Daily Wrap-Up

US House Approves $155 Billion Stimulus Bill: It’ll never stop. Not until it ends.


Boom Times for Big Government: Pat Buchanan asks, "Is this the government the Founding Fathers dreamed of — or is this the kind of government they took up arms against?"


Ex-Gov. Emerges as Next Ron Paul: “Former New Mexico Republican Gov. Gary Johnson is a teetotaling triathlete who looks the part of the laid-back Mountain West politician. But don’t let the jeans and black mock turtleneck he's sporting on his new website fool you: Johnson is starting to sound like a mad-as-hell populist with an eye cast on 2012 and the building fury aimed at Washington."


Church at the Crossroads: Luke "The Common Sense Atheist" has started a series on Christian pastor Jack Good and his book, The Dishonest Church. Jack writes: "Most church schools teach concepts of God that are, at best, appropriate for children...A silent pact often exists between the pastor and the congregation… in which certain difficult issues are to be left unmentioned." Luke pleads for church professionals to "tell your members the truth about the Bible, the Historical Jesus, and the mysteries about the nature of God." Part One is here. And Part Two is here.



I've also updated 2 essays...

The Cannibals of the Scientific Revolution

Groping Toward a New Spirituality

The Curious Case of Benjamin Bernanke

It’s been a great week if your name is “Ben Bernanke.”

On Wednesday, Time Magazine named you “2009: Person of the Year.”

As The Huffington Post reports…

TIME Managing Editor Rick Stengel appeared on the "Today" show Wednesday morning to reveal his magazine's selection for 2009's Person of the Year: Ben Bernanke.

"The winner is Ben Bernanke, Chairman of the Federal Reserve, the most powerful, least understood government force shaping our lives," Stengel said.

Stengel described the cover as a "throwback cover, like a Person of the Year cover from the '40s or '50s."

"He was the great scholar of the Depression, and basically he saw what looked like another Depression coming and he decided he would do whatever it takes to forestall that," Stengel said. "And basically he did."

Then today, The Senate Banking Committee voted to approve Bernanke's reappointment to a second four-year term as Fed chairman.

A Republican, Senator Judd Gregg of New Hampshire, offered a strong endorsement of the nominee. While “mistakes were made” under his purview, Mr. Gregg said, Mr. Bernanke’s swift reaction to the financial crisis had proved crucial. “I tell you, it worked,” he said. “It’s that simple.”

The circle jerk was interrupted, however, by The Wall Street Journal, which continues to cast a wary eye toward the Fed’s policies.

Gerald O’Driscoll writes…

Over the weekend, President Barack Obama went on the offensive against Wall Street for not lending more to Main Street. On CBS's "60 Minutes," the president declared, "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street”….

Wall Street fat cats are always a convenient political target, but bankers are responding to the incentives generated by the economic policies of the Treasury and the Federal Reserve. First and foremost is the Fed's policy of near-zero interest rates.

What this means is that banks can raise short-term money at very low interest rates and buy safe, 10-year Treasury bonds at around 3.5%. The Bernanke Fed has promised to maintain its policy for "an extended period." That translates into an extended opportunity for banks to engage in this interest-rate arbitrage.

Why would a banker take on traditional loans, which even in good times come with some risk of loss? In today's troubled times, only the best credits will be bankable. Meanwhile, financial institutions are happy to service their new, best customer: the U.S. Treasury. That play on the yield curve is open to banks of all sizes.

The Fed's policy makes sense if the goal is restoring bank profitability by generating cash flow. It is a terrible policy if the goal is fueling small business, the engine of economic growth and job creation. Large, nonfinancial corporations have access to banks. They can also tap the public credit markets and have access to internally generated funds. Not so for small business, which depends heavily on banks for credit...

Has recent experience taught the leaders of large financial institutions the need to curb their risk appetite? Not really. The lesson they have learned is that presidents of both parties, the Fed and Congress will come to their rescue when they get in trouble…

Mr. Obama may not have run for president in order to reward them, but that is the effect of his policies.

An Empire at Risk

Niall Ferguson is a British historian and the author of several renowned books, including Empire: The Rise and Demise of the British World Order and the Lessons for Global Power and The Ascent of Money: A Financial History of the World.

This week's edition of Newsweek features a cover story by Prof. Ferguson entitled, An Empire at Risk: We Won the Cold War and Weathered 9/11. But Now Economic Weakness is Endangering Our Global Power.

Some of the highlights are below...

Under the CBO's alternative (i.e., more pessimistic) fiscal scenario, the debt could hit 215 percent by 2039. That's right: more than double the annual output of the entire U.S. economy…

No sweat, reply the Keynesians. We can easily finance $1 trillion a year of new government debt. Just look at the way Japan's households and financial institutions funded the explosion of Japanese public debt (up to 200 percent of GDP) during the two "lost decades" of near-zero growth that began in 1990.

