The phrase ‘a truth-speaking politician’ is an oxymoron. Why?

Successful politicians, it seems, almost always lie to the electorate whose votes they seek. They almost always tell the voters what is is they want to hear, not what they intend to deliver. They tell different voter groups different tales, according to the known profiles of those groups. They lie seemingly without conscience. They change direction once in office without remorse or explanation. I speak here of those who are successful. So, if my hypothesis is correct, lying is an essential ingredient of political success.

In other areas of life and endeavor, such is much more rarely the case. Surely it is true for successful gigolos, who lie to women successfully to dispossess them of their virtue and of their assets. But gigolos are utterly despised by the large majority of women whose common-sense overcomes their superficial sensibilities. In the big picture of human relationships, gigolos do not dominate.

It is true of snake-oil salesmen who dispossess households of their savings by racking up lies about the properties of the commodities in which they deal. Once again, however,  successful snake-oil salesmen constitute a tiny minority of the  overall market-place. They survive by being fleet of foot, moving from community to community fractionally ahead of dawning realizations about what kinds of lying rogues they truly are.

It is true of a minority of religious frauds – the Elmer Gantry’s of that market-place. Once again, however, the large majority of those who market religion are hard-working true believers who honestly sell an albeit irrational product to those who search for such irrationality.

Successful politicians, however, are fundamentally different.  They lie without shame and win election after election on a continuing flood of such lies. Seemingly unfazed voters swallow lie after lie, bewitched by their honeyed words, their tanned faces, their false smiles, their rolled-up sleeves, and their ever -outstretched hands. In the United States, incumbent success rates rival those of the old USSR.

So what is the matter with voters folks?  That is the question that I pose today. That is the question that I shall attempt to answer in forthcoming columns. Does something bad happen to the brains of an individual when he moves from the private market-place to the public arena. Is stupidity a function of in which market-place one  stands, rather than of who one is?

Your views and comments on this issue are really welcome. For we are confronting a problem of immense significance in attempting to understand the seemingly bizarre behavior of otherwise sensible individuals when they congregate in  the public square to imbibe the words of false prophets.

The public choice case against the euro bond

European stock markets have been falling recently over fears of a Greek exit from the euro zone.  Yet Germany’s borrowing costs inexorably decline.  This week Berlin sold two year bonds that pay no interest. Compare that to Italy’s two-years yielding 3.5 per cent, Spain’s 4 per cent and Portugal’s 9 per cent.  So, it is not surprising that the idea of issuing eurobonds is currently topical within the euro zone (Germany excepted):

The argument is this: While some euro-zone countries have huge fiscal problems that have strained their borrowing costs, the picture for the euro zone in aggregate is much better.  The euro zone’s total budget deficit was 4.1% of GDP in 2011, while total government debt equaled 87.2% of GDP.  If the euro zone were a country, those numbers would compare favorably to the U.S., where the deficit was 8.7%  of GDP last year and total debt has already hit 100% of GDP.  Yet the U.S. can still borrow at rates much closer to Germany’s than to Italy’s.  So the idea is to pool the borrowing, lower the rates, and everyone comes out a winner.” Editorial, ‘Deus ex Eurobonds’, The Wall Street Journal, May 25, 2012

In truth, the euro bonds idea is a singularly bad one and every country in the euro zone would not emerge a winner from such an innovation. Germany would be a sure loser.

When the U.S. Congress narrowly approved Alexander Hamilton’s 1790 proposal for the federal government to assume the war debts of the original 13 colonies, the commitment extended only to the legacy war debts, run up arguably in the interest of the country as a whole. Individual states were held fully responsible for all future debts.  In consequence some states went on to over-borrow and fell into bankruptcy. Fiscal discipline still lies with each state in the union.

In contrast, euro bonds would extend to the future debts of each euro zone country. The legacy debts have been run up, not for the benefit of the euro zone as a whole, but to pander to the profligate electorates of each member country.  Undoubtedly, the introduction of euro bonds would weaken the incentives of politicians and electorates in individual euro zone countries to balance their fiscal budgets.  Angela Merkel justifiably will be voted out of office should she burden German taxpayers with the costs of high-rolling among the PIIGS.

