Category Archives: Economics

The Truth About Health Care

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Yesterday’s post, was tangentially about health care, but it got a lot of responses about health care. It is a funny subject, in that everyone starts from the premise that everything has been the way it is now since forever. The Left has been so good at proselytizing about government run health care for the last 25 years that the public suffers from collective amnesia. We forget that no one complained about insurance very much a generation ago and no one expected miracles from medicine. Health care was just not a big topic.

After a quarter century of chanting about health care, most everyone seems to buy into the belief that it is a fountain high up on Magic Mountain. It is guarded by the twin dragons of Big Pharma and Big Insurance. The keepers of the faith sent their paladin, Barak Obama, to slay the dragons so that the people could dip their cup into the fountain of health care, getting all they need. His failure to accomplish this is proof that the dragons are mighty and therefore the most extreme weapons must be deployed.

It’s all ridiculous nonsense, of course, but that’s where we are with the topic. All goods and services are rationed. That’s an iron law of the universe. There are no exceptions. The rationing is either done though control of the supply or through price. In America, a massively convoluted system to control supply has evolved so that the people do not see the cost of health services. This lets a long list of skimmers attach themselves to the system so that prices go up, even though the quality of service often declines.

The question no one ever asks is how to make it cheaper. Follow the talking heads on the subject and they will never address making the price of services cheaper. Instead, they prattle on about access and risk pools and other terms they think sound clever. The reason is not that they view health care as a right. It is because they see it as a privilege to be dispensed by the Cloud People to the Dirt People. Allowing a free market for health services would take all the fun out of being a Cloud Person.

Even so, the goal of any health care reform should be making it cheaper, especially the common care items. The two areas where health care has gotten much better and much cheaper are dentistry and eye care, both of which are usually paid for out of pocket and have low barriers to entry. Veterinary medicine is the most obvious example of what happens to prices when you have anything resembling a marketplace. That’s also why the people in charge will never allow competition for health services. Their donors hate it.

The other aspect of health care is the quality of medicine. The truth is, the advance of medicine has been very slow and is not looking to speed up in the near future. The great leaps in health are a) diet, b) antibiotics and c) sanitation and d) a crackdown on quackery. All of these things are products of the last century. Some treatments are much better than fifty years ago, but cure rates for most diseases have not budged. Death, of course, remains a universal constant. Medical advances are glacial, not revolutionary.

As Greg Cochran pointed out the other day, a free market in medicine is probably not the answer, any more than a government monopoly has been. The truth is we don’t know a lot of about the human body and the diseases that afflict it. Genetics promises to open the door to a vast new trove of learning about human biology and medicine, but that’s not going to speed up with any government health care scheme. This is a science problem, not an economics problem and that takes the time it takes.

Finally, the problem of health insurance starts with understanding that there is no such thing as health insurance. What we have in America is an elaborate system of cost shifting. The young are forced to pay for the old. The healthy are forced to pay for the sick. The government and their buddies in the insurance business get a piece of the action. Nowhere in America can you buy insurance in case you have a stroke or just for the chance you fall off your roof.  Everyone’s plan is designed by the government.

This is a problem that is easily solved in theory, but nearly impossible to solve in reality because insurance companies have billions to spend on politicians. There’s also the fact that generations of Americans have become conditioned to having someone else pay their doctor bills. All the reforms that would work require people paying their own way and that will never happen on purpose. It’s why the current system will mostly likely stagger along until it collapses. At that point, we end up with government insurance.

That’s the truth of health care in America. The system, at its best, is a web of lies designed to shield the citizens from reality. At its worst, it is a complicated skimming operations so the people at the top can squeeze a bit more from the middle-class. It does not have to be this way, but until we resurrect the national razor, nothing substantive will change until it collapses. At which point, the “solution” will be something worse like national health care or single payer insurance.

Collateral Damage

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One of the unintended consequences of a world of floating exchange rates has been the geometric growth of debt. The total amount of debt in the world currently sits at around $300 trillion, which is about three times the global GDP. That seems like an impossibility, but the value of all assets on earth is estimated to be around $300 trillion, which means every bit of potential collateral is pledged to someone, somewhere in some fashion. The world is literally drowning in debt, you could say.

Of course, those are just guesses. Some debt is actually listed as both an asset and a liability. Your mortgage is most likely in some sort of synthetic financial instrument as an asset against which there is some form of debt. Government bonds are used for collateral, as they are often considered the most reliable and trustworthy asset on earth. Banks soak up US debt, for example, because it is worth more to the bank than their cash deposits, as they can quickly package bonds into other financial transactions like repo agreements.

It’s also why the US government has no trouble finding willing lenders, despite having record debt and deficits. Those lenders are holding cash, which is not as valuable to them as the bonds. It’s not just the US government. The Germans also enjoy high demand for their debt. In Europe, the German Bund is the preferred collateral in finance transactions. In fact, it is so valuable, there is a shortage of it. The result is there is always pressure on the European Central Bank to not hold Germans bonds.

