Misguided Plans to Fix the Fed Part 1: Bernie Sanders

Starting with a recent op-ed in the New York Times by Bernie Sanders, let’s take a look at various proposals floating around to fix the Fed and other central banks.

Bernie Sanders says To Rein In Wall Street, Fix the Fed

Sanders: Wall Street is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

Mish: That type of populist proposal will appeal to those who believe Wall Street is the problem. It will also appeal to those who understand the Fed is indeed in bed with Wall Street. But we must analyze Sanders’ specific recommendations one-by-one.

Sanders: The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

Mish: Sanders ignores the dotcom bubble, the housing bubble, and the bubbles now in both stocks and bonds. Those bubbles all have their roots in a Fed that kept rates too low, too long. The idea that rates should be tied to a single measure like unemployment is ludicrous. And at 4% unemployment rates, the Fed would seldom if ever hiked. The Fed does not know where interest rates should be, and neither does Sanders.

Sanders: What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs. These are clear conflicts of interest, the kind that would not be allowed at other agencies. We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.

Mish: The conflicts of interest are indeed obvious. The solution is to get rid of the Fed.

Sanders: The Fed must also make sure that financial institutions are investing in the productive economy by providing affordable loans to small businesses and consumers that create good jobs. How? First, we should prohibit commercial banks from gambling with the bank deposits of the American people. Second, the Fed must stop providing incentives for banks to keep money out of the economy. Since 2008, the Fed has been paying financial institutions interest on excess reserves parked at the central bank — reserves that have grown to an unprecedented $2.4 trillion. That is insane. Instead of paying banks interest on these reserves, the Fed should charge them a fee that would be used to provide direct loans to small businesses.

Mish: I agree the Fed should prohibit commercial banks from gambling with the bank deposits of the American people. The way to do that is end fractional reserve lending. Lending deposits that are supposed to be available on demand is fraudulent. Paying interest on excess reserves the Fed creates out of thin air is also fraudulent. However, the notion the Fed should charge interest on reserves to spur lending is ridiculous. Mathematically, every dollar the Fed prints has to be held by someone. When banks lend, the money eventually ends up as a deposit somewhere else. Moreover, efforts to force banks to make more loans will just encourage bad lending decisions and subsequent writeoffs.

Sanders: As a condition of receiving financial assistance from the Fed, large banks must commit to increasing lending to creditworthy small businesses and consumers, reducing credit card interest rates and fees, and providing help to underwater and struggling homeowners.

Mish: Banks should not be bailed out or given assistance ever. To do so creates a moral hazard.

Sanders: We also need transparency. Too much of the Fed’s business is conducted in secret, known only to the bankers on its various boards and committees. Full and unredacted transcripts of the Federal Open Market Committee must be released to the public within six months, not five years, which is the custom now. If we had made this reform in 2004, the American people would have learned about the housing bubble well in advance of the financial crisis.

Mish: The housing bubble was obvious to every thinking person. Yet, the idea minutes would prove the Fed knew are highly unlikely. The Fed has never spotted a bubble. And neither the Fed nor Sanders sees the bubbles we are in now. That said, I fully support transparency and the release of full and unredacted transcripts.

Sanders has some things right, but as many things wrong.

We should audit the Fed and end it, not attempt to fix it with absurd rules about where interest rates should be, coupled with preposterous efforts to force banks to lend.

Mike “Mish” Shedlock

Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up

Illinois Pension Problems Mount

Illinois’ unfunded liabilities have risen ten out of the last eleven years. The only exception was 2011. This was despite massive rallies in financial markets every year since 2009.

One out of every five tax dollars goes to pensions, but that’s nowhere close to enough to stem the tide.

Illinois has the worst funded pension plans in the nation. Those plans are a mere 42% funded in aggregate.

That bleak estimate understates the problem because it assumes 8% annualized returns going forward. Those returns are not going to happen.

I expect 0-2% returns at best, and most likely negative real returns for seven to ten years.

Still No Budget

In October, Moody’s cut Illinois debt to one step above junk, specifically citing pensions as the “greatest challenge”.  Lower ratings have driven up borrowing costs. In turn, rising borrowing costs mean less money to spend elsewhere.

The new year is less than a week away, but Illinois still does not have a budget.

Bloomberg reports Illinois Record Budget Impasse Makes It Worse for the State’s Pension Disaster.

As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state’s biggest problem: its underfunded pensions.

Home to the least-funded state retirement system in the nation, Illinois has $111 billion of pension debt, which breaks down to more than $8,000 per resident. Partisan gridlock has produced the longest budget impasse in Illinois history. The stalemate has not only weakened state finances, it has kept lawmakers from finding a fix for those mounting liabilities.

It’s been seven months since the Illinois Supreme Court rejected the state’s solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.

Illinois enters 2016 snarled in partisan bickering as Governor Bruce Rauner, the state’s first Republican chief executive in 12 years, and the Democrat-controlled legislature can’t agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.

In July, Rauner laid out a plan to create a tiered system to cut retirement liabilities. At the time, he said it would save taxpayers billions of dollars. The proposal, which included a measure to allow municipalities to file for bankruptcy protection, was never introduced, according to Catherine Kelly, his spokeswoman.

Illinois hasn’t sold bonds since April 2014, a record borrowing drought. The spread on its existing debt has widened. Investors demand 1.8 percentage points of extra yield to own 30-year Illinois bonds, the most among the 20 states tracked by Bloomberg. When the spread climbs, that’s reflecting that investors think the problem is getting worse, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services.

“What’s the root cause of why we’re in the problem we’re in?” Ciccarone said. “It’s down to the pensions.”

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities.

Death Watch Illinois

Illinois is terminal. Pension cancer is too deep and has spread too far to save the patient. The state is bankrupt morally, politically, and monetarily.

However, there is no provision for state bankruptcy (something US Congress needs to address). Regardless, what cannot be paid won’t.

Illinois cancer is not just at the state level. The cancer permeates cities far and wide.

The Chicago Board of Education is already dead whether the coroner or Mayor Rahm Emmanuel makes the announcement or not.

Tax hikes won’t help the dead or dying. Instead they will cause the healthy and able to flee.

Many Illinois cities lie in a bankruptcy coffin, but the current law will not let the coroner make that announcement.

