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German Pope, Italian Central Banker

Should German pay for the PIIGS?  Hell no.  Watch this short video to understand why not.

http://news.bbc.co.uk/2/hi/programmes/hardtalk/9639507.stm

The European soverign debt crisis will not be resolved by summits and press releases.  The world stock markets will decline greatly.  Specific creditors need to lose their shirts to liquidate the bad debts of the PIIGS.  That would be the free market in action.  There is no free market in the world right now.

This is why I’ve mostly been out of the market since October 2008.  There will be many high dividend stocks on sale in the near tearm future.

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Entrepreneurship with Fiat Property by Hans-Hermann Hoppe

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[The following is the text of a speech first delivered at the Edelweiss Holdings Symposium held in Zurich, Switzerland, on September 17, 2011.]

Let me begin with a brief description of what a capitalist-entrepreneur does, and then explain how the job of the capitalist-entrepreneur is changed under statist conditions.

What the capitalist does is this: He saves (or borrows saved funds), hires labor, buys or rents capital goods and land, and he buys raw materials. Then he proceeds to produce his product or service, whatever it may be, and he hopes that he will make a profit.

Profits are defined simply as an excess of sales revenue over the costs of production. The costs of production, however, do not determine the revenue. If the cost of production determined price and revenue, everyone could be a capitalist. No one would ever fail. Rather, it is anticipated prices and revenues that determine what production costs the capitalist can possibly afford.

The capitalist does not know what the future prices will be or what quantity of his product will be bought at such prices. This depends on the consumers, and the capitalist has no control over them. The capitalist must speculate what the future demand for his products will be, and he can go wrong in his speculation, in which case he does not make profits but will incur losses instead.

To risk your own money in anticipation of an uncertain future demand is obviously a difficult task. Great profits may await you, but so also may total financial ruin. Few people are willing to take this risk, and even fewer are good at it and stay in business for any length of time.

In fact, there is even more to be said about the difficulty of being a capitalist.

Every capitalist stands in permanent competition with every other one for the invariably limited amounts of money to be spent on their goods and services by consumers. Every product competes with every other product. Whenever consumers spend more (or less) on one thing, they must spend less (or more) on another. Even if a capitalist has produced a successful product and earned a profit, there is nothing that guarantees that this will go on. Other businessmen can imitate his product, produce it more cheaply, underbid his price and outcompete him. To prevent this, every capitalist must thus continuously strive to lower his production costs. Yet even trying to produce whatever you produce ever more cheaply is not enough.

The set of products offered by various capitalists is in constant flux, and so is the evaluation of these products by consumers. Continuously new or improved products are offered on the market and consumer tastes constantly change. Nothing remains constant. The uncertainty of the future facing every capitalist never disappears. There is always the lure of profits but also the threat of losses. Again, then, it is very difficult to be continuously successful as a businessman and not to sink back to the rank of an employee.

In all of this there is only one thing that the businessman can count on and take for granted, and that is his real, physical property — and even that is not safe, as we will see.

His real property comes in two forms. First, there are the physical resources, the means of production, including labor services, that the capitalist has bought or rented for some time and that he combines in order to produce whatever he produces. The value of all of these items is variable, as already explained. It depends ultimately on consumer evaluations. What is stable about them is only their physical character and capability. But without this physical stability of his productive property the capitalist could not produce what he produces.

Second, besides his productive property, the capitalist can count on his ownership of real money. Money is neither a consumer good nor a producer good. It is the common medium of exchange. As such, it is the most easily and widely sold good. And it is used as the unit of account. In order to calculate profit and loss, the capitalist needs recourse to money. The input factors and the output, his products to be produced, are incommensurable, like apples and oranges. They are made commensurable only insofar as they can all be expressed in terms of money. Without money, economic calculation is impossible, as Ludwig von Mises above all has explained. The value of money, too, is variable, like the value of everything else. But money, too, has physical characteristics. It is commodity money, such as gold or silver, and money profits are reflected in an increase in the supply of this commodity, gold or silver, at the disposal of the capitalist.

What can be said, then, about both the capitalist's means of production and his money, is this: their physical characteristics do not determine their value, but without their physical characteristics, they would have no value at all, and changes in the physical quality and quantity of his property do affect the value of his property, whatever other factors (such as changing consumer evaluations) may affect the value of his property also.

Now let me introduce the state and see how it affects the business of the capitalist.

The state is conventionally defined as an institution that possesses a territorial monopoly of ultimate decision making in every case of conflict, including conflicts involving the state and its agents itself, and, by implication, the right to tax — i.e., to unilaterally determine the price that its subjects must pay to perform the task of ultimate decision making.

To act under these constraints — or rather, lack of constraints — is what constitutes politics and political action, and it should be clear from the outset that politics, then, by its very nature, always means mischief.

More specifically, we can make two interrelated predictions as to the effect of a state on the business of business. First, and most fundamentally, under statist conditions real property will become what may be called fiat property. And secondly and more specifically, real money will be turned into fiat money.

First, with the state being the ultimate arbiter in every case of conflict including those in which it is involved itself, the state has essentially become the ultimate owner of all property. In principle, it can provoke a conflict with a businessman and then decide against him by expropriating him and making itself (or someone of its liking) the owner of the businessman's physical property. Or else, if it doesn't want to go as far, it can pass legislation or regulations that involve only a partial expropriation. It can restrict the uses that the businessman can make of his physical property. Certain things the businessman is no longer permitted to do with his property.

