Free Economy and Social Order

Mises Daily by Wilhelm Röpke

[First published January 11, 1954]

Most of us, and all of us most of the time, deal with the market economy as a definite type of economic order, a sort of "economic technique" as opposed to the socialist "technique." For this view, it is significant that we call its constructional principle the "price mechanism." Here we move in the world of prices, of markets, of supply and demand, of competition, of wage rates, of interest rates, of exchange rates, and what not.

That is, of course, right and proper — as far as it goes. But there is a great danger of overlooking an important fact: the market economy as an economic order must be correlated to a certain structure of society, and to a definite mental climate which is appropriate to it.

The success of the market economy wherever it has been restored in our time — most conspicuously in western Germany — has resulted, even in some socialist circles, in a tendency to appropriate the market economy as a technical device capable of being built into a society which, in all other respects, is socialist.

The market economy then appears as part of a comprehensive social and political system which, in its conception, is a highly centralized colossal machinery. In that sense, there has always been a sector of market economy also in the Soviet system, but we all realize that this sector is a mere gadget, a technical device, not a living thing. Why? Because the market economy as a field of liberty, spontaneity, and free coordination cannot thrive in a social system which is the very opposite.

That leads to my first main proposition: the market economy rests on two essential pillars, not on one alone. It assumes not only the freedom of prices and competition (whose virtues the new socialist adepts of the market economy now reluctantly acknowledge), but rests equally on the institution of private property. This property must be genuine. It must comprise all the rights of free disposal without which — as formerly in Nationalist Socialist Germany and today in Norway — it becomes an empty legal shell. To these rights must be added the right to bequeath property.

Property in a free society has a double function. It means not only that the individual sphere of decision and responsibility is, as we have learned as lawyers, demarcated against other individuals, but it also means that property protects the individual sphere against the government and its ever-present tendency toward omnipotence. It is both a horizontal and a vertical boundary. And it is in this double function that property must be understood as the indispensable condition of liberty.

It is curious and saddening to see how blind the average type of socialist is vis-à-vis the economic, moral, and sociological functions of property, and even more that particular social philosophy in which property must be rooted. In this tendency to ignore the meaning of property, socialism has made enormous progress in our time. Traces of this may be discovered even in modern discussion on the problems of enterprise and management, which sometimes give the impression that the property owner is the "forgotten man" of our age.

The Role of Private Property

The intellectual constructions of "market socialism" are a good example of how the most serious fallacies ensue if we overlook the functions of private property. These fallacies can already be demonstrated on the level of ordinary economic analysis. But I wish to suggest that it is the whole social climate, the form of life, and the habits of planning for life which matter.

There is a definite "leftist" ideology, inspired by excessive social rationalism, as opposed to a "rightist," conservative one, respecting certain things we cannot touch, weigh, or measure but which are of sovereign importance. The real role of property cannot be understood unless we see it as one of the most important examples of something of much wider significance.

It illustrates the fact that the market economy is a form of economic order that is correlated to a concept of life and a socio-moral pattern which, for want of an appropriate English or French term, we may call "buergerliche" in the wide sense of this German word, which is largely free of the disparaging associations of the adjective "bourgeois."

This buergerliche foundation of the market economy must be frankly acknowledged. All the more so because a century of Marxist propaganda and intellectualist romanticism has been astonishingly and alarmingly successful in spreading a parody of this concept. In fact, the market economy can thrive only as part of and surrounded by a buergerliche social order.

Its place is in a society where certain elementary things are respected and are coloring the whole life of the community: individual responsibility; respect of certain indisputable norms; the individual's honest and serious struggle to get ahead and develop his faculties; independence anchored in property; responsible planning of one's own life and that of one's family; thriftiness; enterprise; assuming well calculated risks; the sense of workmanship; the right relation to nature and the community; the sense of continuity and tradition; the courage to brave the uncertainties of life on one's own account; the sense of the natural order of things.

Those who find all this contemptible and reeking of narrow-mindedness and "reaction" must be seriously asked to reveal their own scale of values and to tell us what kind of values they want to defend against communism without borrowing ideas from it.

That is only another way of saying that the market economy supposes a society which is the opposite of a "proletarianized" one, the opposite of a mass society — with its lack of a solid and necessarily hierarchical structure, and its corresponding sense of being uprooted. Independence, property, individual reserves, natural anchors of life, saving, thrift, responsibility, reasonable planning of life, all these are alien to such a society. They are destroyed by it, at least to that extent that they cease to give the tone to society. But we must realize that these are precisely the conditions of a durable free society.

The moment has come to see clearly that this is the real watershed of social philosophies. Here the ultimate parting of ways takes place, and there is no getting around the fact that the concepts and patterns of life which clash against each other in this field are decisive for the fate of society, and that they are irreconcilable.

Once we admit this, we must be prepared to see its significance in every field and to draw the corresponding conclusions. It is indeed remarkable to see how far we all are already drawn into the habits of thinking of an essentially unbuergerliche world. That is a fact which the economists also ought to take to heart, for they are among the worst sinners.

Enchanted by the elegance of a certain type of analysis, how often we discuss the problems of aggregate savings and investments, the hydraulics of income flows, the attractions of vast schemes of economic stabilization and of social security, the beauties of advertising or installment credits, the advantages of "functional" public finance, the progress of giant enterprise and whatnot, without realizing that, in doing so, we take for granted a society which is already largely deprived of those buergerliche conditions and habits which I described.

It is shocking to think how far our minds are already moving in terms of a proletarianized, mechanized, centralized mass society. It has become almost impossible for us to reason other than, in terms of income and expenditure, of input and output, having forgotten to think in terms of property. That is, by the way, the deepest reason for my own fundamental and insurmountable distrust in Keynesian and post-Keynesian economics.

It is, indeed, highly significant that Keynes attained fame mostly for his trite and cynical remark that "in the long run, we are all dead." And it is even more significant that so many contemporary economists have found this dictum particularly spiritual and progressive. But let us remember that it only echoes the slogan of the Ancien Regime in the eighteenth century: Apres nous le deluge. And let us ask why this is so significant. Because it reveals the decidedly unbuergerliche, the Bohemian spirit of this modern trend in economics and in economic policy. It betrays the new hardboiled happy-go-luckiness, the tendency to live from hand to mouth, and to make the style of the Bohemian the new watchword for a more enlightened generation.

To incur debts becomes a positive virtue; to save, a capital sin. To live beyond one's means, as individuals and as nations, is the logical consequence. But what else is this than Entbuergerlichung, deracination, proletarianization, nomadization? And is not this the very opposite of our concept of civilization which is derived from civis, the Buerger?

Muddling through from day to day and from one expedient to another, to boast that "money does not matter" — that is, indeed, the opposite of an honest, disciplined, and orderly concept and plan of life. The income of people living on these lines may have become buergerliche, but their style of life is still proletarian.

A Growing Concept

It is clearly impossible in the space of a short article to study the impact of all this in all the important fields. I have discussed it in regards to private property. It is further very disquieting to see how this concept has permeated more and more the economic and social policies of our time. One major example is the Mitbestimmungsrecht (codetermination — the right of workers and trade-union representatives to participate in the administration of industrial enterprises and thus to take over some functions of proper ownership) in West Germany.

To give an illustration: the director of a large power plant in Germany tells me how silly he felt the other day when, in wage negotiations with trade-union officials, he had to deal with the same men who, at the same time, sit beside him at meetings of trustees of the power plants themselves. He adds that the structure of enterprises in West Germany approaches more and more that which Tito seems to have in mind. And that is happening in the very country which is considered today the model of a successful restoration of the free market economy!