The best way to ease municipality pain is to pass a law allowing municipal bankruptcies. Such a bill would let terminal cities and taxing bodies move to hospice to die in peace. That’s something the Illinois legislature can and should address.

Illinois Republicans, I have a question: Where the heck is that bill?

Fresh Start

Corrupt politicians in bed with union officials have hollowed out the state beyond repair. Let’s not pretend otherwise.

Illinois needs a fresh start:

  1. Bankruptcies at the municipal level
  2. A new constitution that allows pension cuts at the state level
  3. Right to work laws
  4. End of collective bargaining of government employees
  5. End of prevailing wage laws
  6. Tax reform, especially property tax reform
  7. Workers’ compensation reform
  8. Unemployment insurance reform

Until we see those changes, the state will lay on the death-bed slowly bleeding workers and businesses in a fate worse than death by bankruptcy or default.

Sobering Pension Assessment

As noted above Illinois pension plans are 42% funded, and that’s with projected returns of 8%. If returns average 2% or even 5%, liabilities and under-fundings will soar.

Unfortunately, history suggests 0% is more likely. Here’s further discussion of what to expect and why.

  1. Stocks More Overvalued Now Than 2000 and 2007 No Matter How You Look at Things
  2. Bubble Debate; Equity Allocations vs. Shiller PE; Simple World
  3. Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities

Mike “Mish” Shedlock

Economic Illusions vs. Reality; Helicopter Drop, What Else?

Without providing a link, ZeroHedge posted some comments today regarding “Helicopter Drop Theory” by Willem Buiter, Citibank’s Chief Economist.

Willem Buiter on Failure of Monetary Policy

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.

The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.

To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.

Economic Illusions vs. Reality

I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.

With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.

  1. Brought demand forward at the expense of future GDP
  2. Encouraged more leverage
  3. Increased speculation in financial assets
  4. Created bubbles in equities and bonds
  5. Mistook economic activity for what much of it really is: malinvestment

The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.

Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.

Willem Buiter Proposes Helicopter Drop

“Helicopter money drops (what else?)”

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.

Myth of the Deflation Monster 

Buiter wants to slay an imaginary monster, deflation.

He moans “Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990.”

Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?

The answer is: None.

The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?

The answer once again is: None.

Nonetheless Buiter wants the ECB to pursue the same inane path.

There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.

Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.

But economic illiterates don’t resign, they just keep promoting policies that both common sense and history show can never work.

Challenge to Keynesians

The simple fact of the matter is “Inflation Benefits the Wealthy” (At the Expense of Everyone Else) .

If Buiter disagrees, he can respond to my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit”

Mike “Mish” Shedlock

Fed a Creature of Financial Markets; The Draghi PUT; Global Crisis Coming Up

Creature of Financial Markets

Stephen Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, blasts the Greenspan Fed, the Bernanke Fed, and the Yellen Fed in his latest post The Perils of Fed Gradualism.

After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. It has now taken the first step toward returning its benchmark policy interest rate – the federal funds rate – to a level that imparts neither stimulus nor restraint to the US economy.

A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

The challenges of the post-inflation era came to a head during Alan Greenspan’s 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

In retrospect, this was the template for what became known as the “Greenspan put” – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed’s market-driven tactics.

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition.

Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome.

Only by shortening the normalization timeline can the Fed hope to reduce the build-up of systemic risks. The sooner the Fed takes on the markets, the less likely the markets will be to take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crisis.

Beholden to Financial Markets

Roach provides a nice historical perspective but he misses the boat in regards to risks.

Not only is the Fed a creature of the Financial markets, it is beholden to the markets. For some treasury durations, the Fed became the market.

Unfortunately, it’s not just the Fed.

Global Crisis Coming Up

Global imbalances have never been worse.

The Bank of Japan is the only market for Japanese government debt. And in Europe, government debt trades at preposterously low and sometimes negative yields. The “Draghi PUT” is at least as big as any PUT by Greenspan.

The risk is not that the Fed (central banks in general) will spawn more asset bubbles. It’s far too late to raise that concern. Massive bubbles in equities and bonds have already been blown.

Banks that were “too big to fail” are far bigger now than ever before.

Beggar-thy-neighbor competitive currency debasement is the order of the day in China, Europe, and Japan.

Let’s not pretend we have a choice that will prevent another devastating financial crisis. We don’t. Only the timing is in question.

Mike “Mish” Shedlock

Merkel-Enhanced Migration Problem: Million Refugees Hit Europe, 80% Through Greece by Boat; Turkish Mafia, Banks Pave the Way

Over a million refugees have made their way to Europe this year. Every country is complaining now, even Germany. So why isn’t anything concrete being done?

Why the Problem Is Not Fixed

If Turkey, Greece, or Germany really wanted to solve the migration problem, the problem would be solved.

However, there’s too much ignorance in Germany and too much graft money in Turkey. Greece does not have the resources or the willpower to do the right thing: send them back.

Million Refugees Hit Europe, Primarily Through Greece by Boat

The Financial Times reports More than 1 Million Refugees Arrive in Europe.

The International Organisation for Migration reported on Tuesday that the number of migrants had hit 1,005,504. That is almost five times greater than the total last year, and was the highest migration flow since the second world war.

The vast majority of the migrants — 821,008 — arrived in Greece. Almost all of them came by boat, according to the IOM, a Geneva-based intergovernmental organization.

Italy received the second biggest total: 150,317. Bulgaria was third, with 29,959 arrivals.

Merkel-Made Migration Problem

German Chancellor Angela Merkel is too damn stupid or too damn arrogant to do anything about the problem.

Besides, there’s simply too much money to be made by the Turkish mafia and Turkish banks for anyone in Turkey too give a hoot.

Turkish Mafia, Banks Pave the Way

As is typically the case, when there’s money to be made, heads look the other way. Such is the case right now with Turkish profits fueling the “Merkel-made” problem.

In a scathing explanation (that Merkel will ignore and Western media won’t report on), please consider How the Turkish mafia organizes the trafficking of refugees .

His name is Osman. Or, that’s how he introduced himself. He is one of the top members of the Turkish mafia doing business upon migrants and refugees in Turkey. He is not hiding … “If the Turkish government didn’t want us to do the job we do, we couldn’t pass to Greece not even a fly” says disarmingly.

