29 Jun 2012 – " One Step Beyond " (Madness, 1979)



Understands who can… The Brussels nightly drama yielded first tweeted “results”, then none, then yes. Then some bickering, Southern drama, then truce. Then they still were not done haggling.

In any case, first white smoke signals 30 minutes ahead of the US close managed to turn around the equity market sharply by over 1%, leading to an only mild negative close. Asian stocks up 1.5% as a whole, leaving Q1 behind and heading into the weekend. Overnight data showing stable CPI and employment figures in Japan, but disappointing IP readings slowing to 6.2% YoY (fcst 6.7% after 12.9%. Don’t forget the Fukushima base effect, here) and PMI slipping just below the 50 mark at 49.9 after 50.7, its weakest reading since Dec 2011.


Roaring ROn start in Europe with equities gapping up 3%, Core EGBs wider by a good 15bp. Italy and Spain tighter by 40 and 50 bp respectively in 10s, taking BTPs back through 6% and BONOs through 6.50%. The effect was even more explosive in 2s, down by 70 bp and 85bp, taking the latter respectively back to the 3.75% and 4.50% area. Then again, it’s certainly a big move, but on second thought these remain HIGH yields.

Main and Financials tighter by 10 and 20. Tamer commodities reaction with 1.5%-2% upswing. EUR out to the 26 handle.


German Retail Sales hit hard in May and at -1.1% YoY a huge miss of the +1.9% forecast. Previous data was as well revised lower from -3.8% to -4.3%. Same picture on a MoM basis at -0.3% (fcst +0.2% after prior +0.6% revised to -0.2%). Another sign that Germany is running out of steam, too. French PPI below forecast as well at 2.2% YoY (fcst 2.7% unchanged). Doesn’t seem to worry French consumers, who unexpectedly increased spending in May MoM by 0.4% (fcst was 0% after revised +0.7%). Good headline stuff for musings about freewheeling French and austere Germans. In any case, price pressure seems to diminish here and there, which should give the ECB the opportunity next week to add a stone to the rescue by lowering rates a little. If it wasn’t for that M3 growth that came out at much higher than expected +2.9% YoY (fcst 2.3% after 2.5%)… Then again, given the capital flight stories of late, one could expect that all that money sloshing back and forth ends messing up statistics. EZ CPI unchanged at 2.4%, as expected. Sticky above 2%, but with lower outlook.


And then? Once the initial ROn Rocket launched, stops triggered and shorts covered, people started poring over the docs and statements and things went “static to less ecstatic”. That EUR 120bn growth package happened to have been the one already pitched last Friday and mainly coming courtesy of a capital-increased EIB, some frontloaded spending and from the private sector. So no real new cash here. As this being a 2-day exercise and still ongoing, different titbits and comments, bickering about details, seniority or not questions et al started to somewhat sap the mood. Southern European popular press headlines certainly not helping the cohesion process, either. As details were still hammered out, Core EZ Front adjustments and setting things straight comments had the ROn fizzle out a bit at the end of the morning.

Most to the point morning comment du jour, certainly reflecting many views at that stage: A decisive solution: using a fund that doesn't exist to buy debt that won't be repaid via a mechanism that hasn't been agreed.


End of morning static stand-by with the Core EZ EGB gang wider by 10bp, Italy down a good 20bp to 5.95% and Spain down 30bp to 6.60% EUR off highs at 1.258. Equities about 2.5% from COB. Credit quite static after the initial tightening of 10 and 20 in Main and Financials. Waiting for whatever happens next – and details… Story of everyone’s life in the markets these days.

European equities gained 1% over lunch, as practical details were hammered out, and added another 1% at US open.


Strong Milwaukee NAPM at 60.2 (fcst 55.1 after 57.7). Not sure this would have mattered in normal times, but on such a strong ROn day, it just added to the positive attitude. Personal Income and spending at 0.2% and 0.0% as forecasted. Chicago Purchasing better at 52.9 (fcst 52.3 after 52.7) with final Michigan Confidence undershooting at 73.2 (fcst 74.1).


Tailor-made ESM non-seniority for the Spanish intervention, but conditionality attached, so a bit for everyone. Finnish and probable Dutch collateral demands. German opposition in arms over the German attitude U-turn (small tail risk, but the ESM still needs to be ratified in Germany).

The whole summit is certainly a strong Italo-Spanish political achievement. But, hell, from here on things ought not to derail anymore, as, despite contrary assertions, it does look like the German front was cornered and pushed to its limits. Difficult to expect further concessions, comes the next crisis. Italian 2-10 steeper by 40 bp and Spanish equivalent by 50bp. Strong Irish performance, too, with long benchmarks down by 60 bp on the day, now trading low 6.40% as that bespoke ESM banking thing can certainly be applied elsewhere, too.

Seemingly Greece was either not discussed at all or not seen as imminent threat enough at this summit.