It is an important thing to understand about the world of modern finance. It is entirely driven by debt. When company X wants to do a deal, it does not reach into its cash reserves to finance the transaction. Instead, it will pledge an asset in a repurchase agreement. This is where it agrees to sell the asset to another party, but simultaneously agrees to buy it back at some point in the future at a fixed price. This is a modern form of pawning the wife’s wedding ring. The company gets the cash and the lender gets interest.

Of course, no tree grows to the sky, but the modern financial system is counting on debt being the exception.

Down in the depths of Europe’s financial system, a nasty blockage is building. The plumbers at the European Central Bank meet next week to try and fix it.

They may be four days too late. Italy’s referendum could just stretch the system to breaking point before then.

At stake is the health of the 5 trillion-euro ($5.3 trillion) securities lending market, which greases the wheels of all manner of derivative, short-selling and structured transactions. A crunch point has arrived in Europe. The last few days have seen an extreme spike in demand in particular for short-dated German government bonds.

These are among the few securities of high enough quality to be accepted as collateral in repurchase agreements. Cash is no good (well, not for the Bundesbank anyway). These agreements operate like high-quality loans whose proceeds are normally used for activities like financing the purchase of other securities. Without them, a lot of other everyday activities — such as bidding at bond auctions and hedging underwriting risk — could seize up.

The demand spike is from the usual year-end surge in demand for collateral getting pulled forward, and has exacerbated a shortage of securities that count as collateral.

In normal times, firms borrow the securities they need and quickly return them — there’s usually a flood of lending and borrowing going on, and the repo market operates silently in the background of Europe’s financial system.

But the ECB’s drive to jump start the economy has led it to buy up about 20 percent of the market for German bunds and other top-quality securities. Schatz — German government bonds of a two-year maturity — had become notably harder to come by. Firms can borrow them from the ECB, but only on the strictest of conditions. The Bundesbank has been even more resistant: it’s long been reluctant to accept any kind of collateral of lesser quality than German government bonds.

What all that means is the modern financial system has come to rely so heavily on government debt that governments cannot issue enough of it. The trouble is, government debt can take cash from the economy. This is fine when the economy is overheated or there is inflation. Central banks can step in and sell their bond holdings to soak up the excess cash. That’s not the case today anywhere in the world. Instead, governments are looking to boost the retail economy by getting more cash into the system.

The result is an unsolvable conflict. On the one had we have a financial system demanding ever more high quality debt, in order to drive growth in asset values. On the other hand, we have a retail economy demanding more cash moving around in the system in order to stimulate economic growth. It’s why smart guys like James Rickards see a financial crisis in the near future. The methods to paper over this inherent conflict are just a delaying action. At some point, the pressure exceeds the restraints and you get a crisis.

An organized unwinding of trillions in debt is never going to happen, so that means we will have a disorganized unwinding of trillions in debt. That’s the definition of a crisis. It is the unexpected, disorganized unraveling of something that probably should never have been allowed to happen. The mortgage crisis is the most recent example. Lending billions to people, who have no way to repay the loans, turned out to be a bad idea. In the fullness of time, the mortgage crisis will be seen as a warning, one everyone ignored.

The High Cost of Free Trade

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The Wall Street Journal has a story on the troubles facing Chinese tech giant Huawei as it tries to enter the US mobile phone market.

A Chinese technology giant, whose telecom networking equipment is shut out of the U.S. due to security concerns, is bringing its high-end smartphone to American consumers for the first time.

But a number of obstacles are blocking Huawei Technologies Co.’s path to success in the U.S. smartphone market.

U.S. carriers, which distribute more than 80% of handsets in the country, are reluctant to work with Huawei—the world’s third-largest smartphone maker by shipments behind Samsung Electronics Co. and Apple Inc.—because of its low brand recognition and security concerns associated with its networking equipment, people familiar with the matter say. A 2012 congressional report recommended that U.S. carriers avoid using Huawei gear in their networks for fear that China might use it to spy on Americans. Huawei has denied such accusations, saying it operates independently of Beijing.

Much of what goes on in the modern age requires people to deny observable reality. China is an authoritarian state, run by a military government, that is highly paranoid of the outside world. Paranoia about the non-Chinese world is a feature of Chinese culture, a permanent feature. The type of government can change, but the Chinese elite will always view the rest of the world as smelly barbarians that must be kept under control. China is probably the most chauvinistic society on earth.

The result of this is that no Chinese firm operates independent of Beijing. Any company large enough to export to the rest of the world, or import from the rest of the world, is in bed with the Chinese government. More important, any tech firm big enough to play on the global stage is deeply connected to the Chinese military, because they could not be so big without the blessing and active support of the People’s Liberation Army. This is something everyone knows, except for the writers of the Wall Street Journal.

The result is trade with China comes with a hidden cost. If you move your electronics making factory to China, they will steal your technology. They will also do things like bake spyware and back doors into networking gear so the the PLA can exploit US communications networks. That means the US has to spend billions in counter-espionage activities in order to prevent the Chinese from running off with all of our secrets. This is just one example of the hidden costs of trade with China.

