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Opinion from a Libertarian ViewPoint

Posts Tagged ‘bailouts’

Tomgram: Mandy Smithberger, Bailing Out the War State | TomDispatch

Posted by M. C. on May 5, 2020

In fact, continuing to prioritize the U.S. military will only further weaken the country’s public health system. As a start, simply to call up doctors and nurses in the military reserves, as even Secretary of Defense Mark Esper has pointed out, would hurt the broader civilian response to the pandemic. After all, in their civilian lives many of them now work at domestic hospitals and medical centers deluged by Covid-19 patients.

http://www.tomdispatch.com/post/176696/tomgram%3A_mandy_smithberger%2C_bailing_out_the_war_state/#more

Posted by Mandy Smithberger

In this century, the war-fighting performance of the U.S. military has proven woeful indeed and both the Pentagon high command and key Trump administration officials have evidently been incapable of drawing obvious conclusions from that fact. Or think of it another way: even the president who can’t tell Lysol from a helpful prescription drug has noticed that something is truly wrong with America’s war in Afghanistan. This should have long been obvious. After all, almost 19 years after the U.S. invaded that country on a mission to destroy the Taliban, as well as al-Qaeda, and “liberate” Afghans, thousands of American troops, advisers, and contractors (though officially being drawn down) remain there, along with striking amounts of U.S. air power. And, of course, Washington is still embroiled in a conflict with the Taliban, which now controls ever more of the Afghan countryside, as well as other insurgent groups, including a spinoff of the Islamic State. (Meanwhile, spin-offs from the original al-Qaeda operate across significant parts of the Greater Middle East and Africa.)

Now, add into that equation the Covid-19 pandemic. It’s clear that the coronavirus is spreading from Iran into poverty-stricken Afghanistan via hundreds of thousands of Afghans heading home from that country into crowded cities lacking the most basic health care or even hot water and soap for hand-washing. In other words, as I’ve written elsewhere, the U.S. military is now certain to find itself embroiled in pandemic wars that could make events on the Covid-19-ridden aircraft carrier USS Roosevelt look like next to nothing. Stranger yet, the “very stable genius” who often seems to grasp so little has, NBC News reports, grasped this and has been pushing his national security team daily “to pull all U.S. troops out of Afghanistan amid concerns about a major coronavirus outbreak in the war-torn country.” By now, you probably have some sense of what it might be like to have Donald Trump push you daily.

Yet hand it to the Pentagon and crew: they haven’t agreed to his request. Instead, his “military advisers” have reportedly pointed out to him, in true Trumpian fashion (via an analogy from hell), that “if the U.S. pulls troops out of Afghanistan because of the coronavirus, by that standard the Pentagon would also have to withdraw from places like Italy.” Gasp!

Now, don’t misunderstand me: this country’s top military figures and national-security types may be hopeless when it comes to waging war successfully in the twenty-first century, but they’re by no means hopeless. They couldn’t be more skilled or more successful when it comes to getting themselves and the rest of the military-industrial complex funded at levels that are historically mind-boggling. As TomDispatch regular and director of the Center for Defense Information at the Project On Government Oversight Mandy Smithberger points out so strikingly today, their skill in making use of this pandemic moment to ensure that funding flows ever more quickly and copiously into the complex is beyond compare. If America’s forever wars were funding ones, the winners would be instantly obvious. Tom

Beware the Pentagon’s Pandemic Profiteers
Hasn’t the Military-Industrial Complex Taken Enough of Our Money?
By Mandy Smithberger

At this moment of unprecedented crisis, you might think that those not overcome by the economic and mortal consequences of the coronavirus would be asking, “What can we do to help?” A few companies have indeed pivoted to making masks and ventilators for an overwhelmed medical establishment. Unfortunately, when it comes to the top officials of the Pentagon and the CEOs running a large part of the arms industry, examples abound of them asking what they can do to help themselves.

It’s important to grasp just how staggeringly well the defense industry has done in these last nearly 19 years since 9/11. Its companies (filled with ex-military and defense officials) have received trillions of dollars in government contracts, which they’ve largely used to feather their own nests. Data compiled by the New York Times showed that the chief executive officers of the top five military-industrial contractors received nearly $90 million in compensation in 2017. An investigation that same year by the Providence Journal discovered that, from 2005 to the first half of 2017, the top five defense contractors spent more than $114 billion repurchasing their own company stocks and so boosting their value at the expense of new investment.