The state cannot increase the quality and quantity of real property. But it can redistribute it as it sees fit. It can reduce the real property at the disposal of businessmen or it can limit the range of control that they are allowed over their property; and it can thereby increase its own property (or that of its allies) and increase its own range of control over existing physical things.

The businessmen's property, then, is their property in name only. It is granted to them by the state, and it exists only as long as the state does not decide otherwise. Constantly, the sword of Damocles is hanging over the heads of businessmen. The execution of their business plans is based on their assumption of the existence, at their disposal, of certain physical resources and their physical capabilities, and all of their value speculations are based on this physical basis being given. But these assumptions about the physical basis can be rendered incorrect at any time — and their value calculations vitiated as well — if only the state decides to change its current legislation and regulations.

The existence of a state, then, heightens the uncertainty facing the businessman. It makes the future less certain than would be the case otherwise. Realizing this, many people who might otherwise become businessmen will not become businessmen at all. And many businessmen will see their business plans spoiled — not because they did not correctly anticipate future consumer demand, but because the physical basis, on which their plan was based, was altered by some unexpected and unanticipated change in state laws and regulations.

Second, rather than meddling with a businessman's productive capital through confiscation and regulation, however, the state prefers to meddle with money. Because money is the most easily and widely salable good, it allows the state operators the greatest freedom to spend their income as they like. Hence the state's preference for money taxes, i.e., for confiscating money income and money profits. Real money becomes subject to confiscation and changing rates of confiscation. This is the first sense in which money becomes fiat money under statist conditions. People own their money only insofar as the state allows them to keep it.

But there is also a second, even more perfidious, way in which money becomes fiat money under statist conditions.

States everywhere have discovered an even smoother way of enriching themselves at the expense of productive people: by monopolizing the production of money and replacing real, commodity money and commodity credit with genuine fiat money and fiat or fiduciary credit.

On its territory, per legislation, only the state is permitted to produce money. But that is not sufficient. Because as long as money is a real good, i.e., a commodity that must be costly to produce, there is nothing in it for the state except expenses. More importantly, then, the state must use its monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly, quality money such as gold or silver, the state must see to it that worthless pieces of paper, which can be produced at practically zero cost, will become money.

Under competitive conditions — i.e., if everyone is free to produce money — a money that can be produced at zero cost would be produced up to a quantity where marginal revenue equals marginal cost. And since marginal cost is zero the marginal revenue, i.e., the purchasing power of this money, would be zero as well. Hence, the necessity to monopolize the production of paper money, so as to be able to restrict its supply, in order to avoid hyperinflationary conditions and the disappearance of money from the market altogether (and a flight into "real values") — and the more so the cheaper the money commodity.

Having monopolized the production of money and reduced its production cost and quality to virtually zero, the state has made a marvelous accomplishment. It costs almost nothing to print money and one can turn around and buy oneself something really valuable, such as a house or a Mercedes.

What are the effects of such fiat money, and in particular what are the effects for the business of business? First and in general, more paper money does not in the slightest affect the quantity or quality of all other, nonmonetary goods. Rather, what the additional money does is twofold. On the one hand, money prices will be higher than they would otherwise be and the purchasing power per unit of money will be lower. And secondly, with the injection of additional paper money existing wealth will be redistributed in favor of those receiving and spending the new money first and at the expense of those receiving and spending it later or last.

And specifically regarding the capitalist, then, paper money adds another dose of uncertainty to his business. If and as long as money is a commodity, such as gold or silver, it may not be exactly "easy" to predict the future supply and purchasing power of money. However, based on information about current production costs and industry profits, it is very well possible to come up with a realistic estimate. In any case, the task is not pure guesswork. And while it is conceivable that, with gold or silver as money, nominal money profits may not always equal "real" profits, it is at least impossible that a nominal profit should ever amount to nothing at all. There is always something left: quantities of gold or silver.

In distinct contrast, with paper money, the production of which is unconstrained by any kind of natural (physical) limitations (scarcity) but dependent solely on subjective whim and will, the prediction of the future money supply and purchasing power does become guesswork. What will the money printers do? And it is not just conceivable but a very real possibility that nominal money profits will turn out to represent literally nothing but bundles of worthless paper.

Moreover, hand in hand with fiat money comes fiat or fiduciary credit, and this creates still more uncertainty.

If the state can create money out of thin air it also can create money credit out of thin air. And because it can create credit out of thin air, i.e., without any previous savings on its part, it can offer cheaper loans than anyone else, at below-market rates of interest, even at rates as low as zero. The interest rate is thus distorted and falsified, and the volume of investment will become divorced from the volume of savings. Systematic malinvestment is thus generated, i.e., investment unbacked by savings. An unsustainable investment boom is set in motion, necessarily followed by a bust, revealing large-scale clusters of entrepreneurial errors.

Last but not least, under statist conditions, i.e., under a regime of fiat property and fiat money, the character of businessmen and of doing business is changed, and this change introduces another hazard into the world.

Absent a state, it is consumers that determine what will be produced, in what quality and quantity, and who among businessmen will succeed or fail. With the state, the situation facing businessmen becomes entirely different. It is now the state and its operators, not consumers, who ultimately decide who will succeed or fail. The state can keep any businessman alive by subsidizing him or bailing him out; or else it can ruin anyone by deciding to investigate him and find him in violation of state laws and regulations.