It’s not just China. We have so-called free trade with Mexico. The result was not trade in the way normal people think of it. What happened was dirty US manufacturers located their plants to Mexico. Companies looking to game the labor laws followed soon after. Mexico is not selling us more stuff and buying more of our stuff. Mexico is just a loophole in US labor and environmental laws. If you make lead-acid batteries, for example, putting the battery plant in Mexico in the right move.

The problem is those environmental costs don’t go away. The Mexican government estimates that 10% of their GDP is lost due to the effects of environmental degradation. Go to Mexico City and the air is like soup. Of course, environmental degradation does not stay local. Air pollution in one place goes global as the winds change. The fevered attempts to ban your car and lawnmower in order to reduce carbon emissions are mostly due to “developing” countries like China and Mexico.

Of course, you also have the labor problem. Making car batteries in the US means people working in a car battery factory. Move those jobs to Mexico and we do get slightly cheaper car batteries, but we get more unemployed people. The unemployed car battery worker is not taking up a self-actualizing career at the George Mason economics department. He’s going on the dole or drifting down the economic scale. At low levels, the trade-offs seem worthwhile, but once you scale this up the costs metastasize.

There’s also another hidden cost to free trade. Donald Trump rode to the White House on the promise of reorienting trade in the patriotic direction. All the beautiful people thought the issue was settled. Everyone they knew was a free trader. The same was true in Britain with regards to EU membership. Open borders and free trade are obviously all good with no bad, according to the beautiful people. In both cases, the Dirt People had other ideas and rallied to the banner of patriotic trade and nationalism.

The reason for this is so-called free trade erodes public trust. People assume politicians are crooked and dishonest. Even so, they expect their government to put their interests, the nation’s interests, ahead of the interests of foreigners. They may be crooks, but they are our crooks. Free trade and open borders break that contract as the state ends up siding with strangers over the citizens. The citizens soon begin to question the value of citizenship and their support for the state. The consequences are inevitable.

A good rule of life is that anytime a well understood word suddenly gets a modifier, you know a caper is afoot. Trade is something people always understood. One group of people trades their excess for the excess of another group of people. Mexico sends Canada sombreros, while the Canadians send Mexico beaver hats. Free-trade is something else entirely. It is a collection of loopholes, so well-connected industries can get all the benefits of the state, but shift the costs onto others. Those cost are often quite high.

Trade between nations is a good thing. America selling pop culture to China makes it tough for China to be bellicose and belligerent. China selling cheap manufactured good to America prevents domestic firms from becoming lazy and stupid. American cars are vastly better due to competition with Japan. China scrupulously looks out for her interests and America should do the same. If that means the snowflakes on campus have to pay a little more for their iPhone, so be it. In the long run, it is a bargain for them and their countrymen.

We Still Have A Word For It

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I’ve always been a skeptic of Facebook, mostly because I don’t understand how they make money. I mean, I know how they make money, but I don’t know why they make money. It’s just a crappy platform for the technologically inept to post pictures of their cat. Facebook charges companies a fee so they can put ads next to the picture of your cat, but why those companies do it is a mystery to me. The whole thing depends upon ordinary people being interesting and looking at those ads, which no one does.

You can’t cheat an honest man and the companies buying ads on Facebook are not Boy Scouts so it is no wonder that Mark Zuckerberg has been hustling them.

Mark Zuckerberg has a credibility problem.

The tech mogul’s Facebook just admitted to finding more “bugs” in the way it measures ads — and once again, those bugs benefited Facebook.

The social-networking giant said Wednesday it has found numerous errors in the ways it calculates how many people view its ads, artificially inflating their perceived value to advertisers and publishers.

Key metrics that Facebook has exaggerated include the weekly and monthly reach of marketers’ posts, which got inflated by 33 percent and 55 percent, respectively, as the site improperly included repeat visitors in its figures.

Elsewhere, Facebook admitted to exaggerating the number of full views that video ads received, as well as time spent by users reading fast-loading “Instant Articles” for publishers including The Post and the Wall Street Journal, both of which are owned by News Corp.

Facebook insisted that the messed-up metrics — which followed the company’s admission in September that it had inflated its reporting of video viewing times to advertisers by as much as 80 percent — didn’t affect billing to publishers and advertisers.

This stuff is not new. It appears to be the business model for Facebook. This video from a couple of years ago sounds a lot like what is in the NYPost story.

Of course, we have a word for this. It’s called fraud. There was a time when something like this would have resulted in the executives at Facebook being led out in chains. Advertisers should be walking away and the stock should be tanking, but that’s not the modern age. Robbing your customers and vendors is just the way it is done at this level. You never give a sucker and even break or smarten up a chump. Ours is a grifter culture where everyone is running a scam.