Unfortunately for this argument, the evidence to support it is lacking. American households were, in fact, net sellers of Treasuries in the second quarter of 2009, and on a massive scale…

That just leaves two potential buyers: the Federal Reserve, which bought the bulk of Treasuries issued in the second quarter; and foreigners, who bought $380 billion. Morgan Stanley's analysts have crunched the numbers and concluded that, in the year ending June 2010, there could be a shortfall in demand on the order of $598 billion—about a third of projected new issuance.

Of course, our friends in Beijing could ride to the rescue by increasing their already vast holdings of U.S. government debt…

Right now, the People's Republic of China holds about 13 percent of U.S. government bonds and notes in public hands. At the peak of this process of reserve accumulation, back in 2007, it was absorbing as much as 75 percent of monthly Treasury issuance…

The Chinese keep grumbling that they have far too many Treasuries already…

Now, who said the following? "My prediction is that politicians will eventually be tempted to resolve the [fiscal] crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar."

Seems pretty reasonable to me. The surprising thing is that this was none other than Paul Krugman, the high priest of Keynesianism, writing back in March 2003. A year and a half later he was comparing the U.S. deficit with Argentina's (at a time when it was 4.5 percent of GDP). Has the economic situation really changed so drastically that now the same Krugman believes it was "deficits that saved us," and wants to see an even larger deficit next year? Perhaps. But it might just be that the party in power has changed.

History strongly supports the proposition that major financial crises are followed by major fiscal crises. "On average," write Carmen Reinhart and Kenneth Rogoff in their new book, This Time Is Different, "government debt rises by 86 percent during the three years following a banking crisis." In the wake of these debt explosions, one of two things can happen: either a default, usually when the debt is in a foreign currency, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed, serial default and high inflation have tended to be the surest symptoms of imperial decline.

As the U.S. is unlikely to default on its debt, since it's all in dollars, the key question, therefore, is whether we are going to see the Fed "printing money"—buying newly minted Treasuries in exchange for even more newly minted greenbacks—followed by the familiar story of rising prices and declining real-debt burdens. It's a scenario many investors around the world fear. That is why they are selling dollars. That is why they are buying gold…

This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis... If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

The precedents are certainly there. Habsburg Spain defaulted on all or part of its debt 14 times between 1557 and 1696 and also succumbed to inflation due to a surfeit of New World silver. Prerevolutionary France was spending 62 percent of royal revenue on debt service by 1788. The Ottoman Empire went the same way: interest payments and amortization rose from 15 percent of the budget in 1860 to 50 percent in 1875. And don't forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.

Note: The photo above is of the Empire State Building, which went red on October 1 in honor of the 60th anniversary of China's Communist Revolution.

Time for a Third Party?

Mort Kondracke in yesterday's Roll Call...

With Republicans and Democrats fighting all the time and improving nothing, there's an opening for a third-party challenge as strong as Ross Perot's in 1992…

The likeliest figure to seize upon this opening is populist demagogue (and self-styled "Mr. Independent") Lou Dobbs, formerly of CNN, so let's hope a better alternative appears - or the direction of the country improves.

But, right now, the prospects are dismal. My favorite economic guru, David Smick, editor of International Economy magazine, summarized them in a speech last week at the Colony Club of New York, soon to be excerpted in Commentary magazine.

"Americans are worried," he said, "about a pending national fiscal nightmare that could doom the U.S. economy to slow growth and second-rate status. "They instinctively sense we may be becoming like Britain after the Second World War, quickly fading in relevance, our currency losing credibility, our industrial and entrepreneurial edge dulled, our people deeply frustrated"...

"Reducing unemployment to where it was before the [current] crisis may be impossible," he said. "So get ready for an American work force full of long-term anxiety - and anger."

Smick, once chief of staff to the late Rep. Jack Kemp (R-N.Y.) and a 1996 presidential campaign adviser to Democratic Sen. Bill Bradley (N.J.), added that the barely recovering economy is burdened by "a 300-pound backpack of personal and public debt."

"Within a decade," he said, "the U.S. will be borrowing $722 billion a year just to pay interest" on the national debt.

"We're about to enter a fiscal trap, chasing our tail just to pay off our creditors. That's the experience of Third World regimes. Their currencies lose all credibility. They suffer from high and crushing interest rates, ending up as wards of the International Monetary Fund."

Smick is an expert on all this. He's made a fortune as an international trader and he wrote a best-selling book, "The World Is Curved," on the dangers of the unregulated world financial system.

Both George W. Bush and Barack Obama ("George W. Obama") have made matters worse, he said.

"Both proposed huge new entitlements with no way of paying for them. Both are at a loss at understanding the means of creating new private sector employment opportunities...

"Both offered the big Wall Street banks an incredible $700 billion in taxpayer funding with no stipulation that the banks lend the money, which today they are not doing."

