Canada's Place in the Global Economy

[Infanteer]

Ship it to Prince Rupert and send it east....

 

[Edward Campbell]

Ship it to Prince Rupert and send it east....

That's always puzzled me a bit, too ... I guess Kitimat makes for a shorter, cheaper pipeline, but I don't really know. Bueller? Anyone?

 

[Brad Sallows]

This is a good time to have another look at energy flows in the US (2009).

Please to note relative contributions of "renewables" to understand the magnitude of the problem.  Please to note relative separation of "transportation" from "electricity generation".

As John McCarthy, a notable man who recently passed away, wrote: "He who refuses to do arithmetic is doomed to talk nonsense."

 

[Brad Sallows]

>This first escape route will be an economic disaster, and not only for the poorer countries of southern Europe.

I find it amusing that if any forward step by statism is revoked, the outcome must always be "disaster".  The Germans are already screwed; the question is only one of duration: their choice is to take it up the chute once (break the euro), or take it up the chute for all time.

 

[Kirkhill]

Good info Brad.

Thanks for finding and posting it.

Isn't it curious how efficient the residential, commercial and industrial sectors are?  The two biggest wasters of energy are - transportation - not a real surprise - and electricity generation by the Public Utilities

How much of that waste heat could be put to use if the coal, oil and gas fired electrical generator plants were relocated back down town and the heat re-applied as district heating systems?

Honda has a nice little Freewatt generator system that takes in 5 kW of natural gas, generates 1 kW of electricity and 3.25 kw of usable heat for your home.  There is only 15% waste.

Imagine that on an industrial scale. 

NIMBY fails.

 

[a_majoor]

This first escape route will be an economic disaster, and not only for the poorer countries of southern Europe.

I think what David Frum was getting at is the disaster will also affect anyone who has securities denominated in Euros, anyone who trades with Europe and the downline effect on people who are dependent on those directly affected.

The Europeans are not only well and truely screwed; they have screwed most of the West as well, and the contagion will affect Russia (which depends on natural gas sales to Europe), the Middle East (which depends on oil sales to Europe), China (which depends on sales of manufactured goods to Europe) with ever increasing ripple effects that will wash over to the rest of Asia, Africa and South America as well.

So while the poor nations of Europe like Estonia and Slovenia will pay to bail out Greece (despite havig far lower GDP's and personal incomes), the rest of us will be trying to find our footings as the economic landscape changes at dizzying speeds. The global deleveraging will not be in the form of a controlled drawdown....

 

[a_majoor]

While I understand what you are saying Edward, Brad has backed up my point. In London, there is aprox $1 billion in infrastructure maintainence to be done due to decades of neglect; by odd coincidence, the civic budget is standing at about $1 billion, of which council votes $8 million for infrastructure. Just so you all know what the magnitude of spending really is, London also has @ $450 million dollars in long term debt, most of which was racked up in the last decade to pay for the pet projects and "investments" which cost the taxpayer so dearly.

London could probably rationalize its budget and make major savings by eliinating the white elephants and "investments", privitize a great deal of its portfolio of properties and services (like garbage collection), cut taxes, and STILL have enough in its budget to provide the City Engineer with the $30 million/year needed to carry out routine maintainence. If the routine maintainence is done and (say) an extra $20-30 million/year is thrown in for repair and replacement, then we should be just fine. (Obviously it will be impossible to carry out a $1 billion infrastructure replacement at once; the city would have to be evacuated...)

The problem is (as at all levels of government) out of control spending on non priority items.

 

[Edward Campbell]

While I understand what you are saying Edward, Brad has backed up my point. In London, there is aprox $1 billion in infrastructure maintainence to be done due to decades of neglect; by odd coincidence, the civic budget is standing at about $1 billion, of which council votes $8 million for infrastructure. Just so you all know what the magnitude of spending really is, London also has @ $450 million dollars in long term debt, most of which was racked up in the last decade to pay for the pet projects and "investments" which cost the taxpayer so dearly.

London could probably rationalize its budget and make major savings by eliinating the white elephants and "investments", privitize a great deal of its portfolio of properties and services (like garbage collection), cut taxes, and STILL have enough in its budget to provide the City Engineer with the $30 million/year needed to carry out routine maintainence. If the routine maintainence is done and (say) an extra $20-30 million/year is thrown in for repair and replacement, then we should be just fine. (Obviously it will be impossible to carry out a $1 billion infrastructure replacement at once; the city would have to be evacuated...)