A definitive step towards a banking union, but the final target just seems highly improbable on a short outlook and will take years of further bickering.

Question is how many more times can this be done, as the whole sovereignty-solidarity-federalism-deficit-bank loop-risk adverseness is certainly not off the table for good.


Good close of the week. Certainly one step beyond… on a long and winding road.


Had New Issue from Nordea testing waters for a senior double-trancher with EUR 1.25bn long 5 YRS at MS +100 and EUR 1bn 10 YRS at MS +135 and fellow Nordic Sparebanken 1 tapping EUR 250m on an outstanding 2016 covered bond at MS +27.


Closing levels:

10 YRS Yields: Germany 1,58% (+7); Luxembourg 1,91% (+5); Swaps 2,02% (+9); Finland 2,04% (+5); Netherlands 2,09% (+3); EU 2,40% (+4), Austria 2,52% (+2); EIB 2,61% (+4); France 2,68% (+1); EFSF 2,72% (+2); Belgium 3,18% (-3); Italy 5,78% (-40); Spain 6,29% (-60).


10 YRS Spreads: Luxembourg 33bp (-2); Swaps 44bp (+2); Finland 40bp (-8); Netherlands 51bp (-4); EU 82bp (-3); Austria 94bp (-5); EIB 103bp (-3); France 110bp (-6); EFSF 114bp (-5); Belgium 160bp (-10); Italy 420bp (-47); Spain 471bp (-67).

Switched Belgium ref to Sep 2022.


EUR swap curve 2-5 YRS 47bp (+3,0); 5-10 YRS 69bp (+4,0) 10-30 YRS 30bp (-1,0).

2 YRS German BKOs closed 0,120% (+1,6) and 5 YRS OBLs 0,61% (+4).


Main at 166 from 178 (6,7% tighter); Financials at 261 after 289 (tighter by 9,7%). SovX at 282 from 298. Cross at 662 from 705.


Stoxx Futures at 2255 / +4,7% (from 2153) with S&P minis at 1349 (+2,9% from 1311, at European close). Well that’s an impressive 5.7% rally from yesterday’s lows.

VIX index at 19,7 after 20,6 yesterday same time.


Oil 82,3/95,4 (WTI/Brent) from 78,5/92,0 (+4,8%/+3,7%). Gold at 1598 after 1555 (+2,8%). Copper at 347 from 332 (+4,5%). CRB closes 278,0 from 272,0 (+2,2%).

Baltic Dry up 10 to 1004, back over the 4-digit mark.


EUR 1,267 from 1,244

ECB deposits at EUR 782bn after EUR 773bn.


Greek bonds guesstimates: Greece down 50 bp with 2023s at 26% from 26.50% and 2042s at 22% from 22.50%.

(20.25% and 16.75% before the first election round).


All levels COB 17:30 CET


On the week (compared to Fri 22 Jun COB):

Another week, another story. Stop! It’s the same story, but just told differently, over and over… Friday had seen some of the spirit “Shot Down in Flames” to start the day as the Spanish banking bail-out doubts were abounding (Bunds +5 / Spain -25 / Stoxx -0.6%). Following a European quartet meeting in Rome and a EUR 120bn infra pack announcement, things closed about ok, especially for Spain, which staged a one-man rally in an empty Friday afternoon market. The whole thing was of course reversed by Monday and Risk went tanking, hoping for someone to “Catch My Fall ” (Bunds -12 / Spain +29 / Stoxx -2.5%). Eventually, Cypriot and Spanish bail-out demands went official. As things can’t always be wholly manic-depressive all times, markets too a breather on Tuesday in a “Quiet Times” session, which for once was rather risk neutral, although things went soft into the close (Bunds +4 / Spain +28 / Stoxx -0.2%). Ahead of the EU summit, it seemed that everyone wanted not to “Never Make Your Move Too Soon” on Wednesday, with exception of equities, which felt that something good would certainly happen (Bunds +6 / Spain +4 / Stoxx +1.6%). As, first EU titbits were only to appear later at night, yesterday was a day with “Nothing to Say”, at least not much (Bunds -6 / Spain unch / Stoxx -0.2%).


Unimaginable as this may seem, at first glance, nothing happened in European bonds… Just kidding. But just half.

On the week, we’d note that the trend of 10 YRS EGB softening across the board has continued. While stress behaviour still regularly yields a retreat into Core EZ bonds, there’s an underlying heaviness in here for the moment. Best and sole performer of the week in absolute and relative terms? Belgium. Caught between the Soft Core and the Periphery, it managed to issue well on Monday, is mostly out of the limelight, except when hosting all these summits and, if my numbers are right, has now covered 72% of its funding needs with some EUR 9bn to go for the rest of the year).

Sad looser left on the side of the road: the Soft Core, when considering that on a week on week basis, the wings didn’t really move. Tout ça pour ça???

