A blog posting today from Zero Hedge sent me to an essay called “The Truth about Tytler” by Loren Collins, (http://www.lorencollins.net/tytler.html), where I found the following:

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship and then a Monarchy”     (This has often been attributed to Prof. Alexander Fraser Tytler (later Lord Woodhouselee) a Scottish historian from Edinburgh University who lived from 1747 to 1813. Loren Collins details her study of the attribution at the above site.)

“Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.”

(From a speech by Henning Webb Prentis, Jr., President of the Armstrong Cork Company in a speech to National Conference Board on March 18, 1943.)

And further from the Prentis speech where the above is embedded:

“Paradoxically enough, the release of initiative and enterprise made possible by popular self-government ultimately generates disintegrating forces from within. Again and again after freedom has brought opportunity and some degree of plenty, the competent become selfish, luxury-loving and complacent, the incompetent and the unfortunate grow envious and covetous, and all three groups turn aside from the hard road of freedom to worship the Golden Calf of economic security. The historical cycle seems to be: From bondage to spiritual faith; from spiritual faith to courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to apathy; from apathy to dependency; and from dependency back to bondage once more.

At the stage between apathy and dependency, men always turn in fear to economic and political panaceas. New conditions, it is claimed, require new remedies. Under such circumstances, the competent citizen is certainly not a fool if he insists upon using the compass of history when forced to sail uncharted seas. Usually so-called new remedies are not new at all. Compulsory planned economy, for example, was tried by the Chinese some three millenniums ago, and by the Romans in the early centuries of the Christian era. It was applied in Germany, Italy and Russia long before the present war broke out. Yet it is being seriously advocated today as a solution of our economic problems in the United States. Its proponents confidently assert that government can successfully plan and control all major business activity in the nation, and still not interfere with our political freedom and our hard-won civil and religious liberties. The lessons of history all point in exactly the reverse direction.”  - Henning W. Prentis, Industrial Management in a Republic, p. 22

While there is clearly some dispute about who first coined the words above, there is little doubt of their appeal – as Ms. Collins has said: “the authors of each half were most likely not famous persons or respected scholars, but rather just private political thinkers who got their words in print, and whose words then happened to strike a chord in others……..The passage of time merely encouraged quoters to attach an author’s name that strengthened the authority behind the words.”

They have thus been attributed to various historical figures such as Benjamin Disraeli, Arnold Toynbee, Lord Thomas Macaulay, Alexis de Tocqueville, and Ronald Reagan to name a few.

Another fellow had a few words to say on the subject as well:

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism.” Karl Marx – “Das Kapital”

And from someone contemporary:   “The crisis came from debt and you don’t escape it with more debt. We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumour is getting worse because we are transforming private debt into public debt and public debt is not manageable.” Nassim Taleb.

And a pithy few from perhaps the greatest of American 20^th century essayists  H.L. Mencken:

Every decent man is ashamed of the government he lives under.

The men the American public admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth.

Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule – and both commonly succeed, and are right.

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

Oh well, there goes my political career!

Wayne Lochore

I have to give the ‘headline of the week’ prize to James Howard Kunstler for his extremely clever take on the European bailout – “And Chicks for Free?”

For those of you too young to know it was from a 1985 song by Dire Straits which went “Money for nothing, and chicks for free.”  I used to croon along with Mark Knopfler myself – he was as ugly as sin and if he hadn’t been such a good guitarist and singer he wouldn’t have had chicks for free – not in the early part of the evening anyway.

Two weeks ago in a posting (“Think Global – The ‘end game’ shows up!”) I suggested that if we didn’t see a major political response to the pressure being placed on the PIIGS of Europe by CDS traders then we could well see the collapse of the European financial system, and soon. So is €750 Billion of Loan Guarantees and unlimited Quantitative Easing big enough for you? Well it was certainly big enough for the shorts in European equities to get a smacking – in France the CAC rose about 10% on Monday, and there was a serious move up in European Bonds and for about half an hour the Euro as well.