The problem is (as at all levels of government) out of control spending on non priority items.

OK, so Brad and Thucydides vote for talking about the problem and assigning blame (to those unwilling to accept it) while the infrastructure continues to crumble ... is that it?

Is that all there is?

 

[Edward Campbell]

I think what David Frum was getting at is the disaster will also affect anyone who has securities denominated in Euros, anyone who trades with Europe and the downline effect on people who are dependent on those directly affected.

The Europeans are not only well and truely screwed; they have screwed most of the West as well, and the contagion will affect Russia (which depends on natural gas sales to Europe), the Middle East (which depends on oil sales to Europe), China (which depends on sales of manufactured goods to Europe) with ever increasing ripple effects that will wash over to the rest of Asia, Africa and South America as well.

So while the poor nations of Europe like Estonia and Slovenia will pay to bail out Greece (despite havig far lower GDP's and personal incomes), the rest of us will be trying to find our footings as the economic landscape changes at dizzying speeds. The global deleveraging will not be in the form of a controlled drawdown....

The Europeans didn't screw America and Japan: America, Europe and Japan, and others, all in tandem, screwed themselves. Globalization is working itself out, painfully.

I am a believer in tooth and claw capitalism; unpleasant though it is, it is utilitarian: it produces the greatest good for the greatest number. Unfortunately the "greatest number" is not always a really large number and those who pay the price in being less well off, having less "good" produced for them are, often a very large minority. We have decided that we should have the almost "greatest good" without suffering for much of anyone. We are discovering that is not possible.

 

[a_majoor]

No, I am talking about reordering priorities to reflect financial reality. If London City Council refuses to drop the white elephant funding or redirect budget money to the infrastructure, then they are condemming the city to slow death. There is no "new" source of money to repair the damage; we live in Ontario which is already swiming in $200 billion in debt. London's taxes and fees are already punishing enough (either the highest or second highest in all Ontario), so to say there should be "more" money devoted to infrastructure repair is to either suggest the tax burden becomes unsustainable (driving busines and people out of the city at greater rates), or that reality needs to set in.

Since there are powerful entrenched interests who will fight to the last taxpayer for their perques at the expense of infrastructure or basic services, the battle liines are pretty clear.

The end results are either a controlled drawdown of spending and realignment with basic priorities, or a catastrophic collapse as taxpayers flee and the money runs out.

 

[Brad Sallows]

In both my time with the reserves and my profession, I have noticed that nothing gets fixed (ie. receives adequate resources) until it breaks.  It is an admirable ethic to "make it happen" no matter how short the shoestring gets cut, but as long as "it happens" there is unlikely to be any constructive reform.  The cost of making it happen is generally the well-being of people willing to repeatedly work themselves to exhaustion.  Whenever my stress mitigation bank gets unreasonably depleted, I quit plugging the dyke, stand back, and let things break.  Then the broken things get fixed.

Not all cities suffer from abysmal infrastructure.  Clearly, some cities are spending what money they do have more prudently than others.  Clearly, there is enough funding out there, provided needs are correctly ranked.  What is needed is to motivate the imprudent to become prudent - to "fix" the underlying problem (allocation of funds) and stop paying for frills, or paying too much for what they do have.

If I reach into my pocket now to deliver the imprudent municipalities from the consequences of their own self-indulgent wanking, then I expect they will just keep right on wanking and asking for more money.  The choice on the menu is not "give money to fix infrastructure for poor hard done-by cities now"; it is "give money to fix infrastructure indefinitely so that cities can continue spending their entirely fungible dollars on whatever else it is that turns their crank".  No.

 

[Kirkhill]

If I reach into my pocket now to deliver the imprudent municipalities from the consequences of their own self-indulgent wanking, then I expect they will just keep right on wanking and asking for more money.  The choice on the menu is not "give money to fix infrastructure for poor hard done-by cities now"; it is "give money to fix infrastructure indefinitely so that cities can continue spending their entirely fungible dollars on whatever else it is that turns their crank".  No.