Stratis Balaskas for the Athens News Agency

He has a store in İzmir selling food stuff. It is a big store in Basmane, the district of Greeks and Jews before 1922, which was saved from the fire. The Turks in the district call him “Damascus”. As they say “there are more Syrians here than in Syria”. However, the picture of the area is not as it was last summer. There are no Syrians in the streets. The municipality authorities re-planted the grass in parks, there is not even a single Syrian.

Yet … there are!

Osman explains to us that now “they stay in houses which have been rented especially for this purpose. They cannot move freely, their transportation is done through private cars which take them from their houses and leave them on starting points. From there they are being transferred to the departure spots.”

They are being transferred through many ways that show the size and the ruthlessness of the network.

So, migrants and refugees have been transported by Osman in areas at the Turkish side, located across Lesvos and Chios, through buses carried by trucks for roadside assistance. Through school buses during the hours that are not being used for the transportation of the kids. Through convoys of private vehicles, which means that even if a car would be stopped by the police, the others could continue to their destination. But there is also … VIP transportation, like of rich Arabs with Russian escorts, even through … hearses! The latest, as Osman says, are expensive services and being paid nearly as much as the trip to islands.

But let’s go back to İzmir where we find the base of the network. Under the fear of the measures that allegedly will be taken by the Turkish authorities, after the European pressure, the network has the following plan schedule.

On the top stand the members of the mafia. Most of them do this job for more than 20 years. The old times were doing it for a nice daily wage. Now, and especially the latest year, there is too much money in the business and it is worth someone to risk.

On the other side of the network stand some locals. They possess some spaces from where the boats can start their journey safely. They are responsible to keep the passage safe and clean. They are also responsible for the training of someone among the passengers on how should handle the boat. Or, they should pay someone, say 100 euros each time, to transfer the boat with the passengers to the islands and return to the base.

In the middle of these groups, there are mainly two categories of people involved. The “dealers”, which are those who find “customers” and pass them to the top members of the mafia. They are doing it through Facebook pages, or, phone numbers that are distributed among the “customers”. They “fill” the boat with passengers every time that the top members have one ready for departure.

Close to them stand the “bankers” of the network who are responsible for receiving the payments. Anyone who wants to be transported pays them through any way he/she can. With money or services. Jewelry, valuable stones, or even archaeological pieces! From the moment of the payment, he/she has three days to pass to Europe. After the end of the journey, every migrant and refugee calls a phone number and gives a code number which has been provided when he/she paid. Then, the payments are “released” and the “banker” has to pay everyone involved. About 15-20% is being paid to all who are involved to the transportation and the rest goes to the top member of the network, in our case, Osman.

“Why do you take most of the money?”, we ask him. He explains that he has too much expenses. He pays for the plastic boats which, depending on their size and the quality of the engine, cost between 800 and 20,000 euro! These are being bought legally. Therefore, the police can’t do anything, even if they stop him while carrying the boats.

He also pays the “bankers”. They take between 20 and 100 euro for every payment. They also keep all the money from those who do not call to confirm that they arrived at the destination, either because they have been drowned, or have been arrested by the coast guard and have been sent back to camps in South-East Turkey.

“I don’t want blood money” [!], Osman says with audacity. But frequently claims that there are “rules of morality” in his job. Because, as he says, the top members “are moral”! They do not let people pass under stormy sea. They do not fill with more than 50 people every big boat, or 20, every small one. They transport people only in plastic boats. Other locals and Arabs are responsible for the wooden boats. Those Arabs “we had as mediators because of the language, but they opened their own businesses and sent people to be drowned. These are usually being caught by the Turkish coast guard, or they risk transporting people with big boats resulting in accidents like the one that happened in Lesvos in 28th October.”

Osman is completely informed about the situation in Lesvos. He knows about the accidents, the dead people, the hot spots, and all the problems in the islands. He knows of course very well what happens also in Turkey. For example, he said that during a weekend last month, no one passed to Lesvos because of the presence of Erdogan in the area for the celebration of olive collection. “We should not provoke” says laughing.

He says goodbye “because he has work to do”. We ask him if he worries for telling these things to us. He’s not afraid. “I told you again” he says. “If the Turkish government didn’t want us to do the job we do, we couldn’t pass to Greece not even a fly”! Besides, he made a lot of money. “I don’t have to work. Neither my children and my grandchildren. Today, if someone tells me to stop, I’ll do it. But no one tells me …” he says as we leave!

A tip of the hat to “The Failed Revolution” for the above translation from the original Greek article that Google translates as Greek Refugee Trafficker Confesses.

Amazingly, Merkel’s solution was to get in bed with Turkish prime minister Recep Tayyip Erdoğan, offering Erdoğan three billion euros to stem the tide.

Her proposed “solution” is absurd enough, but Merkel also held out a carrot to speed the way in granting 75 million Turks passport-free access to the EU.

Even if Turkey does temporarily pen in the refugees, they will be released in a massive flood once Turkey is a member of the passport-free Schengen zone.

Mike “Mish” Shedlock

Existing Home Sales Plunge 10.5%, NAR Blames “Know Before You Owe”; What’s the Excuse for Last Month?

Existing homes sales plunged 10.5% this month which the NAR attributes to an initiative called “Know Before You Owe“.

Economists, apparently unaware of “Know Before You Owe”, came up with a consensus estimate of 5.320 million sales, SAAR ( seasonally adjusted annualized rate), the same as last month.

New closing rules appear to have depressed sales of existing homes in November which fell 10.5 percent to a much lower-than-expected annualized rate of 4.760 million. The year-on-year rate, for the first time since September last year, is suddenly in the negative column, at minus 3.8 percent. The National Association of Realtors, which compiles the report, attributes the weakness to the “Know Before You Owe” initiative which is lengthening closing times and which likely makes November an outlier. The NAR suspects that the sales delays in November are likely to give a boost to December’s totals.

Weakness in the month is centered in single-family sales, down 12.1 percent to a 4.150 million rate. Condos rose 1.7 percent to a 610,000 rate.

All regions show declines for total sales with the Northeast, at a modest plus 1.5 percent, the only one to show a year-on-year gain.