Federal Reserve Chairman Ben Bernanke, Smick says, is trying to keep the economy afloat by holding down interest rates - but all that means is that big banks borrow at zero, invest (often overseas) at 3 percent or 4 percent, make huge profits and refuse to lend to small U.S. businesses, which create 70 percent of new jobs… Smick agrees that the moment is ripe for a third-party candidate - "a problem-solving, no-nonsense leader who can come to Washington to clean out the swamp created by both political parties."

"We need to reignite America's fires of innovation, daring and confidence. If the current crowd in Washington lacks this vision, the American people, I can assure you, will find someone who has it"...

There is an opening. Help wanted.

Daily Wrap-Up

Going, Going...Galt: "Many people briefly go through an 'Ayn Rand phase' where they devour Anthem, The Fountainhead and Atlas Shrugged and dream of being a heroic architect standing athwart mediocrity. But government expansion in 2009 has touched off a remarkable revival of interest in Rand, spurring endless speculation that her philosophy of self-interest and free-market economics will come back in vogue. Writers point to a spate of Rand-themed releases, including two new biographies, uncountable articles, talk-show bits, merchandise, even a videogame. Here's a history…"


John Derbyshire Hearts Roissy: "I'm by no means the first to admit it, but I find the Roissy in DC blog hilarious and totally addictive. He's one of us, for sure (secular, Right); and his stone reductionism appeals to me enough to override the nagging feeling that I'm probably a bit of a herb myself, or was when it mattered."


John Derbyshire on the Death of Intellectual Protestantism: "So far as the great mass of American Protestants are concerned, theology is a dead letter. They are either “tribal Protestants,” going to church because their parents did, or because their neighbors do, or else they are Left Behind fundamentalists of the Huckabee persuasion, fundamentally anti-intellectual and indifferent to theology, or to any kind of intellectual inquiry...Intellectual Protestantism probably survives in a few seminaries somewhere, but nobody cares."


Chuck Ross Analyzes the "Vibe" on Different Blogs: "Todd White's site reminds me of the house of this Mormon kid I used to be best friends with. You go over there and his mom is always baking ginger bread cookies. They want to keep up the auspices of Pleasantville, but deep down, they just want to convert you. Those Mormons (and Todd White) are tenacious."


The U.S. Budget Deficit in International Context: "A few weeks ago, the International Monetary Fund released a report analyzing the fiscal situation of the world’s largest economies. As I discuss at greater length in a piece over at e21, the IMF finds that the United States is not alone in facing daunting fiscal challenges. For example, the IMF predicts that the United States will have the fifth highest structural primary budget deficit in 2010."

Quote of the Day

"If you look historically, every great republic has died over fiscal issues. That is the biggest moral issue of our time." - Senator Tom Coburn

Feelin' Bearish?

Yesterday, Martin Hutchinson at Prudentbear.com posted a negative (and pretty scary) forecast of the U.S. economy.

In his piece, Waiting for the Train-Wreck, Mr. Hutchinson wrote...

The rise in the gold price above $1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world's central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck...

The exceptional monetary stimulus entered into around the world during the financial crisis last year has prevented a downward liquidity spiral, but at the cost of destabilizing markets...With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now...

As was demonstrated by the housing bubble of 2004-06, modest rises in interest rates are not sufficient to stop a bubble once it is well under way. Given the Fed's recent track record, it is most unlikely that we will get any more than modest and very reluctant interest-rate rises...Hence the bubble will inexorably move to its denouement, at which point gold will probably be north of $3,000 an ounce and oil well north of $150 per barrel...

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble.

In the next downturn, the Fed will not be able to cut interest rates, because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the U.S. will become still more difficult to come by, and unemployment will approach 15%...

2011 and 2012 will be very unpleasant years, as the Obama administration struggles to get closer to budget balance without pushing up taxes so far as to cause yet a third recession. Stock prices will be at or below their March 2009 lows, and will stay there even as earnings of export-oriented companies will be robust...Foreign goods and services will be inordinately expensive in dollar terms.

The danger in those years will be that Ben Bernanke will attempt yet again to refloat the U.S. economy through inflation, buying government debt to fund the deficit and forcing short term rates well below the inflation rate. This danger is exacerbated by the Obama administration's insouciance about deficits. Ben Bernanke on his own (and his predecessor Alan Greenspan) bears a large share of responsibility for the 2008 crash, but the Bernanke/Obama combination is potentially even more dangerous. If expansionary monetary and fiscal policies are pursued regardless of market signals, the U.S. will head towards Weimar-style trillion-percent inflation. That would make the government's position easier as its mountain of Treasury debt became worthless, but devastate everybody else's savings and impoverish the American people as Weimar impoverished 1920s Germany.

As I said, a train wreck. Probability of arrival: close to 100%. Time of arrival: around the end of 2010, or possibly a bit earlier. And at this stage, there's very little anyone can do about it...

Yeesh.

Daily Wrap-Up

It is Japan We Should Be Worrying About, Not America: "Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return."


Four Reasons Hyperinflation Hasn’t Hit the US... Yet: "Everything we know about classic economic theory suggests the US economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the US Federal Reserve has pumped into the system....But we’re not... yet...So what gives?...Well, there are four reasons we haven’t yet seen hyperinflation..."