Third option:

Bugger off into the countryside and leave the cities to their own devices......

 

[Edward Campbell]

I agree with you, Brad: cities have to make better choices.

Way back when Premier Mike Harris asked the critical question: "who does what?" Cities and their provincial "masters" and the feds are all intruding into one another's areas of responsibility. Ralph Klein, when he was mayor of Calgary also boasted about and got reelected because he paid attention to core city responsibilities like sewers, garbage collection, safe streets and so on.

Look at these two web sites: http://www.ottawa.ca/social_com/index_en.html and http://www.mcss.gov.on.ca/en/mcss/index.aspx . Now ask Mike Harris' question again: "who does what?"

Provinces, including Ontario, have downloaded both too many and the wrong services to cities, without giving them the tax base. City politicians, and it's hard to blame them, insist that they must provide e.g. social services or else people will freeze or starve to death in our cold, cruel streets - I'm not so sure. I think the province and charity can and should look after low income housing, which might even require people to move to places where they might have better opportunities, employment and financial assistance, immigration assistance, daycare and seniors services and so on. I think the city should look after road and sidewalks, sewers, water, garbage, police, fire and so on. I think cities should look after school buildings and provinces should look after teachers, including paying them, and curiccula. I could go on, but you get the idea.

All of cities, provinces and the feds have important infrastructure responsibilities but maintenance is never sexy and social services always are.


Edit: typo

 

[mariomike]

Regarding tax revenue. Perhaps it is time to consider a change.
This month:
"We’re getting stiffed by two levels of government on a regular basis. It may be time for us to start thinking about acting on our own and becoming a province.”
http://www.torontosun.com/2011/10/04/mammoliti-floats-province-of-toronto-idea

Also suggested this month in another thread:
http://forums.army.ca/forums/threads/102361/post-1081025#msg1081025
"<snip> (and Toronto actually needs to become its own province so it can start raising its own taxes)."

It might be good for rural Ontario too:
"He recently told farmers in his riding that a "Toronto mentality" dominates provincial politics, to the detriment of Ontario's rural areas. And he suggested one way to fix that would be to make Toronto Canada's 11th province.":
http://www.thestar.com/opinion/editorials/article/781385--should-toronto-be-a-province

 

[Edward Campbell]

More and more bad news from Europe in this report which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/report-on-business/top-business-stories/george-papandreou-opens-a-euro-can-of-worms-with-referendum/article2220106/

TOP BUSINESS STORIES

George Papandreou opens a euro can of worms with referendum

MICHAEL BABAD | Columnist profile | E-mail
Globe and Mail Update

Published Monday, Oct. 31, 2011

Papandreou's strategy

Don't take this to mean that I think George Papandreou is wrong in putting the euro debt accord to a referendum. But it is an extremely risky strategy that threatens an already fragile monetary union.

Greece's Prime Minister said today his government will put the rescue package to a referendum and a confidence vote, saying he trusts in the decision of the Greek people. But with Greeks so wildly opposed to Mr. Papandreou's austerity plan - strikes and demonstrations have been frequent and widespread - one can't help but wonder about the outcome.

Indeed, a fresh survey published on the weekend showed 60 per cent of Greeks aren't keen on the bailout plan struck last week at an EU summit in Brussels, which followed tense negotiations and inspection of Greece by the so-called troika of the EU, European Central Bank and International Monetary Fund.

The plan would see Greece's debt-to-GDP level fall to 120 per cent by 2020, but that's going to take a lot, given the country's bleak economic outlook. Also in the plan are measures to shore up euro zone banks, push holders of Greek debt to take a huge hit, and boost the region's bailout fund, known as the EFSF.

Is Mr. Papandreou risking the entire bailout process with his referendum plan?

"Given the terms of the bailout package it is the democratic thing to do, given the loss of fiscal sovereignty to the troika until 2020," said CMC Markets analyst Michael Hewson.

"But if Greece votes no, where does that leave Europe and their place in the euro?" he told me. "It could herald the beginning of the break-up of the euro."

If it's a political ploy, it's a risky one. David Watt, senior fixed income and currency strategist at RBC Dominion Securities in Toronto, agreed there's a threat to all this.