In other words, it’s at least as likely that a debt union would drag Germany’s borrowing costs up as it would bring Italy’s down – a possibility of which the Germans are acutely aware.  Investors lend to governments because that’s where the money is, to borrow a phrase.  A debt union without a central fisc is another euro-mirage.” Editorial, ‘Deus ex Eurobonds’, ibid.

Secret Service Director, Mark Sullivan, lies under oath

If Mark Sullivan was an honorable man, he would have resigned immediately following the disgraceful sexual misbehavior of  twelve Secret Service agents in Columbia in April 2012. If Mark Sullivan was an effective director of the Secret Service, the sexual license in Columbia would not have occurred. Unfortunately, if Mark Sullivan were honorable and effective he would never have been appointed to the directorship of a deeply corrupt agency of the United States Government. 

Circuses require ringmasters.  Mark Sullivan is Director of the Secret Service because he is a popular ringmaster, bonded deeply into the culture of sexual promiscuity promoted within the agency. “Wheels up and rings off” is the motto that vaulted Mark Sullivan into the directorship of a Secret Service sexual circus run entirely off taxpayer dollars.

If Mark Sullivan was an honest man, he would have acknowledged the widespread cultural depravity of his agency yesterday before the Senate Homeland Security and Governmental Affairs Committee. Instead, he chose to perjure himself under oath in order to insulate his debauched colleagues while protecting his own well-padded government paycheck. Fortunately, his blatant lies fell largely on skeptical Senatorial ears.

“Over the last six years, we’ve done 37,000 trips around the world, and we’ve had no situation like this one before.”  (Mark Sullivan)

“These individuals did some really dumb things.  I’m hoping I can convince you that it isn’t a cultural issue.” (Mark Sullivan)

“It is hard for many people to believe that on one night in April 2012 in Columbia, 12 Secret Service agents there to protect the president suddenly and simultaneously did something other agents had never done before.”  (Senator Joe Lieberman, Connecticut, Independent)

“I’m a little bit confused as to why we would be sending a $150,000 person, another person, to basically babysit people that you say this hasn’t happened to before.”  (Senator Scott B. Brown, Massachusetts, Republican) 

“This isn’t Animal House.  The mission of the Secret Service is too important to the nation for its agents to engage in risky behavior.” Senator Joe Lieberman, Connecticut, Independent)

“If we ignore or downplay what happened here, it can be like cancer.”  (Senator Susan Collins, Maine, Republican)

“If Sullivan doesn’t change his tune, it won’t be long before his superiors conclude that he is the disease.”  Dana Milbank, Cirque du So Lame, The Washington Post, May 24, 2012

Eagles are worth more than owls in euroland

Gresham’s Law – bad money drives out good – dates from an era of metallic currency. Debased coins circulated while genuine coins were hoarded.  Gresham’s Law now applies to a single currency – the euro – where some euros are deemed to be more valuable than others.

“When countries joined the single currency, a relatively simple piece of legislation converted contracts into euros at a prescribed exchange rate.  But you cannot simply reverse that process when countries leave the single currency.  You have to prescribe which contracts are now to be fulfilled in drachmas and which remain in euros, or converted into Deutschmarks.  That determination is politically fraught, technically complex and subject to long legal challenges.” John Kay, ‘All euros are equal but some are more equal than others’, Financial Times, May 23, 2012

The issue is not whether the euro coins in one’s pocket carry an Athenian owl or a German eagle.  The issue goes to bank deposits and loans, residential mortgages and commercial contracts, as well as to wages and prices.  The drain of funds from Greek banks is an indication that ordinary people are now thinking in these terms. Instinctively, they understand the nature of Gresham’s Law.

Awaredness of Gresham’a Law is why a Greek exit from the eurozone presents an existential threat to the zone itself.  Once a path to exit has been defined, households and businessness will have a template for understanding the consequences of any further unwinding: cheap money always drives out dear money, if they exchange for the same price.

In the current eurozone context, German and Finnish euros are worth more than Greek, Spanish, Irish, Portuguese and Italian euros. For the former carry only upside risk whereas the latter carry only the risk of loss. Once the Greek template clarifies the magnitude of this differential, Gresham’s Law will follow with a vengeance:

Since there is potentially no limit to the willingness of the private sector to exchange weak euros for strong, the only limit to the process is the patience of German and Finnish taxpayers. So check whether the euros you hold are eagles or owls before others do.” John Kay, ibid.