Marx Was Right, Sort Of

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In the Communist Manifesto, Marx described the periodic crisis of capitalism in terms of “the enforced destruction of a mass of productive forces.” Marx argued that the productive forces unleashed by capitalism eventually get out of hand and the result is excess, thus collapsing the value of the means of production. The capital classes remedy this by enforced destruction of a mass of productive forces, the conquest of new markets, and by the more thorough exploitation of existing markets.

Marx gets blamed for the 100 million or so murders committed in his name, but he did make a few insightful observations. For instance, the nature of business to ruthlessly exploit existing markets in pursuit of growth, even when it becomes self-defeating, is still true today. Similarly, business will bankrupt itself in pursuit of new markets, all in the name of growth. Much of what plagues us these days is the result of global business desperately searching for a new market to exploit. It is also at the heart of what is ailing the NFL.

A lot of people are blaming the idiotic and offensive antics of the players for the sudden drop in ratings. Football players have short careers and most end up broke soon after leaving the game, but most men envy them anyway. Boys grow up wanting to be a sports star and that admiration carries over into adulthood, long after we know the reality of sport. Colin Kaepernick disrespecting the fans and the country by kneeling during the anthem grates on people. Normal people think he is an ungrateful prick.

That may be part of the problem the NFL is facing, but my sense is the impact is trivial. Maybe it is the last straw for some people, but if you are a sports fan, you are willing to overlook the antics of the meat heads wearing your team’s colors. The individual players are not all that important to the drama. The point of professional sport is to simulate the tribal warfare for which all of us were born. Instead of defeating the neighboring tribe’s men and stealing their women, we watch our team beat their team at a ball game.

The real issue that is plaguing the NFL is they have run out of ways to separate their customers from their money. In fact, they ran out of sensible ways to do that a long time ago. That’s why they have started holding games in foreign countries. They think they can maybe find new customers to exploit. The games they hold in London, for example, cost the league millions, but they hope that Brits will get hooked on the narcotic of the NFL and cough up millions for the product. So far, no good.

As Marx observed, they are also ruthlessly trying to exploit their existing market. Go to an NFL game and you come away feeling like you have just been mugged. It’s not the absurd prices for everything. They constantly bombard the fan with marketing, because they expect the fan to commit his life to the corporate entity known as his team. Go to a Dallas Cowboy game, for example, and you are treated to a long pre-game ceremony about how you are not just a fan, you are soldier in the army of the Dallas Cowboys.

Of course, most people consume their sports via the television and that’s where you see the ravenous appetite of the NFL as they ruthlessly exploit their market. It used to be that the NFL games were played at one o’clock on Sunday afternoon. Now, there are games all day on Sunday. There’s a game on Sunday night and Monday night. Now we have a game on Thursday night. If that is not enough, there’s the NFL package for your phone, tablet and whatever else you use to consume media.

The games are now more advertising than games. As the linked article points out, the games themselves are only about 10-15 minutes of action. The rest of the presentation is fluff and most of that is advertising. There’s a play and then the refs have to hold a meeting about it. That means a break to sell product for three or four minutes. They get back to the game for a few plays and then it is time to have a break for more commercials. It’s why the Red Zone Channel is so popular. It has no ads.

The NFL is in many ways emblematic of the modern credit economy. Rich guys buy the teams on borrowed money at artificially low interest rates. They don’t really care that much about the cash flow, like a normal business. Their game is to inflate the value of the franchise over the duration of their investment. To do that means maximizing the “brand” and that costs money, which is why they load up their product with ads to the point where it is more ads than product. The NFL is a big bust out.

What’s happening to the NFL is their endless pursuit of growth has put the live product out of reach for most people. The TV version is exhausting the viewers with marketing and advertising. In an effort to fully exploit its market, it is destroying the desirability of the product. This is not exactly as Marx imagined the crisis of capitalism, but it is a good lesson on the fantasy of endless growth. The whole point of the NFL as a business is to get bigger and that cannot go on forever.

This does not mean the NFL is about to go out of business, but it serves as a useful lesson about the limits of the asset model. The modern credit economy is based on the idea that asset values can grow forever, therefore the credit base can grow forever. The NFL is based on the same premise. In both cases, the effort to keep the fantasy alive in the face of objective reality, is doing more harm than good. The question is how long does it take the people in charge to figure it out.

 

I Bring Bad Tidings

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Recently, I was involved, in a limited basis, with a bankruptcy. The company that went belly up had over a million dollars in debts and no assets. Most of their debt was in the form of accounts receivable, but they had some loans and leases as well. Up until the point they filed for bankruptcy protection, they had paid all of their bills on time. In fact, they paid most vendors in ten days, something that is just about unheard of these days. This prompt payment is what led their vendors to be so generous with them.

This story reminded me of something that happened years ago. There was a house party at a mansion (are there mansion parties?) and many party goers were out on a balcony of some sort that extended over the pool area. The balcony was large enough to hold dozens of people, but it started to give way due to the mass of people. Panic set in and that made things worse as the frightened party goers scrambled to get off the balcony. The whole thing collapsed and took a bunch of people down in the process.