"If holding a referendum was in the cards, the sooner the better might be tactically wise, though it certainly might end up having been a strategic error," Mr. Watt said.

"Rejection of the EU package could set the roller coaster off once again," he added. "Hence, a threat to go over the heads of the opposition (internal and otherwise) and take it to the people, even though polls highlight the risk of such a move."

I agree with Mr. Hewson that it's the democratic thing to do, and with Mr. Papandreou, who told his parliament today that "this is a surpreme act of democracy and of patriotism for the people to make their own decision."

But the decision of the people may well go counter to the wishes of Mr. Papandreou. And how the Greeks see patriotism may not meet the definition of Greece's leaders.


Italy can't dodge markets

Italy is now in the crosshairs of the market as well.

Prime Minister Silvio Berlusconi warned in a newspaper interview that only he can lead the government through Italy's crisis, and deliver the reforms necessary. The problem is that few believe him.

Yields on Italy's 10-year bonds climbed again today to stick above 6 per cent as the focus of the euro troubles continued to shift to Rome.

"Italy remains the key pressure point in the European sovereign debt saga and despite the ECB continuing to buy Italian bonds; it appears that they are only doing so grudgingly," said CMC's Mr. Hewson.

"While currency and equity markets surged on last week's deal it would appear that bond markets have been more sanguine and it would appear that Italy’s feet continue to burn while their prime minister becomes more of a liability with each passing day."

Mr. Berlusconi lacks credibility. And, noted Mr. Hewson, the prime minister says all the right things when backed into a corner by his colleagues in the euro zone, only to back off when yields fall and the pressure is relieved.

Italy's debt is at 120 per cent of its gross domestic product. But its interest payments are the main problem, rather than its overall debt burden.

As Scotia Capital currency strategist Eric Theoret put it, Italy would have a primary budget suplus but for the debt service.

"The rising cost of debt is an ongoing concern for markets, who fear a buyer’s strike on the part of investors in the €1.6-trillion Italian debt market. All three major credit rating agencies have a negative outlook for Italian debt, currently rated at A by S&P and A2 by Moody’s," Mr. Theoret said.

Along with that is the fact that Italy has stagnated for the better part of a decade, raising fears that the debt payments will become unsustainable if growth continues to lag. Not only is there a lack of growth, but also of government will to "streamline the Italian economy and bring it into the 21st Century," Mr. Hewson said.

"I think he's the biggest liability that Italy's got," he said of the scandal-plagued Mr. Berlusconi and his economy, the euro zone's third-largest and most heavily indebted. "Unfortunately, there's no one to replace him."

Mr. Berlusconi is rejecting calls for an election, and told an Italian newspaper he alone is up to the challenge that Italy faces.

"Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside," he said in an interview published on the weekend by Corriere della Sera.

The very existence of the Euro could be in doubt and if it falls another, deeper, global recession will be in the offing.

 

[Kirkhill]

The official Xinhua news agency, used to communicate Communist Party policy, said Europe must address its own financial woes. "China can neither take up the role as a saviour to the Europeans, nor provide a 'cure' for the European malaise," it stated. "Obviously, it is up to European countries themselves to tackle their financial problems."

Daily Telegraph

Barclays reported a healthy increase in profits today as it continues to reduce its exposure to debt-ridden Eurozone countries.
.....
A spokesman said the bank's sovereign exposure to Spain, Italy, Portugal, Ireland and Greece reduced in the third quarter by 31 per cent to £8 billion.

Daily Mail

Meanwhile Societe Generale is not impressed by Barclay's book-keeping

..."Tricks and treats drove the adjusted results, in our view," said Hank Calenti, a banks analyst at Societe Generale. "Despite the liquidity and sovereign periphery treats, Barclays Q3 results fail to inspire....

Daily Telegraph

And meanwhile the Jerries lose track of 55 Billion Euros

...The German government tried to deflect responsibility on Monday for a 55-billion euro accounting blunder that has exposed it to charges of ridicule for being inept and hypocritical after its steady criticism of Greek bookkeeping practices...

Reuters

Quoth the Jerry:

....The German media nevertheless mocked Schaeuble, saying the 55-billion euro accounting error put Berlin in the same category as the Greek government for failing to report accurate figures. Inaccurate reporting of Greek deficits contributed to the euro zone sovereign debt crisis that has hit Europe hard.