Germany’s generosity to Greece meets with ill grace

The prospect that Greece will default on its national debt is not really news. The Greeks are a profligate race.  Indeed, since Greece gained its independence from the Ottoman Empire in 1832, the country has been restructuring  or defaulting on its debt for some 90 of the ensuing 180 years. 

The news, this time, is that Germany is willing to bail them out. The yet more momentous news is that Germany is bailing them out despite the open contempt with which bailout monies have been received.  Greek newspapers are openly labeling their generous benefactors as Nazis, as they eagerly pocket German taxpayers’ hard-earned donations and continue with their deficit-fueled lifestyles.

“Germany was an organizer of and is by far the largest contributor to the European Financial Stability Facility, which totals a staggering 726 billion euros ($924 billion).  That number will rise and, when combined with earlier funds and loans, Germany’s share will easily exceed the country’s total annual federal tax revenues.  Imagine the U.S. being willing to guarantee more than $2 trillion to bail out Mexico.” Fareed Zakaria, ‘Time to say Danke’, Time, May 28, 2012

Of course, Germans are anxious not to flush euros down Greek sewers, so they require austerity and reform guarantees in return for their largess. There can be no doubt whatsoever that Greece needs good doses of both.  Not only is Greece teetering right on the edge of unsustainable budget deficits. It is ranked 126th (out of 142 nations) in flexibility of hiring and firing and 140th in terms of the burden of government regulation.  Tax collection is almost non-existent and corruption is rampant.

If the next Greek government determines to flout the austerity and reform package that it approved in February 2012, no one should blame the Germans if they pull the plug on Greek bailouts. Greeks should not then bemoan their fate as the realities of life weigh down on the Greek economy:

“Greece might yet have to default and quit the euro zone.  Its competitiveness problem is simply too great and its political leadership too weak.  But if it goes down this path, Greece will find that the markets will refuse to lend it money at reasonable rates unless it does pretty much the same thing Germany is asking it to do.  Life without Germany will mean a lot more austerity than life with Germany.” Fareed Zakaria, ibid.

The 2012 US presidential election farce

So far I have not commented on the 2012 US presidential election campaigns of Barack Obama and Mitt Romney. The reason for my silence is that neither candidate, so far, is addressing effectively the key economic issues that confront the United States economy. Instead, both Obama and Romney – most especially Obama – insult the intelligence of the electorate by talking with a profundity that one might expect late on Saturday night in an Irish bar.

The United States economy currently is in a shocking condition. Unemployment, correctly measured, stagnates in the mid- teens, the rate of economic growth for an economy emerging from a recession is anaemic, the level of federal debt as a ratio to gross domestic product is dangerously high, and  the federal budget spills red ink as far as the eye can see.  Whichever of the two candidates accesses the White House in November 2012, these are the issues that will confront his administration. If they are not resolved by 2016, the United States will look like Greece in 2012.

If the election campaigns of the two candidates were real and not phony, the electorate by now should be comparing detailed economic policy plans printed and distributed  widely across the country. The press should be analysing and evaluating the two  prospectuses against the 2016 horizon, questioning and querying apparent inconsistencies wherever they are to be found.

Instead, what we hear from the President is Chicago street-talk about vulture capitalists, economic royalists, fat-cats and job-destroyers. When is the last time that the President has presented an economic model through which to seive the implications of his litany of accusations and threatened reprisals against the most successful participants in a market economy?

Instead we hear from Mitt Romney a proposal for tax reform that does not remotely identify the specific  tax exemptions that must be eliminated if tax rates are to be cut. We hear from Mitt Romney lip-service to Paul Ryan on spending cuts without any details of the precise hits that Social Security, Medicare and Medicaid must take in order to move the budget into the surplus that is required to bring down the burden of the debt. Romney’s campaign undoubtedly is closer to economic reality than Obama’s, but it also is riddled with obfuscation wherever electoral pain is involved.

