years after the banking collapse, Iceland was able to wipe the slate clean, and has now revived its economy at 4.5% growth rate in Q1 of this year, while inflation was at an elevated level of 5.4% in June.  Iceland had to raise interest rate five times since last August to contain inflation, which could get even worse as króna could depreciate even more with the current Euro crisis, and the country is still years away from fully removing capital controls, according to the Finance Minister.     

Back in 2010, Krugman concluded in his post that [emphasis ours]

    “The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one. Otherwise, you’ll end up taking the advice of people who assure you that even more suffering [i.e. austerity and the resulted deflation] will cure what ails you.”

Sure, if a country could technically default on a significant portion of its debt, trash its currency, impose capital control, then there’s no where else to go but up with a heck of a price to pay in terms of internal turmoil (Zimbawe is an extreme example, but yes.).  Furthermore, Iceland is of relatively little significance in the global grand scheme of things, but due to the dominance of the US dollar in the global currency system, the size of the economy and population, the “Iceland model” is not even an option for the United States, which Krugman seems to intimate.     


One last tibit for those preaching “the advantage of adjustment via devaluation,” Iceland, in a bid to gain stability in its currency system, now is considering ditching the króna, and adopt either Euro or the Canadian Loonie instead.  Poll says 70% of the Icelanders want to get rid of the króna.  The Icelandic government believes an EU membership would be the best option since Europe is the largest market for Iceland.  

Unfortunately, Iceland most likely can’t count on much support for its EU membership, as the country refused to pay back the €4 billion owed to UK and Netherland.  UK, for one, has already publicly refused to back a resolution on Iceland’s EU membership.  

The more important question is if currency devaluation is such an economic miracle cure, why is Iceland looking to adopt Euro or Loonie?    

Further Reading – The Pitfall of Rock Star Economists


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