Another example of this gradual dissolution of the meaning of property, and of the corresponding norms, which can be observed in many countries, is the softening of the responsibility of the debtor. By lax legal procedure with regard to execution and bankruptcy, this, more often than not, amounts — in the name of social justice — to the expropriation of the creditor. It is hardly necessary to recall, in this connection, the expropriation of the hapless class of house owners by rent control, and the effects of progressive taxation.

Let us apply our reflections to another most important field: money. Let us recognize that respect for money as something intangible is, like property, an essential part of the social order and of the mentality which are the prerequisites of the market economy.

To illustrate my case, I want to tell two stories which I take from the financial history of France. At the end of 1870, Gambetta, the leader of the French Resistance after the defeat of the Second Empire, left the besieged capital in a balloon for Tours to create the new republican army. In his desperate need for money, he remembered that his admired predecessors of the Revolution had financed their wars by printing and assignats. He asked the representative of the Banque de France to print for him a few hundred million notes. But he met with a flat and indignant refusal. At that time, such a demand was considered so monstrous that Gambetta did not insist. The Jacobin firebrand and all-powerful dictator yielded to the determined No of the representative of the central bank who would not accept even a supreme national emergency as an excuse for the crime of inflation.

A few months later, the socialist revolt known as the Commune occurred in Paris. The gold reserves and the plates of the notes of the Banque de France were at the mercy of the revolutionaries. But, badly in need of money and politically unscrupulous as they were, they strongly resisted the temptation to lay their hands on them. In the very midst of the flames of civil war, the central bank and its money were sacrosanct to them.

The significance of these two stories will not escape anyone. It would, indeed, be harsh to ask what has become of this respect for money in our time, not least of all in France. To restore this respect and the corresponding discipline in money and credit policy is one of the most important conditions for the durable success of all our efforts to restore and maintain a free economy and, therewith, a free society.

Want to Shrink the Economy? Limit the Labor Force

Mises Daily by Zach Bibeault

Listening to Thom Hartmann's radio program, the only halfway-interesting program broadcast during the day where I live, is a practicing ground for me on economic fallacies. His radio show, and his blog at Huffington Post, have strengthened my ability to find these fallacies, and given me fresh examples for future use.

Hartmann (who, like most of the media folk around him, believes "deregulation" and "capitalism" caused the current economic depression) subscribes to the "demand drives the economy" nonsense that unfortunately made John Maynard Keynes one of the most celebrated economists of the 20th century.

Hartmann recently recommended on his blog that, since he believes our stimulus plan won't work because it isn't adequately protectionist, we should lower the retirement age to 55.

Such an idea is literally insane, not to mention antilabor. To help workers get new jobs, Hartmann recommends forcibly limiting individuals' entry into the market, and killing off future productivity — new wealth, new jobs, etc. In other words, he thinks we can create jobs by killing off jobs. This sounds quite similar to FDR's attempt to stimulate the economy by destroying food supplies in the 1930s. In short, it's insane.

Here, I will explain why, by responding to remarks of Thom's op-ed column.

[Lowering the retirement age to 55] would eliminate the problem of unemployment in the United States. All those Boomers retiring would make room in the labor market for all the recent high-school and college graduates who are now finding it so hard to find a job.

First, Hartmann's shows that he fails to realize that the minimum wage is a hurdle that cannot be jumped by the types of high-school and college graduates he specifies here. Without the minimum wage, these people — who are unemployed because employers do not value their services more than the minimum wage rate government makes them pay — would already be employed at lower wages. They could then begin learning new skills, building résumés, moving up in the work world, and then gaining higher wages.

This idea of Hartmann's would lower productivity. It would also increase the costs of goods because of lower productivity and because of the increased volume of spending chasing the already-more-expensive goods.

On Hartmann's radio show, he recently debated John Lott, author of the book Freedomnomics. When Lott stated that Hartmann's plan would lower productivity, Hartmann dismissed him by saying that the 20-year-olds would merely take the jobs, and productivity would then be the same or better.

But this idea ignores two things: (1) the people over 55 would no longer be creating goods and services — i.e., wealth. They would merely be collecting government benefits and spending them. (2) if the 20-year-olds were the best for the jobs that people over 55 held, they would already have been hired instead of the older people. In short, we can a priori know that a worse person for the job would now hold it, thanks to a limiting of the labor supply by the government.

As you can see, this change in the retirement age would disrupt the division of labor, and the entire economy, for the worse.

If enough Boomers left the job market, it would even flip the current dynamic of too-many-people-chasing-too-few-jobs upside down, and create a tight labor markets [sic]. Tight labor markets drive up wages.

Hartmann needs to ask himself why there are fewer jobs than people right now. He blames Reaganomics and NAFTA/GATT for outsourcing jobs, as if the only way to ensure the existence of good jobs is by government forcing citizens to buy only stuff made in America (which is exactly what protectionism does).

Yet free trade drives prices down and allows individuals in different countries to specialize in what they excel at. Without free trade, government arbitrarily forces a cartel with objectively less productive operations, in order to benefit a single "class" (the working class) at the expense of all of society. That is special-interest policy at its worst.

The truth is that right now the economy is vomiting out the malinvestment caused by the Alan Greenspan–created boom. Once the economy rebounds and readjusts itself to voluntary consumer preferences, more jobs will be created. This is what happened in 1920–1921, thanks to Warren Harding's laissez-faire response to the 1920 economic crash (which was worse than the 1929 crash). The only thing that could get in the way of this recovery is the kind of interventions that Hartmann proposes.

Additionally, these new-into-the-workforce people can then pay off student loans, buy new houses and cars, and otherwise drive the economy from the bottom up.

In other words, Thom wants us to create the very sort of insane spending that got our country into this economic crisis in the first place. And the economy is never built from the bottom up, unless you believe that somehow supply can magically catch up with demand. Ever heard of savings, Thom?

To further tighten the job market and drive up wages (and tax revenues), modify the Fair Labor Standards Act of 1938 — which tightened the labor market and reduced unemployment by establishing the 40-hour work week — to include all hours worked by a person. We could also, like in France, drop the 40-hour maximum-workweek threshold to 35 hours.

In this example, just like the last one, Hartmann recommends lowering productivity and increasing raw spending. In other words, he suggests lowering supply and increasing demand, which would kill living standards by forcibly subsidizing inefficiency and waste. This is the polar opposite of what is helpful for an economy.

He and other "progressives" may quip that the inflated wages spent by the workers will in turn create more jobs and thus stimulate more supply, but the fact is that this stimulus is never sustainable — it can only create tiny offshoots of economic growth that do not spread throughout the economy, and will be offset by reduced productivity.

And he thinks the 40-hour workweek and 8-hour workday reduced unemployment? Such measures always increase unemployment, because individuals who would voluntarily work more are barred from doing so by the government.

This is the main reason why the labor movements of the 18th and 19th centuries fought so hard against child labor; they knew that if children were removed from the labor marketplace, then the supply of labor (the number of people available to work) would decrease and the price of labor (wages) would increase. And, sure enough, that's exactly what happened — and it began the creation of a blue-collar middle class.

Precisely. One of the key reasons that unions fought so hard for restrictions on youth entering the marketplace was not for social justice (like the high school history books say), but for the protection of their own bloated wage rates. And Hartmann views this as a good thing? It forced youths out of jobs so other workers could protect their own inflated wage rates — again, special-interest policy at its worst.

This policy is also not what led to the creation of a middle class. In believing this, Hartmann has simply fallen prey to the post hoc ergo propter hoc fallacy.

Hartmann has stated previously that "the 'middle class' is not a normal result of 'free markets,'" and that it has to be created by government. In other words, he believes that freedom would naturally create a few rich people and a mass of poor people starving and begging for mercy. (A reading of Rothbard's and Mises's writings on monopoly may be in order for Thom.)

