Flashman Letters

NIALL FERGUSON: Okay, I Admit It—Paul Krugman Was Right

FERGUSON: Well, you see the problem is that the logic of what she said was that she sees Europe becoming like the Federal Republic of Europe over the next 20 years. The European Commission will be the government, Parliament will be more powerful, the Council of Ministers will be like the second chamber. Fine. But the Federal Republic of Germany isn’t based on an austerity pact that requires countries never to run a budget deficit. It’s based on a transfer union. The money goes from the richer Bavarians to the poorer north Germans and, of course, to the East Germans. And it’s based on a central treasury with things called Bunds. Now, if you apply the analogy to the European level, it means there has to be a proper European treasury and European bonds. And that’s just what the Germans have been opposing. So the German position is inconsistent. They want a Federal Europe, that’s now clear. But they’re not prepared to will the means. And you cannot base fiscal federalism exclusively on a pact—a kind of pact of death that nobody ever runs a budget deficit.

via www.businessinsider.com

Have You Ever Tried to Sell a Diamond? The world is a complicated place

The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever -- "forever" in the sense that they should never be resold.

In September of 1938, Harry Oppenheimer, son of the founder of De Beers and then twenty-nine, traveled from Johannesburg to New York City, to meet with Gerold M. Lauck, the president of N. W. Ayer, a leading advertising agency in the United States. Lauck and N. W. Ayer had been recommended to Oppenheimer by the Morgan Bank, which had helped his father consolidate the De Beers financial empire. His bankers were concerned about the price of diamonds, which had declined worldwide.

In Europe, where diamond prices had collapsed during the Depression, there seemed little possibility of restoring public confidence in diamonds. In Germany, Austria, Italy, and Spain, the notion of giving a diamond ring to commemorate an engagement had never taken hold. In England and France, diamonds were still presumed to be jewels for aristocrats rather than the masses. Furthermore, Europe was on the verge of war, and there seemed little possibility of expanding diamond sales. This left the United States as the only real market for De Beers's diamonds. In fact, in 1938 some three quarters of all the cartel's diamonds were sold for engagement rings in the United States. Most of these stones, however, were smaller and of poorer quality than those bought in Europe, and had an average price of $80 apiece. Oppenheimer and the bankers believed that an advertising campaign could persuade Americans to buy more expensive diamonds.

Oppenheimer suggested to Lauck that his agency prepare a plan for creating a new image for diamonds among Americans. He assured Lauck that De Beers had not called on any other American advertising agency with this proposal, and that if the plan met with his father's approval, N. W. Ayer would be the exclusive agents for the placement of newspaper and radio advertisements in the United States. Oppenheimer agreed to underwrite the costs of the research necessary for developing the campaign. Lauck instantly accepted the offer.

In their subsequent investigation of the American diamond market, the staff of N. W. Ayer found that since the end of World War I, in 1919, the total amount of diamonds sold in America, measured in carats, had declined by 50 percent; at the same time, the quality of the diamonds, measured in dollar value, had declined by nearly 100 percent. An Ayer memo concluded that the depressed state of the market for diamonds was "the result of the economy, changes in social attitudes and the promotion of competitive luxuries."

Although it could do little about the state of the economy, N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the "social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of "competitive luxuries." Specifically, the Ayer study stressed the need to strengthen the association in the public's mind of diamonds with romance. Since "young men buy over 90% of all engagement rings" it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any

via www.theatlantic.com

Girl, 19, disguises herself as a boy on Facebook to trick two girls into sex - Ready or Not Here it Comes - Dating in the socially - networked world

Prosecutor Ruby Selva said: “Having befriended the victims she disguised herself as various 16-year-old boys for the sole purpose of having sexual relationships with them.”

Judge Peter Moss branded Barker, now 20, “mean and manipulative” and warned she could face jail. He said he could not be certain whether the cruel scam made her “bad and dangerous to know or mad and dangerous to know”.

Barker created bogus characters Aaron Lampard, Connor McCormack and Luke Jones on Facebook to lure her victims after they had told her about their “ideal” boyfriends.

After winning their ­confidence, she disguised herself as boys to meet them for kissing, cuddling and petting sessions at their homes.

The girls and their families knew Barker but did not suspect anything.

Ms Selva added: “Neither girl had any idea it was Miss Barker, their friend. If either of them had known of the deceit, that the boy they were having a relationship with was Miss Barker, they would not have consented to the acts.”