So what have we really seen in this quite stunning development – clearly the EUR has bet the farm, the floodgates are open, and in doing so the Gnomes of Europe have forgotten one of the critical concepts of safe investing – if in trouble, sooner or later you have to stop digging!  What this move signals is that if you’re big enough there is no longer any risk to trading Europe – “How much do you want?”  Just like the Americans and the Japanese, Europe has signalled that they will create as much money as the banking system demands – as long as your problems are big ones.  Moral Hazard is now government policy is all the major economies of the world.

The truth is with this combination of ‘money for nothing’, and tricks for free, (because this is the ultimate form of prostitution), world governments are now clearly going all out to pimp/pump their way to safety. And it seems as if Angela Merkel was encouraged for her part in the affair by President Obama – “Make it a big one” he said.    “It certainly worked for us.”

(But did it? – The April fiscal deficit announced yesterday in the US was the highest April in history at $83 Billion (April 2009 $20.9 Billion), and it’s in the details that the real story shows.  Tax receipts down 7.9% YoY, Individual Income Tax down 21.5% YoY, and total spending up 14.2%, National defense up 17%, Medicare up 39.4%, Social Security up 4.2% and General Government up 5.6%.  Interest payments were some comfort at down 9.5%.

Reading through the blog strings on this I came to something very interesting about the jump in Medicare – “Free to everyone” Obama said, excepting you can’t park the car, you can’t get in the waiting room, and when you finally do the Doctor had just had his income crushed by 80% and has decided to retire.  So it looks like health could well be heading the same way as California’s expenditure on schooling per child, where it has gone from No. 1 to No. 48 in less than a decade.)

But most definitely the markets spoke in reply to the Euro bailout and they said very loudly “Get me some Gold.”  Quite simply gold has now reached an all-time high in ALL fiat currencies.  Such was the demand from panicking Europeans that their mints are running out of both gold and silver, as larger and larger numbers don’t want to hold any more of a fiat currency than is necessary to keep their daily lives running. It is clear that the hope of the various governments is that they will be able to develop and then control inflation as a solution to the debt mountains they create; or have they actually given up and decided to kick the can as far down the road as one kick could manage in the hope it would become someone else’s problem?

One of the main reasons markets have responded with disbelief rather than excitement is the financial strength of the providers of the €750 Billion of Guarantees – look at this chart from the European Commission:

Principally all the guarantors of the massive bailout were in late 2009 themselves living outside the maximums allowable under their guiding Maastricht Treaty, with the paradoxical exception of Spain’s Debt to GDP figure. And things have only got worse since then so it’s not hard for the market to figure that the guarantee is not the end of the matter. (France, which is absent from this chart, has a present estimated Debt to GDP figure of 76.7% and deficit to GDP of about 8.5%)

I’m sure the EUR members truly believe they know what they’re doing, such it their conceit.  Somehow they can’t grasp the futility of creating more debt to deal with the problem of too much of the stuff already; they probably don’t realise how they got into this situation in the first place?  (In the US the answer is fairly simple – they were convinced by a banking lobby that spends $US1 million per day). Europe however has been the architects of their own fate as they created a shared currency that guaranteed the weak and profligate would drag down the strong – I don’t see the possibility of any other result, as when a member country starts on the slippery slope towards bad economic numbers they are only left with austerity as their solution.

If being naughty places the entire team at risk then there are two choices – bail them out or kick them out. But it seems to me that there is no increased risk for the badly behaved “Club Med” countries in this latest scenario. They may as well be as naughty as they dare, spend as fast as they can, because the worst thing that can happen is that they default and get kicked out of the Euro.  As the cards lie that would be quite a worthwhile result for a country like Greece – spend the money on themselves now, default on the debt and use their own seriously weakened currency to aid climbing out of the hole when it all falls apart.  The alternative austerity process must take them close to civil war, and there aren’t too many politicians in the world that would choose that option when they are first in the bailout queue.  Because let’s face it, the people they are meant to be paying are the guarantors and their bankers anyway.

Wayne Lochore

p.s. If anyone is interested in reading a précis of Michael (Liar’s Poker) Lewis’s most recent book – The Big Short: Inside the Doomsday Machine –  they could do worse than reading a posting from James Quinn on the www.marketoracle site called “The Big Short – How Wall Street Destroyed Main Street”. It’s a fascinating piece that won’t leave you feeling like a big meal immediately afterwards.