Of course, this is the exact opposite of American labor policy ever since the Reagan/Bush/Clinton/Bush era. Reagan drove down wages by busting unions (which tighten a labor marketplace); declared an amnesty for millions of then-illegal immigrant workers to increase the supply of labor and depress wages (particularly whacking the carpenters and other construction trades unions); and began the process (completed in a big way by Bill Clinton with NAFTA and GATT/WTO) of dismantling tariffs, taxes, and laws that made it expensive or illegal to export American jobs.

This is just more of the same. Hartmann even decries amnesty for illegal immigrants, a standard progressive political ideal, simply because it brings down the wages of carpenters and construction workers. But last time I checked, immigrants need food and jobs too. There's a reason why they're coming over here.

If the immigrants are indeed hired, then the companies are getting better workers for a lower price, thus increasing productivity and living standards. In turn, it is up to the newly unemployed construction workers and carpenters to realign themselves in the division of labor in a manner that is most productive to consumer wants. Taking down the government's fiat labor restrictions, such as the minimum wage, would be a simple way to get that ball rolling.

Frédéric Bastiat (1801–1850)

Right-wing Ideologue?

Furthermore, Thom Hartmann, who constantly slams "corporate dominance," here advocates tariffs, which actually force a protected cartel to form within our country. These measures ensure corporate dominance, reduce supply, and increase demand. They are terrible for the living standards of all people, including the working class.

In order to understand this, you need to understand the long-run effects, not just the short-run effects; in essence, you need to see "That Which Is Not Seen," to quote the title of a famous essay by Frédéric Bastiat — but I'm sure Hartmann would simply label Bastiat a right-wing ideologue.

Reagan also put into the chairmanship of the Fed Alan Greenspan, who openly declared that his most important job as chairman of the Fed was to prevent "wage inflation" — a term which he exclusively applied to working-class people. Greenspan is still preaching that now-discredited and anti-American philosophy he learned from Ayn Rand, in fact.

In a previous blog post, Thom Hartmann referred to Alan Greenspan as an "antiregulation Libertarian." Saying that there is a libertarian running the Federal Reserve is akin to saying there is a libertarian running the DEA or the FDA. If you're in charge of one of them, you've proven you're not a supporter of even basic libertarian principles.

And Thom Hartmann is clearly an Ayn Rand illiterate. Ayn Rand decried central banking and the Federal Reserve, so even though she correctly thought it was wrong to artificially boost wages, she did NOT say that a central-bank czar should attempt to do the opposite. Hartmann is so wrong on this it's appalling.

Oh, and being "anti-American"? Isn't that the same stuff I heard from Bush and the neoconservatives?

It's shocking that ideologues like Greenspan, Reagan, and Clinton believe this, but they do. And the only way to reverse the past 29 years of Reaganomics/Clintonomics is to tighten up the labor market again. While a great start would be to pull out of our insane trade treaties and begin again protecting American manufacturers, that will take a decade for the impact to be truly felt even if we were to go back to our 1980 tariff levels today.

Greenspan, Reagan, and Clinton are not free marketers. It was Greenspan's Keynesian reduction of interest rates that caused the boom and bust. A truly free-market ideology lies in natural rights, which is an objectively determinable ideology.

But providing space for a good chunk of the 16 percent of the American workforce over 55 years old will immediately take us to nearly zero unemployment and dramatically stimulate the economy. Then we can begin to bring our manufacturing jobs back home from China and the other important steps.

Thom Hartmann believes that economies lead to wealth stratification unless government force steps in to regulate things in the name of the working class. Does he have an explanation for the quick recovery from the depression of 1920? Didn't think so. Does he have an explanation as to why anarchic Iceland lasted 1000 years? Didn't think so. Instead he subscribes to the public-school–textbook explanations, which he seems to have memorized.

The "zero unemployment" resulting from a forced reduction of the retirement age to 55 would be a counterfeit one, since those newly retired would still be working were it not for the disincentive that the government inflicted on them.

True zero unemployment would only occur in a free society, without misguided policies propping up wages and preventing the price of labor (as well as land and capital goods) from liquidating to normal levels. If you do not allow the liquidation to occur, and instead perform little tricks like lowering the retirement age, you create massive disincentives for laborers that make it impossible for the economy to ever recover.

And even with all this aside, it is bizarre that Hartmann sees falling wages as a bad thing. Falling wages mean labor is becoming cheaper, and thus easier and easier for companies to afford. Once wages are low enough, the unemployed will be employed, productivity will take off, and more and more jobs will be created.

This "liquidation of labor" is precisely what happened in 1920 when the economy crashed and government did nothing to prop up wages or demand. The crash ended a short time later. But it's not surprising that Hartmann doesn't know or understand this concept, because in a previous blog post on the Huffington Post he stated that

in Hoover's world (and virtually all the Republicans since reconstruction with the exception of Teddy Roosevelt), market fundamentalism was a virtual religion.… Hoover enthusiastically followed the advice of his Treasury Secretary, multimillionaire Andrew Mellon, who said in 1931: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down … enterprising people will pick up the wrecks from less competent people.

In fact, Herbert Hoover was a hyperinterventionist who instituted the first New Deal in 1932. Hoover's New Deal set up public works, restricted immigration, and granted loans to states for relief. Wow, Thom, that really sounds like market fundamentalism to me!

The Bastiat Collection

In conclusion, Thom Hartmann's economic views are based on misinformation. He is correct that there is a corporatocracy in this country, but he advocates the very ideas that created.

The only reason Hartmann retains any economic credibility among his audience is that he gets weak supporters of the free market, like Yaron Brook, and Dan Geinor from the T. Boone Pickens Institute, on as guests to debate government control of markets vs. free markets. Were he to have someone of real economic wisdom on the program, this would change. Perhaps this is why such individuals are never on: keeping the illusion of Hartmann's economic wisdom alive props up his salary rate and prevents it from liquidating.

EU Says Europe Economy May Resume Growth This Quarter (Update4)

By Simone Meier

Sept. 14 (Bloomberg) -- Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades, the European Union said.

The euro-area economy may expand 0.2 percent in the third quarter and 0.1 percent in the fourth after contracting 0.1 percent in the three months through June, the European Commission, the EU executive in Brussels, said today in updated economic forecasts. For the full year, the economy may shrink 4 percent, the commission said, maintaining its May projection.

European companies from Germany’s ThyssenKrupp AG to France’s L’Oreal SA have reported results that beat analysts’ estimates, suggesting government efforts to encourage spending are feeding into the broader economy. European Central Bank President Jean-Claude Trichet on Sept. 3 cited “increasing signs” of stabilization. EU Monetary Affairs Commissioner Joaquin Almunia said today that the second-half outlook may be revised upward by one-quarter percentage point.

“We expect to see a relatively good third quarter partly as a consequence of fiscal and monetary stimulus,” said Laurent Bilke, a senior economist at Nomura in London. “I wouldn’t call it a recovery, however. The economy will be a bit more resilient in 2010 to face the end of stimulus measures.”

Largest Economy

The economies of Germany and France unexpectedly returned to growth in the second quarter. In Germany, Europe’s largest economy, gross domestic product will probably rise 0.7 percent in the third quarter and 0.1 percent in the fourth, the commission said today. The French economy probably will expand 0.4 percent in the current quarter.

Italy probably emerged from the recession during the third quarter, while Spain’s economy will continue to shrink through 2009, according to the forecasts. The U.K., which isn’t in the euro region, may resume growth this quarter and expand 0.5 percent in the fourth quarter, the EU estimates.

“We know that part of these improvements are due to policy-driven measures and factors,” Almunia told a press conference in Brussels. “We’re not sure that this positive evolution will be sustained during 2010, so we need to be very prudent.”

The ECB earlier this month raised its forecasts for the euro region to predict expansion of about 0.2 percent in 2010 instead of a previously projected 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago. The EU forecasts a 0.1 percent contraction next year.