We Have Failed to Learn From the Death of Communism in 1989: "Properly speaking, capitalism is not a system at all (which is why most of its supporters prefer the term "free market economics"): it is just the human condition in economic form...If we had dared to look long enough at the events that followed 1989, as have many of those Eastern European countries which lived through them – if we had produced the plays and films and television documentaries and school texts that they had actually deserved – we might now have a fuller appreciation of the terror that follows from the need to extirpate individualistic impulses."


Chief Rabbi Lord Sacks: Islam Must Separate Religion From Power: "The Chief Rabbi, Lord Sacks of Aldgate, warned today that Europe was dying because the growth of secularism had made people too selfish to have children. Its loss of a tolerant religious culture made it vulnerable to the advance of fundamentalism, he argued." H/T: Darwiniana


Disaster for All Humanity, With One Exception: "In his global disaster movie 2012, which is premiering next week, director Roland Emmerich portrays the destruction of many secular and religious monuments--with one exception, the Kaaba. He was afraid that if his movie showed Los Angeles being destroyed, and showed Rome and St. Peters being destroyed, but also showed the Kaaba being destroyed, Muslims would be so outraged they would put out a fatwa on his head.”

Demise of the Dollar, Part 2

Note: What does the dollar have to do with The Mustard Seed? See, for starters, my 2 essays, Will the Economic Crisis Inflame the Culture Wars or End Them? and The Wiley E. Coyote Economy.


In today's Wall Street Journal, Professor Allan Meltzer, who authored the multi-volume A History of the Federal Reserve, pens a great column warning about the demise of the dollar.

The United States is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.

As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the "exorbitant privilege" of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.

Worse, banks' idle reserves that are available for lending reached $1 trillion last week. Federal Reserve Chairman Ben Bernanke said repeatedly in the past that excess reserves would run down when banks and other financial companies repaid their heavy short-term borrowing to the Fed. The borrowing has been repaid but idle reserves have increased. Once banks begin to expand loans or finance even more of the massive deficits, money growth will rise rapidly and the dollar will sink to new lows. Do we have to wait for a crisis before we replace promises with effective restraint?...

It is far better to begin containing the problem before we blow a hole in the dollar and start another downturn…

We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. Except for a few years in the 1990s, both parties have been at fault for decades, and the Obama administration is one of the worst offenders. Its $780 billion stimulus bill, enacted earlier this year, has been wasteful and ineffective…

High inflation is unlikely in 2010. That's why a program beginning now should start to lower excess reserves gradually so that the Fed will not have to make its usual big shift from excessive ease to severe contraction that causes a major downturn in the economy.

**UPDATE, OCT. 23, 2009**


Gillian Tett had an insightful piece in yesterday's Financial Times: Rally Fueled by Cheap Money Brings a Sense of Foreboding...

“Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?...”

Six months ago, the financial system was in deep distress, reeling from a meltdown. Now despair and panic have been replaced not simply by relief – but, in some quarters, euphoria…

No doubt many brokers would like to attribute this to fundamentals. After all, last year’s crash in asset prices was so extreme that some rebound was almost inevitable…

Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying – even as non-risky assets such as Treasuries bounce too.

Now, some western policymakers like to argue – or hope – that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals. After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the “real” economy.

On this interpretation, the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood…

After all, much of the current economic rebound seems to reflect stimulus packages (and flattering year-on-year comparisons) that will end next year. And while there are still plenty of firelighters around – in the form of monetary stimulus and ultra low market rates – there seems to be a good chance of a future interest rate shock as central banks implement their exit strategies…

In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.

Demise of the Dollar?

On today's radio program, Glenn Beck put recent economic news into perspective...

Back in the 1970s we decided… “We don't have to build anything. We'll be the world's consumer…We'll be the bankers of the world.”

Being the bankers of the world doesn't work out when you're in a…society [where]… you have to define the word "Is”…Nobody wants that banker…

There's plenty of smarts in America. There are not enough people with credibility and honesty and integrity, somebody that understands ethics. So we became the world's banker with no ethics. And then about four years ago we went over to China and we lectured China and the rest of the world, "You've got to adopt our system. You just don't know what you're doing." And we lectured them on how to do finances. How's that working out for you? So now the rest of the world is saying, wait a minute, okay, they lied to us when they said they would be on the gold standard and then Nixon convinced them, no, no, no, we'll be the consumer…And so we got off the gold standard and we said, "But we'll never trash the dollar" because it affects them. So what happened? We trashed the dollar. But as we were trashing the dollar we said, yeah, but the rest of the world will need us because we're the world's financial center. And then we trashed that image. So now our dollar is falling because we're borrowing too much money. See, the dollar bill, if you have one in your pocket, pull it out. Look at it. That's a stock certificate. That's what that is. Think of it as a stock certificate. It's a share, a $1 share in America. Well, just like any other company, when the company's health starts to look bad, people sell their shares. That's what China is doing by spending it. They were holding it, but they no longer think it's going to have a long term growth…