With regards to the Periphery, total meltdown risk seems averted, but given what has been put on the table, the market reaction, as seen by this week’s closing levels, is far from being convinced yet.

Comeback kid of the week? The EUR, considering the 300 pip rally today.


10 YRS Yields: Germany 1,58% (unch); Luxembourg 1,91% (+1); Swaps 2,02% (+4); Finland 2,04% (+1); Netherlands 2,09% (+0); EU 2,40% (+2);Austria 2,52% (+11); EIB 2,61% (+3); France 2,68% (+9); EFSF 2,72% (unch); Belgium 3,18% (-6); Italy 5,78% (+1); Spain 6,29% (-2).


10 YRS Spreads: Luxembourg 33bp (+1); Swaps 44bp (+4); Finland 40bp (-5); Netherlands 51bp (+0); EU 82bp (+2); Austria 94bp (+11); EIB 103bp (+3); France 110bp (+9); EFSF 114bp (unch); Belgium 160bp (-6); Italy 420bp (+1); Spain 471bp (-2).


EUR swap curve 2-5 YRS 47bp (-1,0); 5-10 YRS 69bp (+5,0) 10-30 YRS 30bp (+4,0).

2 YRS German BKOs closed 0,12% (-1) and 5 YRS OBLs 0,61% (-3), on the week.

Swiss 2-years flat at -0.28%, but having traded a record low -0.38% yesterday.


Main at 166 from 170 (2,4% tighter); Financials at 261 after 276 (5,4% tighter). SovX at 282 from 295. Cross at 662 from 680.


Stoxx Futures at 2255 / +3,4% from 2181 with S&P minis at 1349 / +1,9% from 1324, at European COB last week.

VIX index at 19,7 after 19,2 last week.


Oil 82,3/95,4 (WTI/Brent) from 79,2/90,6 (+3,8%/+5,3%). Gold at 1598 after 1562 (+2,3%). Copper at 347 from 330 (+5,2%) . CRB at 278,0 from 268,0 (+3,7%) at European COB.

Commodities by and large correcting the prior week’s slide with the exception of precious metals that remain (relatively) under pressure.

Baltic Dry back to 1004 from 978 (+2.7%), after last week’s 5.8% rise. Need to watch seasonal behaviour starting July.


EUR 1,267 after 1,253 last Friday


Greek bonds guesstimates: Down to 26% from 26.50% for 2023s and 22% from 22.25% for the 2042s (20.25% and 16.75% before elections).


All levels Friday COB 17:30 CET


Next week:

Very, very light on European data. Very heavy end of the week US data supply, following the 4th of July holiday.


Germany: Thu Factory Orders May fcst -5.8% YoY after -3.8% Fri IP fcst -1.2% after -0.7%

France: Presque rien

EZ: Tue EZ PPI fcst 2.5% YoY after 2.6%. Wed Final PMIs. EZ Retail Sales fcst -0.6% after revised -2.7%. Thu ECB

Periphery: IT Mon Manu PMI fcst 44.5 after 44.8 Wed Services PMI fcst 42.5 after 42.8. Deficit/GDP Q1. Spain next to nada Wed Unemployment Fri Indu Output fcst -8% after -8.3%

US: Mon Manu ISM fcst 52 after 53.5 Px ISM 45.9 after 47.5 Construction Spend fcst 0.2 after 0.3% Tue Factory Orders Wed closed Thu MBA mortgages; Claims; Non-Man ISM; Chain Store sales; Fri Payrolls & Unemployment

Asia: China leading indicators


Click link on title or below for today’s musical support:

(So if you've come in off the street / And you're beginning to feel the heat / Well listen buster/ You better start to move your feet/ To the rockinest, rock-steady beat)

(Yep, there’s some Heat in the Street these days…)





Mainstream Economics is a Cult


Neoclassical Economics Is Based on Myth

Neoclassical economics is a cult which ignores reality in favor of shared myths.

Economics professor Michael Hudson writes:

[One Nobel prize winning economist stated,]  “In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions.”


This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live….


Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize:

“Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them… The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world.  A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor the conclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made.”

Such disdain for empirical verification is not found in the physical sciences.

http://i.imgur.com/aoSKU.jpg"Our models show there is no chance of water"

Neoclassical economists created the mega-banks, thinking that bigger was better.  They pretend that it's better to help the big banks than the people, debt doesn't existhigh levels of leverage are good, artificially low interest rates are fine, bubbles are great, fraud should be covered up, and insolvent institutions propped up.

Indeed, even after a brief period of questioning their myths – after the 2008 economic crisis proved their core assumptions wrong – they have quickly regressed into their old ways.

 Government Economic Leaders Surprised that Real World Isnt Responding to their Magic Pixie Dust

Economics professor Steve Keen notes:

Neoclassical economics has become a religion.  Because it has a mathematical veneer, and I emphasize the word veneer, they actually believe it’s true. Once you believe something is true, you’re locked into its way of thinking unless there’s something that can break in from the outside and destroy that confidence.