The truth is, given demographics, past commitments, and current burdens, that federal spending must be reduced from 24 to 20 percent of gross domestic product  by 2014 while federal tax revenues must rise from 15 to 21 percent of gross domestic product  by 2014  in order to begin lower the debt burden by 2016.

If Obama and Romney feel unable to address those realities, they should not be running for office at this time. Until they do so, I shall not be paying attention to the meaningless anodynes that emanate from their lips. There are more important issues on which to expend my energy than to review platitudes in a phony election competition between two weak and cowardly candidates who dare not confront the electorate with the dire reality of the  situation that confronts their nation.

Which way will China lurch?

China is a dictatorship. Because dictatorships are controlled by small winning coalitions, they are inevitably unstable.  A few changes at the top potentially result in huge changes in policy. Because dictatorships are never governed by the rule of law, close attention must be paid to the men (and almost always it is men) who rule instead.

What we now understand, however, following recent insights from public choice, is that what matters for policy is not just the nature of the men who rule, but also the size of the winning coalition (the essentials) on whom they rely to gain and secure their power. We also understand that, for the most part, the objectives of those in power are purely private.  Public policies are a by-product of narrow self-seeking behavior. 

In this respect, the Chinese dictators behave predictably. As one long-time Chinese investor privately observes, ‘the whole point of political office is to steal as much as possible as fast as possible’. Well, actually, in China, the time-dimension is 10 years in which the Standing Committee of Nine will steal and transfer overseas as much loot as they can accumulate without provoking a coup d’etat.

A ten year reign is currently drawing to its close and the essentials are locked in heated debate about which way to go for the coming decade. Uncertainties are high because of unusual turbulence at the top of the pyramid. Bo Xilai and his powerful entourage at the head of the People’s Liberation Army have recently been taken down by the Standing Committee of Nine, at high risk of provoking a dreaded coup. The full array of targets in the anti-Bo campaign is not yet clear, so the ultimate fall-out is hard to predict.

In analysing the dynamics that underlie  current jockeying for power, five factors play a prominent role.

First, the Chinese leadership is clearly divided. Although Bo has been attackedf as a princeling son of the party elite, Xi Jinping, the man expected to replace Hu Jintao in Fall 2012, is also a princeling, as are several other members of the Politburo under consideration for promotion to the Standing Committee of Nine. Since Mao, the leadership has placed considerable reliance on consensus, so division at the top is a matter of supreme concern

Second, the essentials are fully aware that the growing middle-class in China is increasingly disaffected by policy failures of the current elite: transportation failures, product quality failures, public health failures, air quality pollution, widespread corruption and invasion of property rights, etc.  This disaffection is exacerbated by the new social media, provoking censorship that is also a source of middle-class anger.

Third, the Chinese elite eye nervously the huge migrant labor force, estimated at 300 million souls, who live on the margins of the rich coastal cities. Denied full urban status, with its attendant health and education benefits, and living in squalid basement dormitories usually without their families, this migrant population is an obvious source of unrest. The elite deploy a security service larger than the 2.5 million strong People’s Liberation Army, to keep potential unrest under wraps. They must always hope that the security force does not vent its wrath against its creator.

Fourth, he Chines elite is fully aware of growing unease across rural China, where 600 million peasants do not share in the growing wealth of the country, and where corrupt bureaucrats seize such land as those peasants work, in order to line their own pockets with development bribes.  The last thing that the elite desires is another ‘Long March’ under the leadership of a third-generation Mao Zedung. After all, such a Long March would end up in Beijing.  And there is now no new Formosa  to which the elite can flee, given China’s aggressive ’one-nation’ policy. Tibet anyone?

Fifth, the elite is well aware that the Chinese economy is no longer in its mega-boom phase.  A less robust economy raises the probability of a successful coup or even of a jasmine spring over the coming decade.

In such circumstances, public choice tells us that the essentials confront a clear choice of two directions in transitioning to the next decade.

The first direction – and the truly dangerous one for the world – is that of narrowing the size of the winning coalition. In such an outcome, the elite will focus heavily on lining its own pockets, and those of its winning coalition of essentials, while increasing levels of repression across the country. It will evidence an increasingly aggressive foreign policy designed to control the South China Sea, and to browbreat its east Asian neighbors. The Empire of Japan during the 1930s and pre-Hiroshima 1940s is the relevant model.