The connection here is that it is human nature to observe the actions of others, trust those actions and to infer things from them. The vendors extended terms to that business saw that they paid in ten days and that others were more than happy to extend credit, so they did the same. The party goers saw everyone else out on the balcony and just assumed it must be safe. They never stopped to think that maybe it was not built to hold a hundred people. In both cases, when reality came rushing in, there was a rush to the exit.

That’s something I think about when I read stories like this regarding the global economy. The entirety of the world economy is built on one thing. That is the rock solid belief that the US government will never miss a debt payment and never devalue the dollar to arrest its debt. The entire global economy is built on the asset value of US Treasuries. If there ever comes a time when people begin to doubt the security of that debt, the panic will plunge the world into a new dark age or possible something worse.

The people in charge of the Federal Reserve understand this. The people running the ECB know this. The PBOC knows this. The masters of the universe all agree on one thing and that is they have to protect the foundation stone of the world economy. Guarding the underlying stability of the financial system is their overriding concern. That means they are willing to risk recession and maybe worse in order to protect the asset system. It’s not unreasonable from their perspective, but it does reveal the bigger problem.

That bigger problem is we have reached the logical end point of the credit economy. If the US economy does lurch into recession, the world economy will follow. The central banks will not have many options as they have used all of their big tools to prop up the asset base over the last decade. The Fed can lower rates a bit and maybe restart their Quantitative Easing program, but they will have little or no success in blunting a recession. The world will just have to wait it out and hope for the best.

That is not how the world ever works. A 2017 recession will cause the new US president to propose “solutions” and new governments in Europe will demand relief from Brussels. Bad economics always leads to worse politics and the politics of the West are already fairly rotten. The rise of nationalist and populist parties in Europe will only complicate an already fragile set of arrangements. Imagine if something like a Syriza were to take over the Italian government just as the world is headed to recession. Fun times.

The fact is, there’s a limit to how much the world can borrow from the future. We are probably near that limit. With recession looming, the ability of central bankers to blunt it with credit issuance is limited. That means it becomes a political problem. The record of politicians coming up with useful reforms in times of crisis is not good. What’s needed is a sustained and organized retreat from a money system that has outlived its usefulness, but that is probably impossible. Instead it means a disorganized and haphazard retreat.

As Evans-Pritchard concludes in his story, the possible outcomes are mostly grim with some of them very grim. If the central bankers get it wrong and plunge the economy into a deep recession, the politicians will most likely respond with massive spending of money that does not exist. That could unleash price inflation and a collapse of asset values. It’s not guaranteed, but the fact that it is one possible outcome is grim news in itself. The future is grim and things will mostly likely be worse than we expect.

The Corporate State

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The other day, someone was telling me about their troubles getting fraudulent charges removed from their credit card. It started with a $499 charge for some sort of AT&T service. He called his bank and was told he needed to call the merchant that put through the charge. After a number of phone calls, he was put in touch with someone that tried to talk him out of a refund. After some angry words, he got the the charges reversed and a credit to his account.

Somewhere in the process, he spotted some more fraud charges, so he was back hassling with the bank and vendors getting those off his card. Those charges were for shoes and clothes he did not buy. Talking to the merchants, he discovered that the items were being shipped to an address in another state so he asked if he should notify the police. The merchant laughed and said they don’t do that. They just try to notify the shipper to have the items returned. Otherwise, it is just a loss.

I would imagine everyone reading this has had a similar hassle with this type of theft. I once had a bunch of weird charges show up on my Verizon bill. It was a cramming deal and it took weeks to get the things off my bill. Verizon was in on it somehow and they eventually got hit with a civil suit. I called the attorney general, but I quickly learned they had no interest. They only take on small fries they can push a around. A big company like Verizon operates outside the law.

Now, I did get my money back from Verizon and my acquaintance got his money back on his credit card. I’m guessing he had half a day of time in hassling with the bank. I had a few hours yelling at the dirt bags in Verizon customer service. In my case, I had gone to a paperless bill. I had to jump through hoops to get an actual paper bill sent to me again so I could begin watching the bills for this sort of scam. Verizon works very hard to conceal the details from their customers and this is why.

This sort of theft is just a fact of life everyone accepts. The police no longer investigate most property crimes and they rarely go after the organized scammers, like the crammers working the telephone bills. The on-line merchants that get hit by credit card scammers just accept a certain amount of loss and bake it into the cost of doing business. Even the banks assume losses due to electronic theft. All of these losses are socialized, spread around to all of us in the form of interest and fees.

It’s not just that they are socialized. Increasingly, government is handing the responsibility of policing society over to corporations. That’s what happened when the government had Yahoo monitor their e-mail system without a warrant. They basically deputized the corporation so they could do the policing. Cities and counties all over America have outsourced traffic enforcement to private enterprise. These companies get the right to tax speeders and red light runners by using cameras to catch them.