Cosmetics Maker

Paris-based L’Oreal, the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-forecast drop in earnings and said sales will gradually improve through the second half. Dusseldorf-based ThyssenKrupp, Germany’s biggest steelmaker, last month said there are signs that prices and sales volumes for some products have bottomed out.

Rising unemployment and the expiration of government stimulus packages may damp economic growth next year. International Monetary Fund Managing Director Dominique Strauss- Kahn said on Sept. 4 that there is a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.

In the U.S., the world’s largest economy, the recovery may be the slowest since World War II to regain all the ground lost during the recession, according to JPMorgan Chase & Co. chief economist Bruce Kasman. The Federal Reserve may hold U.S. rates between zero and 0.25 percent through 2010, he said.

Key Rate

The ECB on Sept. 3 kept its key rate at a record low of 1 percent to encourage spending. The Frankfurt-based central bank providing banks with unlimited cash for 12 months and is buying covered bonds to fight the crisis.

“It seems that the period of strong economic contraction is behind us,” ECB council member Yves Mersch wrote in the quarterly bulletin of the Bank of Luxembourg published on Sept. 10. Still, the recovery will “be very gradual and volatile, partly because of the temporary nature of some of its underpinnings, such as government stimulus,” he said.

The financial “crisis, with a lag of two or three quarters, is taking a serious toll on our labor market,” Almunia said. The job market “is still in very bad shape.”

Air France-KLM Group said on Sept. 4 that it will eliminate 1,500 jobs and slash capacity by 5 percent in order to bring down costs. Siemens AG, Europe’s largest engineer, has said that it plans 1,600 job cuts beyond the 17,000 announced last year and has placed 15,000 workers on reduced hours. Euro-area employment declined 0.5 percent in the second quarter, while industrial output fell 0.3 percent in July, data showed today.

European Stocks

European stocks pared their declines after the EU forecasts were published. The Dow Jones Stoxx 600 Index was 1 percent lower at 3:05 p.m. in London, after trading down as much as 1.6 percent earlier.

Companies are cutting costs just as retreating oil prices are pushing down inflation. Euro-area consumer prices have posted annual declines for three straight months. The ECB said on Sept. 10 that, while “inflation rates are projected turn positive again within the coming months,” price developments will remain “subdued” amid “ongoing sluggish demand.”

Euro-area consumer prices probably will drop 0.3 percent this quarter before rising 0.7 percent in the three months through December, the commission forecast today. For the full year, inflation may average 0.4 percent, it said. The ECB aims to keep inflation just below 2 percent.

It's Barack Obama's Economy Now

Tent City America

The Expiring Economy

By PAUL CRAIG ROBERTS

Tent cities springing up all over America are filling with the homeless unemployed from the worst economy since the 1930s. While Americans live in tents, the Obama government has embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan, to rival the one the Bush government build in Baghdad, Iraq.

Hard times have now afflicted Americans for so long that even the extension of unemployment benefits from 6 months to 18 months for 24 high unemployment states, and to 46 - 72 weeks in other states, is beginning to run out. By Christmas 1.5 million Americans will have exhausted unemployment benefits while unemployment rolls continue to rise.

Amidst this worsening economic crisis, the House of Representatives just passed a $636 billion “defense” bill.

Who is the United States defending against? Americans have no enemies except those that the US government goes out of its way to create by bombing and invading countries that comprise no threat whatsoever to the US and by encircling others--Russia for example--with threatening military bases.

America’s wars are contrived affairs to serve the money laundering machine: from the taxpayers and money borrowed from foreign creditors to the armaments industry to the political contributions that ensure $636 billion “defense” bills.

President George W. Bush gave us wars in Iraq and Afghanistan that are entirely based on lies and misrepresentations. But Obama has done Bush one better. Obama has started a war in Pakistan with no explanation whatsoever.

If the armaments industry and the neoconservative brownshirts have their way, the US will also be at war with Iran, Russia, Sudan and North Korea.

Meanwhile, America continues to be overrun, as it has been for decades, not by armed foreign enemies but by illegal immigrants across America’s porous and undefended borders.

It is more proof of the Orwellian time in which we live that $636 billion appropriated for wars of aggression is called a “defense bill.”

Who is going to pay for all of this? When foreign countries have spent their trade surpluses and have no more dollars to recycle into the purchase of Treasury bonds, when US banks have used up their “bailout” money by purchasing Treasury bonds, and when the Federal Reserve cannot print any more money to keep the government going without pushing up inflation and interest rates, the taxpayer will be all that is left. Already Obama’s two top economic advisors, Treasury Secretary Timothy Geithner and director of the National Economic Council Larry Summers, are floating the prospect of a middle class tax increase. Will Obama be maneuvered away from his promise just as Bush Sr. was?

Will Americans see the disconnect between their interests and the interests of “their” government? In the small town of Vassalboro, Maine, a few topless waitress jobs in a coffee house drew 150 applicants. Women in this small town are so desperate for jobs that they are reduced to undressing for their neighbors’ amusement.

Meanwhile, the Obama government is going to straighten out Afghanistan and Pakistan and build marble palaces to awe the locals half way around the world.

The US government keeps hyping “recovery” the way Bush hyped “terrorist threat” and “weapons of mass destruction.” The recovery is no more real than the threats. Indeed, it is possible that the economic collapse has hardly begun. Let’s look at what might await us here at home while the US government pursues hegemony abroad.

The real estate crisis is not over. More home foreclosures await as unemployment rises and unemployment benefits are exhausted. The commercial real estate crisis is yet to hit. More bailouts are coming, and they will have to be financed by more debt or money creation. If there are not sufficient purchasers for the Treasury bonds, the Federal Reserve will have to purchase them by creating checking accounts for the Treasury, that is, by debt monetization or the printing of money.

More debt and money creation will put more pressure on the US dollar’s exchange value. At some point import prices, which include offshored goods and services of US corporations, will rise, adding to the inflation fueled by domestic money creation. The Federal Reserve will be unable to hold down interest rates by buying bonds.

No part of US economic policy addresses the systemic crisis in American incomes. For most Americans real income ceased to grow some years ago. Americans have substituted second jobs and debt accumulation for the missing growth in real wages. With most households maxed out on debt and jobs disappearing, these substitutes for real income growth no longer exist.

The Bush-Obama economic policy actually worsens the systemic crisis that the US dollar faces as reserve currency. The fact that there might be no alternative to the dollar as reserve currency does not guarantee that the dollar will continue in this role. Countries might find it less risky to settle trade transactions in their own currencies.

How does an economy based heavily on consumer spending recover when so many high-value-added jobs, and the GDP and payroll tax revenues associated with them, have been moved offshore and when consumers have no more assets to leverage in order to increase their spending?

How does the US pay for its imports if the dollar is no longer used as reserve currency?

These are the unanswered questions.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions. This fall CounterPunch/AK Press will publish Robert's War of the Worlds: How the Economy Was Lost. He can be reached at: PaulCraigRoberts@yahoo.com

World economy

U, V or W for recovery

The world economy has stopped shrinking. That’s the end of the good news

IT HAS been deep and nasty. But the worst global recession since the 1930s may be over. Led by China, Asia’s emerging economies have revived fastest, with several expanding at annualised rates of more than 10% in the second quarter. A few big rich economies also returned to growth, albeit far more modestly, between April and June. Japan’s output rose at an annualised pace of 3.7%, and both Germany and France notched up annualised growth rates of just over 1%. In America the housing market has shown signs of stabilising, the pace of job losses is slowing and the vast majority of forecasters expect output to expand between July and September. Most economies are still a lot smaller than they were a year ago. On a quarterly basis, though, they are turning the corner.

This is good news. The first step in any recovery is for output to stop shrinking. But the more interesting question is what shape the recovery will take. The debate centres around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.