The second direction – and the one that all people of goodwill and common sense must hope will be taken – is that of widening the winning coalition to encompass disenchanted outsiders. In such an outcome, corruption should decline as public good provisions replace private profiteering and loyalty should replace repression at all relevant margins as the elite slowly moves towards some form of limited democracy.

Two roads with very different outcomes. Pray to God that China lurches onto the road to freedom and not the road to perdition!

Banking is true Achilles heel for the eurozone

By now it is common knowledge that a full currency union without a corresponding fiscal union is unworkable unless the currency union is optimal. The eurozone is not even remotely an optimal currency union – its north- south divide is a splitting chasm – and divergent fiscal policies have brought the zone to the edge of complete collapse.

It is now becoming apparent, however, that the state of the eurozone’s banking system poses a much more mortal threat to the single currency than the state of its fiscal finances. Arguably, banking is the true Achilles heel for the eurozone. An on-target joke about Greece, for example, is that the euro will be out of Greece before Greece is out of the eurozone.

Across Greece, since last week’s failure to form a pro-austerity pact government, deposit withdrawals by Greek nationals from Greek banks has accelerated dramatically.  Unless this is checked, Greece will run out of euros well before mid-June, and a replacement drachma currency will become inevitable.

The eurozone’s original sin was to unify money into a common currency while leaving the responsibility for banking firmly under sovereign control. Despite financial integration many banks, especially among the PIIGS, are over-extended in their domestic markets and over-committed to their sovereign debt.

This combination of common money and national banking is a primary cause of the sector’s continuing chronic under-capitalization. National regulators, cognizant of the ease of capital flight within the eurozone, hesitate to compel banks to write down their losses from the credit crisis. In consequence, many banks cannot attract private capital. National governments have filled the gaps with taxpayer injections to the point where they have stretched the credibility of their sovereign credit-worthiness.

Should the specter of a credit-run emerge – as is surely on the cards for Greece, and most likely also for Spain – any eurozone solution would have to be euro-wide. The European Central Bank  can stop any run it wants – but only to solvent but illiquid banks and against sufficient collateral.  The lender of last resort cannot, however, bear the solvency risk of banks.  Nor, at this stage in the eurozone crisis, can all governments.

So, if the eurozone is to survive, not only is fiscal harmonization important. More crucial still is the option of recapitalizing eurozone banks with eurozone funds.  Such an authority is inconceivable without eurozone authority to write down creditors and restructure banks. In essence, euro members may soon find that banking union is more important than fiscal union.

And so, some two-thirds of a century on, Adolf  Hitler’s vision of a Third Reich that would last 1,000 years may be back on the  playing field of continental Europe. Thankfully, the United Kingdom remains safely offshore.

Jamie Dimon should kick some Washington butt

As the CEO of JP Morgan Chase, Jamie Dimon owes an explanation to the company’s shareholders for the recent trading loss of $2 billion. Although the loss is relatively small – one percent on the company’s  $200 billion portfolio – still it is large in absolute terms. The market has already punished shareholders by a $25 billion reduction in the value of JP Morgan Chase stock. If shareholders determine to sanction Jamie Dimon – the smartest man on Wall Street – for this event so be it. It is their right so to do, though one would think that they will be cautious not to remove such a skillful skipper from the tiller of their vessel.

No one else has any right to intervene in this intra-company event. JP Morgan Chase played no role in creating the September 2008 financial crisis. It stood magnificently aside as the real trash of Wall Street – Citicorp, Goldman Sachs, Bank of America, Wells Fargo and Morgan Stanley –  groveled before the Treasury Secretary and begged for public bail- outs for their dreadful companies.

Thanks to Jamie Dimon,  JP Morgan Chase needed no bailout. A bail out was forced upon the company by a weak and duplicitous Treasury Secretary, desperate to hide the names of the true villains from an unforgiving Street. The TARP loan forced upon Jamie Dimon was repaid in full in 2009. So there is no taxpayer or political interest in this $2 billion loss.