Paul Heyne said:

The arguments of economists legitimate social and economic arrangements by providing these arrangements with quasi-religious justification. Economists are thus doing theology while for the most part unaware of that fact.

Economics professor Bill Black told me:

The amount of fraud that drove the Wall Street bubble and its collapse and caused the Great Depression is contested [keep reading to see what Black means]. The Pecora investigation found widespread manipulation of earnings, conflicts of interest, and insider abuse by the nation’s most elite financial leaders. John Kenneth Galbraith’s work documented these abuses. Theoclassical economic accounts, however, ignore or excuse these abuses.

Black explains:

[Neoclassical economists believed that] fraud is impossible because securities markets are “efficient” and act as if they were guided by an “invisible hand.” Markets cannot be efficient if there is accounting control fraud, so we know (on the basis of circular reasoning) that securities fraud cannot exist. Indeed, when [mainstream economists] try to explain why the securities markets automatically exclude frauds their faith-based logic becomes even more humorous.

Alex Andrews notes in the Guardian:

Greenspan's confession [that his assumption that fraud is not a big problem for the economy was totally wrong] was seen by many for precisely what it was: a crisis of faith, the faith that unrestricted free markets would always act benevolently. [Note: As we show below, neoclassical economists do not really believe in free markets.  As such, they are blind cultists, rather than thinking people of faith.] It revealed what a few had been arguing for some time, that the character of neoliberal economics is essentially religious. This is counter-intuitive. Surely the policy of Greenspan and others is based on an understanding of the science of economics, particularly in the mainstream neoclassical form that is most often taught in universities around the world? It is certainly the case that neoclassical economics appears scientific. This is because it deploys huge quantities of complex mathematics, giving it the veneer of being what it has long hoped to be, a kind of social physics.




Equations prove free markets work, but only in a sterile world of mathematical abstraction that relies on ridiculous assumptions such as perfectly competitive markets. It is little surprise then that Jean-Philippe Bouchaud, writing in the journal Nature, calls for a "scientific revolution" in economics.


Once economics loses its status as science, its religious aspects become more obvious. Robert H Nelson has spent his career trying to show that economics is religious in character. Through "the gospel of efficiency" after the second world war, Nelson argues that economists promised progress, a removal of sin, heaven on earth. Economists play the role of priests, defining good and bad behaviours that make this salvation possible.




It is clear that this is a market theodicy, justifying the ways of the market to men. When neoliberal politicians warn against governments interfering in the market, lest the irrational and temporary will of the electorate interfere with the "spontaneous order" of markets, this now seems like a dire warning that we must not "play God" and attempt to control the mysteries of the market that in our finitude, our "bounded rationality", we cannot properly fathom.

Harpers noted in 2005 that neoclassical economics – underneath it's veneer of math and science – is actually a twisted form of Protestant religion in disguise:

Economics, as channeled by its popular avatars in media and politics, is the cosmology and the theodicy of our contemporary culture. More than religion itself, more than literature, more than cable television, it is economics that offers the dominant creation narrative of our society, depicting the relation of each of us to the universe we inhabit, the relation of human beings to God. And the story it tells is a marvelous one. In it an enormous multitude of strangers, all individuals, all striving alone, are nevertheless all bound together in a beautiful and natural pattern of existence: the market. This understanding of markets—not as artifacts of human civilization but as phenomena of nature—now serves as the unquestioned foundation of nearly all political and social debate.




Economics departments around the world are overwhelmingly populated by economists of one particular stripe. Within the field they are called “neoclassical” economists, and their approach to the discipline was developed over the course of the nineteenth century.




Neoclassical economics tends to downplay the importance of human institutions, seeing instead a system of flows and exchanges that are governed by an inherent equilibrium. Predicated on the belief that markets operate in a scientifically knowable fashion, it sees them as self-regulating mathematical miracles, as delicate ecosystems best left alone.


If there is a whiff of creationism around this idea, it is no accident. By the time the term “economics” first emerged, in the 1870s, it was evangelical Christianity that had done the most to spur the field on toward its present scientific self-certainty.


When evangelical Christianity first grew into a powerful movement, between 1800 and 1850, studies of wealth and trade were called “political economy.” The two books at the center of this new learning were Adam Smith’s Wealth of Nations (1776) and David Ricardo’s Principles of Political Economy and Taxation (1817).




Ricardo concluded that the interests of different groups within an economy—owners, investors, renters, laborers—would always be in conflict with one another. Ricardo’s credibility with the capitalists was unquestionable: he was not a philosopher like Adam Smith but a successful stockbroker who had retired young on his earnings. But his view of capitalism made it seem that a harmonious society was a thing of the past: class conflict was part of the modern world, and the gentle old England of squire and farmer was over.