To put this in perspective in the midst of a pandemic, the co-directors of the Costs of War Project at Brown University recently pointed out that allocations for the Food and Drug Administration, the Centers for Disease Control and Prevention, and the National Institutes of Health for 2020 amounted to less than 1% of what the U.S. government has spent on the wars in Iraq and Afghanistan alone since 9/11. While just about every imaginable government agency and industry has been impacted by the still-spreading coronavirus, the role of the defense industry and the military in responding to it has, in truth, been limited indeed. The highly publicized use of military hospital ships in New York City and Los Angeles, for example, not only had relatively little impact on the crises in those cities but came to serve as a symbol of just how dysfunctional the military response has truly been.

 

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With Bailouts, Governments Are the Big Winners | Mises Wire

Posted by M. C. on March 26, 2020

…but above all with loan guarantees provided by the state-owned bank KfW. This means that the state makes the taxpayer responsible for squaring the bill for any loan default in an emergency; the taxpayer must once again serve as a credit default insurer.

Whether the unsecured paper money system survives the current crisis depends significantly on whether (i) the state’s credit guarantees succeed in warding off a wave of bankruptcies and (ii) investors regain confidence in the system and credit markets return to normal. There should be no doubt, however, that a life-threatening situation has arisen for the unbacked monetary system. The probability of things going wrong this time is not zero.

Every crisis caused by the unbacked paper money system expands the power of states over economic and social life, and unfortunately, once the state has expanded its power, its expansion will not be reversed.

https://mises.org/wire/bailouts-governments-are-big-winners?utm_source=Mises+Institute+Subscriptions&utm_campaign=991626415a-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-991626415a-228343965

The growing concerns about the consequences of the COVID-19 coronavirus have led to a global demand and supply shock: the demand for goods and services has collapsed, and because international production and value chains are now also disrupted, output slows down, and its former level can no longer be maintained.

The demand and supply shock brings the division of labor in the individual countries and thus internationally to a standstill. The damage is colossal and threatening. The fine division of labor is the engine that drives the economic prosperity of the world’s population. It cannot be switched off with impunity. If the shutdown continues, supply shortages of vital goods will be inevitable for people around the world.

Above all, however, the unbacked paper money system, which has been established worldwide, has been severely shaken by the slump in production and incomes, and this could ultimately have fatal consequences for the global economy; price action in financial markets has already given us a taste of this (as the figure below shows). Whether in the USA, Europe, Asia, or Latin America, unbacked paper money systems are found everywhere.

poll1

Unbacked Paper Money Systems

In an unbacked paper money system, the central bank, in close cooperation with the commercial banks, expands the money supply by extending loans. It amounts to an increase in the money supply out of thin air (ex nihilo): new money is put into circulation that is not covered by “real savings.” Economists are only too well aware that such an unfunded monetary system inevitably causes crises.

The unbacked paper money system cannot stand one thing: a drop in income, a drop in the price of goods. This is because then the overindebtedness of companies, households, and, above all, states comes to light—the whole paper money swindle is exposed. And that is the reason why the states are now intervening more heavily than ever (“all in”) with their central banks in the economic and societal system.

Interest rates have been cut as far as possible to provide relief to borrowers and keep the debt pyramid from collapsing. Financially ailing states and banks have access to unlimited cash injections from the central bank if necessary. However, unlike in the financial and economic crisis of 2008/2009, the private sector is now also on fire: companies and private households are threatened by bankruptcy.

Most companies are indebted; they have to pay interest and principal on an ongoing basis. If sales collapse, firms no longer earn anything and run into financial difficulties. If companies become insolvent, jobs will be lost, and the storm will ultimately reach private households, the consumers, who will then also have no money to service their debts.

This is when banks step on the “credit brake”: they are no longer willing or able to prop up shaky borrowers, let alone lend them new money. However, if the inflow of new loans to the national economy dries up, basically all debtors will end up in a tight spot. They cannot repay their loans, and they can also no longer get new loans that could replace their liabilities coming due.

Loan defaults are increasing. The credit supply is shrinking—and exacerbating the bankruptcy problem. Banks are experiencing credit defaults that deplete their equity, and they, too, are experiencing difficulties. In other words: The “credit boom” that drove economies and fueled the debt incentive is bursting. The boom is turning into a bust.

Banking “Bailout”

In Germany, for instance, there has already been a reaction to “master” the crisis, with an expansion of short-time work benefits and tax deferrals, but above all with loan guarantees provided by the state-owned bank KfW. This means that the state makes the taxpayer responsible for squaring the bill for any loan default in an emergency; the taxpayer must once again serve as a credit default insurer.

If the placebo pill works, trust returns, stumbling debtors get new bank loans, and loan defaults remain low, the taxpayer gets off lightly. But if the maneuver fails and loan defaults occur, a lot of money will be needed. The state will have to incur new debt, which will then presumably be bought up by the European Central Bank (ECB). This creates new central bank money.