We used to be GM, 1940. We're now GM 2009. People don't want their stock anymore. But because they hold so much of it, they don't want to just dump it. Because if somebody dumps it, then everybody is selling, and you can't get it sold. If somebody like China comes in and just tries to dump all of their stock or if somebody who holds a huge amount of our stock, our shares, our money, our dollars and they just go into the open market and they dump it quickly, the price would just cave because there would be too much. It works just like the stock market and so your dollar loses value. Already in the last [seven years*] by what we have done to our country… every single dollar you hold has lost 20 to 30 cents…And it hasn't even begun yet…

Right now we're blowing blue smoke all across the highway. Our engine is about to fail. The question is, does America pull herself off to the side of the road, take the engine out and redo it, or do we just keep driving and maybe end up in the middle of absolutely nowhere where we are miles away from any kind of tools?

I think we all know the answer to that.

Note: *The radio transcript says, "six months," but on his TV show, Beck said, "seven years." I think the latter is correct.

Banks Brace for Latvia's Collapse

The media is full of great news today!

First, The Independent reported that China, Russia, and the Arab states are planning to quit the dollar for oil trading (which would be a huge blow to U.S. economic hegemony). Now The Telegraph is jumping into the fray with another scary headline, Banks Brace for Latvia's Collapse.

See below for highlights...

The Svenska Dagbladet newspaper said Sweden's finance minister Anders Borg had told banks secretly that Latvia's political order was unravelling, advising them to prepare for the collapse of Latvia's rescue talks.

Latvia has failed to deliver draconian spending cuts agreed to secure the next tranche of its €7.5bn (£6.85bn) bail-out from the EU, the International Monetary Fund, and Sweden, balking at 20pc cuts in pensions and a further 15pc cut in public wages.

The People's Party, the largest group in the coalition, voted against austerity measures last month, raising concerns that the country is ungovernable…

Latvia's economy contracted by 18.2pc in the twelve months to June, trumped only by Lithuania at 20.4pc… Youth unemployment in Latvia is already 31pc, and concentrated among ethnic Russians…

Latvia is "more likely than not" to devalue, toppling pegs in Estonia and Lithuania. "Financial markets elsewhere in the region are likely to be hit by contagion, with Hungary, Romania, and Ukraine most vulnerable"…

The Baltic trio financed property booms in euros (and swiss francs) because rates were lower. It was taken for granted that eventual euro entry had eliminated the exchange risk. This has become a trap. They need to devalue to break the cycle of depression, but cannot do so because of euro mortgages. Instead they hope to claw back lost competitiveness through wage deflation. This takes years, and discipline.

Mr. Shearing said Latvia's economy would shrink by 30pc whether it devalues or not.

The Wiley E. Coyote Economy

We have huge news on the economic front today...

In my darker moments, I've called the U.S. economy the "Wiley E. Coyote Economy" because even though the stock market is up almost 50% over the last 7 months, the U.S. economy is so burdened by debt and so crippled by government regulation that recovery won't come for another 5-10 years, if ever.

Back in January, when President Obama was inaugurated, I speculated about how world events would unfold during Obama's first-term, and - just as a pure, hypothetical guess - I predicted that during his tenure, OPEC would go off the dollar (which would spark a new bout of economic chaos).

Well guess what? In today's Independent, Robert Fisk writes...

In the most profound financial change in recent Middle East history, Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

..

The Americans, who are aware the meetings have taken place - although they have not discovered the details - are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

...

The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power - along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system - which has prompted the latest discussions involving the Gulf states.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

China imports 60 per cent of its oil, much of it from the Middle East and Russia.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

...Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East...

Ever since the Bretton Woods agreements - the accords after the Second World War which bequeathed the architecture for the modern international financial system - America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

..

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried...

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

This is huge, huge news - even though the mainstream media is basically ignoring it. If the international powers go ahead with their decision to de-link from the dollar (as today's report indicates), it will be a massive vote of "no-confidence" in the U.S. economy.

For over 200 years (and especially over the last 25 years), foreign investors have flocked to American shores because our country was the most profitable game in town. But the Crash of '08 showed that the U.S. economy has morphed into a Giant Ponzi Scam, and despite the nice diplomatic talk of the last year, it was inevitable that China, Russia, Japan, and the OPEC nations (the countries that - you know - actually produce stuff - whether it's oil, natural gas, or manufactured goods) would take their money elsewhere. Thus, The Demise of The Dollar.

Of course, the oil-producing states are denying the report. But while their denials ring on deaf ears, the United Nations itself is calling for a new global reserve currency.

According to today's Breitbart...

"Important progress in managing imbalances can be made by reducing the reserve currency country's 'privilege' to run external deficits in order to provide international liquidity," UN undersecretary-general for economic and social affairs, Sha Zukang, said.

Just to clarify: The country with the "privilege" is the United States.

More to come.