Optimists argue that the scale of the downturn augurs for a strong rebound. America’s deepest post-war recessions, they point out, were followed by vigorous recoveries. In the two years after the slump of 1981-82, for instance, output soared at an average annual rate of almost 6%; and this time round, output has slumped even further, and for longer, than it did in the early 1980s.

Pessimists, meanwhile, think this downturn’s origins favour a weak recovery or a double-dip. Unlike typical post-war recessions this slump was spawned by a financial bust, not high interest rates, and when overindebted borrowers need to rebuild their balance-sheets and financial systems need repair, growth can be weak and easily derailed for years. Japan’s 1990s banking crisis left the economy stagnant for a decade; a premature tax increase in 1997 plunged it back into recession.

V for vulnerable

Neither of these parallels is exact, because today’s global slump combines several types of downturn and an unprecedented policy response. In formerly bubble economies, it is largely a balance-sheet recession. Debt-fuelled consumption has been felled. But the scale of collapse was broadened and deepened by the freezing up of the machinery of global finance, a dramatic collapse in confidence and stock-slashing. It was then countered with the biggest stimulus in history. The shape of the recovery depends on how these forces interact.

In the short term that shape could look beguilingly like a “V”, as stimulus kicks in and the inventory cycle turns. In emerging Asia, the unfreezing of trade finance, a turnaround in stocks and hefty fiscal stimulus are powering a rebound. Government support, especially employment subsidies and incentives toa buy new cars, has cushioned demand in Germany and France (see article). With export orders rising and confidence growing, the next few months could be surprisingly buoyant. Even in America, the fiscal stimulus is kicking in, the “cash for clunkers” scheme is a big, if temporary, prop to output and firms will, sooner or later, stop cutting inventories.

Yet a rebound based on stock adjustments is necessarily temporary, and one based on government stimulus alone will not last. Beyond those two factors there is little reason for cheer. America’s housing market may yet lurch down again as foreclosures rise, high unemployment takes its toll and a temporary home-buyers’ tax-credit ends (see article). Even if housing stabilises, consumer spending will stay weak as households pay down debt. In America and other post-bubble economies, a real V-shaped bounce seems fanciful. Elsewhere, it will happen only if vigorous private domestic demand picks up the baton from government stimulus. In Japan and Germany, where joblessness has further to rise, that seems unlikely any time soon. The odds are better in emerging economies, especially China. But even there an array of reforms, from a stronger currency to an overhaul of subsidies, is needed to boost labour income and encourage consumption. Until that shift takes place, the global recovery will be fragile and probably quite feeble. A gloomy U with a long, flat bottom of weak growth is the likeliest shape of the next few years.

Japan's economy

A hollow recovery

Japan’s recession has technically ended but voters are likely to see through the numbers

SUMMERS in Tokyo are renowned for their diabolical heat. But salarymen sweating from Fukuoka to Sapporo might take comfort in economic data released on Monday August 17th showing that Japan’s economy has warmed up a little too. The country, which previously suffered four consecutive quarters of contraction, grew by 0.9% between April and June compared with the previous quarter (or 3.7% at an annualised rate). It follows a massive 11.7% annualised slump in first quarter. The growth means that Japan is no longer technically in recession.

Celebrations will be muted, however. The modest rebound after such a punishing slump is nothing to get excited about, either for the country, or the ruling party, which faces what could be a historic defeat in elections on August 30th. And it is the result of a quirk, due in part to small upticks in production, exports and domestic sales following a year of hefty shortfalls. Moreover, the positive blip will do little to help the ruling Liberal Democratic Party’s (LDP’s) electoral chances.

Their candidates are likely to make a lot of the data when the short campaign officially starts on Tuesday–after all, the government had promised that the economy would rebound by the summer. But the party has presided over two decades of economic hardship during its almost 53 years in control, and disenchantment is running high. Opinion polls suggest that the LDP is likely to be beaten by the Democratic Party of Japan because of a wide set of failings, not just its economic (mis)management. Japan is still expected to perform the worst among the G7 group of rich countries and the economy may contract by as much as 6% this year, around twice the rate of America, according to some forecasters.

Those who doubt the sustainability of the upswing note that, above all, it was technical in nature. After a period of destocking, inventories fell so low that an upswing in production was inevitable—indeed, it was widely forecast to happen as far back as January.

Furthermore, some of the growth is due to one-off government stimulus measures. Big public works projects pumped money into the economy, and the government has been credited for the aggressive way that it poured cash at the crisis. But economic stimulus packages can not boost an economy forever in a country with a ratio of government debt to GDP that is close to 200%, the largest of any rich country. On the consumer side it also offered financial incentives for consumers to buy new, energy-efficient cars and appliances, as well as handing out ¥12,000 ($127) per person. Household consumption grew by 0.8% quarter on quarter.

But they are short-term fillips. Domestic demand is expected to decline as joblessness rises and wages fall. The unemployment rate hit 5.4% in June, near a post-war peak of 5.5% in 2003. And Japan has a shrinking workforce which weakens growth further. Consumer sentiment is improving slightly, but only after deep declines.

Falling prices are also putting a break on consumption; the rate of deflation is actually accelerating. At the same time, capital investment is expected to shrink this year and even fall by 7.9% in 2010, according to analysts at HSBC. Taken together, this bodes ill for the world’s second-largest economy. Heavily exposed to exports, Japan suffered when overseas demand shrivelled amid the downturn.

Rebalancing the economy towards domestic demand will be hard in Japan. Politicians are unlikely to countenance the sort of bold changes needed to stoke spending at home such as slashing the regulations that surround service industries, protecting them from competition. Farming too could be liberalised, as could heavily protected bits of the economy such as energy, transport, health care and education. The government’s claim that the worst may be over may be true. But any recovery is probably too late to save its skin.

Redesigning Europe's biggest economy

Unbalanced Germany

Europe’s champion is justly proud of its exporters. It also needs to worry about markets closer to home

IN THE late 1950s Chancellor Konrad Adenauer campaigned by reminding West German voters of their growing, but fragile, prosperity. “No experiments!” was his slogan. Adenauer’s spirit is abroad once more as Germany, united now and infinitely more self-assured, prepares for a national poll in September with a startling lack of audacity.

To German eyes, the reason to be steady is as plain as the badge on a Mercedes-Benz. The country has had a pretty good crisis. GDP has lurched sickeningly downward, but employment has not. Germany’s economic machine is made of honest iron and steel, not subprime mortgages, collateralised debt obligations and other financial chicanery. Having been concocted in Wall Street and the City of London, the crisis, it is said, has proved the merit of Germany’s solid social-market economy. Indeed, today’s chancellor, Angela Merkel, wants September’s G20 summit in Pittsburgh—just days before the election—to approve a “sustainable” economic charter that enshrines the German approach to taming markets.

Ideological assertiveness makes a change for a country that spent much of the past 15 years debating how far it needed to copy Anglo-American capitalism. But, if you look more closely, the Bundesrepublik does not come out of the crisis quite so well. Just as America and Britain now have to grapple with better ways to regulate financial services, so Germany also faces hard questions, about the lopsided shape of its economy, the need for further painful change, and whether its political parties have the gumption to embrace reform.

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Wirtschaftsblunder

It may seem unfair, but the reason to question Germany’s economy is the dominance of its exporters. Few can look at Germany’s champions without admiring them—not just the giant carmakers that have conquered the world through their engineering excellence, but the pencil-makers, machine-tool designers, printing-press firms and countless other specialists that each lead their niche. Some German companies have been caught up in scandals, a sign perhaps that their corporate governance is not all that it is cracked up to be (see article). Most of them, however, mock the clichés used to deride European business. German exporters are innovators, tough on wages and flexible enough to get the job done. They have stayed competitive against all comers.