And the new money is paid out to the banks directly: on their balance sheets, credit claims are exchanged for balances with the central bank. It’s pretty clear: it will be those banks in particular that will be protected by the state guarantees. The banks get this insurance virtually free of charge, on top of the collateral that borrowers have already given them, and which banks can use. So it will be the taxpayer who will have to shoulder the bill.

Guaranteeing Credit

Things will be less pleasant for borrowers. Struggling companies can be saved from insolvency if and when they get new loans thanks to state guarantees. But their debt is increasing: either the interest and principal payments are temporarily suspended and capitalized—that is, they are added to the outstanding loan amount to be serviced subsequently—or the new loans are used to pay the debt service of the old loans.

At this point, it should be borne in mind that many companies will most likely suffer a permanent loss of sales due to the crisis: even if the demand for goods should normalize again at some point, the lost sales will not be recuperated. As a result, firms’ debt-to-earning power ratio will deteriorate and their cost of capital will increase (other things being equal).

In December 2019, German banks had credit claims of more than €4,000 billion in their balance sheets. If the banks receive a loan guarantee from the state, which, let’s say, secures 80 percent of the loan claims, the guarantees of €553 billion announced by the KFW would result in bank loans of a good €690 billion, i.e., collateral for almost 17 percent of the outstanding bank loans.

In the euro area as a whole, outstanding bank loans amounted to a massive €18,591 billion at the end of last year. If euro governments were to follow the German credit guarantee example, they would have to accept considerable contingent liabilities for their households. This, in turn, will presumably drastically lower their credit rating on the financial markets—especially since all countries are already overstretched financially.

Helicopter Money

It would not be surprising if sooner or later people called for the issuance of helicopter money. The US administration seems to be moving in this direction already: on March 17, US Treasury secretary Steve Mnuchin announced that the US wants to send checks to its citizens by mail, something to the amount of $1,000 per person. You may argue that formally this is a tax refund. But as all the US dollars will be created out of thin air, the procedure comes relatively close to a form of helicopter US dollar issuance.

From a technical point of view, it is indeed quite easy to issue helicopter money: every account holder receives a “monetary gift” from the central bank and can use it to go shopping or service his/her outstanding debts. However, the issuance of helicopter money is difficult to control politically: it wouldn’t take long, and the central bank would be drowning in requests for monetary gifts.

Be that as it may, the issuance of helicopter money is very alluring, especially in a situation in which the debt pyramid threatens to collapse as recession-depression looms on the horizon and people strongly believe that inflation of goods prices is a blessing and the “least evil” policy. Under these conditions, helicopter money will likely be distributed at some point to stimulate consumption and ease debtors’ financial strain.

Almighty State

Whether the unsecured paper money system survives the current crisis depends significantly on whether (i) the state’s credit guarantees succeed in warding off a wave of bankruptcies and (ii) investors regain confidence in the system and credit markets return to normal. There should be no doubt, however, that a life-threatening situation has arisen for the unbacked monetary system. The probability of things going wrong this time is not zero.

But a breakdown is not yet inevitable. The states and their central banks can still pull “new rabbits out of the hat.” For example, faltering banks could be recapitalized by countries injecting new money that they receive from the ECB as equity capital; or states could finance themselves and consumers as well as firms with the issuance of helicopter money. One thing is pretty certain: without government intervention, without their market manipulations, the unbacked money system could no longer be maintained.

And that should make citizens extremely concerned indeed. Crises regularly lead to an increase in government power. The causes of crises are habitually mis- and reinterpreted: the free market has failed, it will be said, and now only the state can help—even though the state and its central bank are the main culprits causing financial and economic crises.

They are the ones who started and encouraged the debt economy with their unbacked paper money system, a system that sooner or later must collapse. This time, the trigger of the crisis is the concern about the consequences of the coronavirus. How aggressively the states intervene in the global market and societal system also plays an important role; that is, the extent to which states seize the opportunity to expand their power.

Serfdom

The more apparent it becomes that the unbacked monetary system does not work—that it causes crises—the higher is the tendency for people to turn a blind eye to this very truth. The more uninhibitedly collectivist-socialist measures are reinterpreted as “rescue policies” on the part of politicians and mainstream economists, the more such interventions are welcomed by the general public and approved.

Every crisis caused by the unbacked paper money system expands the power of states over economic and social life, and unfortunately, once the state has expanded its power, its expansion will not be reversed. As a result, the economy will become increasingly entangled with state socialist policies over time as the state and its central bank fight the crisis whose seeds they planted.

If people do not want to turn away from the unbacked paper money system, it is predictable that sooner or later everything will be subordinated to one goal: to strengthen the state—to provide it with ever more powers and with unlimited financial resources. And this means that the free markets (or what little is left of them), and thus also civil and entrepreneurial freedoms, will be stifled more and more.