This happens with other types of crime too. If my vehicle is stolen, the cops do not look for it. Instead, the insurance companies now organize the hunt for car theft rings. In many parts of the country, the cops no longer investigate home robberies until the insurance companies step in with evidence of a pattern. Since filing a claim with your insurer is mostly likely going to result in a rate hike, many people don’t bother calling the cops at all. There’s little benefit and lots of hassle.

This is another facet of anarcho-tyranny. It’s not just that the state has stopped doing the basic duties of government. They have subtly outsourced them to cartels with the power to tax all of us in order to socialize the cost of crime. As we saw with the Yahoo case, the logical next step is to give corporations the power to police. You may never be arrested by Google or Apple, but they will be the ones that report you to those with the power to arrest you, most likely a contractor, too.

Sam Francis imagined a more Orwellian end result than we are seeing. The end game appears to be a corporate state that is legitimized by the law, but fully de-legitimized in practice. On the one hand you have management that wears the synthetic mask of enthusiasm, as they go from meeting to meeting, figuring out how to obliquely enforce policy. On the other hand you have the lower ranks, grimly going through the motions in order to avoid interaction with management.

A World of Problems

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Back when the Germans were threatening to shut down Greece and sell it off for parts, it was fairly obvious that there was no way to “fix” the Greek problem. Even it were possible to radically overhaul their public sector, the debt payments are too high to maintain the level of social services expected from a modern social democracy. Default was unthinkable because close to 80 percent of Greece’s public debt is owned by public institutions, primarily the EU governments and the ECB.

The “solution” was to kick the can down the road until a miracle happened, but now the problem is back.

ATHENS—Greece’s economic recovery is proving elusive, challenging the forecasts of the country’s government and foreign creditors still counting on growth reviving this year.

The International Monetary Fund said last week  that the economy is stagnating, in the first admission from creditors that Greece’s recovery is off track again. Growth will only restart next year, the head of the IMF’s team in Greece said on a conference call with reporters, without offering details.

Of particular concern is that exports, which are supposed to lead Greece out of trouble, are on a slow downward trajectory, hampered by capital controls, taxes and a lack of credit.

“There is no chance we will see a rebound unless we see some bold political decisions that would introduce a more stable business environment,” said Dimitris Tsakonitis, general manager at mining company Grecian Magnesite.

The bailout agreement between Greece and its German-led creditors assumes rapid growth from late 2016 onward, including an official forecast of 2.7% growth in 2017. Private-sector economists believe next year’s growth could be closer to 0.6%.

Weaker growth would undermine the budget, likely leading to fresh arguments with lenders about extra austerity measures.

Greece is still grappling with the measures it has already agreed to. Late on Tuesday the country’s parliament approved pension overhauls and other policy changes that have been delayed for months, holding up bailout funding.

Greek government officials are sticking to their view that the economy is on the cusp of growth. “We are at the turning point at which we can we say with certainty that we are leaving the recession behind us,” Economy Minister George Stathakis told supporters of the ruling left-wing Syriza party Sunday.

The economy will get a push from investors as of the end of the year, when lenders are expected to provide some debt relief and the country qualifies for a European Central Bank bond buyback program, Prime Minister Alexis Tsipras said in an interview with The Wall Street Journal last week.

In other words, the miracle did not happen and the problem is now worse. This comes at a time when Europe’s biggest bank is in very serious trouble.

Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender.

As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position.

European regulators and government officials have kept a low profile in public over Deutsche’s deepening woes. However, in private they have struck a sanguine tone, stressing that in extremis there is scope under European regulation to inject state funds to support the bank, provided it is done in line with market conditions.

Marcel Fratzscher, head of DIW Berlin, a think-tank, said: “If push comes to shove, the German government would contribute because Deutsche Bank is the only global bank that Germany has.”

There is one solid rule with banking and that is when the biggest bank is in trouble, all the banks are in trouble. The reason is a bank in trouble seeks to increase its cash by unwinding its holdings. This puts downward pressure on the price of those assets, which forces all banks holding similar assets to revalue and perhaps raise their cash holdings, by selling assets. This can easily set off a cascading effect, which is popularly referred to as contagion. The ghost of Lehman now haunts Deutsche Bank.

Deutsche Bank has something north of €42 Trillion in derivative exposure. To put that into perspective, the GDP of Europe is €14 Trillion. The phrase “systemic risk” is starting to pop up in news stories for obvious reasons. Presumably the German government would step in and bail out the bank, but this is the same German government that invited millions of Muslims into the country. That and no one really knows how big the problem is at Deutsche Bank. There’s nothing more dangerous in the financial world than uncertainty.

If that’s not enough to have you stocking up on potable water and MRE’s, the news brings word that the Obama Administration is trying its best to start a war with Russia over Syria. They are ending talks with the Russians over the bombing of Aleppo. The Russians are threatening to impose a no-fly zone, while John Kerry is making noises about sending troops to Syria. The US position is completely nuts, which is what makes it so dangerous. The same people who screwed this up are now tasked with avoiding a mistake that will lead to a shooting war with the Russians.