Yet Germany’s muscle-bound economy is also a victim of its exporters’ success. Global markets are volatile: the country’s current-account surplus has fallen by more than half from a mighty 8% of GDP in just a year. As the hard-earned surpluses piled up, they were invested in lower-quality foreign assets. Just ask the German banks that gave their money to those sharks on Wall Street, or the firms that splashed out on big acquisitions, like Chrysler. Germany seemed to forget that the point of exports is ultimately to pay for imports (see article).

But Germany prefers to save rather than spend. In the boom German consumers stayed at home. Last year consumer spending was only 56% of GDP compared with 70% in America. Puny demand was partly the result of small wage rises, but it was also because Germany’s service sector is underdeveloped. This matters because, although Germany can still export to the rapidly industrialising (and rapidly growing) emerging economies, demand has faded in the far bigger markets in America and Europe. Germany needs to sell services at home to fill the gap.

Germans will tell you saving is a national obsession that reaches far back into their history. And they do not want more services—they hate getting in help to do the cleaning or put up shelves. Perhaps; but the dearth of spending and new service businesses is also caused by government policy. Germans struggle to create companies. Germany comes 102nd out of 181 countries recently surveyed as places to start businesses by the World Bank. Start-up capital is scarcer than it is elsewhere. There has been deregulation, to lengthen shopping hours and to coax the long-term unemployed back into work. But Germany remains bad at getting women and older people into jobs. Full-time posts are over-protected and generous welfare benefits act as a minimum wage. To cap it all, in 2007 the state squashed consumer demand by increasing value-added tax.

Instead of using the crisis to promote services at home, the coalition of the Social Democratic Party (SPD) and Ms Merkel’s Christian Democrats has fallen back into bad old habits and used policy to prop up exporters. Germany has 1.4m workers in job-saving schemes which are supposed to tide people over until export demand picks up. It makes sense to preserve skills, but, since export demand will not fully recover, many of these people will end up unemployed. Realising this, perhaps, the SPD this week proposed a “Silicon Valley of environmentally friendly industrial production”—another export-boosting plan. Moreover, this one will happen only if Germany can create and commercialise valuable university research and learn to incubate high-technology start-ups. Young Germans thinking about starting a high-tech business today prefer to go to the real Silicon Valley.

Time to experiment

The next government’s main job will be to sort all this out. Yet politicians seem loth even to talk about it. This is partly because German politics is fragmenting and the centre parties are on the defensive (see article). But it is also because voters rejected free-market programmes earlier this decade. In 2005 they punished the SPD for its reforms and, in the general election, Ms Merkel herself for even talking about a radical path.

Yet isn’t politics supposed to be all about the art of persuasion? In the past decade German firms, unions and politicians have set about making their export economy competitive, with spectacular results. Now the country needs to gear up the domestic economy. Politicians often protest that services are for dodgy financiers or downtrodden burger-flippers and that Germany deserves better. As September’s vote draws near, they should think again, if only for the sake of millions of their underemployed compatriots. It is time to experiment.

Drinking Until the Economy Looks Good

By The Mogambo Guru

Tampa Bay, Florida

I have, as part of my Official Mogambo Duties (OMD), spent many an evening at local bars, sampling various beverages and making goo-goo eyes at the barmaids while waxing loud and lyrical about the ludicrous extremes of fractional-reserve banking extant in the world today, a device where banks can loan out huge multiples of any money deposited, keeping only a fraction of the original deposit as reserves to insure against loans not being repaid.

As you may not know and about which I have a hard time believing myself, offering free economic education to stupid drunken people has not made me very popular at these establishments, and I am starting to think I have wasted a lot of my Precious Mogambo Time (PMT) with those losers.

I say this because I just got back from visiting one of my favorite hangouts where I entered the place and asked, “Is everybody here upset at the degree of fractional-reserve banking that the stinking Federal Reserve has allowed in the banks, and how it is bankrupting banks all over the country?” where I expected them to say, “Yes, we are worried sick about it, Glorious And Wonderful Mogambo (GAWM), thanks to you educating about it! Let us buy you drink after drink until you are really loaded as a way of showing our everlasting appreciation!”

Alas, I was disappointed when they all shouted back, “No! Now shut up and go away!”

I’ll bet they would not be so rude to Chris Mayer of Capital and Crisis newsletter, as he has the exact facts and figures that could educate those lowlife drunken morons and, perhaps, break through to them and make them realize the dangers!

Alas, I have tried and, obviously, failed, even though I did exit gracefully by yelling, “You’re all a bunch of stupid lowlife drunken morons, just like my mother warned me about and my wife warns me about to this day!”

I can only imagine with a sense of joy the look of Total Mogambo Enlightenment (TME) on their faces if I had shown those losers his newsletter where he wrote, “The typical bank has only 4 cents of tangible equity for every dollar of assets. That means a 4% drop in asset value wipes out the equity – making the bank insolvent.”

A drop of a lousy 4% will wipe them out! No wonder the Federal Reserve pumped about $60 billion into reserves at the banks last week, bringing the total to a whopping $805.772 billion in Total Reserves, and it added about $76 billion in Non-borrowed Reserves, bringing that total to $417.9 billion, last week alone!

This seems like a lot of money when you realize Required Reserves, the money held in cash by the bank as an insurance cushion against many trillions of dollars in loans and deposits, is still only a laughably pitiful $61.9 billion, although up from the ridiculous less-than-$50-billion in reserves that prevailed since 2000! Hahaha!

It has all resulted in total, unmitigated failure (just like it always has, in all the monetary booms, in all of history!), which I easily prove by merely standing up, going over to the window, whereupon to look out upon the landscape and, in a breathtaking performance of the story of Man, his spirit broken by looking into the future, who is despondent to the point of crying the heartbreaking Tears Of The Mogambo (TOTM) at the sight of such suffering and bankrupting misery as it unfolds anew through the window!

Obviously, it is enough to thrill and chill even the most jaded theatergoer with a blazing performance of theatrical incandescence of despair and anger that should, in a just world, win a prestigious award of some kind just for the way I melodramatically and memorably scream, “Nooooooooo!” as if my very soul was in mortal torment at the prospect of the disaster of inflation in consumer prices that will result from such insane amounts of Fed-created money, if nothing else.

As fabulous as it is to see such a terrific performance in the category of a short informational or educational film concerning an economic, social, religious, race or other cult subject in a primarily-documentary format, the point is that this is all especially bad news, including anyone wanting a job in the future, as new jobs come from expanded reserves, which come from expanded deposits and expanded loans, expanded business investment and expanded consumption.

As if to prove me right, although nobody can quite remember what I was talking about, for some reason it led to Byron King writing at Whiskey and Gunpowder that, last week, “the Fed made a shocking prediction. It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years!”

Dan Amoss of the Strategic Short Report newsletter reports that BusinessWeek magazine found that “the public sector of the U.S. economy created 2.4 million jobs over the past decade – twice as many as the private sector.”

Being the gentleman that he is, Mr. King does not say something Mogambo-like, such as, “We’re freaking doomed, and you are doomed, too, you moron, unless you are building bunkers in the backyard and buying gold, silver and oil with every dollar you can get your filthy hands on, because the dirtbag government is going to use this lack of gains in employment as an excuse to act even MORE insane with deficit-spending, and the Federal Reserve will, in turn, use it as an excuse to print up the excessive amounts of fiat money and credit necessary to pay for it all, meaning that inflation in consumer prices will destroy us all!”

I would have ended the outburst by dramatically proving my point, repeating, “Print up all of the fiat money and credit to pay for it all, meaning that inflation in consumer prices will destroy us all! It’s not only Completely Freaking True (CFT), but it even rhymes, as if to prove it all over again! Can’t you see that? Don’t you see the obvious connection, you morons?”

Mr. King chooses, instead, to say merely, “Whoa!”