The prosecutor told the court that the older girl struck up a relationship with “Aaron Lampard” and the pair became an item before they even met.

She added: “She described meeting who she thought was Aaron in various parks, taking him home to her family.

“They too were taken in by the ­character, even though they had met Miss Barker. They described never really seeing Aaron Lampard’s face because of the hat being pulled down so low or him averting his eyes from them.”

via www.mirror.co.uk

F.A. Hayek On "The Great Utopia"

What is promised to us as the Road to Freedom is in fact the Highroad to Servitude. For it is not difficult to see what must be the consequences when democracy embarks upon a course of planning. The goal of the planning will be described by some such vague term as "the general welfare." There will be no real agreement as to the ends to be attained, and the effect of the people's agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all.

Democratic assemblies cannot function as planning agencies. They cannot produce agreement on everything — the whole direction of the resources of the nation-for the number of possible courses of action will be legion. Even if a congress could, by proceeding step by step and compromising at each point, agree on some scheme, it would certainly in the end satisfy nobody.

To draw up an economic plan in this fashion is even less possible than, for instance, successfully to plan a military campaign by democratic procedure. As in strategy it would become inevitable to delegate the task to experts. And even if, by this expedient, a democracy should succeed in planning every sector of economic activity, it would still have to face the problem of integrating these separate plans into a unitary whole. There will be a stronger and stronger demand that some board or some single individual should be given power to act on their own responsibility. The cry for an economic dictator is a characteristic stage in the movement toward planning. Thus the legislative body will be reduced to choosing the persons who are to have practically absolute power. The whole system will tend toward that kind of dictatorship in which the head of the government is position by popular vote, but where he has all the powers at his command to make certain that the vote will go in the direction he desires.

Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and, as such, essential if central planning on a large scale is to be possible. There is no justification for the widespread belief that, so long as power is conferred by democratic procedure, it cannot be arbitrary; it is not the source of power which prevents it from being arbitrary; to be free from dictatorial qualities, the power must also be limited. A true "dictatorship of the proletariat," even if democratic in form, if it undertook centrally to direct the economic system, would probably destroy personal freedom as completely as any autocracy has ever done.

Individual freedom cannot be reconciled with the supremacy of one single purpose to which the whole of society is permanently subordinated. To a limited extent we ourselves experience this fact in wartime, when subordination of almost everything to the immediate and pressing need is the price at which we preserve our freedom in the long run. The fashionable phrases about doing for the purposes of peace what we have learned.to do for the purposes of war are completely misleading, for it is sensible temporarily to sacrifice freedom in order to make it more secure in the future, but it is quite a different thing to sacrifice liberty permanently in the interests of a planned economy.

To those who have watched the transition from socialism to fascism at close quarters, the connection between the two systems is obvious. The realization of the socialist program means the destruction of freedom. Democratic socialism, the great utopia of the last few generations, is simply not achievable.

via www.zerohedge.com

The Hedge Fund Industry Has Kept 98% Of The Profits in Fees

It turns out that if you calculate how much money hedge funds generated BEFORE fees from 1998-2010, and then deduct hedge fund fees (and fund of fund fees) from the gross profits (that is, in excess of treasury bills since those are the only measure of returns that are worth anything) , the clients were left with 2%.

Hedge funds have been highly profitable, but unfortunately the profits haven’t made it to the investors. Anybody can do this calculation – the methodology is simple, is explained in my book (The Hedge Fund Mirage) and has not been seriously challenged by anybody.

The industry kept 98%. Bloomberg presented a version of this chart on TV this morning. Hopefully the message is getting across. It’s not that there aren’t some great hedge fund managers out there – of course there are. But investors need to do a far better job of negotiating terms that allow them to share in that success.

via www.businessinsider.com

Oh, and by the way..... I need to make 7% or my pension fund blows up.

 

Marshall Auerback: Anschluss Economics – The Germans Launch a Blitzkrieg on the Greek Debt Negotiations

Now, polls appear to indicate that a bunch of the Greek middle classes might actually welcome EU control over their finances, as opposed to a bunch of corrupt Greek politicians, but overall, it’s almost certainly guaranteed to trigger a violent reaction. In any case, given that a deal with Athens is seemingly so close, why did Berlin choose this particular moment to make this demand, and place the entire deal potentially at risk?

I think we have to look beyond Greece for the answer to that question.