Moreover, the state is flush with taxes and fiat money and can spend more money than anyone else. It can make any businessman rich (or not). And the state and its operators have a different spending behavior than normal consumers. They do not spend their own money, but other people's money, and in most cases not for their own, personal purposes, but for those of some anonymous third parties. Accordingly, they are frivolous and wasteful in their spending. Neither the price nor the quality of what they buy is of great concern to them.

In addition, the state can go into business itself. And because it doesn't have to make profits and avoid losses, as it can always supplement its earnings through taxes or made-up money, it can always outcompete any private producer of the same or similar goods or services.

And finally, by virtue of its ability to legislate, to make laws, the state can grant exclusive privileges to some businesses, insulating or shielding them from competition, and by the same token partially expropriate and disadvantage other businesses.

In this environment, it is imperative for every businessman to pay constant and close attention to politics. In order to stay alive and possibly prosper, he must spend time and effort to concern himself with matters that have nothing to do with satisfying consumers, but with power politics. And based on his understanding of the nature of the state and of politics, then, he must make a choice: a moral choice.

$15.00 $14.00

He can either join in and become a part of the vast criminal enterprise that is the state. He can bribe politicians, political parties or public officials, whether with cash or in kind (including promises of future employment in the "private" sector as "board-members," "advisors," or "consultants"), in order to gain for himself economic advantages at the expense of other businesses. That is, he can pay bribes to secure state contracts or subsidies for himself and at the exclusion of others. Or he can pay bribes for the passing or maintenance of legislation that secures him and his business legal privileges and monopoly profits (and capital gains) while partially expropriating and thus screwing his competitors. Needless to say, countless businessmen have chosen this path. In particular big banking and big industry have thus become intricately involved in the state, and many a wealthy businessman has made his fortune more on account of his political skills than his abilities as a consumer-serving economic entrepreneur.

Or else, a businessman can choose the honorable but at the same time also the most difficult path. This businessman is aware of the nature of the state. He knows that the state and its operators are out to get him and bully him, to confiscate his property and money and, even worse, that they are arrogant, self-righteous, haughty, and full of themselves. Based on such understanding, this very different breed of businessman then tries his best to anticipate and adjust to the state's every evil move. But he does not join the gang. He does not pay bribes to secure contracts or privileges from the state. Instead, he tries as well as he can to defend whatever is still left of his property and property rights and make as large profits as possible in doing so.

Hans-Hermann Hoppe, an Austrian School economist and anarchocapitalist philosopher, is professor emeritus of economics at UNLV, a distinguished fellow with the Ludwig von Mises Institute, and founder and president of The Property and Freedom Society. Send him mail. See Hans-Hermann Hoppe's article archives.

This article, originally published at LewRockwell.com, is the text of a speech first delivered at the Edelweiss Holdings Symposium held in Zurich, Switzerland, on September 17, 2011.

You can subscribe to future articles by Hans-Hermann Hoppe via this RSS feed.

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Link to original Mises Daily Article: http://mises.org/daily/5817/Entrepreneurship-with-Fiat-Property

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If Italy Defaults, The Euro Dies

Follow the link below to read a 40 second article and then watch the 6 minute video that accompanies it for the best summary of what is happening in Europe right now.

http://www.garynorth.com/public/8738.cfm

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Central Banks in Scramble to Buy Gold

Central banks around the world are buying gold to diversify the foreign exchange reserves. They are scared of the dominoes falling. Europe will likely be the first domino to fall, then the US, and then Asia. All central bankers are Keynesians by their nature. They believe that government deficits overcome recessions. They create fiat money out-of-thin-air to buy mostly government bonds. But this increases the money supply (inflation) which normally leads to higher prices of goods. When goods prices rises massively there is societal discord and strife.

Central bankers dislike gold, but they hold it to preserve some figment of monetary legitimacy. They hold it like a housewife holds a toilet brush; with nose pinched and at arms length. It is a hated but necessary tool. That is why John Maynard Keynes called gold "a barbarous relic". Gold can't created at the whim of some anti-capitalist central banker to fund the deficits of bankrupt socialist governments.

http://blogs.wsj.com/marketbeat/2011/11/17/central-banks-in-scramble-to-buy-g...

Some central bankers are positioning their country's for the post-US-dollar-as-the-world's-reserve-currency world. When the music stops they don't want to be holding a central bank full of US I.O.U.s.

You should have 20-30% of your net worth in physical precious metal coins. They will hold their purchasing power through crisis.

There will be a time many years from now when you should sell some to pay off your mortgage. When central bankers cease to inflate their money supplies for real, then a depression will ensue that will contract the money supply (deflation). All prices will fall. The purchasing power of the domestic will rise and fixed rate loans will be harder to pay back. Think of the US deflationary depression in 1930-1933.

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A First Look at Lennar (LEN)

I know some people that work for Lennar (LEN), so I’m always interested in how their employers are financial positioned.  The bottom lines is that I think Lennar is going lower from today’s market price of $17.93.

Lennar (LEN)

Share price: $17.93

Shares: 187.01 million

Market capitalization: $3.35 billion

Bonds: $4.8 billion outstanding

Here is a graphic of Lennar’s bonds outstanding and their due dates:  The good news is that nothing is due until 2013.

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What does Lennar do to earn money?

Lennar builds and sells new homes targeted at value-oriented, first-time, and move-up purchasers in 14 states across the country. In 2010, the company delivered approximately 11,000 homes at an average price of roughly $240,000. Lennar also provides title and mortgage-related services. Outside of its core operations, Lennar maintains investments in a portfolio of numerous joint ventures and operates a distressed real estate focused unit, Rialto Investments.