The group that bridled most against these pessimistic elements of Smith and Ricardo was the evangelicals. These were middle-class reformers who wanted to reshape Protestant doctrine. For them it was unthinkable that capitalism led to class conflict, for that would mean that God had created a world at war with itself. The evangelicals believed in a providential God, one who built a logical and orderly universe, and they saw the new industrial economy as a fulfillment of God’s plan. The free market, they believed, was a perfectly designed instrument to reward good Christian behavior and to punish and humiliate the unrepentant.


At the center of this early evangelical doctrine was the idea of original sin: we were all born stained by corruption and fleshly desire, and the true purpose of earthly life was to redeem this. The trials of economic life—the sweat of hard labor, the fear of poverty, the self-denial involved in saving—were earthly tests of sinfulness and virtue. While evangelicals believed salvation was ultimately possible only through conversion and faith, they saw the pain of earthly life as means of atonement for original sin.  




The extreme among them urged mortification of the flesh and would scold anyone who took pleasure in food, drink, or good company. Moreover, they regarded poverty as part of a divine program. Evangelicals interpreted the mental anguish of poverty and debt, and the physical agony of hunger or cold, as natural spurs to prick the conscience of sinners. They believed that the suffering of the poor would provoke remorse, reflection, and ultimately the conversion that would change their fate. In other words, poor people were poor for a reason, and helping them out of poverty would endanger their mortal souls. It was the evangelicals who began to see the business mogul as an heroic figure, his wealth a triumph of righteous will. The stockbroker, who to Adam Smith had been a suspicious and somewhat twisted character, was for nineteenth-century evangelicals a spiritual victor.


By the 1820s evangelicals were a dominant force in British economic policy.




Victorian evangelicals took a similar approach to the crisis in Ireland between 1845 and 1850 …the potato famine.




The phrase “political economy” itself began to connote a cruel disregard for human suffering. And so a generation later, when the next phase of capitalist boosterism emerged, the term “political economy” was simply junked. The new field was called “economics.” What had got the political economists into trouble a generation before was the perception, from a public dominated by Dickens readers, that “political economy” was mostly about politics—about imposing a zealous ideology of the market. Economics was devised, instead, as a science, a field of objective knowledge with iron mathematical laws. Remodeling economics along the lines of physics insulated the new discipline from any charges filed on moral or sentimental grounds. William Stanley Jevons made this case in 1871, comparing the “Theory of Economy” to “the science of Statical Mechanics” (i.e., physics) and arguing that “the Laws of Exchange” in the marketplace “resemble the Laws of Equilibrium.”




Today we often think of science and religion as standing in opposition, but the “scientific” turn made by Jevons and his fellows only served to enshrine the faith of their evangelical predecessors. The evangelicals believed that the market was a divine system, guided by spiritual laws. The “scientific” economists saw the market as a natural system, a principle of equilibrium produced in the balance of individual souls.




U.S. policy debate, both in Congress and in the press, proceeds today as if the neoclassical theory of the free market were incontrovertible, endorsed by science and ordained by God. But markets are not spontaneous features of nature; they are creations of human civilization, like, for example, skating rinks.




The claim that markets are products of higher-order law, products of nature or of divine will, simply lends legitimacy to one particularly extreme view of politics and society.

Similarly, Philip Pilkington writes:

Taken at a very base level, the notion that there is an ‘invisible hand’ that irons out inconsistencies and increases the efficiency of the production and circulation of goods is basically the same claim that Hegel made about history being moved by a force called Reason. (Indeed, Adam Smith was one of Hegel’s references, perhaps even one of his key references). This claim, when made by either Smith or Hegel, can be traced back in turn to the Protestant tradition of predestination. The reasoning here is absolutely metaphysical and like the metaphysicians of yore it carries with it a moral lesson to be passed on to disciples.




Economists make huge generalisations about the people they study. They assume, for example, a single consumer that consumes the same goods and then projects this onto all consumers.


This is pure metaphysical reasoning. The economists concoct an idea in their heads which they then use to construct a theoretical edifice which falls apart when the original idea is shown to be false. They then derive a sort of ‘moral code’ from this construct which tells people how they should behave. In this case, students are told that this is how people should behave if they are to produce efficiently and effectively.


How is this different from the shaman who makes up a myth about the origins of the tribe and then derives moral lessons from this myth that he then teaches to the tribes-people? It’s not.




Economic ideas – such as the myth of the ‘single consumer’ – serve the function of ‘limiting principles’ for the way people in our contemporary society are allowed to think about the world. To think outside these ‘symbolic boundaries’ is not to be taken seriously. And yet, these boundaries are simply metaphysical constructs built up by economists and then disseminated to the population at large as a type of moral system.


Economics, then, is the totem – its simple moral lessons, the taboos. And this is how we in the modern world organise our thoughts and actions.




Adam Smith’s ‘hidden hand’ – is the direct descendent of Protestant predestination.