One suggestion by Megan Greene is that Berlin’s proposal is a by-product of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO):

If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default.

In the absence of the ECB hoovering up all of Greece’s debt via its Securities Market Programme (“Not gonna happen; wouldn’t be prudent,” as George Bush the Elder/Dana Carvey might have said), Greece is, as Greene argues, clearly insolvent and would likely have to leave the eurozone to eventually return to growth. The German proposal, argues Greene, may have accelerated the inevitable.

But there’s another, more sinister interpretation. The question which has been persistently asked since the debt renegotiations started with Greece is: what will stop Portugal, Ireland, or indeed Spain from demanding the same deal? And I continue to believe that Spain is the domino which is too big to fail. Its liabilities are too big to be covered by the existing firewall established by the EFSF and ESM. An expansion of the LTRO might address the solvency/banking crisis, but not the broader problem of deficient aggregate demand, high unemployment, and rising social turmoil.

So to repeat the question: how do you preclude Portugal, Ireland and, indeed, Spain from asking for the same deal as Greece, if the negotiations succeed?

Answer; you can’t. So the Germans throw a politically impossible demand in front of the Greeks, in effect saying, “No more money unless you effectively surrender your national sovereignty.” And that’s the implied warning ahead for the other periphery countries which look to secure the deal currently on the table for Greece.

In effect, the Germans (behind the auspices of the troika) are saying, “It’s fiscal austerity on our terms. You try to renegotiate like the Greeks and we take you over. The other alternative is that you leave.”

via www.nakedcapitalism.com

Newt is my Man.....

Well, Gingich’s imaginative space exploration ideas are far advanced over anything anyone else could offer. Indeed, the other candidates (save Ron Paul) seem to have zero imagination on this or any other issue.

I also think you hit on something in last week’s Radio Derb episode when you said that Newt has won the “bitter ex-husband” constituency. So the sanctimonious “marriage is sacred” crowd thinks Newt’s affairs are unacceptable. You have to wonder what world these people live in where they have never been in a relationship with a pain-in-the-butt female. Lots of things can happen after you commit to someone. They let themselves go, get fat, etc. These broads can drain you emotionally and physically with their endless demands and grievances. People change over time, and divorce is a messy business, especially when there’s money involved. Affairs are biologically natural, when one is separated from their mate for a significant period of time. They are even more natural for the male, whose biological goal in most respects is to impregnate as many females as possible, no? Anyway, if it weren’t for Newt’s dreadful neocon policies, he would have this misogynist’s vote hands down.

One other reason I’m inclined to root for Newt is that he just makes for such a great villain. His narcissism, grandiosity and megalomania have all the makings of a bombastic antagonist, perhaps in the mold of someone like Drax from Moonraker. Even his name, “Newt” lends itself to this narrative (a salamander?) I could easily see him as one of the Alien leaders from V — the original miniseries (1983 version, not the crappy remake.)

via www.nationalreview.com

The US is not an example of a fiscal contraction expansion

What explains the stark differences between the performance of the UK and US economies at present?

It is possible that some of the difference is due to the UK economy being more exposed to the Eurozone than the US economy. But this just highlights the different fiscal position currently being adopted by the respective national governments in each country.

My assessment is that the major difference between the two economies relates to the conduct of the government in each case. The UK government has been announcing its intention to impose harsh fiscal austerity on the national economy since the day it took office. The fact is that most of the spending cuts are still to come, which doesn’t augur well for 2012, the spending associated with the Olympic Games notwithstanding.

It is highly likely that the “announcement effect” by the government of its intention to harshly cut spending has further eroded confidence among households and business firms, already labouring under the deflationary burden of high unemployment.

By way of contrast, while there has been austerity rhetoric in the US, which is probably held back private spending, the unresolved nature of the current political impasse has not translated into any serious budget cuts to date. The current US regime is still talking job creation and growth, which is far removed from the rhetoric that emerges from the British government.

However, I do not want to suggest that the US government is demonstrating sound macroeconomic policy management. Rather that it hasn’t started to actively undermine private spending and overall economic growth in any major way.

via bilbo.economicoutlook.net

The (no) Money Shot - Boomer Retirement: Headwinds for U.S. Equity Markets? (2011-26, 8/22/2011)

Demographic headwinds for U.S. stock prices

Figure 2
Projected P/E ratio from demographic trends

via www.frbsf.org