Lennar’s stock price peaked in 2005 just above $60 per share.  Since then the stock price has lost 70% down to today’s $17.93.  I think it will go lower when the world reenters recession sometime in the next year.

Morningstar’s take (not mine)- Lennar sits poised to reap major economic gains from an eventual rebound in housing. The firm has fortified its operations and balance sheet amid the collapse in demand during the last few years. Core construction benefits from streamlined designs, more centralized purchasing, and closer-to-order building practices. Overhead cuts of more than 50% from peak further ensure that eventual increases in revenue fall meaningfully to the bottom line. At the same time, Lennar has bolstered its balance sheet with liquidation of once-bloated inventory, multiple debt refinancings to extend maturities, and strategic equity sales during the last several years. The company also has reduced risk by trimming its once voluminous joint venture portfolio to stable partners, reducing contingent recourse debt liabilities by approximately $1 billion or 80%.

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DIVIDEND RECORD

Lennar has paid a dividend every quarter since 1988 as far as I can tell with the Google Finance data.  However, it cut its quarterly dividend from $0.16 to $0.04 in the 4th quarter of 2008.  The dividend has remained at $0.04 for thirteen consecutive quarters.

Dividend: $0.04 quarterly

Dividend yield: 0.8% ($0.16 annual dividend / $17.93 share price)

Dividend payout ratio: 33.3% ($0.16 annual dividend / $0.48 mean EPS estimate for 2011)

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EARNING POWER – Lennar’s six year average adjusted earnings is ($2.40) per share.  If you believe that the new housing market will recover in the next few years (I don’t), then you would ignore the “bust” years of 2007 – 2009.  Today’s Lennar does not resemble the Lennar of 2006, so throw out that year also.  This leaves you with 2010 and most of 2011.  Lennar has an earning power of $0.495 per share at 187.01 million shares in the past 2 years (assuming $0.16 EPS in 4Q 2011).

                        EPS                   Net Inc.             Shares               Adj EPS

2006                 $3.69                $593.9 M           160.7 M             $3.18

2007                 ($12.31)            ($1,941.1 M)     157.7 M             ($10.38)

2008                 ($7.00)             ($1,109.1 M)     160.6 M             ($5.93)

2009                 ($2.45)             ($417.1 M)        170.5 M             ($2.23)

2010                 $0.51                $95.3 M             188.9 M             $0.51

2011E               $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate)

Six year average adjusted EPS = ($2.40)

Quarterly earnings results for 2011:

            Q1        $0.14                $27.4 M                                     $0.146

            Q2        $0.07                $13.8 M                                     $0.073

            Q3        $0.11                $20.7 M             187.01 M           $0.11

            Q4        $0.16 E             $29.9 M E          187.01 M           $0.16 E

            Total     $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate on Morningstar.com)

If you believe the new housing market will not recover in the next few years, then do not buy Lennar because it is barely profitable in the last six quarters.  A continued recession will likely return them to unprofitability.

If you believe that the new housing market will at least stabilize in the next few years, then use the following valuations to help you buy low:

Consider contrarian buying below $3.96 (8x the 2 year avg. adjusted EPS)

Consider value buying below $5.94 (12x the 2 year avg. adjusted EPS)

Consider speculative selling above $9.90 (20x the 2 year avg. adjusted EPS)

Lennar is currently trading at 36.2 times the two year average adjusted earnings.  This is highly speculative pricing.

BALANCE SHEET

Lennar has stabilized its balance sheet since the end of 2010.  It has more than enough money to cover short term liabilities.

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Book value per share:  $14.28

Price to book value ratio: 1.26 (that’s pretty good)

Current ratio: 6.48 in the latest quarter (that’s really good; over 2.0 is good)

Quick ratio: 1.91 in the latest quarter (that is also very good; over 1.0 is good)

CONCLUSION

I think that the new housing market will not recover in the next few years because the US government is taking actions to stabilize then stimulate the housing market.  The market price system is being retarded by government intervention and accounting rules changes that are incentivizing banks not to put all the bank owned properties on the market (this is known as the shadow inventory).  There will be an eventual turnaround in the new housing market because of increased populations, but it is many years away.  Please visit this link (http://tinyurl.com/7fx5o2b ) to read many articles on the ill-fated housing recover based on the Austrian economics perspective.

Lennar is speculatively priced at over 36 times it 2 year average earnings.  It has a puny dividend yield below the S&P 500 average.  And its balance sheet is nothing to boast about.  Its Rialto real estate fund/portfolio is heavily dependent on short term financing and an economic rebound that isn’t going to happen thanks to the Keynesian fools that run the Federal Reserve and the US government.  Pass on Lennar until much lower prices and higher dividend yields.

Just for giggles I looked up the earnings for the past 10 years on Morningstar.com (unadjusted).  With boom and bust years of the past ten years its average EPS only comes out to $0.73 per share.  The stock price would have to fall to $8.71 just to equate to 12 times its ten year average EPS.  That’s not even value pricing.  Lennar is overpriced by any measurement you wish to consider.

DISCLOSURE – I don’t own Lennar (LEN)

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Dirty, rotten financial scoundrels in Europe.

Desperate European Financial Tricks - LewRockwell.com Blog
by Michael S. Rozeff on Nov 6, 2011 8:42 AM
The problem in Europe, for both banks and governments, is insolvency everywhere one looks. This was brought about by too much debt and too much financial leverage by issuing debt. The only known solutions are (a) default, and (b) printing money to pay off the debts (inflation).