"Incredible but true," wrote the Rheinische Post newspaper. "The nationalized bank HRE made a staggering 55-billion euro miscalculation. It's scandalous that bank managers, certified public accountants and government supervisors made an error of this dimension. This kind of sloppiness reminds us of Greece.....

Time for a nice bowl of Scotch Broth, two aspirins and a wee dram.  I'm  sure it will have all sorted itself out by the morning........

 

[Edward Campbell]

...
Time for a nice bowl of Scotch Broth, two aspirins and a wee dram.  I'm  sure it will have all sorted itself out by the morning........

Of course, m'boy, a bit of whisky puts (almost) everything right!  :cheers:

 

[a_majoor]

He who has no understanding of history....

Page Printed from: http://www.americanthinker.com/articles/../2011/10/slouching_toward_the_1930s.html

Slouching toward the 1930s (American Thinker)

Return to the Article

October 31, 2011

By Monty Pelerin

The current economic crisis rivals the one of the 1930s. Despite shameless propaganda by government and its cronies in the media, people understand that the situation is getting worse. Consumer confidence continues to decline as does confidence in the future.

We are headed for an event that history will record as worse than the Great Depression. It is unavoidable.

The Level of Debt

The principal reason for the dire prediction is the level of debt outstanding. Current debt levels are simply not sustainable. Assets and cash flows cannot support or service this debt.

No economic recovery can occur without massive debt reduction. As shown below, current debt is much higher than the 1930s:

As a percentage of GDP, debt is at an all-time high. Immediately prior to the Great Depression US debt was about 200% of GDP. It rose briefly to 300% as a result of massive government interventions to combat the Depression.

At the beginning of the current downturn, debt was about 370% of GDP. It is about 400% currently.

Eyeballing the chart from 1870 forward, debt levels are generally in the range of 150% of GDP. That appears to be the norm for the last 140 years. Only in the 1920s and recently did debt exceed 180% of GDP. Even funding World Wars I and II did not drive debt above 180%.

To return to 150% requires a reduction of about $30 Trillion in debt. That represents about two full years worth of GDP!

The Political Myths

After the 1930s politicians convinced themselves and the public of two things:

  1. Free markets need government interventions to produce a healthy economy.
  2. Keynesian pseudo science provided the tools necessary to manage the economy.

Both beliefs were false, but both aided politicians' insatiable drive for power and control. Once the public came to believe these myths, government owned the economy. Any economic problem became a political one. Economic slowdowns were no longer politically acceptable.

"Don't just stand there, do something" drove economic policy. It was politically impossible to allow an economy to correct on its own. Political action was required, even if such activity was ultimately harmful. Politicians had to do something, anything! Their constituents demanded it.

The "government is responsible" attitude quickly spread. Today, virtually any perceived problem or inequity is assumed to be fixable by government. Government readily took on responsibility for virtually every aspect of our lives.

The madness is evident. It is assumed that government creates jobs, educates kids, designs toilets and light bulbs. It is necessary to provide mortgages, retirement benefits and healthcare. "Green energy" and other new technologies are assumed impossible without the assistance of government.

This litany of the presumed need for government could continue for pages. Virtually all these presumptions are false. Worse, many in the public still believe that these "services" are "free."

Economic Reality

Every swing in the business cycle, no matter how mild, became the responsibility of government. Government was to step in and "fix" economic problems. Seventy years of such "fixes" preceded our current problem.

Economic downturns are both normal and necessary. Individual and business mistakes are remedied via economic slowdowns. Misplaced capital and labor is freed up for more productive uses. When this cleansing does not occur, an economy becomes less efficient and grows at a slower rate. The mistakes remain in place and are perpetuated.

Government intervention is not corrective. It is a cover up of prior mistakes. The phrase "pretend and extend" describes what happens. Instead of allowing the economy to correct, government attempts to avoid the correction and the pain by covering up the mistakes. That has been the history of much of the last 80 years. Continued interventionism brought the economy to this crisis point.

The artificial boom that began decades ago is exhausted. Response to the dot-com stock market bubble was the last coverup that "worked." The system was flooded with credit and one bubble was replaced with another. Now the housing bubble has burst, marking the high point of "pretend and extend."