-Todd

Read more at: http://www.huffingtonpost.com/2009/10/06/arab-states-have-launched_n_310826.html

Will Western Civilization End in Your Lifetime? Yes, Probably

Over at Seasons of Tumult and Change, Talleyrand and his pals are speculating about the "fall of Western civilization." Will it happen? Yep, that's the consensus. When? Perhaps quite soon.

Tal lists "24 reasons given for why the Roman Empire fell," and claims America has achieved 21 of them. Yep, 21 out of 24. He writes: "The betting pool for when the West collapses into chaos begins now. Only gold please, no fiat cigarette rolling paper."

I've been very leery of making predictions.

Back in April, I wrote...

I make no predictions. I can only state a single truth: "Ideas have consequences"...

If the day should come when a critical mass of Americans believe… 1) We are nothing more than hairless apes, and 2) Free will is an illusion...Then it’s hard to see how freedom can survive more than another 1-2 generations...unless, of course, there's some sort of intellectual renaissance.

The next month, when writing about the economic crisis, I declared...

We might be on the verge of an economic/social paradigm shift not seen since the 1930's!

Should we be concerned? Absolutely. From the perspective of a typical American, it's one thing to be out of a job for a while with the understanding that prosperity is "right 'round the corner." It's quite another thing when our economic system is shaken to its very core and our our standard of living is thrown into doubt. Right now, I would wager that we are between those 2 perspectives, but over the next 1-3 years, we may solidly be in the 2nd perspective...

We may be on the cusp of a total revolution in America's political, economic, and moral order. Or...then again...maybe not.

I've been coy in the past, but I'll be more blunt today:

As I commented on Talleyrand's site...

Yes, if I was a betting man, I would bet on the collapse of the West in my lifetime. But it’s far from guaranteed. And it will almost certainly be a gradual process – with some brief recoveries in between.

Why the pessimism?

First let me set the context: The mystery isn't why the West will collapse ("all good things must come an end"). No, the mystery is how the West was able to last as long as it did!

Think about it: For thousands of years of human history, life all across the world life was - to quote Hobbes - "nasty, brutish, and short." Then, in one small region of the world in one brief window of time, a civilization emerged in which people (on average) lived for 75+ years in excellent health, enjoyed an economic quality of life unimaginable to their ancestors, experienced freedom from tyranny and violence, and entertained nearly limitless opportunities for creativity and self-expression.

This civilization (first blossoming in the US, Great Britain, France, and Holland in the 18th century, spreading to most of Western Europe by the late 19th century, and spreading even into remote corners like Latin America by late 20th century) was no accident. And it was not inevitable. It was a coming together of a religion and a philosophy.

As I wrote in January...

I've never felt comfortable when politicians describe America as a "Judeo-Christian country" or reaffirm the need to preserve our "Judeo-Christian values"...It defines our country, our values, and our heritage through religion alone.

About a year ago, I coined the term "Christian-Enlightenment" because it combines the religion of the West (Christianity) with the ground-breaking Enlightenment ideas (freedom, reason, the Scientific Method, etc.) that enabled the West to dominate the world.

Ethiopia is a "Judeo-Christian" country, but it's one of the worst countries on Earth because it doesn't have the Enlightenment heritage of Europe and the United States.

The West is a product of the "Christian-Enlightenment." The "Christian Enlightenment" unlocked the "genius of man" - the genius of the rational man - unencumbered by religious superstition or political oppression. But how many people in the West realize that? Not many. And therein lies our problem. How can we preserve Western civilization when so few of us understand it?

Thankfully, the Founding Fathers understood it. They were the product of "The Age of Reason." They created the institutions and customs to preserve it. And when the European intellectuals started abandoning Reason in the mid-19th Century (and totally gave up on it by the end of World War One), only the U.S. was able to stop the descent into the abyss.

Why? Because of the Founders. They created the framework for the U.S. to become an economic superpower - and that economic power - in time - became military power - unprecedented military power.

When Europe started obeying the Second Law of Political Dynamics ("everything turns to shit") - abandoning reason and embracing a pair of horrific mysticisms - only the U.S. could, and did, save them.

When the Nazis conquered Europe, only the U.S. could, and did, save them. France surrendered with barely a fight. Great Britain had the resources to resist invasion, but not to roll back the Nazi Empire. Only the U.S. could do it. And years later, only the U.S. - for the same reasons - could resist Communism when that other irrational ideology consumed one-third of the world, and threatened to overrun the other two-thirds.

Since 2001, the U.S. has been experiencing a major economic decline - although it was able to mask that decline for 7 years by borrowing from China and other hostile foreign powers to finance a consumer binge at home while also undertaking a modern-day illogical "White Man's Burden" in Iraq and Afghanistan. To achieve those goals, this year, the federal government will run a $1.8 trillion deficit. And over the next 10 years, the U.S. debt is expected to double to almost $20 trillion. We are broke. So, so broke.