Europe is trying to solve the problems by neither method. Their solution, as it has similarly been attempted by the US, is to issue more debt and create more leverage. One means of doing this is to create a new financial intermediary, called the EFSF (European Financial Stability Facility). The Fed also invented such "facilities" and such acronyms. They're just coverups for creating more debt combined with doses of both partial defaults, inflation, and accounting fakery by which bond values remain overstated on the books of banks. In the EFSF, the European states indirectly issue bonds by standing behind bonds issued by the EFSF. This process is then "levered" (a misnomer in this case) by issuing credit default swaps, or guarantees of the debts of the insolvent recipients of the money.

The net result is simply that government (sovereign) debt issuance rises and the burdens fall upon the hapless taxpayers. Another result is that the credit market prices become distorted (bubbles). I cannot think of another stage beyond this end game that will avoid the only known solutions of default or inflation. They've begged the Chinese for a bailout, but that doesn't seem to be working at the moment. It is the longstanding joint and integrated marriage between the State and the fractional-reserve central bank fiat money system that is causing this mess. In the end, this marriage must fail.

I wonder in what monetary system direction the rest of the world, mainly the BRIC countries, will go. The main player is China. China is playing several games simultaneously. First, it is increasing its gold. It is seriously building up the yuan as a currency by allowing and encouraging its gold convertibility. This path challenges the West's currency system, even though China also has big banking flaws too. Second, China is playing along with the West by working for a greater role in the IMF and a greater role for other currencies and gold in the SDR. We also know that China is gradually reducing its holdings of US treasuries and making direct investments worldwide. These too challenge the US. It is also bulking up militarily, not with war in mind, but also as a challenge to US power and to back up a greater global presence.

Why these two paths? China does not want a chaotic end to the western monetary system. That creates economic and political problems in China. However, should monetary chaos happen, it would prove temporary and China would emerge the stronger, relative to the West. However, western chaos increases the odds of political instability and frictions, even wars. I think China prefers to gain position gradually and to cooperate with the West as a peaceful entity. The US actually is the more antagonistic and the more threatening. This is why China pursues two divergent paths. It prefers to build up its currency, but it also prefers that the West not suddenly collapse monetarily.

So now we have the spectacle of Euroland wanting Chinese financial investment. And China and much of the rest of the world must be wondering what they ever saw in the euro, especially if Europe chooses inflation over default. Already doubting the dollar and now doubting the euro, there is ever more incentive to go for gold as a basis for the yuan. There is no good reason for the Chinese to get sucked into the quicksand of the Euroland difficulties. Their future does not lie with the euro.

A scary chart for Keynesians on Halloween

The scariest chart ever - to a Keynesian!!
 
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Budget Deadlock in Washington

Budget Deadlock in Washington

by Gary North

Recently by Gary North: Not Theirs To Occupy

 

   

The debt ceiling battle led to a compromise. Congress and the President promised to submit to mandatory budget cuts. A bipartisan super committee was set up to put together a package of debt reduction cuts totaling several trillion dollars over supposedly a decade. If the committee deadlocks, the cuts will begin automatically on January 2, 2013. These must be $1.2 trillion in cuts, or $120 billion a year.

As expected by everyone, the committee is deadlocked. The Democrats want $3 trillion in debt reduction, mainly from tax increases. The Republicans will not grant this.

Democratic sources told CNN that at the meeting Tuesday the plan was presented to the 12-member committee by Sen. Max Baucus, D-Montana, the Finance Committee chairman. A majority of the six Democrats on the super committee supported the proposal but sources declined to say which member or members disagreed.

The plan would have made cuts to entitlement programs such as Medicare and Medicaid, which the Democratic sources described as a major concession from their party. In return Republicans were asked to go along with between $1.2 and $1.3 trillion in new tax revenue.

An unnamed Republican aide expressed anger that some Democrat had leaked the details of the deal to the press. I mean what kind of stab in the back is this? Telling the public what's in store for them! This is clearly an outrage. It means, the aide said, that the Democrats think the super committee will fail.

Did anyone in his right mind expect it to succeed? The August deal to extend the ceiling and thereby avoid shutting down some government agencies temporarily was based on a sham solution.

The politicians want no responsibility for cuts. There was no record of which Democrats opposed the leaked deal. Some did. Everything is being kept hidden. There is an election year coming up.

This was the first proposed plan. The committee has not gone public with anything in two months. It has a deadline for announcing a plan: November 23. That is less than one month away. If Congress and the President refuse to accept a plan, or if no plan is offered, then cuts will begin a year later.

So, phase one deadlock is here. There is little likelihood that members of the super committee will put their careers on the line and vote publicly for cuts that specific special-interest groups can identify. There would be retaliation in November 2012.

THE IMPORTANCE OF POLITICAL SYMBOLS

The debt ceiling extension had a back-up plan: mandatory cuts, imposed by no one in particular, beginning on January 2, 2013. That gives the politicians a year to find a way to defer the cuts.

The cuts can be blamed on no one in particular. But the cuts will start hurting special interests. One of the main targets will be the military. The Pentagon will howl.