Credit expansion since 2008 has been impotent. The real economy has stopped responding. Economists who advocate more stimulus or credit are either ill-trained or have political motives. Governmental stimulus and credit expansion created the problem. Recommendations for more of the same qualify as insanity per Albert Einstein's definition.

A Worldwide Problem

The US is not unique. Most of the developed world is burdened by excessive credit and government spending. Easy credit enabled governments to grow too large and individuals to take on too much debt. The point where markets are unwilling to provide more debt has arrived.

The position of the US, thought to be stronger than other countries, is not, as shown in this chart:

Rumors of another US credit downgrade circulate for good reason.

Governments everywhere are trying to prevent a massive economic and financial correction, but they will not succeed. In order for economies to return to health, debt must be liquidated. De-leveraging must occur. Debt will be paid down and/or defaulted upon. Normal economic growth cannot resume until excess debt is removed from the system.

The Problem With De-Leveraging

Reducing debt is known as de-leveraging. The ramifications of de-leveraging are not widely understood. Ray Dalio of Bridgewater Associates discussed the process on the Charlie Rose show (full transcript):

    I think it's important to understand that we're going through a deleveraging. So we have to understand the big picture is -- there's a deleveraging. Three big themes: first there's a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other's throats politically and globally in terms of having a problem resolving those.

    So then we begin the process in reverse as you can't spend as much you -- somebody else's income falls. And that process works in reverse.

    Imagine you earned $100,000 a year and you didn't have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there's a self-reinforcing process in which your debt rises in relationship to your income.

    And that goes on for a long time and that goes on for 50 or 75 years through history. We've had 50, 75-year cycles and then you reach a point where you can't anymore get more debt and the process starts to change. And you can't leverage up. Traditionally the private sector leverages up, we leveraged up then we got to a point in 2007 where we had a bubble and that same sort of bubble that happened in Japan, same sort of bubble that happened in the Great Depression, meaning we reached our debt limits. Europe's reached its debt limits.

The current credit bubble is bigger than the one that preceded and caused The Great Depression. Consumer and government balance sheets are worse than they were eighty years ago. Income is incapable of supporting current debt levels.

Reducing debt to manageable levels will produce another Great Depression, likely greater and more painful than the original. Debt reduction requires lower spending and higher savings. Large amounts of debt will not be paid and will be liquidated via defaults.

Until now, governments have done everything to prevent this natural process from occurring. According to Dalio, governments have "no more tools in the tool kit."

Some governments and private companies will experience bankruptcy. Harrisburg, PA just did so. National government defaults will occur with Greece most likely be the first. When the economy begins to shrink, private companies will follow.

The Other Alternative

There is no other alternative cure for the economy other than de-leveraging.

Governments around the world will attempt to avoid de-leveraging because of the associated pain of a Great Depression. Unfortunately, that is not possible as Ludwig von Mises pointed out:

    There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

Prior attempts to avoid corrections got us to this point. Now the supply of credit has been exhausted and taxpayers deeply indebted. Another coverup is not possible.

The simple summary of what years of governmental intervention accomplished is the impending economic and financial tragedy. Politicians from the past may have gleaned benefits. Our generation is left to pick up the pieces.

A printing press is available to most countries. It is no solution to the underlying economic problems, but is the method that the political class will try once again. Doing so will make the situation worse. It steals purchasing power from the private sector. In extremis, it will cause hyperinflation, effectively wiping out the value of savings and fixed contract obligations.

Credit creation cannot prevent de-leveraging. It merely defers it and impoverishes the citizens of a country prior to the onset of a Depression. Will the US government engage in such chicanery? Based on past history, the answer must be an unqualified Yes! Jon Hilsenrath, sometimes referred to as the unofficial trial balloon holder for the Fed, has reported:

    Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

Steve Englander of Citibank describes how Europe will be set up as an excuse for more credit creation:

    Policymakers in the US, UK and elsewhere are using the euro crisis as cover to ease policy. For example, the FRBNY's Dudley yesterday characterized even the improved US numbers as disappointing and pointed to further measures if growth did not improve. Chinese growth targets and policy maker comments imply that measures might be taken if there is any sign of slowing. The BoE has already expanded it QE program.