Low supply is a problem in the market, at 2.040 million vs 2.110 million in October. Relative to sales, supply is at 5.1 months which, because of November’s sales weakness, is up slightly from prior months. For a balanced market, supply is generally pegged at 6.0 months.

Price data are positive, showing some traction with the median up 0.5 percent in the month to $220,300. Year-on-year, the median is up 6.3 percent which is right in line with the trends in this morning’s FHFA report.

For volatility, this report is usually tame compared to the new home sales report. Judging strength right now is difficult but a fair judgment is that growth in the housing sector is probably moderate and a plus for the economy. New homes sales are out tomorrow and are expected to show a gain.

What’s the Excuse for Last Month?

Interestingly, “Know Before You Owe” came into play in October 3.

Why did the NAR pass up a golden opportunity to use that excuse last month when existing home sales dipped?

Disturbing Last Month

From Bloomberg last month: The number of homes on the market, at 2.14 million, is actually below the 2.24 million this time last year, an unwanted surprise that the National Association of Realtors, which compiles the existing home sales report, calls “disturbing”.

No Longer Disturbing This Month

Now that the plunge has deepened, it’s no longer disturbing, it’s because of “Know Before You Owe”.

I have a simple question: If “Know Before You Owe” took place effective October 3, and that’s really what’s to blame, then, why wasn’t there a huge plunge last month instead of a “disturbing” surprise?

New Rules

Since not even the NAR seems to understand the implications, let’s take a step back with a peek at Know Before You Owe Mortgages as seen by PBS.

There are two big changes. One, the forms you get right after you make a mortgage application and the form you get right before closing is going to be simplified.

The terms are supposed to be easier to understand. You’re supposed to understand if you have an adjustable rate, and the rate will go higher after a certain number of years.

You’re not supposed to be surprised if, you know, 10 years from now you have some sort of balloon payment on a mortgage or anything like that. So, that’s the first change.

The second change is before – before closing, you’re supposed to get these documents at least three business days before closing.

And that’s designed so you have time to understand what you’re getting into before you sign on the dotted line.

Now, it seems to make sense, but if you make any changes within that three-day window – so if you decide you want to switch, say, a fixed-rate mortgage to an adjustable-rate mortgage, that resets the three days.

As for people who are trying to, you know, closely time home closings, resetting that three-day window can lead to some headaches.

So what’s going to happen over the next few months is we’ll see whether or not home closings are happening on time or whether, you know, some of these mortgage lenders or real estate agents weren’t actually ready and we see a lot of closing delays.

Before vs. After

The forms are simpler and easier to understand. Those wishing to compare the before and after forms can do so at the Consumer Finance Protection Bureau.

If there were first month glitches, why didn’t they turn up a month ago?

What I Said Last Month

Let’s turn to my report from a month ago for more details about recent trends.

Please consider Existing Home Sales Decline, NAR Calls Report “Disturbing”; First Time Buyers Decline Third Year; Housing Clearly Weakening.

If there was an “outlier“, perhaps it was the September gain, not the August and October declines.

And even though September sales data bounced, prices didn’t. The median price declined 2.9% in September.

Bloomberg concluded “This report, which wraps up a busy and mostly positive week for housing data, is a big plus for the housing outlook, suggesting that demand for existing homes may be catching up with demand for new homes.

I responded: “That last statement by Econoday is amusing. For starters, new home sales are not all that strong, and it is new home sales that contribute most to GDP and family formations.

As a followup, please note my November 18 article Housing Starts Plunge 11% to 7-Month Low: Single-Family Down 2.4%, Multi-Family Down 25%

October wiped away all of September’s good news and then some. 1.060 million starts was far below Econoday Consensus Estimate of 1.162 million SAAR and also well below the lowest estimate of 1.125 million.

Bloomberg pointed out hidden strength including “important good news” on October permits.

Spotlight on Permits

  • September month permits were down 5%
  • October permits rose only 4.1%.
  • September starts were revised lower from 1.206 million to 1.191 million (a 15,000 -1.24% negative revision).

In aggregate, that hardly looks like “important good news“.

First Time Buyers Decline Third Year

The National Association of Realtors (NAR) notes First-time Buyers Fall Again in NAR Annual Buyer and Seller Survey.

The share of first–time buyers declined for the third consecutive year and remained at its lowest point in nearly three decades as the overall strengthening pace of home sales over the past year was driven more by repeat buyers with dual incomes.

Housing Clearly Weakening

On average, starts are weakening, permits are weakening, new home sales are weakening, price data is weakening, and existing home sales are weakening.

First time buyers, a strong indication of family formation, is at a three-decades low, and the NAR is “disturbed” about trends.

Simply put, housing is weakening, albeit in a volatile way, making it a bit harder to spot the change in underlying trends.


The disclosure forms are easier. They are also down in number, from four to two.  The rule change took place on October 3.

Somehow that rule change had a huge impact in November but only a small (and not even mentioned) impact in October. That’s possible, but color me skeptical.

By November, one would have thought lenders would be bright enough to go over the rules with borrowers in advance to avoid closing delays.

Next month could be telling, one way or another.

Mike “Mish” Shedlock

Reshoring Myth Explodes: Offshoring Outpaces Onshoring Every Year Since 2004 Except 2011

Reshoring Over Before It Ever Got Going

Recall the hype over reshoring? Manufacturing jobs supposedly were returning to the US in droves from Asia.

My view was that although some manufacturing processes returned, not many jobs came back thanks to robots and software automation. That view was far too optimistic.

Reshoring Myth and Reality

The second annual A.T. Kearney U.S. Reshoring Index shows that for the fourth consecutive year, reshoring of manufacturing operations to the United States has once again failed to keep up with offshoring.

Supply Chain reports 2015 U.S. Reshoring Index Indicates Manufacturing Reshoring Trend Has Subsided.

In 2015 the A.T. Kearney U.S. Reshoring Index dropped to -115, down from -30 in 2014, and represents the largest year-over-year decrease in the last 10 years.

Even if the effect of raw material price declines is discounted by, conservatively, holding manufacturing input values constant relative to 2014 while ignoring that same effect on the value of offshore manufactured goods, the U.S. Reshoring Index would drop to -26, still supportive of the view that the widely predicted reshoring trend seems to be over before it started.