As we saw during the Great Depression, the world doesn't react well to sustained economic downturns (the rise of Nazi Germany, Soviet Russia, World War Two, etc). Thus, we're in for a rough 5-10 years, to say the least. Can we stop the decline? Can we reverse it?

I'd say "no."


To quote Charles Murray...

What's happening? Call it the Europe syndrome. Last April I had occasion to speak in Zurich, where I made some of these same points. After the speech, a few of the twenty-something members of the audience approached and said plainly that the phrase "a life well-lived" did not have meaning for them. They were having a great time with their current sex partner and new BMW and the vacation home in Majorca, and saw no voids in their lives that needed filling.

And how do we reverse this "Europe Syndrome?" According to Mr. Murray, we need a "political Great Awakening among America's elites."

When I say that something akin to a political Great Awakening is required among America's elites, what I mean is that America's elites have to ask themselves how much they really do value what has made America exceptional, and what they are willing to do to preserve it.

Indeed. But later on, Mr. Murray claims that Reductionist science will save the West. Seriously! as I pointed out in my essay...

In his acceptance speech, Mr. Murray correctly diagnoses the "bag of chemicals" philosophy as the source of the "Europe Syndrome," but he doesn't recognize that the syndrome can't be defeated by only treating the symptoms (in this case, rolling back the welfare state). The syndrome itself (reductionism) must be treated, as well. In some of the best unintentional comedy ever found in a political speech, Mr. Murray thinks reductionist science will help advance the conservative movement and facilitate the "happiness of the people!" Ha!

Ah yes, Reductionism. I won't do here another full-scale dissection of Reductionism here. Let's just accept that it exists and it's quite powerful. M'kay? M'kay.

As I wrote to Talleyrand on Sep. 3...

Today, Reductionist premises are ubiquitous through our public schools, universities, mass media, popular culture, legal system, and political system…Indeed, probably the only institution in modern society that hasn’t been infected is organized religion…Thank God for that, I guess.

I am 29. I assume you’re around my age. If that’s the case, we are only the second generation to be heavily exposed to Reductionist thinking (with very little resistance from organized religion, in most cases). The first generation was lucky. They lived off the fumes of an earlier Christian/Enlightenment culture. Today, those of us who are under 30 are living off the FUMES OF FUMES.

Again, at the risk of sounding over-dramatic, our generation will either be the one that begins an Intellectual/Spiritual Renaissance, or we will be the first generation in American history to know the twin evils of anarchy and tyranny.

Yes. The Elites are Reductionists. And the Christian Fundies are morons. Thus, it's almost irrelevant whether the Reductionist Party (the Democrats) or the Fundie Party (the Republicans) holds power. Both of them are actively undermining the vision of the Founding Fathers. They are destroying reason in place of mysticism.

As I wrote to Talleyrand in a separate post....

A "rational civilization" needs only 2 things...

1) A citizenry that believes in the power of reason - i.e., that people have the intellectual and moral capacity to live their own lives with a minimum of outside coercion (coercion from a government agency or a religious body or whatever), and

2) A government that operates in a way that enables its "rational citizens" to flourish (i.e, a government of limited powers that can maintain law and order).

By those standards, which civilizations are "rational?" Not many. The United States, Israel, and the Anglosphere (Britain, Canada, Australia, New Zealand). Maybe one or two others.

And obviously, all of those countries are in danger today, because the idea that reason is good for humanity - indeed, the very CONCEPT that reason even exists - is under attack.

Actually, reason - at least as a political matter - is already gone. In retrospect, history will probably the record the year 2008 as the year that the American people lost control of their government. If that's true, the collapse of the West is already "baked in."



When both the GOP and the Democrats ganged up on the taxpayers to bail out Wall Street crooks to the tune of $700 billion (actually a lot more than that) and destroyed the ethos of the capitalist system and the spirit of the American Dream ("if you work hard and play by the rules, you'll do OK) - and did it despite unprecedented voter opposition - then we knew "something was rotten in the state of Denmark.

Today, we've reached a state of "demoschlerosis" that can't be resolved through constitutional means. When that bill was signed into law - the vision of the Founding Fathers and the American Republic - was given its lethal injection.

The Reductionists grow in power. And the Christian Fundies - while still powerful in many ways - refuse to learn and grow up. As for the rest of us? We sit and stew. And write. But we haven't reached a critical mass. I've entertained hopes for an "Intellectual Renaissance." And I still do. But now I'm starting to move those hopes to AFTER the collapse, not BEFORE the collapse, and thus avoiding the need for a collapse altogether.




So what does the future hold?

I’ll bounce this idea as pure speculation (not a prediction):

The world in 2050…

The US as a violent, economically-sluggish tyranny (think Cold War-era Latin America), China as the world’s economic superpower, but still a tyranny (in some ways, even more oppressive than today), Europe in a state of civil war (think 90s-era Yugoslavia), the Arab World in Stone Age conditions (with China controlling the oil-producing regions by force), Australia as a rising democracy (with large numbers of refugees from Europe and the US), Japan as a vassal state of China, India still growing peacefully (but behind China), Latin America dysfunctional (just like today) and Africa horrific (just like today).