Economics has become, once again, a metaphysical doctrine boiled down to a few crass moralisms that are spoon-fed to the educated public.




It is really a subtle way of telling people what to do and assuring them that such authority is founded on some sort of Natural or Divine Law.




In policy circles today economists play the role of the court-priest. They deploy their esoteric and impenetrable ‘knowledge’ to tell policymakers what they should and should not do. To constrain economists to simply explain how the system works is to give them a role closer to that of the lawyer. The policymaker consults a lawyer to figure out what he or she can or cannot do and then makes a decision from there. Similarly, he or she might consult the economist, if the latter was seen as an operational role rather than as that of a seer.


This would, of course, threaten the role of the economist in society today. One can imagine that it is rather nice to be thought of as a divine, laying down metaphysical principles about the ‘inner’ workings of the world and deriving from these timeless truths and moral certainties that we mere mortals can then submit to. So, one can also imagine that these preachers and their flocks will respond to such a challenge with moral outrage. It is the outrage of a priest who has been told that his God is an invention, concocted in his mind to be used as leverage over his fellow men.

Neoclassical Economists Do NOT Believe in a Free Market

While many of the above quotes claim that neoclassical economists worship the free market, this is not actually true.

As I’ve previously noted:

When Mahatma Gandhi was asked what he thought about Western civilization, he answered:

I think it would be a good idea.

I feel the same way about free market capitalism.


It would be a good idea, but it is not what we have now. Instead, we have either socialism, fascism or a type of looting.


If people want to criticize capitalism and propose an alternative, that is fine . . . but only if they understand what free market capitalism is and acknowledge that America has not practiced free market capitalism for some time.




People pointing to the Western economies and saying that capitalism doesn’t work is as incorrect as pointing to Stalin’s murder of millions of innocent people and blaming it on socialism. Without the government’s creation of the too big to fail banks, Fed’s intervention in interest rates and the markets, government-created moral hazard emboldening casino-style speculation, corruption of government officials, creation of a system of government-sponsored rating agencies which had at its core a model of bribery, and other government-induced distortions of the free market, things wouldn’t have gotten nearly as bad.




Being against capitalism because of the mess we’ve gotten in would be like Gandhi saying that he is against Western civilization because of the way the British behaved towards India.

And – in the same way that the village shaman was often enlisted to promote and justify the chief's power as being divinely-ordained and unquestionable, many of today's neoclassical economists justify the acts of the ruling political class as being "economically sound", even when such acts are antithetical to free market economics.

Postscript 1:  Of course, for free market economics to become a real science, it will have to take into account realities such as imperfect information, externalities, the ability of powerful criminals to warp markets, people's behavioral idiosyncrasies  and other real world factors.

Postscript 2:  Just as it is unfair to blame the behavior of a crazy cult leader on religion as a whole, it is improper to blame our broken economic system on free market capitalism. It is the neoclassical economists who have broken our system.

Guest Post: The Supreme Court And Natural Law

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

The Supreme Court And Natural Law

I won a bet today.

A few weeks ago I wagered with a coworker that the United States Supreme Court would uphold the Affordable Care Act otherwise known as Obamacare.  He reasoned that the federal government has no authority under the Constitution to force an individual to purchase a product from a private company.  My reasoning was much simpler.  Because the Supreme Court is a functioning arm of the state, it will do nothing to stunt Leviathan’s growth.  The fact that the Court declared no federal law unconstitutional from 1937 to 1995—from the tail end of the New Deal through Lyndon Johnson’s Great Society—should have been proof enough.  He naively believed in the impartialness of politically-appointed judges.  For the first time he saw that those nine individuals are nothing more than politicians with an allegiance to state supremacy.

It was a tough but valuable lesson to learn.

As far as unintended effects are concerned, the economic justification for increased government regulation of the health care industry has been argued countless times up to this point.  Proponents of intervention are convinced that more bureaucracies, red tape, and central planning are the answer.  They have no knowledge of the pricing system and how it functions as the most efficient means through which consumers and producers can interact to come to an agreeable deal.  They don’t realize that the undersupply of doctors and care providers is a direct consequence of previous government intervention and occupational licensing.  Many actually believe that Obamacare wasn’t written by the insurance industry and isn’t a fascist-like appeasement of another deep pocketed lobbying campaign.

Common sense economics tells us that Obamacare will only lead to further inefficiencies and rationing as decisions of care continue to be made by third parties.  Once fully enacted, doctor offices will likely start resembling that of the waiting area of your local Department of Motor Vehicles.

All that aside, the Supreme Court’s upholding of the Affordable Care Act should serve as an eye opener to those who still believe the state exists as a protector of property and defender of the rule of law.

In the present day, the vast number of edicts coming from Washington can hardly be characterized as laws.  “But wait,” you may ask, “when legislation is passed by Congress, signed by the President, and ultimately approved by the Supreme Court, isn’t it now considered the law of the land?”  While it is certainly true that whatever scheme envisioned by the political class can be enforced by the state’s monopoly on violence, such rules of governance are more often than not laws in the traditional sense.