Patrick Van den Bossche, A.T. Kearney partner and co-author of the study, stated, “The U.S. Reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration. The 2015 data confirms that offshoring seems only to be gathering steam, while the U.S. reshoring train that so many predicted has yet to leave the station.”

Reshoring Myth Explodes: Offshoring Outpaces Onshoring Every Year Since 2004 Except 2011

Industries vulnerable to rising labor costs in China have been successfully relocating to other Asian countries, rather than returning to the United States. They have done so without incurring significantly higher supply chain costs, despite the weaker infrastructure and supporting ecosystems of these new low-labor-cost destinations. Vietnam has absorbed the lion’s share of China’s manufacturing outflow, especially in apparel. U.S. imports of manufactured goods from Vietnam in 2015 will be nearly triple the level of imports in 2010.

Study Findings

The A.T. Kearney U.S. Reshoring Index and the U.S. Reshoring Database provide a number of insights on the factors driving imports of offshore manufactured goods and manufacturing reshoring. Many of the report insights run counter to the points of view and “hype” regarding reshoring of manufacturing to the United States.

  • Surprisingly, some of the top sectors for reshoring from 2011 to 2015 are also sectors that have led the pack in further offshoring over that same period.
  • The recent increase of nearshoring to Mexico also seems to indicate that, even if U.S. companies consider leaving Asia, they may choose to stop south of the border.
  • The forecast strengthening of the dollar, the oil price slide, the tightening U.S. labor market in manufacturing and the Trans-Pacific Partnership (TPP), if ratified by the U.S. Congress, will likely further weaken the case for reshoring in 2016.
  • Although reshoring of manufacturing by U.S. companies is on the decline, non-U.S. companies, including Chinese companies, increasingly invest in establishing or expanding their manufacturing footprint in the United States. The insatiable U.S. consumer market, the stable political and economic environment, and the benefit of tapping into America engineering skills and manufacturing know-how are main draws.

America’s Manufacturing Renaissance Myth

Also consider The Myth of America’s Manufacturing Renaissance

For the casual observer, it is easy to get the impression that American manufacturing has entered a new and exciting period of revival.

Many in the media, along with consulting firms, think tanks, and economists, now proclaim the emergence of a U.S. “manufacturing renaissance,” marked by the “reshoring” of production and the growing competitiveness challenges of many foreign nations vis-à-vis the United States. If only this were true.

The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, a new report by the Information Technology and Innovation Foundation (ITIF), assesses the true status of the American manufacturing economy and argues pundits have overestimated the impact of isolated incidents of reshored production and misread or ignored the data.

If there were a true renaissance, we’d expect to see growth in inflation-adjusted manufacturing value added. But in fact 2013 manufacturing value added is 3.2 percent below 2007 levels, with non-durable goods value-added (which includes chemicals and oil and gas) down almost 12 percent. U.S. manufacturers employ over a million fewer workers and there are 15,000 fewer manufacturing establishments since the beginning of the Great Recession. Moreover, America ran a $458 billion trade deficit in manufacturing goods in 2013. Hardly evidence of a renaissance.

And most of the recovery that has occurred has been cyclical in nature. In fact, 122 percent of manufacturing output growth between 2010 and 2013 was in the auto sector, whose growth is due almost solely to a rebound in U.S. consumer demand, rather than reshoring of automobile production.

“Most of the claims for a structural rebirth of U.S. manufacturing are unfortunately based on myths and anecdotes,” states Robert Atkinson, President of ITIF and co-author of the report. “Instead, any assessment of U.S. manufacturing should be based on rigorous analysis and review of the official data.”

Prevailing Wisdom 

The first article, released December 21, 2015 is far more damning than the second, released January 14.

Check out the prevailing wisdom in January:

One thing is clear – optimism about the future of U.S. manufacturing is relatively buoyant, as 68% of the executives surveyed agreed that U.S. manufacturing will experience accelerated growth in the next five years.

A manufacturing recession has been upon us for six months.

Mike “Mish” Shedlock

There’s No Such Thing As a Neutral Government

[This article appears in the November–December 2015 issue of The Austrian.]

Peter Simpson is a distinguished classicist and philosopher, known especially for his work on Aristotle’s ethics and politics. (He is also, by the way, a mordant critic of Leo Strauss and his followers.) In Political Illiberalism, he poses a fundamental challenge to philosophical justifications of modern liberalism, culminating in the vastly influential Political Liberalism (1993) of John Rawls. Though Simpson cannot be classed as a libertarian, his bold arguments will be of great use to all of us who, like Lew Rockwell, are Against the State.

According to a familiar tale, states before the inception of liberalism in the seventeenth and eighteenth centuries were fatally flawed. They sought to impose on their subject populations a political and religious orthodoxy. The Protestant Reformation brought some progress, but all too often, control by the monarch replaced dominance by the Catholic Church. Premodern illiberal states “taught and imposed on society a distinctive view of the good life. … Those who disagreed with this view of religion imposed by the state had to be resisted or expelled or incarcerated or killed.”

What was the distinctive contribution of liberalism? According to this view, the state must not rule on the basis of what Rawls calls a “conception of the good.” By this he means a comprehensive view of the good life for human beings. Religions are prime examples of conceptions of the good, but not the only ones. The all-embracing theory of life taught in Soviet Russia in the glory days of Lenin and Stalin would be a secular example of what liberalism deplores and seeks to eradicate.

Instead, liberals maintain, the state must remain neutral in the battle between such competing conceptions of the good. People must be allowed to work out their own salvation, religious or secular, as their own consciences dictate.

The recent Rawlsian account of liberalism rests itself on a notion of a neutral core of morality … which all such visions [of the good] are supposed to be able to accept and live by. … The core morality sets down conditions of respect and tolerance that, while permitting each person to pursue their vision as they wish, forbids them so to pursue it so they forcibly prevent others from pursuing other visions.

What is wrong with that? Is it not simple common sense? Who can reject freedom of conscience?  Simpson exposes a crucial weakness in this seemingly impregnable argument for liberalism. The supposedly neutral state does not ensure freedom of conscience. It itself imposes its own ideology, namely liberalism, on everyone.  The state is not an impartial umpire, standing above competing conceptions of the good: it is a powerful and malevolent force.