The world always has some problem that could get out of control and bring the whole thing crashing down, but the odds are usually long enough to not worry too much. Pakistan is now threatening to nuke India, but that happens often enough to not take too seriously. Pakistan’s military understands that they will lose a real war with India. India understands that they will gain nothing by winning a war against Pakistan. This is one of those problems that can be managed by the permanent diplomatic service, with little help from the political class.

The three crisis I’m following all have some things in common. One is they will require hard choices from the political class to contain. In politics, a hard choice is one that causes a politician to lose support. Merkel’s government is already teetering so how willing is she going to be to make a bold move to rescue Deutsche Bank? The ECB proved unable to deal with the Greeks the last time. If Merkel is facing a financial crisis, who will she play bad cop with the Greeks when Tsipris inevitably comes calling, demanding a break on Greek debt?

The Syria debacle is the most concerning because it resembles so many European problems of the past. There’s a Seven Year’s War quality to it where you have two main players with the rest changing teams after every stage. With the US now increasing the troop levels in nearby Iraq, presumably to fight in one theater of this conflict, the chances of a mistake increase. In these situations, mistakes are often not mistakes, but even when they are, they become reasons to abandon dialogue in favor of military options.

We live in a world of trouble. One can be forgiven for having a sense of foreboding.

The Fury of the Central Planners

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When I was out in the provinces last month, I watched a bit of the BBC and SkyNews. One of the things I found humorous about the news coverage was the hyperventilating about Brexit. Every story had a Brexit angle, even the local interest stuff. The general impression I got from the news presenters was that they were having a tough time keeping it together. At any moment they could break down into sobbing over the horrors of Brexit. If you did not know better, you would think Brexit was code for re-opening Auschwitz.

All the prophesies about the disasters that would befall the world, if the snaggletoothed yokels voted to leave Europe, have not come to pass. In fact, the early returns suggest it has been a net positive for the Brits. Time will tell how it all unfolds as there is a lot that has yet to happen. Even so, the results thus far are making the Remain side look rather foolish. Instead of accepting this reality, the true believers are carrying on like Godzilla is about to cross the Channel and attack London, because of Brexit.

This inability to accept reality is not confined to the Brits. Tyler Cowen has an unintentionally hilarious column up demanding that we believe the libertarian economists and not our lying eyes. The short version, for those uninterested in reading it, is that he and the rest of the doomsayers forgot to carry the one and the day of reckoning is actually a little ways off. But don’t you worry though. The day of reckoning is approaching and those beastly Dirt People in the accompanying picture will be held to account.

In fairness to libertarians, modern economists are not libertarians. They dress up their act with libertarian hobbyhorse items like free weed and open borders, but modern economics is managerial central planning. They are technocrats convinced they can micromanage everything through monetary and tax policy. No matter how many times they get it wrong, they remain certain they just need to tweak their models and boundless bliss will spread over the countryside. Worse still, they fully embrace the lunacy of homo economicus.

Economics, as I’m fond of saying, is the modern equivalent of astrology. Before a battle, Cyrus II of Persia would bring in his astrologers to advice him on the time and place to attack his enemy. The astrologers would figure out what he wanted to hear, consult their maps and then tell him what he wanted to hear. Cyrus was a bad ass dude, who was rarely wrong, so it was a wise course by the astrologers to tell the boss what he already knew. When he won, they got some credit and they avoided contradicting the boss.

This old story about the eminent astrologer economist Joseph Stiglitz praising the economic polices of Venezuela ten years ago is a good example. Stiglitz was telling his hosts what they wanted to hear because they were paying him to endorse their brand of lunacy. Of course, Venezuela is now headed to total collapse because their economy has ground to a halt. In an age when Mexico’s poor people are obese, Venezuela has managed to have a food shortage. Maybe the rulers should not have listened to Joseph Stiglitz.

The fascinating thing about economists is that their error rate is outlandishly high, but they never lose credibility with the rulers. Obama called in his best seers when he rose to power in 2008. They told him that borrowing a trillion dollars and blowing it on pointless projects would result in 1.5 trillion in economic activity. They called it the fiscal multiplier. One could be forgiven for thinking that this is another version of this old joke about a stranger coming into town and spending $100 at an hotel, then changing his mind.

The Obama stimulus plan was a bust, but that was never really the point anyway. Obama wanted to lavish his party with your money and he wanted to make it look like he was doing you a favor by doing it. That’s why he called in his best magicians and astrologers to give it their stamp of approval. Being right or wrong was never a concern. It never is in economics. The chief architects of the stimulus knew it was a great career move to give their stamp of approval to what was obviously just good old fashioned patronage. All of them landed prestigious jobs in the academy and Wall Street afterward.