Historically, what was known as private or natural law rested upon the rational deduction of a set of ethically-based norms.  These norms focused on acts considered morally wrong such as assault, murder, rape, and violations of property in general.  Such aggressions were seen by classical liberal thinkers as detrimental to social cooperation.  According to 20th century legal scholar Edwin Patterson, the concept of natural law evolved from

Principles of human conduct that are discoverable by “reason” from the basic inclinations of human nature, and that are absolute, immutable and of universal validity for all times and places. This is the basic conception of scholastic natural law . . . and most natural law philosophers.

Or as Murray Rothbard wrote in his book The Ethics of Liberty:

The natural law is, in essence, a profoundly “radical” ethic, for it holds the existing status quo, which might grossly violate natural law, up to the unsparing and unyielding light of reason. In the realm of politics or State action, the natural law presents man with a set of norms which may well be radically critical of existing positive law imposed by the State.

Positive law is the kind enacted by the state that bestows special privileges to specific individuals.  Whereas natural law is essentially negative in that it disallows for the violent treatment of others, state-sanctioned positive law is the granting of reward that is necessarily provided by confiscatory taxation or government coercion.

What the state, which is institutionalized predation and force, embodies is antithetical to natural law and the very belief that violence is morally repugnant.  To characterize the Supreme Court as some great upholder of the rule of law in spite of it being a pillar in the state apparatus is insulting to any decent person that has a basic understanding of justice.

In lieu of the upholding of the Affordable Care Act, it’s now worth asking what the U.S. government can’t do to Americans.  As of right now, a sitting president can call for the indefinite detainment and execution of both citizens and non citizens alike with no due process.  The band of thieves known as Congress can force the public to purchase a good or service and order its goons to read private communications without prior consent or knowledge.  The dollar is constantly inflated to the benefit of major financial institutions, thus destroying the purchasing power of the money Americans are forced into using.  The American people are no longer afforded their rights to their property, , or own lives.  Those discretions are currently in the hands of the various marionettes of Washington.  Whether it is occupied by outright fascists or closet socialists, the state has no regard for liberty in its incremental quest for omnipotence.

As Ludwig von Mises spent his life expounding:

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

In the world of centralized or constitutional government, rules are always made to be broken.  The irony in today’s Supreme Court decision is that it was never given the authority to strike down federal laws under the Constitution.  The power of “judicial review” was established by precedent in Marbury v. Madison, 5 U.S. 137 (1803) and was not explicitly granted in the language of the Constitution.  As Lew Rockwell puts it, judicial review is a

Usurped power not present in the constitution. The anti-federalists had anticipated it, however, seeing it as just another of the viciously increased federal powers to be enabled by the new constitution as versus the far more libertarian Articles, which had been overthrown in the federalist coup at Philadelphia.

Many legal scholars argue that judicial review is an implied power.  If that were so, their logic can be applied to each and every blatantly unconstitutional law enforced by the federal government.  And as history has shown, this is precisely what has occurred as the Constitution’s purposefully vague language has been the cornerstone for growing Washington’s dominance over every aspect of civil society.

The upholding of Obamacare is just more evidence of the totalitarian jackboot that continues to be pressed down upon on America’s collective throat.  Instead of Congress or the President, it was the Supreme Court’s turn to pave the way toward serfdom.  In a truly free society, all forms of violence would be condemnable and worthy of legal recourse.  Men with badges and guns would receive no special treatment such as they do today.  Thieves would be thieves.  Murders would be murders.  Counterfeiters would be counterfeiters.  And mobsters would be mobsters.  Titles such as “President,” “Congressman,” “police officer,” or “central banker” would mean nothing under a functioning system of proper law.

To those who may object to natural or proper law, it may be asked “would you not defend your life or the lives of your loved ones against potential aggressors?”  For those who answer in the affirmative, they have rationally assumed their property is theirs to protect and their life and the lives of the innocent can be defended from coercion.  The only other option would be for a society where no property, including one’s own body, is to be justifiably owned.  The widespread practice of the latter tends to be enforced through brutal totalitarianism.  The former is the foundation for peace, justice, and prosperity.

The Big Blink?

Wolf Richter   www.testosteronepit.com

Markets soared in Asia, Europe, the US, everywhere. Let the good times roll. The euro jumped to the highest level in a couple of weeks. Yields on Spanish bonds plunged to the lowest level since, well, Monday. A miracle had happened. German Chancellor Angela Merkel had blinked. Um, a little bit.

All eyes were on her at the EU summit in Brussels, the one summit that would once and for all save the Eurozone, THE summit, where she’d be forced to submit to the majority of the Eurozone, and indeed to the majority of the world, and where she’d be forced to come to her senses and give in to the demands set out before the summit.