The paradox is that while liberalism claims to free people from the oppression of states that impose on everyone the one true doctrine espoused by the state, liberalism itself imposes on everyone such a doctrine: namely liberalism itself. … All those in professedly liberal states who, for whatever reason, do not accept the liberal doctrine, or are suspected of not doing so, become enemies of the state. … The liberal state has proved itself as ruthless against its opponents as any illiberal state is supposed to have done.

Even if Simpson’s argument is right, though, is there not an obvious objection he must confront? Is it not better to have a “neutral” state, which at least professes the ideal of freedom of conscience, than an avowedly ideological state that openly demands conformity?

Simpson has a brilliant response to this objection. The state is not necessary at all. To the contrary, he says, the state is an invention of the modern world. In what sense is this true? Simpson has in mind Max Weber’s famous definition of the state as an organization that claims a monopoly on the legitimate use of force.

Note, too, the novelty of this idea, for what Weber brings to our attention … is the difference between what existed before and what exists now. Before the modern emergence of the state, no institutional structure had a monopoly of coercive enforcement.

In past times, people to a large measure protected their persons and property by their own efforts.

One sign of the accuracy of Weber’s definition [of the modern state] is the absence of organized police forces in the pre-modern world. … The functions we now depute exclusively to the police were performed previously by the citizens, who relied on themselves and their relatives and friends for the enforcement of rights and for defense and protection.

In the face of the tyrannical contemporary state, Simpson places special emphasis on the private ownership of guns.

Weapons of self-defense … and nowadays primarily guns, belong naturally to the family. … By the situation of present times, the first defense is against the state. … Weapons, therefore, naturally belong in the hands of the people, and it is intrinsically unjust for any higher authority to confiscate or forbid them.

The monopoly state, supposedly needed to protect us, harms rather than benefits us. The record of the state is no better in foreign affairs. The modern liberal state has brought death and destruction, far more than it has protected us from foreign invaders.

One cannot even say that it was the totalitarian and not the liberal version of the state that caused total war. In the world wars of the twentieth century that were fought between liberal and totalitarian states, the liberal states caused at least as much death and destruction as the totalitarian ones, and these liberal states also pursued war when the totalitarian ones would have preferred peace. … So how, then, is liberalism better as regards war, since all systems will fight when they think they must? The only difference seems to be that liberalism will fight total wars, while most of these other systems will not be able to,  which is an argument against liberalism and the state, not for them.

In his account of the rise of the state and the ideology that purports to justify it, Simpson brings to the fore the philosophy of Hegel, who remarked that the state “is the march of God in the world.” I would add to Simpson’s fine discussion that Hegel, incredibly, regarded the decline of the “divided conscience,” when the Church was an independent source of authority apart from the monarch, as a part of the growth of freedom. Now people were “free” to obey the state, without the distraction of a competing authority.

Simpson applies his anti-state perspective to American history. He does not view the Constitution with favor. Its adoption was a coup for centralizers and a blow against the dispersal of power.

The Constitution, therefore, makes two different changes [from the Articles of Confederation] at the same time: from a league to a national government and from a congress of delegates to a congress  of individuals whose collective power, because it is the coercive power of the state and because in extremis it is unlimited, amounts to autocracy or despotism.

Simpson highlights to great effect the warnings of the Anti-Federalists against the potential for tyranny inherent in the Constitution.

The Anti-Federalists knew far more about political realities than the Federalists did, or at least that the Federalists admitted (for one may suspect that the actual results that the Ant-Federalists foresaw and feared were foreseen and perhaps in part welcomed by the Federalists).

As mentioned earlier, Simpson is no libertarian; and Austrians and libertarians will differ with some of his remarks about the economy. It is all the more remarkable, then, that Simpson’s views on the state converge so substantially with views that we at the Mises Institute have long defended. In our efforts to do so, we now have the help of the arguments of this original thinker and distinguished scholar.

Poland, Free Markets, and the Eurozone

Mateusz Machaj is a former Mises Fellow, the founder of Mises Institute Poland, and is assistant professor at the Institute of Economic Sciences at the University of Wroclaw in Wroclaw, Poland.

He spoke with us recently about his work at the Mises Institute and the state of free-market thinking in Poland. An excerpt of this interview appeared in July/August issue of The Austrian.

The Austrian: Why did you decide to apply for a Mises Institute fellowship?

Mateusz Machaj: The summer fellowship program is the best place on Earth to take the first steps in developing your career and learning how to do scientific research. The fellowship program and Mises University are of incredible value for young scholars, and it is impossible to overstate their importance. The online resources, books, and articles of the Mises Institute are definitely the building blocks of our knowledge, yet I found personal interaction with the Mises faculty to really be key in advancing my knowledge. Once we learn anything it is necessary to share our thoughts, insights, and discuss them with our teachers, mentors, and other students. The publications at the Institute are the bricks, but the summer programs are the necessary mortar.

TA: Why did you decide to obtain a PhD? What role, if any did the Mises Institute play in the direction of your academic studies?

MM: I decided to take the academic route, because I am passionate about economics as a discipline. The Mises Institute was the main factor in sparking that passion, first as a supplier of the online library, and then as a sponsor of my attendance at the summer programs. When I first came to Mises University I already knew almost all of the lectures (because I had watched them online in the previous years), but it was my personal interactions with students and scholars at the Institute that were a key stimulus for further studies. Then, I was fortunate enough to work as a summer fellow under the supportive guidance of Professor Salerno. Most of the work on my PhD thesis was done within the walls of the Mises Institute. The Institute is truly the “indispensable framework,” to borrow a phrase from Rothbard.

TA: What research topics are you working on right now?

MM: Currently I am working on monetary policy, which has become even more important to the global economy thanks to the rise of “special” monetary policy. Once upon a time, the debate was dominated by “conventional” monetary policy, which, according to the mainstream, should be performed in “normal” times, and applied according to certain guidelines such as the Taylor Rule. More and more, however, monetary policy consists of “special” monetary tools — which we might call “Bernanke Bazookas” — that are nearly turning the central banks into financial pawnshops ready to supply additional liquidity in exchange for almost anything.