“No net new jobs?” he asks. “That ought to scare you. The Census Bureau predicts that the US population will grow over five years. But the numbers of new jobs will remain static. That is, for every job gain there will be a loss.”

I am particularly sensitive to losses in total jobs, having lost my own job so many times, and ALMOST lost it many times before that, since I seem to always get jobs with anal-retentive perfectionist Stalinists who want me to show up at the job every day, like it is some kind of “crime” to stay up too late drinking and partying with my hoodlum friends, and thus accidentally oversleep by a few hours every few days.

Instead, they wanted me to get to work at the same time every morning with all the “little people” who, herd-like, shuffle and moo as they pass the time clock. How degrading!

And then – get this! – my bosses get all upset when I do manage to get to work on time, and use it as an perfect opportunity to greet my fellow employees merrily clocking in and give them – absolutely free! – the Best Financial Advice (BFA) they ever got by telling them to buy gold, silver and oil because their stupid government is allowing the creation of excess money and credit, which is doing exactly what they should NOT be doing, which is why the Founding Fathers, who were men who had the wherewithal and inclination to look into history to discover that a fiat currency in the hands of a government determined to spend more than it should got destroyed Every Freaking Time (EFT).

Like most employees everywhere, they all just looked at me with that stupid, uncomprehending bovine expression on their stupid cow-like faces, which explains why, from then on, I always called them “moo people”, which was a lot more clever that what they called ME in return, which was simply “jerk”, which shows a serious lack of imagination in selecting nicknames.

But it takes no imagination, or even smarts, to quickly see that history is full of examples of governments with a fiat currency getting into trouble by creating too much of it, which always makes gold go up when priced in a fiat currency in trouble, which makes me exclaim with undisguised glee, “Whee! This investing stuff is easy!”

Canada's stalled economy

The humbling of Detroit North

The decline of America’s car industry has hurt the Canadian economy too. Revival depends on making it easier to cross the border—or on seeking markets elsewhere

FOR almost a century the fate and fortune of Windsor, Ontario, have been intertwined with those of Detroit, Michigan. General Motors (GM), Ford and Chrysler made cars on both sides of the Detroit River, sending parts and vehicles back and forth at will. Windsorites worked in the car plants, loyally bought the cars, followed American sports teams, and thought nothing of driving over the Ambassador Bridge or popping through the Detroit-Windsor tunnel for a night on the town.

So the collapse into bankruptcy of GM and Chrysler has brought Windsor down along with Detroit. A blue-collar city of 273,000 people, Windsor now has the highest jobless rate in Canada (14.4%) and faces an uncertain future. Its decline is visible on Ouellette Avenue, the main commercial artery. On some blocks, more shops have shut down than are still open. The brightest sign on the street announces the grand opening of Dollarama, a deep discount store. On the riverside promenade the headquarters of Chrysler Canada, opened with much hoopla in 2002, stands partly empty, a “For Rent” sign on the plate-glass window of its showroom. Truck traffic between Windsor and Detroit—the busiest crossing-point on the Canadian border—fell by a third in the first six months of this year compared with the same period in 2008.

Windsor’s woes are echoed across southern Ontario, the heartland of industrial Canada, which depends on exporting to the United States. Tighter security at the border after the terrorist attacks of September 2001 and a stronger Canadian dollar constrained the region’s economy even before the American economy plunged into recession in late 2007, with Detroit leading the decline.

Between them, Canada’s federal government and Ontario’s provincial administration contributed C$14.5 billion ($13.4 billion) to the bail-outs of GM and Chrysler. That was enough to deter them from pulling out of the country. But they will cut a slimmer figure. Output and employment in Canada’s car industry will end up at least a third below the 1999 peak of 3m vehicles and 160,000 workers at assembly plants and parts-makers, says Dennis DesRosiers, an industry analyst. It helps that Toyota and Honda, with factories in Ontario, are keeping most of their workers.

Ontario’s problems go wider than cars. Recession has curbed demand for its minerals and forest products. Nortel, a telecoms firm that was once Canada’s leading high-tech company, recently entered bankruptcy. Bits of it are being sold off piecemeal. Two-thirds of the 370,000 jobs lost in Canada between October 2008 and June 2009 were in Ontario, most of them in manufacturing.

Ontario’s economy is still the biggest in Canada. But it is no longer the richest. Indeed Ontario is now classified as a have-not province, making it eligible for handouts from a federal fund to equalise public spending across the country. It has even been granted its own federally funded economic development agency.

Some pundits reckon that rather than bailing out industrial dinosaurs government should be encouraging new technologies. Supporters of Dalton McGuinty, the province’s premier, say that he had no choice but to help to bail out the car industry because of its size. (He also offered a subsidy of C$10,000 to each purchaser of an electric car.) Critics contrast this largesse with the government’s failure to help Nortel. Stephen Harper, Canada’s Conservative prime minister, faces nationalist pressure to veto a bid of $1.1 billion from Sweden’s Ericsson for its wireless technology division and find a Canadian buyer.

Even in car-mad Windsor people are starting to realise that change is inevitable. Eddie Francis, the mayor, says he hopes to make the municipal airport a processing centre for perishable cargo. He says that some of the city’s car-parts makers have started supplying oil companies and Quebec’s aerospace industry.

But diversification is not easy. Caesars Windsor, a massive casino, convention centre and hotel aimed at the 17m Americans who live within a three-hour drive, is suffering along with the car industry. Its workforce has shrunk from a peak of 5,400 before 2001 to 3,800 today. “It’s not true that casinos are recession-proof,” says Keith Andrews, the casino’s spokesman. He is sitting in the hotel’s 10,000 square-foot (930 square-metre) lobby, where statues of Roman gods and goddesses outnumber guests.

Canada’s economy, like that of the United States, shows signs of recovery. Though weakened, the car industry will survive. The biggest headache for places like Windsor may be the thickening border. Since June 1st those returning to the United States from Canada have been required to show a passport (or another approved identity document), where a driving licence was always sufficient. Janet Napolitano, the secretary for homeland security, talks of treating America’s northern border more like its southern one with Mexico (where the building of a fence on long stretches continues).

Security measures are not the only impediment to travel between Detroit and Windsor. The privately owned Ambassador Bridge and the public road and rail tunnels that link the two cities are old and narrow. Plans to build a new bridge, or add a span to the existing one, have bogged down in lawsuits. The owner of the Ambassador Bridge wants to protect his near-monopoly.

Like it or not, Canada is uncomfortably dependent on the United States as a market, with 76% of its exports going to its southern neighbour. Mr Harper’s government has tried to open new markets. It is now negotiating a free-trade agreement with the European Union, for example. But places like Windsor, just a short stretch of water from the flickering beacon that is Detroit, can only hope that the American economy is quickly restored to health.

U.S. Markets Wrap: Stocks Gain, Bond Fall as Economy Rebounds

June 18 (Bloomberg) -- U.S. stocks snapped a three-day losing streak and Treasuries fell as reports on jobless claims and manufacturing added to evidence the recession may be near a bottom. The dollar and oil rose.

Bank of America Corp. and JPMorgan Chase & Co. climbed at least 4.4 percent as the number of people collecting unemployment insurance fell by the most in almost eight years. Alcoa Inc. and DuPont Co. added more than 1.7 percent as gauges of leading economic indicators and Philadelphia’s economy topped economists’ estimates. Discover Financial Services rallied as the credit-card company’s loan losses grew less than forecast.

“The market has run out of fantastic reasons to sell,” said Stephen Wood, who helps manage $136 billion as chief market strategist for North America at Russell Investments in New York. “Those Armageddon, Great Depression, worst-case scenarios being priced in a few months ago are now a low probability, and the recovery reflects that.”