There was the Grand Plan, issued by European Council President Herman Van Rompuy. It included all the goodies: a European Treasury with power over national budgets and how much countries could borrow; Eurobonds; a banking union that would guarantee deposits; and the ESM that would bail out banks directly.

There was French President François Hollande’s plan, first issued during his campaign, then reiterated many times since. It included Eurobonds and the ability by the European Central Bank to directly buy sovereign bonds of debt sinner countries. He’d formed a triumvirate with Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy to corner Merkel.

Rajoy had been begging for help but didn’t want Spain to take the bitter medicine that the bailout Troika would prescribe if he asked for a full-fledged bailout. Hence his emphasis on bailing out the banks directly, and let Spain run its dismal affairs as it saw fit. Monti had warned last week that the Eurozone would break apart if summit attendees didn’t sign off on his list of items that were “absolutely necessary” to save the Eurozone.

So, here are the summit results on these items:

– Eurobonds? Nein.

– A banking union with tools to prop up banks and with a common deposit insurance fund. Nein.

– Allowing the ECB to buy sovereign bonds directly? Aber nein!

They did agree on a common banking regulator (even Merkel had wanted that). Of course, they already have one, the European Banking Authority (EBA), established in late 2010. It conducted “stress tests” on 91 major European banks. Results came out in July 2011. And in October, the 12th safest bank, the Franco-Belgian megabank Dexia, collapsed.

So now, they want a different regulator. The ECB should play a role, the agreement said, but…. The Federal Association of German Banks and the Federal Association of Public Banks both expressed their opposition to the ECB becoming a regulator. Since the UK declared it wouldn’t have any part of it, German banks were worried that they’d experience pressures from the regulator that UK banks would not experience. And they were worried about the conflict of interest between the ECB’s role in funding states and in supervising banks that were also funding states.

And Merkel did blink. Or at least she redrew the line in the sand: she agreed to the tweaking the European Stability Mechanism (ESM), the permanent bailout fund. The ESM doesn’t exist yet and hasn’t been ratified by a whole slew of countries, and it’s getting scrutinized by the German Constitutional Court, but assuming it will see the light of the day, it would be changed in several ways, including:

– It can bail out banks directly, rather than lending to the government which then recapitalizes the banks. This way, on paper, this new debt to bail out the banks would not raise the indebtedness of the country.

– It can buy sovereign bonds of countries that stick to their commitments to cut budgets and implement structural reforms; thus, no further austerity measures if they ask for aid.

However, funding banks directly won’t be possible until after the Eurozone banking regulator has been established. The Commission will present a proposal in the near future. If all member states pass it by the end of the year, direct aid to banks would be possible at the earliest in 2013.

So, the ESM will be able to bail out Spain and Italy, and their banks, and all the other countries, to which Slovenia may be added by end of July—and do all this with the €700 billion it may in theory have some day. In theory because the €700 billion includes the contributions of Spain and Italy, the very countries that the fund would have to bail out.

Merkel’s switcheroo on the ESM caused some consternation in Germany. “A new breach in the dam,” it was called. Others complained that “the ink isn’t dry and they already announce the next changes,” and that it was one more step towards a “transfer union.” As before, it will pass. The line in the sand has been moved. That's it. None of the fundamental problems have been solved. And the wait for Merkel’s big blink on Eurobonds continues.

In Cyprus, it’s panic time. €1.8 billion is needed by June 30. That’s just the beginning. Its banks have been eviscerated by Greek government bonds, Greek corporate debt, a real estate bubble that collapsed, and a title-deed scandal that they colluded in. It has a communist president and vast deposits of natural gas. Russia and China hover nearby. And now Cyprus points out, unwittingly, why no country should ever transfer even more sovereignty to the EU. Cyprus and the EU: Bitter Medicine.

And here is the hilarious video from down-under comedians Clarke & Dawe that in 2.5 minutes summarizes with superb accuracy the entire Eurozone debt crisis.

Big Banks Have Become Mafia-Style Criminal Enterprises

Two stories this week prove once again that the big banks are literally criminal enterprises.

Initially, all of the big banks have engaged in Mafia-style “bid-rigging” of municipal bonds, to bilk money from every city in the nation … to the collective tune of tens billions of dollars.

And Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, UBS, Royal Bank of Scotland – manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.

And see this. That means they manipulated a good chunk of the world economy.

Other recent stories also show criminal fraud as well. For example, the big banks have been cheating homeownersespecially veterans.

And as Max Keiser explains, banking giants Mellon and State Street shaved 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.)

Indeed, the entire business model of the big banks is fraud. See this, this, this, this, this and this.

Fraud caused the 1930s Depression and the current financial crisis.

Regulators Have Become “Cops On the Take”

There’s no recovery because the government made it official policy not to prosecute fraud (and see this, this, this, and this).

Unfortunately, the cop is on the take … and the government’s only actions are to cover up the fraud and to leave the people holding the bag.

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