The tools are special because with their usage, central banks are beginning to flirt with zero interest rate ideas and other monetary-crank proposals. In the light of recent rage against the money printing machines, both topics deserve a careful scrutiny. Especially because there is lots of demagoguery and amateurish criticism of monetary policy out there.

TA: What is the state of free-market thinking in Poland?

MM: Younger people are very interested in the pro-market ideas. We have two very unique programs at the Polish Mises Institute, for example. The first one is composed of the Austrian Economics Clubs which are at the main Polish universities that focus on economics, and they attract young and intelligent people.

We also prepare lesson plans and curricula for teaching economics at high schools. Currently, we are attempting to create a free-of-charge online elementary book for this subject, as well. Both of the programs are very successful, and younger people who are genuinely interested in economics are usually seduced by the Austrian approach. This can be seen in the demand for our Austrian books. We already publish a dozen of them, and we thank the Mises Institute for most of the content.

TA: Why did you decide to start Poland’s Mises Institute?

MM: Austrian economics is the best way to learn good economics. Moreover, I believe that even if one dislikes the ideologies of Mises, Rothbard, and Hayek, the works of those thinkers are the best place to start to learn economics.

This is especially true of Rothbard. Man, Economy, and State is the best introduction to pricing theory, bargaining theory, production theory, competition theory, monetary theory, etc. I think even the opponents of free markets would do well to start with reading Rothbard, because he is the Mozart of economics.

You may prefer to play Wagner, but Eine Kleine Nachtmusik is where you should start. Similarly the Austrians are the best way to study economics, even when one disagrees with some of their premises. They are so much better in explaining the basics of economics than the mainstream textbooks, and no one comes near the writing and lecturing skills of many Austrians.

TA: Some eastern European countries, such as Estonia and Slovakia, have a reputation for continuing to liberalize their economies long after the fall of communism. Does Poland have a similar reputation?

MM: In the case of Poland, the glass is one-third full and two-thirds empty. There are two ways of comparing transformation economies. You can compare Poland to Russia, Belarus, and Ukraine. In those comparisons, Poland’s transformation is a huge success. On the other hand, you can compare Poland to developed Western economies, and then we see huge deficiencies and unfinished reforms. And let us remember that Germany, the United Kingdom, and the United States are very far from any free market paradise.

In terms of broadly defined economic freedom, Poland is behind the Western countries. In comparison, what is particularly burdensome is higher regime uncertainty due to a less predictable (and relatively more oppressive) legal system.

TA: With all the news about the eurozone lately, I have to ask if Poland will be adopting the euro soon. Is there a lot of local support for this?

MM: There’s not really much local support for the euro right now. The recent economic crisis has effectively killed any quest for quick adoption of the euro in Poland. Even the supporters of the euro currency are saying that the eurozone first needs to fix itself, before Poland joins the zone. Let us all hope the euro fixes itself permanently and fully — to gold of course.

PC Is About Control, Not Etiquette

[This appears appears in the November–December 2015 issue of The Austrian.]

I’d like to speak today about what political correctness is, at least in its modern version, what it is not, and what we might do to fight against it.

To begin, we need to understand that political correctness is not about being nice. It’s not simply a social issue, or a subset of the culture wars.

It’s not about politeness, or inclusiveness, or good manners. It’s not about being respectful toward your fellow humans, and it’s not about being sensitive or caring or avoiding hurt feelings and unpleasant slurs.

But you’ve heard this argument, I’m sure. PC is about simple respect and inclusiveness, they tell us. As though we need progressives, the cultural enforcers, to help us understand that we shouldn’t call someone retarded, or use the “N” word, make hurtful comments about someone’s appearance, or tolerate bullies.

If PC truly was about kindness and respect, it wouldn’t need to be imposed on us. After all, we already have a mechanism for the social cohesion PC is said to represent: it’s called manners. And we already have specific individuals charged with insuring that good manners are instilled and upheld: they’re called parents.

Political Correctness Defined

But what exactly is PC? Let me take a stab at defining it: Political correctness is the conscious, designed manipulation of language intended to change the way people speak, write, think, feel, and act, in furtherance of an agenda.

PC is best understood as propaganda, which is how I suggest we approach it. But unlike propaganda, which historically has been used by governments to win favor for a particular campaign or effort, PC is all-encompassing. It seeks nothing less than to mold us into modern versions of Marx’s un-alienated society man, freed of all his bourgeois pretensions and humdrum social conventions.

Like all propaganda, PC fundamentally is a lie. It is about refusing to deal with the underlying nature of reality, in fact attempting to alter that reality by legislative and social fiat. A is no longer A.

To quote Hans-Hermann Hoppe:

[T]he masters … stipulate that aggression, invasion, murder and war are actually self-defense, whereas self-defense is aggression, invasion, murder and war. Freedom is coercion, and coercion is freedom. … Taxes are voluntary payments, and voluntarily paid prices are exploitative taxes. In a PC world, metaphysics is diverted and rerouted. Truth becomes malleable, to serve a bigger purpose determined by our superiors.

But where did all this come from? Surely PC, in all its various forms, is nothing new under the sun. I think we can safely assume that feudal chiefs, kings, emperors, and politicians have ever and always attempted to control the language, thoughts, and thus the actions of their subjects. Thought police have always existed.

To understand the origins of political correctness, we might look to the aforementioned Marx, and later the Frankfurt school. We might consider the work of Leo Strauss for its impact on the war-hungry think tank world. We might study the deceptive sloganeering of Saul Alinsky. We might mention the French philosopher Foucault, who used the term “political correctness” in the 1960s as a criticism of unscientific dogma.

But if you really want to understand the black art of PC propaganda, let me suggest reading one of its foremost practitioners, Edward Bernays.

Bernays was a remarkable man, someone who literally wrote the book on propaganda and its softer guise of public relations. He is little discussed in the West today, despite being the godfather of modern spin.

He was the nephew of Sigmund Freud, and like Mises was born in Austria in the late nineteenth century. Unlike Mises, however, he fortuitously came to New York City as an infant and then proceeded to live an astonishing 103 years.

One of his first jobs was as a press agent for President Woodrow Wilson’s Committee on Public Information, an agency designed to gin up popular support for US entry into WW1 (German Americans and Irish Americans especially were opposed). It was Bernays who coined the infamous phrase “Make the World Safe for Democracy” used by the committee.