Anyway, I suspect the fury of the central planners over Brexit has to do with fear that the scam is no longer working. Every big foot economist from the West weighed in against Brexit. They shook their staffs and promised Britain would be visited by plagues, monsters and dark spirits if they left Europe. The voters chose Brexit anyway. If you’re in the business of fooling the people on behalf of the rulers, you need to show you can fool the voters. Otherwise, the rulers have no use for you.

Follow The Money

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By the time this is posted I will be somewhere over the Atlantic on my way to Iceland. I will then move onto Ireland where I will spend a few days with the bog monkeys. Since there is some chance I may be tricked into having an adult beverage or two and thus be rendered unable to post, the following has been pre-recorded.

–Z

One of the benefits of reading lots of history is you often see the same catalysts, causes and dynamics turning up in the story. The Roman Empire had a lot of problems toward the end, but a big one was their financial structure. Their lack of money led them to do things that made their situation worse. Similarly, the French Revolution had a “want of money” angle to it. The crown was broke and did a lot of very stupid things, as a result of being broke, that compounded the many social problems brewing in the country,

It’s tempting to wonder, for example, what would have happened if Louis XIV had been a bit more prudent or showed a bit more foresight with regards to the financial system of his country. Alternatively, what would have happened if his heirs had better advisers, who would have pushed for mild steady reform in order to slowly bring the French financial system into line with the emerging modern world. Heck, what if Louis XV had simply avoided the mistake of hiring economist John Law.

The best historians, I think, look at the men of the time and ask why were they unable or unwilling to do the necessary things to avoid catastrophe. In almost all cases, there were plenty of people advising the rulers that were making a blunder. In many cases, the rulers knew they were blundering, but events constrained them from acting. In the decades leading to the French Revolution, many smart and influential people knew reform was necessary. They just did not know how to go about it or what they were able to do, within the limits placed upon them, made things worse

Anyway, that’s the vibe I get when reading these stories about the Fed and their deliberations on the economy. Due to the sensitive and precarious nature of their positions, they tend to speak in riddles, but if you are careful, you can tease out some meaning from their public statements. They are very guarded and they reserve their more candid opinions for private conversations, but they rely on the broader financial public to put pressure on policy makers. These staged events are an esoteric form of lobbying.

The United States has a Federal debt that rivals what we had while fighting two empires in World War II. Current debt is close to 100% of GDP and that was the peak during the war years. The difference is we are not battling two empires in a shooting war. Now we are maintaining a global empire. The financiers understand this difference and they certainly recognize the danger it poses. The costs of fighting Hitler and Tojo were temporary and extraordinary. The cost of empire is permanent and ordinary, at least for a while longer.

These debt levels are only possible in the artificially low interest rate environment created by the central bankers. The trouble is they appear to have gone beyond the point of diminishing returns with interest rate policy. We are effectively in a no-growth economy now, despite historically low borrowing rates at all levels. The West is not in recession nor is it facing collapse, but it is exposed. There are no financial tools left in reserve to face the next unknown financial calamity and the bankers know this.

The trouble is the cost of reform is so frightening, no one is willing to face up to it. Interest on the Federal debt is about 6% of annual spending. If borrowing rates returns to historic norms, debt service will grow rapidly. Some estimates say it would exceed 20% of the annual budget within a decade. That’s based on the assumption the economy would not collapse, but rising rates would throttle real estate, tip over bank balance sheets and send the equity markets into free fall. All the attempts to keep the plates spinning have made artificially low borrowing rates the norm. Everything is now based on it.

The Federal government is not about to go bankrupt anytime soon. Federal outlays are about 20% of GDP right now, which is more than manageable. State and local government account for another 20% or thereabouts. Government spending in Germany is at 44% at the moment. It is 44% in Britain and 52% in France. In other words, the US has the same problems we see with all social democracies, but we’re not Zimbabwe. The US dollar is also the world’s reserve currency so that gives the US a much bigger margin for error.

Still, there is a sense you get from theses statements from central bankers is that they know these artificially low borrowing rates cannot go on forever. The longer they continue, the worse it will be when they finally return to normal. It’s just that no one knows how to fix it. The political costs of inflating our way out of debt are too high. Letting rates go up means recession and political panic. A continuation of debt monetization limits the freedom of action of central banks when the next crisis arises and there will always be another crisis.

That is what most likely worries the more sober minded bankers. A decade of 4% inflation would be unpleasant politically, but not end times bad. A slow rise in interest rates would not collapse the world economy either, but it would usher in a long recession similar to the 1870’s, where asset values tumbled for a decade as the Second Industrial Revolution came to an end. The real danger is the unknown crisis that does threaten the foundations of the system and the central banks have no tools to face it.

That’s where the West is at the moment. Things are plodding along, but there’s nothing in reserve in case of a crisis. The US economy is stagnant at the moment, but if it falls into recession, there’s nothing the Fed can do about it. Negative rates are unlikely and probably not effective anyway. The Fed balance sheet is already bloated so further monetization is going to be hard. The financial system is a citadel whose walls need rebuilding, but no one has a clue as to how to go about do it.