The Standard & Poor’s 500 Index rallied 0.8 percent to 918.34 at 4 p.m. in New York. The Dow Jones Industrial Average advanced 57.59 points, or 0.7 percent, to 8,554.77. The Nasdaq Composite lagged other indexes, slipping less than 0.1 percent as SanDisk Corp. tumbled on an analyst downgrade.

Treasuries fell for a second day as the reports showed the deepest recession in 50 years may be ending and the U.S. said note sales will increase to a record $104 billion next week. The dollar gained 0.4 percent against the euro and oil rose 0.3 percent to $71.37 a barrel.

Ten-Year Yields

Ten-year yields touched the highest in almost a week amid concern President Barack Obama’s record borrowing will overwhelm demand. The difference in yield between 2- and 10-year notes widened to 2.56 percentage points, the most in over a week.

“There’s so much focus on the borrowing amounts Treasury will face over the next couple of years,” said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc., in New York. Deutsche is one of 17 primary dealers that trade with the Federal Reserve. “There’s evidence that the economy may be turning the corner. That’s pushing yields up.”

The 10-year note yield rose 13 basis points, or 0.13 percentage point, to 3.82 percent, according to BGCantor Market Data. It touched 3.84 percent, the highest since June 12. The 3.125 percent security maturing in May 2019 fell 1, or $10 per $1,000 face amount, to 94 9/32.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, gained 0.5 percent to 80.590.

Auctions

Stocks opened higher as the Labor Department said continuing jobless claims decreased by 148,000 to 6.69 million, the first drop since January, even after weekly initial claims increased 3,000 to 608,000. Gains accelerated after the Conference Board’s index of leading economic indicators climbed 1.2 percent and a Federal Reserve report showed Philadelphia- area manufacturing shrank at the slowest pace in nine months.

The Treasury said it will auction $40 billion in two-year notes on June 23, $37 billion of five-year debt the following day, and $27 billion of seven-year securities on June 25. The total is $3 billion more than when the government last sold notes of similar maturities and the most since the U.S. began sales of this combination of maturities in February.

Daniel Fuss, the Loomis Sayles bond fund manager who has matched the returns of Pacific Investment Management Co.’s Bill Gross for the past decade, isn’t tempted by Treasuries even after yields on the 10-year note have climbed more than 64 percent this year.

The Greenback

The dollar strengthened against the euro for the first time in three days on speculation changes in how the London interbank offered rate is set may increase the borrowing costs for the greenback outside the U.S.

Investors also abandoned bets that the euro would appreciate further after the common European currency failed to strengthen beyond $1.40. The British Bankers’ Association said it may allow more institutions to take part in the daily survey that sets Libor, the benchmark for more than $360 trillion of financial products around the world.

The dollar gained 0.4 percent to $1.3890 per euro at 3:34 p.m. in New York, from $1.3942 yesterday. It touched $1.4001. The dollar rose 1 percent to 96.66 yen.

Gold fell on speculation that a stronger dollar and an improving U.S. economy will reduce the metal’s investment appeal. Silver also declined.

Crude oil rose after the reports signaled that the U.S. economy will rebound later this year, prompting an increase in energy demand.

“The market is stubbornly holding up,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “Prices are up on expectations that the economy is recovering and demand will strengthen.”

Crude oil for July delivery rose 27 cents, or 0.4 percent, to $71.30 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures dropped as much as 81 cents, or 1.1 percent, earlier today. Prices are up 60 percent this year and reached a seven-month high of $73.23 on June 11.

Venezuela's oil-dependent economy

Socialism on the never-never

Hard times on the streets of Caracas

Grab the chicken while stocks last

GLOBAL capitalism may be in crisis, but thanks to “21st-century socialism” Venezuela’s economy is “armour-plated” and the country’s poor have nothing to fear. That has been the message from Hugo Chávez, Venezuela’s president, and his ministers in recent months. If anyone is to suffer from the lower price of oil, the country’s mainstay, they insist it will be only “the oligarchy”. And serve them right: according to Mr Chávez, the rich are merely “animals in human form”.

The oil price has doubled from its December trough (although it is still only half its peak of a year ago), so one might expect Mr Chávez’s fighting talk to be reflected in resilient living standards. But inflation is close to 30%, real wages are falling and welfare schemes have suffered big cuts in their budget. The mood on the streets of poorer suburbs of Caracas, the capital, is glum.

“I go shopping whenever I can scrape together enough money,” says Pedro López, a bricklayer who has been out of work for the past three months. Officially, unemployment is stable at around 7%. But Mr López says: “It’s not just me. Lots of my workmates have been laid off too.” According to the Central Bank, the economy grew by 0.3% in the first quarter compared with the same months of 2008. Construction is supposed to have expanded by 3.6%. But some economists doubt the figures.

Public investment is under strain. This month, for example, the boss of Caracas’s metro system announced a review of a new line already under construction, with the probable scrapping of two stations. He argued that since these were in middle-class areas they would “benefit the oligarchy” who all have cars anyway. Other public-sector projects have slowed or stalled, seemingly for lack of funds.

Consumer confidence fell by 17% between December and May, according to Datanálisis, a market-research company. Food consumption among poorer Venezuelans may be declining, says Pavel Gómez, an economist at IESA, a Caracas business school. Opinion polls reveal a sharp rise in worries over the cost of living. The government’s answer to years of persistent inflation has been price controls and Mercal, a state-owned and subsidised grocery chain that offers a limited selection of staples at discounts of up to 40%. But Mercal’s sales fell by more than 11% in the first five months of this year, partly because of store closures and distribution problems.

“Every day, things get a little tighter,” said Migdalia Pérez, a community activist in Catia, a working-class district of 500,000 people in western Caracas. “And it’s been a while since we’ve had a Mercal around here.” Near Propatria metro station, a dozen Mercal employees sit idle by the door of the local branch. They insist it is being “refurbished”. Locals say it opens only when an occasional shipment of imported chicken arrives. Smaller corner shops known as Mercalitos which devote some shelf-space to subsidised goods are also closing down. “It’s not profitable,” says José Cabrita, who owned one. “They don’t allow you any margin.” He adds that supplies were erratic.

The most popular of Mr Chávez’s social misiones is Barrio Adentro, which includes a network of primary-health centres initially staffed by thousands of Cuban doctors. But many of these have also closed. Poorer Venezuelans must rely on rundown public hospitals, which have been starved of funds under Mr Chávez. Mr López, the bricklayer, says that when he broke his wrist in an industrial accident, “it took three months to fix it, and I had to buy the metal pins myself.”

Much of the money for the dozens of social misiones which Mr Chávez set up as a parallel welfare state came direct from PDVSA, the state oil company. But its oil output has been falling. When the oil price plunged last year, its direct transfers to welfare programmes fell to $2.7 billion, from $7.1 billion in 2007. That is because responsibility for the misiones has been handed over to the relevant ministries, according to Rafael Ramírez, PDVSA’s chairman. But since oil revenues pay for around half of the government’s budget, this has not prevented cuts in welfare spending.

On the face of things, the recent recovery in the price of oil to around $70 a barrel should enable Mr Chávez to muddle through without radical shifts in policy. But Venezuela’s generally heavy and sulphurous oil sells at a discount of around $10 a barrel. To sustain public spending at its peak level without deficits would have required Venezuelan oil to sell at an average of $90 a barrel last year, according to a calculation by Domingo Maza Zavala, a former governor of the Central Bank. The magic price would be higher still today, given inflation (the official exchange rate is pegged to the dollar) and the further expansion of the state through the nationalisation of private businesses.

So that points to a mixture of cuts and borrowing. Since public debt was low, at 20% of GDP last year, and Venezuelan banks have ever-fewer private clients, there is some room for further loans. The National Assembly duly authorised fresh government borrowing this month. But Mr Chávez’s hopes of remaining in power for decades to come depend, as ever, on the price of oil.