After the war, he asked himself whether one could “apply a similar technique to the problems of peace.” And by “problems,” Bernays meant selling stuff. He directed very successful campaigns promoting Ivory Soap, for bacon and eggs as a healthy breakfast, and ballet. He directed several very successful advertising campaigns, most notably for Lucky Strike in its efforts to make smoking socially acceptable for women.

The Role of “Herd Psychology”

Bernays was quite open and even proud of engaging in the “manufacturing of consent,” a term used by British surgeon and psychologist Wilfred Trotter in his seminal Instincts of the Herd in Peace and War published in 1919.

Bernays took the concept of herd psychology to heart. The herd instinct entails the deep seated psychological need to win approval of one’s social group. The herd overwhelms any other influence; as social humans, our need to fit in is paramount.

But however ingrained, in Bernays’s view the herd instinct cannot be trusted. The herd is irrational and dangerous, and must be steered by wiser men in a thousand imperceptible ways — and this is key. They must not know they are being steered.

The techniques Bernays employed are still very much being used to shape political correctness today.

First, he understood how all-powerful the herd mind and herd instinct really is. We are not the special snowflakes we imagine, according to Bernays. Instead we are timorous and malleable creatures who desperately want to fit in and win acceptance of the group.

Second, he understood the critical importance of using third party authorities to promote causes or products. Celebrities, athletes, models, politicians, and wealthy elites are the people from whom the herd takes its cues, whether they’re endorsing transgender awareness or selling luxury cars. So when George Clooney or Kim Kardashian endorses Hillary Clinton, it resonates with the herd.

Third, he understood the role that emotions play in our tastes and preferences. It’s not a particular candidate or cigarette or a watch or a handbag we really want, it’s the emotional component of the ad that affects us, however subconsciously.

What We Can Do About It

So the question we might ask ourselves is this: how do we fight back against PC? What can we do, as individuals with finite amounts of time and resources, with serious obligations to our families, loved ones, and careers, to reverse the growing tide of darkness?

First, we must understand that we’re in a fight. PC represents a war for our very hearts, minds, and souls. The other side understands this, and so should you. The fight is taking place on multiple fronts: the state-linguistic complex operates not only within government, but also academia, media, the business world, churches and synagogues, nonprofits, and NGOs. So understand the forces aligned against you.

Understand that the PC enforcers are not asking you, they’re not debating you, and they don’t care about your vote. They don’t care whether they can win at the ballot box, or whether they use extralegal means. There are millions of progressives in the US who absolutely would criminalize speech that does not comport with their sense of social justice.

One poll suggests 51 percent of Democrats and 1/3 of all Americans would do just that.

The other side is fighting deliberately and tactically. So realize you’re in a fight, and fight back. Culturally, this really is a matter of life and death.

We Still Have Freedom to Act

As bad as PC contamination may be at this point, we are not like Mises, fleeing a few days ahead of the Nazis. We have tremendous resources at our disposal in a digital age. We can still communicate globally and create communities of outspoken, anti-PC voices. We can still read and share anti-state books and articles. We can still read real history and the great un-PC literary classics. We can still homeschool our kids. We can still hold events like this one today.

This is not to say that bucking PC can’t hurt you: the possible loss of one’s job, reputation, friends, and even family is very serious. But defeatism is never called for, and it makes us unworthy of our ancestors.

Use humor to ridicule PC. PC is absurd, and most people sense it. And its practitioners suffer from a comical lack of self-awareness and irony. Use every tool at your disposal to mock, ridicule, and expose PC for what it is.

Never forget that society can change very rapidly in the wake of certain precipitating events. We certainly all hope that no great calamity strikes America, in the form of an economic collapse, a currency collapse, an inability to provide entitlements and welfare, energy shortages, food and water shortages, natural disasters, or civil unrest. But we can’t discount the possibility of these things happening.

And if they do, I suggest that PC language and PC thinking will be the first ornament of the state to go. Only rich, modern, societies can afford the luxury of a mindset that does not comport with reality, and that mindset will be swiftly swept aside as the “rich” part of America frays.

Men and women might start to rediscover that they need and complement each other if the welfare state breaks down. Endless hours spent on social media might give way to rebuilding social connections that really matter when the chips are down.

More traditional family structures might suddenly seem less oppressive in the face of great economic uncertainty. Schools and universities might rediscover the value of teaching practical skills, instead of whitewashed history and grievance studies. One’s sexual preferences might not loom as large in the scheme of things, certainly not as a source of rights. The rule of law might become something more than an abstraction to be discarded in order to further social justice and deny privilege.

Play the Long Game

I’m afraid it might not be popular to say so, but we have to be prepared for a long and hard campaign. Let’s leave the empty promises of quick fixes to the politicians. Progressives play the long game masterfully. They’ve taken 100 years to ransack our institutions inch by inch. I’m not suggesting incrementalism to reclaim those foregone institutions, which are by all account too far gone — but to create our own.

PC enforcers seek to divide and atomize us, by class, race, sex, and sexuality. So let’s take them up on it. Let’s bypass the institutions controlled by them in favor of our own. Who says we can’t create our own schools, our own churches, our own media, our own literature, and our own civic and social organizations? Starting from scratch certainly is less daunting than fighting PC on its own turf.


PC is a virus that puts us — liberty loving people — on our heels. When we allow progressives to frame the debate and control the narrative, we lose power over our lives. If we don’t address what the state and its agents are doing to control us, we might honestly wonder how much longer organizations like the Mises Institute are going to be free to hold events like this one today.

Is it really that unimaginable that you might wake up one day and find sites with anti-state and anti-egalitarian content blocked — sites like mises.org and lewrockwell.com?

Or that social media outlets like Facebook might simply eliminate opinions not deemed acceptable in the new America?

In fact, head Facebook creep Mark Zuckerberg recently was overheard at a UN summit telling Angela Merkel that he would get to work on suppressing Facebook comments by Germans who have the audacity to object to the government’s handling of migrants.

Here’s the Facebook statement:

We are committed to working closely with the German government on this important issue. We think the best solutions to dealing with people who make racist and xenophobic comments can be found when service providers, government, and civil society all work together to address this common challenge.

Chilling, isn’t it? And coming soon to a server near you, unless we all get busy.