On the occasion of my 2,000th post at RedStateEclectic, here is a little act of celebration, a humble allusion to the intellectual armchair-acrobatics that I have been allowed to hazard publically here since 2008.
An economist used to be a person who was able to explain why the economy works well without interference by the state, and fares, indeed, much better without such meddling. Nowadays, an economist is a person who affirms that the economy can only work properly thanks to interventions by the state.
The economist – versed in knowledge about the invisible hand – has metamorphosed into a staunch proponent of economic policy, the politician’s advisor ambitious to steer the visible hand.
The approach taken to teaching economics has become one in which the market mechanism is ... taught only so that there is a basis for explaining why markets ... [do] not operate properly. The market mechanism is seldom explained as what it is: the sole means to achieve prosperity and the basis for a continuing improvement in living standards for an entire population [p.284]. ... [F]ew are any longer taught that economies have major properties for self-adjustment and are able to recuperate on their own without major government involvement. [p.287]
One of the great dangers of a state monopoly in education is that it provides inordinate leverage for uniform patterns of thought.
The massive distortions in the leading modern economies do seem to be intimately related to the prevalence of the politically both subaltern and ambitious(-for-power-and-status) "economics" of market failure and dirigiste conceit.
Kyle Bass' presentation commences at time mark 7:47
Japan's problems are formidable, but there are many other heavy-weight countries in deep water, it would seem.
Next week we will be told by Wall Street stock peddlers that what are just having a healthy correction and that it will soon be time to “buy the dip”. Don’t believe them. We are perched precariously at the top of one of the greatest financial bubbles ever because it is global—-the handiwork of world-wide central bank driven credit expansion and drastic interest rate repression.
Just recall some of the numbers. At the turn of the century, the US had about $25 trillion of credit market debt outstanding; now it is pushing $60 trillion. About 14 years ago, China had debt of $1 trillion; now its nearly $25 trillion. And similar credit explosions occurred in much of the rest of the world. It was all central bank enabled, and it caused world wide investment booms and asset inflations which defy every law of sound money and economics, and which cannot be sustained indefinitely.
The bottom line of those destructive policies is that “cap rates” are artificially low and so their reciprocal, asset values, are enormously inflated. Likewise, nearly zero money market interest rates in virtually every major economy of the world have fueled the most fantastic expansion of “carry trades” ever imagined.
As I have frequently pointed out, the short-term market for repo and other wholesale funding represents the cost of goods (COGS) for financial gamblers; its what they use to fund their speculations in higher yielding currencies, corporate debt, equities, and every manner of derivatives and OTC concoctions that Wall Street trading desks can engineer.
So when the central banks drive the money market rates to just 5-50 bps, they are offering ZERO-COGS to speculators. This is a massive incentive to bid up the price of anything that has a yield north of 50 basis points or a short-run appreciation prospect of the same—in order to capture the spread. This is what has turned the so-called capital markets of the world into dangerous casinos. This is what led speculators this week to gorge on $4 billion in Greek debt carrying the lunatic coupon of just 4.75%.
The latter is not even a remotely plausible pricing of the risk of a government with a 170% debt to GDP ratio—- sitting atop an eviscerated economy that has shrunk by more than 20% and has nothing much left except tourism, yogurt plants and a 27% unemployment rate. Instead, it evidences the fast money traders who swooped in to buy a 475 bp coupon funded by free money from the central banks, and who did so in the confidence that the ECB will do “whatever it takes” to prop up the price of member country sovereign debt.
Needless to say, the minute that the millions of gamblers who have been enabled by the ZERO-COGS gift of central banks loose confidence in their ability to prop up asset values, the panic will set in. Then a great dumping stampede will start. It will be the mother of all margin calls—-a repeat of the dumping panic on Wall Street that occurred in September 2008 when toxic mortgage securities which had been funded by overnight repo were forced into fire sales by wholesale lenders refusing to roll their repo.
Only this one will be much grander because the carry trades have gone more global then ever before. Even pig farmers in China have their sties loaded with copper because through a roundabout trade it can be repo’d for cash.
Indeed, the global financial system is land-mined with time-bombs–some hidden and others transparent. But what is certain is that when huge distortions like the newly booming market for dollar-denominated junk bonds being issued by EM companies increasingly parched for cash craters, there will be a ricocheting chain reaction that will spread far and wide.
Rationalism leads to sophocracy, the rule of the (supposedly) wise. Of course, it's a travesty of the idea of wisdom to equate its meaning with possession of ultimate truth or exclusive access to superior insight. However, in a rationalistic culture a voice tends to enjoy popular authentication when it appears to be the voice of an expert. In this way, we are being inundated by a deluge of expert voices crowding out the limited, genuine expertise of which we are capable.
Richard Epstein offers a convincing account of the way in which the original natural law approach can be fruitfully reinterpreted in the light of new scientific results.
And so, in this lecture Epstein looks at
the way in which natural law has slowly been able to migrate forward to become a much more complicated [..] body of law today than it was at the time ...
(19:25 - 19:40)
Having started his academic career as a student of Roman law, Epstein would come to realise that he had a tool at hand that allowed him to
respect tradition on the one hand, but bring to it a kind of intellectual rigour which depends upon every one of the modern intellectual developments which takes [sic] place outside the law which you could use to understand those things which occur inside the law.
(17:50 - 18:00)
essentially the lesson is: unless you can master the ancient conceptions of natural law, you'll never be able to do modern public policy well.