Thoughts?

An Opening Shot?

I've speculated (in my more pessimistic moments) that - with the "Great Recession" continuing to deepen - we would start see high-ranking members of "The Elite" vocally losing faith in democracy and advocating (gently) the end of representative government in America.

If that's the case, Thomas Friedman's newest column might be an opening shot...

"There is only one thing worse than one-party autocracy, and that is one-party democracy, which is what we have in America today."

A party-autocracy...like...China???

Yep, Friedman says it.

And why are things better in China?

Because the current "reasonably enlightened group of people" in charge of China, at the moment, can just impose "politically difficult but critically important policies" like raising gas prices to encourage clean power investment and so on.

Yep, that's fine, Mr. Friedman.

One-party autocracy? Check.

A Global CO2 Budget for Every Man, Woman and Child? Something to consider.

Just don't forget to bring back the "punisher God!"

-Todd


**UPDATE, SEP. 9, 2009**

A few musings from The Corner...

Jonah Goldberg: “I cannot begin to tell you how this is exactly the argument that was made by American fans of Mussolini in the 1920s. It is exactly the argument that was made in defense of Stalin and Lenin before him (it's the argument that idiotic, dictator-envying leftists make in defense of Castro and Chavez today). It was the argument made by George Bernard Shaw who yearned for a strong progressive autocracy under a Mussolini, a Hitler or a Stalin (he wasn't picky in this regard). This is the argument for an "economic dictatorship" pushed by Stuart Chase and the New Dealers. It's the dream of Herbert Croly and a great many of the Progressives.”

Mark Steyn: The technocratic argument — that there are no legitimate philosophical or policy differences, merely correct solutions that all experts agree on and that democratic politics merely obstructs — has been used to justify totalitarian regimes from Germany and Italy to the rinky-dinkiest post-colonial African basket-case backwater [TW note: This is consistent with my theory that modern liberalism is a product of relativism. See my essay, From Rorty to Obama to Beyond].

But what's even weirder about Friedman's valentine to the Politburo is that on his big bugbear — "climate change" — the Chinese have explicitly rejected the cap-&-trade/emissions reduction regime he urges upon us. Having no public opinion or Friedmanite media to worry about at home, the ChiComs told the "international community" to go take a hike.

Dan Blumenthal at the EB (via Goldberg):

Just in the past few months Tom Friedman’s “reasonably enlightened group” of Chinese dictators has jailed blogger Wu Baoqun for posting information that the government forced Chinese peasants to sell their land at extremely low prices, so that the Communist Party could auction that land off for a hefty profit.

But complaining about government expropriations from peasants is not all the CCP has been up to. Let’s take one of Mr. Friedman’s pet issues, the environment. His favorite enlightened despots have sent Sun Xiaodi , a Gansu environmental activist and recipient of the 2006 Nuclear-Free Future Award and his daughter Sun Haiyan, to re-education-through-labor camps for exposing official corruption and nuclear waste pollution in Gansu Province. Likewise, the CCP has sent activists Wu Lihong and Tang Zhirong to jail for for complaining about industrial pollution.

It appears that for the enlightened dictatorship that rules China, one is free to build electric cars and solar panels, particularly if these products can make a hefty profit for the CCP and businessmen connected to the Party. An added bonus for Chinese producers of alternative energy is positive press in the New York Times. But if you are just an ordinary Joe (or Zhou) seeking some recourse against industrial pollution and hazardous waste, jail time is the most likely outcome.

More Goldberg: The best example of greens growing weary of democracy I know of is the book The Climate Change Challenge and the Failure of Democracy.

From the publisher's book page: Having argued that democracy has failed humanity, the authors go even further and demonstrate that this failure can easily lead to authoritarianism without our even noticing. Even more provocatively, they assert that there is merit in preparing for this eventuality if we want to survive climate change…

The authors conclude that an authoritarian form of government is necessary, but this will be governance by experts and not by those who seek power.

And here's one of the co-authors:

The savvy Chinese rulers may be first out of the blocks to assuage greenhouse emissions and they will succeed by delivering orders. They will recognize that the alternative is famine and social disorder

Let us contrast this with the indecisiveness of the democracies which together produce approximately the other half of the world’s greenhouse emissions. It is perhaps reasonable to ask the reader a question. Taking into account the performance of the democracies in the reduction of emissions over the past decade, do you feel that the democracies are able and willing to reduce their emissions by 60-80 per cent this century or perhaps more importantly by approximately 10 per cent each decade?

If you say “yes” then you fly in the face of a track record of persistent failure in a wide range of environmental management.

Kenneth Anderson, The Volokh Conspiracy...

There is the dismaying whiff here of the 1930s and the loss of faith in those years by political elites and the chattering classes in the future of parliamentary democracy as measured against the robust and healthy decision-making processes of those, uh, non-parliamentary systems.