I think the reason why Obama is pulling out all U.S. troops from Iraq in December is to take advantage of the deadlock. He is willing to accept these cuts in the Pentagon's budget in 2013. They will not be blamed on him in 2012. After all, this was part of a bipartisan compromise. Those Republican voters who were committed to keeping troops in Iraq "for as long as it takes" – with "it" being undefined, open-ended, and forever – will not be able to pin the tail on the Democrat donkey. The cuts in the Defense budget will come because Republicans in Congress demanded this budget compromise. This is Obama's moment of opportunity. One of his campaign promises was to pull the troops out of Iraq. He is finally doing it. He gets a Republican cover. He can say that these reductions are part of his good-faith attempt to conform to the budget compromise made in August 2011.

The deadlock in the super committee transfers to the President the right to pick and choose the cuts he will make. Constitutionally speaking, the House must introduce all spending bills. In fact, the President has possessed this power for two generations. Obama has been granted a license to cut as he sees fit. It is clear that his first cut is the cost of keeping troops in Iraq.

The name of the political game is to defer taking unpopular political actions. The Congress is a master of this game. The public put pressure on Congress last summer to do something symbolic to defer the debt crisis "with honor." The looming debt ceiling limit was a convenient hammer for the minority of Tea Party-leaning Republicans in the House of Representatives to use to force the Republicans to agree to something resembling a balanced budget.

Of course, the budget is not going to be balanced. The Congressional Budget Office has projected $1 trillion annual deficits through 2020. But the Tea Party Republicans demanded a fig leaf: $1.2 trillion in cuts over a decade, beginning in 2013 at the latest.

These cuts are symbolic. But symbols are important in life. They are important in politics. Someone has to propose cuts, and some special-interest groups must suffer cuts. Special-interest groups resist all cuts.

EMERGENCIES ALLOW DEFERRAL

Politicians will label their spending programs with whatever emergency is available. In Eisenhower's era, Congress passed spending bills in the name of national defense. The best example is the interstate highway system. In 1956, Eisenhower signed into law the National Interstate and Defense Highways Act. In 2001, terrorism was the catch- all. The homeland security law had been sitting in Clinton's files for years in 2001. He just did not introduce it. The time was not ripe. Today, it's job creation.

As the U.S. economy heads into a recession in 2012, an election year, the government is running a deficit of over $1 trillion. This is four years after the recession of 2008 and the bailouts in September and August of that year. Unemployment is still over 9%. Businesses refuse to borrow. New businesses, which provide most increases in employment, are locked out of the bank loan market.

The voters are most concerned over the rotten job market. The deficit is a nagging concern, but unemployment is on the front burner. The politicians know this.

So, as the economy slows, and unemployment rises, Congress will be able to come before the public and call for emergency increases in spending. It is unlikely that unemployment insurance will be cut off. Other programs will receive funding. But new large-scale programs are less likely in an election year. Republicans will block them.

It is doubtful that Obama will get another stimulus package passed in the House. He keeps proposing big spending plans in the name of job creation. Why? Because he knows the House will reject these bills. He can go to the voters in the name of the Democrats in 2012 and claim that the Republicans are to blame for the lousy job market.

For the first two years, he blamed Bush. This year, that strategy has failed to gain traction. It is now his labor market. So, he is setting up Republicans in the House for the great tail-pinning in 2012. He will cease blaming Bush and instead blame Republicans for their refusal to pass his stimulus bills.

He may not get away with this. His rhetoric is no longer drawing crowds. The word magic has worn off. But it is clear what his strategy is: propose, propose, propose; blame, blame, blame. He has the mainstream media on his side. He also has academia.

THE KEYNESIAN ESTABLISHMENT

His political strategy assumes that Keynesianism is true, that the best way to create jobs is for the government to borrow or tax or inflate in order to get the economy rolling again. It assumes that money extracted from the private sector by force today (today's taxes) or promise of future force (tomorrow's taxes) will be used to create jobs, while money left in the private sector will not.

The political economy of the world is built on this assumption: in the USA, in Europe, and in mercantilist Asia. At the center of the modern economy, according to Keynes and his disciples, are the state and the central bank.

In contrast to the Keynesian worldview is Austrian School economic theory, which argues that there is no center. There is decentralized capital in the broadest sense: money, tools, skills, and vision. The absence of any center is the basis of creativity and growth, including job growth. Other schools of free market economics accept this same outlook to one extent or another, but all of them insist on the need for a central bank.

President Obama is relying on the Keynesian analysis to justify additional stimulus spending laws. But he faces a major obstacle. His $787 billion "shovel-ready" law of February 2009 has not led to a strong job market. This job market has been the most resistant since the Great Depression. The unemployment rate stubbornly refuses to come down. This is creating problems for Keynesian economists. They are calling for even greater stimulus spending. But this is no longer politically marketable. The voters have had enough. They know the spending will not lead to unemployment at 5%.

This is not the first time that economic reality has put a crimp in Keynesian theory. The Keynesian outlook was called into question in the 1970s by stagflation. By the end of the decade, the monetarists had gained considerable influence in Washington and in academia. Academia worships power, and monetarism seemed to be the wave of the future. It looked as though Keynesianism was in retreat. The 1980s and 1990s brought a boom and a rising stock market. Keynesianism seemed vulnerable.

The recession that began in late 2007 has brought Keynesians back into unchallenged power. The monetarists are nowhere to be seen or heard. They did not challenge the Paulson-Bernanke coup in 2008. They either said nothing or hailed the October big bank bailout as necessary. They did not challenge Obama's stimulus, either. Yes, a few did, but they were minor figures for the most part: a few hundred out of tens of thousands of economists on various payrolls.