So why is Washington so interested in JP Morgan Chase (President Obama’s personal bank by the way)?  The answer is Jamie Dimon.  Although Jamie Dimon is a lifelong Democrat, and a major contributor to Democratic candidates, since 2009 he has become increasingly critical about President Obama’s mishandling of the economy, and financial regulation in particular. This irks Democratic politicians to the extent that they now desire to bite the hand that feeds them.

Jamie Dimon is highly intelligent, but not a diplomat. He does not suffer fools gladly and , God-knows, there is no deficiency of fools in the United States Congress. Hopefully, in the hearings, Jamie Dimon will finger crass stupidity whenever  it manifests itself across the Congressional tables. Because Congress is above the law, this will place him in danger of contempt charges. I trust that he will be sufficiently courageous as to shoulder such charges as a badge of honor.

If Jamie Dimon blinks in the face of intensely hostile political and media pressure, he will do a disservice to his country. In the market-place the natural response will be to take fewer risks even at the price of lower profits. This will imply fewer loans for small businesses and fewer high paying jobs in America.

“One can only hope that during the hearings, Mr. Dimon can expose his tormentors for what they truly are.  But the game is stacked against him and the knifing has already taken place in the media, making the hearings a bit like the final scene in the movie ‘Gladiator’.  The lesson Washington intends for all is clear: Cross us and we will make you pay.  Unfortunately the media and most of the spectators in the galleries are still cheering.” Lawrence B. Lindsey, ‘Why Washington Hates Jamie Dimon’, The Wall Street Journal, May 18, 2012

If you are able to inflict one clean punch, Mr. Dimon, make sure that it lands on Senator Carl Levin’s fleshy nose. Now that would be a memorable blow for economic freedom under the rule of  law!

Nine Chinese dragons seek to impound the South China Sea

While President Obama is wasting time, sleeves rolled up, on a seemingly endless, self-adulatory electoral campaign grounded on a faux concept of fairness, a very different concept – might is right – is flexing its muscles in the South China Sea, where Beijing’s territorial claims are rubbing up against competing claims from several south-east Asian countries.

The latest confrontation is with the Philippines. In April 2012, a Philippine naval ship attempted to detain several Chinese vessels that were fishing near disputed islands known as Scarborough Shoal in the Philippines and as Huangyan Island in China.  Chinese marine surveillance ships quickly arrived on the scene to shut down the Philippine intervention. Chinese newspapers last week demanded that the People’s Liberation Army Navy should teach the Philippines a lesson. Some speculated that China is preparing for war.

Last year, marine surveillance ships from China clashed with both Philippine and Vietnam seismic vessels, again with China imposing its will on its weaker neighbors. Neither the philippines nor Vietnam can credibly challenge China’s expansionary designs on the South China Sea, at least without powerful international support.

“The problem for the Philippines, as with Vietnam…is that China claims virtually the entire strategic waterway.  It produced an infamous ‘nine-lashed-line’ map marking the waters it claims – like a huge lolling tongue licking its neighbours’ coastline.” David Pilling, ‘The nine dragons stirring up the South China Sea’”, Financial Times, May 17, 2012

Pilling suggests that Chinese aggression is especially dangerous because it is multi-headed rather than the consequence of a carefully evaluated policy by the Standing Committee of Nine:

“the reality may be messier – and more dangerous.  that is because a proliferation of agencies – not the Chinese government itself – may be pushing the boundaries of China’s policy.  These are the dragons that are ‘stirring up the sea.’  They include Customs law Enforcement, China Fisheries Law Enforcement Command, the Maritime Safety Administration, China Marine Surveillance, and so on.” ibid.

In such a multi-level game competing agencies have an incentive to keep tensions high in order to attract bigger budgets.  The arms race being conducted by these competing agencies is especially dangerous because their ships are easily deployed and they do not operate under strict rules of engagement.

I seem to remember that another overly- election-focused United States president – FDR – ignored similar signs emanating from Japan in the run-up to the 1940 presidential elections . His ignorance and lack of foresight led to the avoidable disaster of Pearl Harbor on December 7, 1941.

Maybe President Obama should roll down those shirt-sleeves, button up his cuffs, and abandon the campaign trail in order to complete the job for which he was elected in November 2008.