That a Great Depression lies in our near future is not at issue. Whether we are forced down the route of hyperinflation before the correction occurs is unknown.

Our best outcome is a Depression tomorrow. Better sooner than later. That is what politicians have provided. Hopefully they will not "do something" but "just stand there." The economy needs to be left alone. Their help is killing us. Hyperinflation will truly destroy.

Monty Pelerin blogs at Monty Pelerin's World.

Page Printed from: http://www.americanthinker.com/articles/../2011/10/slouching_toward_the_1930s.html at October 31, 2011 - 07:29:17 AM CDT

 

[Nemo888]

From the Star Tribune. Chance is one of the most relevant factors in wealth accumulation.
http://www.startribune.com/opinion/132819963.html?page=all&prepage=1&c=y#continue
The 1 percent: How lucky they are

Article by: GREG BREINING
Updated: October 29, 2011 - 3:31 PM

The top 1 percent of Americans control about 40 percent of the nation's wealth.


As a stagnant economy and the Occupy Wall Street protests ignite debate over the disparity of wealth in America, a little noticed economic study provides mathematical support for a radical idea. The rich get richer and the poor get poorer. You knew that. But you may not have known that according to a mathematical model developed at the University of Minnesota, the fabulously rich get as rich as they do by chance alone. In a capitalist society, extreme concentration of wealth does not arise from extreme differences in work ethic, skills, investment smarts or other virtues. Nor does it come from connections, cronyism or crookedness. Well, it does, but only some. Mostly, extreme wealth comes from luck. In a laissez faire economy, within a few generations, a handful of players walk away with all the marbles. Because they're lucky.

The policy implications should be alarming, especially if you're a Paul Ryan conservative or Ron Paul libertarian who has been saying that economic liberty gives everyone a chance to grab the golden ring. It's a vanishingly small chance. Indeed, if the model is accurate, the inevitable outcome of unfettered capitalism is oligarchy.

"That's the conclusion I came to, too," says Joseph Fargione, lead author of the paper, published this summer in the peer-reviewed journal PLoS ONE. "I was quite surprised by that."

Fargione first became intrigued by this question not as an economist, but as an ecologist. Fargione is lead scientist for the Nature Conservancy's North America conservation region and an adjunct professor of ecology, evolution and behavior in the University of Minnesota's College of Biological Sciences. Fargione noticed "interesting mathematical parallels" between exponential increases in populations and wealth accumulation. "It is something that ecologists think a lot about," he says.

The link between ecology and economics is not as far-fetched as it might sound. Ecologists had long thought that environmental factors and the characteristics of species would determine the evolutionary outcome of an ecosystem (just as many people insist that talent, hard work, and good decisions determine wealth). Put the same species together under the same conditions, the thinking went, and you'd get a similar result -- again and again.

But in the 1980s, James Drake, an ecologist at the University of Tennessee, repeatedly assembled "microecosystems" in five-gallon aquariums. He found he could add the same pond species in the same numbers under identical conditions -- and get a different result each time. Different species would gain ascendency and dominate the ecosystem -- as if by chance alone.

The wealth project took shape as Fargione read Kevin Phillips' "Wealth and Democracy: A Political History of the American Rich." As Phillips notes, Alexis de Tocqueville in 1837 warned the young American republic that its industrial class, "one of the harshest that ever existed," could create "permanent inequality of conditions and aristocracy." And so it did. Despite the interruptions of the Populist and Progressive eras and the New Deal, writes Phillips, by 2000 "the United States was not only the world's wealthiest nation and leading economic power, but also the Western industrial nation with the greatest percentage of the world's rich and greatest gap between rich and poor."

Fargione discovered that other mathematical models of wealth have failed to account fully for its concentration. Some economists blamed wealth concentration on political factors such as cronyism, or on differences in the sharpness of investors.

"What would you expect would happen on its own without a lot of intervention for redistribution of wealth?" Fargione wondered.

He began his research with a simple question: Can chance alone account for wealth concentration?

Fargione focused on entrepreneurs (who make up one in nine Americans) because, contrary to all advice to diversify portfolios, they typically plow their earnings back into their businesses. "Twenty years ago, Bill Gates didn't say, 'Well, I made some money -- I think I'm going to diversify my investment.'" The all-in strategy is risky, but when it works it leads to rapid accumulation of wealth.