There is not much price inflation today. This undercuts the monetarists. Their schtick rests on either double-digit price inflation (late 1970s) or double-digit price deflation (1930-33). There is surely stagnation today. Monetarism seemed to explain the 1970s: two recessions and rising consumer prices. It does not explain today's economy. This puts monetarist defenders of limited government at a disadvantage in the competitive marketplace of ideas.

Monetarism for over three decades has been the only prominent alternative to Keynesianism. The supply-siders have never had a college-level textbook. The public choice theorists have no unique monetary theory. The rational expectations economists' position is "accept the present and make no changes." Only the Austrian School has provided both a theoretical explanation for the bubbles and the busts. Only they called the recession in advance. Only they argue that decentralization is the only theoretically plausible solution to the problem of systemic unemployment: the decentralization of ownership, political power, and money creation.

This defense of decentralization dooms the Austrian School in academia. Liberal arts academia worships power. Academics did not actively criticize all aspects of the Soviet Union, Red China, and their satellite nations. The intelligentsia did criticize a few peripheral aspects of Communism, such as its limits on the freedom of speech. The intelligentsia did not criticize central economic planning in terms of its inevitable waste of resources and its decades-long failure to increase the standard of living. Academic economists publicly denied that the Soviet Union suffered from widespread poverty. They trusted the published statistics issued by the Soviet Union. The handful of economists who said that the statistics were fabricated were ignored. How many economists in 1970 had ever heard of Naum Jasny (d. 1967), who showed for years that the statistics were fake? Hardly any, and those who had heard of him usually rejected his warnings. I cited his findings repeatedly in the chapter on Soviet economic planning in my 1968 book on Marx, but who noticed? No one. (http://bit.ly/gnmror) Most important, in the eyes of academia, was this fact: the Soviets had nuclear weapons. They also had domestic power. Academia did not turn on the USSR until after the Communist Party committed suicide on December 31, 1991.

The Austrian School argues that centralized political power makes nations poorer. Some call for a lightly armed night watchman state. Others call for disarming the night watchman. All call for a vast decrease in political power, taxation, and regulation. They call for a comprehensive surrendering of power by Washington. Academia will not tolerate this. It is subsidized by the state. Its bread and butter is supplied by the state. Eliminate all academic subsidies from the state, including the state's enforcement of accreditation, and college professors would wind up at the unemployment office – the privately funded unemployment office.

This is why there will be no solution to the fiscal crisis in Washington. There is no body of academically acceptable economic opinion that can be invoked by any political faction to justify the only viable solution: the decentralization of political power and the cutting of Federal spending back to what the Constitution authorizes.

A SYMBOLIC DEFEAT

The inability of the super committee to come up with any plausible plan to balance the budget is an indicator of the present state of the economy. The automatic budget cuts that will begin in January 2013, if they even take place, are merely symbolic. They will not do much to balance the budget. But they at least will be symbols of the need to do so.

Then what of the debt ceiling? Will Republicans be able to hold the line and force a balanced budget? Ron Paul has offered the only plausible scenario for doing this. No other Washington politician in modern times has.

No one takes it seriously in Washington. They do not think he will be elected. They know he will leave Congress in 2013. They think they can safely ignore the plan.

When the symbolic budget cuts begin in 2013 – assuming they are not deferred by a new law – the voters will have a play-pretend solution to keep them asleep at the wheel. The trillion-dollar-plus deficits will continue. The Federal debt will grow.

The symbolic victory of the August debt ceiling compromise was in fact a symbolic defeat. It meant that the Congress is not serious about the cuts. There were some promised cuts, but they will be dwarfed by the deficits.

The fiscal numbers are not irrelevant. They do have meaning. They do point to the bankruptcy of the U.S. government. They cannot be evaded. They can be sustained only for as long as investors, especially the central bank of China, continue to fun what is obviously a suicidal fiscal policy that cannot possibly be sustained for another decade.

CONCLUSION

Most investors hide their eyes. Most voters hide their eyes. All but two members of Congress hide their eyes. There is universal blindness. The masses really do think that the day of reckoning will never come.

They are wrong. It will come. Deferral is a tactic, not a strategy. Blindness is a tactic, not a strategy.

October 29, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North
 

The Evil 1%

The Evil 1%

by Llewellyn H. Rockwell, Jr.

Recently by Llewellyn H. Rockwell, Jr.: The Dawn of Late Fascism

 

  

The "occupy" protest movement is thriving off the claim that the 99% are being exploited by the 1%, and there is truth in what they say. But they have the identities of the groups wrong. They imagine that it is the 1% of highest wealth holders who are the problem. In fact, that 1% includes some of the smartest, most innovative people in the country – the people who invent, market, and distribute material blessings to the whole population. They also own the capital that sustains productivity and growth.

But there is another 1% out there, those who do live parasitically off the population and exploit the 99%. Moreover, there is a long intellectual tradition, dating back to the late middle ages that draws attention to the strange reality that a tiny minority lives off the productive labor of the overwhelming majority.

I’m speaking of the State, which even today is made up of a tiny sliver of the population, but is the direct cause of all the impoverishing wars, inflation, taxes, regimentation, and social conflict. This 1% is the direct cause of the violence, the censorship, the unemployment, and vast amounts of poverty, too.

Look at the numbers, rounding from latest data. The U.S. population is 307 million. There are about 20 million government employees at all levels, which makes 6.5%. But 6.2 million of these people are public school teachers, whom I think we can say are not really the ruling elite. That takes us down to 4.4%.