Given current events, it is therefore far from exaggerated to say that without a “bailout” of the system, a global depression is inevitable. But with a bailout comes serfdom.

Be seeing you

 

 

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March Madness – LewRockwell

Posted by M. C. on March 16, 2020

One of the more annoying narratives going viral is the notion that we’re all a bunch of imbeciles and without the authorities herding us around we’d die by the hundreds of thousands.  The assumption is that in times of crisis, central control is superior to letting people fend for themselves.

So why are cruise operators mothballing ships at immense cost when they could be offering cheap rates that would give many young adults the opportunity of a lifetime to travel the world?  Part of the reason is that the government is wielding a big stick...

https://www.lewrockwell.com/2020/03/kevin-duffy/march-madness/

College students are on spring break and the cruise ships have plenty of idle capacity.  While the coronavirus rightly keeps seniors away, the risks to young people are probably not much greater than getting on an airplane.  Fuel costs plunged last week as the Saudis and Russians engage in a price war, putting even more downward pressure on costs.  Amid this free market match made in heaven, the cruise operators are suspending operations for a month.

Wait, what?

One of the more annoying narratives going viral is the notion that we’re all a bunch of imbeciles and without the authorities herding us around we’d die by the hundreds of thousands.  The assumption is that in times of crisis, central control is superior to letting people fend for themselves.  A tiny minority, among them AIER’s Jeffrey Tucker, say the conventional wisdom has it backwards:

I don’t know what should and shouldn’t be shut down.  But neither does the government have some special magical access to information on risk probabilities and the proper way forward. In fact, government is the last institution that should be making this judgment. Government acts out of self-interest; enterprise acts in the public interest. The obvious answer here is to leave the decision to private actors who are in the best position to make a good judgment on what should shut and what should open.

So why are cruise operators mothballing ships at immense cost when they could be offering cheap rates that would give many young adults the opportunity of a lifetime to travel the world?  Part of the reason is that the government is wielding a big stick, interfering in international travel and pushing people into semi-isolation.  The cruise operators also expanded too rapidly, took on debt and left themselves with little margin of safety, another consequence of the 2008 financial bailouts and a decade of ultra-cheap credit.  When the coronavirus first appeared in China, they remained complacent, maintaining dividends and reassuring investors that the outlook was bright.  Rather than take responsibility, pick a fight with the government, and try to claw their way back, they’ve decided to toss in the towel and get in line for potential future bailouts.

Who can blame them?

Barron’s – March 16, 2020

The financial press is back begging for bailouts, just as they did when the first cracks in the credit bubble appeared in 2007, well over a year before the 2008 meltdown.  The weekend issue of Barron’s shamelessly promotes a massive government response to fight the coronavirus and its spillover effects:

This isn’t 2008, when deep problems were rooted in the financial system.  Covid-19 is a health crisis, an economic crisis, and a financial crisis rolled into one – and policy makers will need to get creative to keep panic at bay…  [P]oliticians from both sides of the aisle must find a way to work together – or risk something worse than the financial crisis.

Investors are like spoiled children who go crying to daddy every time they get into trouble.  After decades of moral hazard conditioned a whole host of economic actors to believe any downturn would be painless and brief, they’ve become devoid of critical thinking and prone to emotional reactions.  Since stocks peaked February 14, the S&P 500 has dropped 20%, yet Treasury bonds have been the safe haven of choice – with the “TLT” up 7% – while gold has actually fallen 4%.  Early last week, the yield on 30-year T-bonds hit an all-time low and now stands at 1.55%.

Anyone who would loan money to the U.S. government at 1.55% for the next 30 years needs to have their head examined.

It is $23 trillion in debt.  Its economy is heading into recession.  It is about to take out the bazooka and go on a spending and money printing spree.  As a friend warned me after the 2016 presidential election, “If you are a creditor, the last person you want to see on the other side of the table is Donald Trump.”

Will the confidence game work again?  Will panicked moviegoers rush back into a burning theater?  Don’t bet against it.  Of course, that won’t extinguish the fire.

Most analysts believe the cruise ship industry can survive the coronavirus pandemic as long as it doesn’t last more than a few quarters.  Even so, these companies will be forced to tap into credit lines, making them more vulnerable to the next shock.  Meanwhile, the large banks which provide these loans will become more fragile as well.  The government, too, will become more leveraged (just as the Boomers are set to swamp entitlement programs).  Just as the system’s defenses are dilapidated, a severe economic storm is bearing down.

After decades of lifeboats showing up on cue, there are no more rescues.  Investors and businessmen, you’re on your own.

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