He assumed that all entrepreneurs began with equal wealth. Returns varied, solely by chance. (Past performance is not an indicator of future success -- you've heard that before.) Earnings were reinvested. And for the purposes of the study, the investors seamlessly passed their wealth on to heirs. Says Fargione, "I started out with an Excel spreadsheet and just did some simulations that ran out over time."
Winner take all

I'll spare you the calculus, but according to Fargione's model, by the "inexorable effect of chance," and chance alone, "a small proportion of entrepreneurs come to possess essentially all of the wealth. ... The concentration of wealth occurs merely because some individuals are lucky by randomly receiving a series of high growth rates, and once they are ahead with exponentially growing capital, they tend to stay ahead."

According to Fargione, greater variation in rates of return hastened the concentration of wealth. Inequality grows with time. Wealth concentration continues despite periods of recession and depression. And splitting estates among heirs does not appreciably slow concentration.

In the real world, of course, some people are more skilled at making money than others. And business owners who are making a high rate of return, by operating highly successful companies, tend to continue earning high rates of return. And the rich have connections and other means to increase their wealth that most folks lack. "Those other factors would exacerbate the underlying pattern," says Fargione.

That underlying pattern is the inexorable concentration of wealth and the inevitable result -- winner takes all. Says Fargione, "If you play long enough, someone will end up with all the money."

Indeed, that is what has been happening in the United States, where the top 1 percent owns about 40 percent of total wealth.

As Ian Dew-Becker of Harvard University and Robert Gordon of Northwestern University have shown, between 1972 and 2001, the wage and salary income of Americans at the 90th percentile of income distribution climbed 34 percent. Income at the 99th percentile increased 87 percent; at the 99.9th percentile, 181 percent, and at the 99.99th percentile, 497 percent. Economists have paid "too little attention to the sources of increased skewness at the very top, within the top 1 percent of the income distribution," they write.

It's an entirely different story among the lower 90 percent. According to U.S. census figures released this fall, an additional 2.6 million Americans slipped below the poverty line last year. The 15.1 percent in poverty was the highest level since 1993. Among the middle class, median household incomes fell last year to levels last seen in 1996.

What would it take to arrest the growing divide between rich and poor? Not much, says Fargione. A tax on large inherited fortunes -- a "death tax" in Republican parlance -- aimed at the very wealthiest would interrupt the cycle of wealth concentration. (The current estate tax of 35 percent exempts the first $5 million in assets.) The estate tax has been a favorite target of Republicans and in fact was suspended in 2010.
Inevitable plutocracy

The greatest potential impact of Fargione's model is on our attitude toward accumulated wealth.

For if you are to believe Fargione's model, the result of Republicans' infatuation with conservative economics and laissez faire libertarianism is inevitable and permanent plutocracy.

That is intolerable for several reasons. Great disparity of wealth -- "the development of a race of the idle rich," in Winston Churchill's words -- violates our sense of justice and breeds social instability. U.S. Supreme Court Justice Louis Brandeis observed, "We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we cannot have both."

Inequality may also be bad business in the long run. According to economists Andrew G. Berg and Jonathan D. Ostry of the International Monetary Fund, "In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality."

But perhaps the greatest conceptual contribution of Fargione's model is that it relieves wealth of much of its moral baggage. Extreme wealth is not a reward for virtue. Nor is it the ill-gotten gains of collusion. It is the inexorable outcome of dumb luck, the giant cardboard check of a national lotto.

As beneficiaries of a system that paid them way out of proportion to any effort or virtue of their own, the superrich are entitled to some of their wealth, but not all.

They should give a lot of it back.

Greg Breining writes about science, nature and travel. He is the author of "Paddle North: Canoeing the Boundary Waters-Quetico Wilderness" and "Wild Shore: Exploring Lake Superior by Kayak."

 

[ModlrMike]

Greg Breining writes about science, nature and travel. He is the author of "Paddle North: Canoeing the Boundary Waters-Quetico Wilderness" and "Wild Shore: Exploring Lake Superior by Kayak."

Which makes him qualified to write about finance and politics? Not meant to be particularly ad hominem, but I think a reasonable question.