We can knock of another half million who work for the post office, and probably the same who work for various service department bureaus. Probably another million do not work in any enforcement arm of the State, and there’s also the amazing labor-pool fluff that comes with any government work. Local governments do not cause nation-wide problems (usually), and the same might be said of the 50 states. The real problem is at the federal level (8.5 million), from which we can subtract fluff, drones, and service workers.

In the end, we end up with about 3 million people who constitute what is commonly called the State. For short, we can just call these people the 1%.

The 1% do not generate any wealth of their own. Everything they have they get by taking from others under the cover of law. They live at our expense. Without us, the State as an institution would die.

Here we come to the core of the issue. What is the State and what does it do? There is vast confusion about this issue, insofar as it is talked about at all. For hundreds of years, people have imagined that the State might be an organic institution that develops naturally out of some social contract. Or perhaps the State is our benefactor because it provides services we could not otherwise provide for ourselves.

In classrooms and in political discussions, there is very little if any honest talk about what the State is and what it does. But in the libertarian tradition, matters are much clearer. From Bastiat to Rothbard, the answer has been before our eyes. The State is the only institution in society that is permitted by law to use aggressive force against person and property.

Let’s understand through a simple example. Let’s say you go into a restaurant and hate the wallpaper. You can complain and try to persuade the owner to change it. If he doesn’t change it, you can decide not to go back. But if you break in, take money out of the cash register, buy paint, and cover the wallpaper yourself, you will be charged with criminal wrongdoing and perhaps go to jail. Everyone in society agrees that you did the wrong thing.

But the State is different. If it doesn’t like the wallpaper, it can pass a law (or maybe even not that) and send a memo. It can mandate a change. It doesn’t have to do the repainting. The State can make you repaint the place. If you refuse, you are guilty of criminal wrongdoing.

Same goals, different means, two very different sets of criminals. The State is the institution that essentially redefines criminal wrongdoing to make itself exempt from the law that governs everyone else.

It is the same with every tax, every regulation, every mandate, and every single word of the federal code. It all represents coercion. Even in the area of money and banking, it is the State that created and sustains the Fed and the dollar because it forcibly limits competition in money and banking, preventing people from making gold or silver money, or innovating in other ways. And in some ways, this is the most dreadful intervention of all, because it allows the State to destroy our money on a whim.

The State is everybody’s enemy. Why don’t the protesters get this? Because they are victims of propaganda by the State, doled out in public school, that attempts to blame all human suffering on private parties and free enterprise. They do not comprehend that the real enemy is the institution that brainwashes them to think the way they do.

They are right that society is rife with conflicts, and that the contest is wildly lopsided. It is indeed the 99% vs. the 1%. They’re just wrong about the identity of the enemy.

October 21, 2011

Llewellyn H. Rockwell, Jr. [send him mail], former editorial assistant to Ludwig von Mises and congressional chief of staff to Ron Paul, is founder and chairman of the Mises Institute, executor for the estate of Murray N. Rothbard, and editor of LewRockwell.com. See his books.

Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Link to original article: http://lewrockwell.com/rockwell/the-evil-1-percent194.html

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TIP OF THE WEEK - Gold is a crisis hedge. Own some before the next crisis.

Gold is a crisis hedge.  Own some before the next crisis.

Jason Brizic

October 14th, 2011

Gold is a crisis hedge.  Rich people buy gold when they are fearful.

There are several good reasons for the wealthy to be fearful right now.  They own more that 80% of all stocks and bonds.  The European sovereign debt crisis is real, the USA will be bankrupted by welfare and warfare programs, and the Chinese economic bubble is going to pop.  Bonds aren’t safe, stocks aren’t safe, and interest rates are at historic lows in many economies.  Gold is a refuge from these crisis events that will not be solved through political means.

The gold price will continue to go up so long as central bankers run their printing presses.  Central bankers such as Ben Bernanke believe in Keynesian economics.  Keynesian economics can be summed up in four words: “Deficit Spending Overcomes Recessions”.  It doesn’t work, but they is what they believe and they are in charge of governments and central banks.

The Federal Reserve under Ben Bernanke has tripled the monetary base since 2008.

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Most of this money is being held by the large commercial banks as excess reserves.  It is not being loaned into the economy.

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Despite gold’s price increases it has not increased in proportion with the inflation of the monetary base.  It has not risen as much because most of the money created by the Federal Reserve has not flowed into the economy to increase the prices of everything.  The newly created money is locked away in the excess reserves of the large commercial banks.  If they were to lend it out, then prices would rise more than the 300% increase in the monetary base due to fractional reserve banking process.  Basically, one dollar added to the monetary base could become 7-10 more dollars in the M1 money supply (depending on how profligate the bankers loans are).

These are the best gold prices since the July-August 2011 timeframe.  Take this opportunity to make your first purchases of some gold coins.  Politicians will announce solutions to the sovereign debt crisis, the FED will announce better economic numbers, and the Chinese will deny they are in a bubble until it obviously pops.  Don’t believe them.  Greece will default.  They are the first domino to fall.  Nobody talks about the Medicare and Social Security unfunded liabilities.  They are too huge.  They are dozens of trillions of dollars.  The Chinese mercantilists have been inflating they currency and their economy.  When they stop their will be a severe recession in China.

Go to www.apmex.com and take a look at the one ounce gold coins from your country’s mint.  Then buy one if you have none already.  I had a good experience with American Precious Metals Exchange in the past.  I get no commissions or anything from them.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week