First, an apology. In the early days of the profession, I was a “financial engineer” managing a “financial arbitrage division” most of whose operations tended in one way or another to hide leverage and allow leverage to increase through risk management. Of course, the market for financial engineering was both small and undeveloped at that stage. Interestingly, some projects my division rejected as impracticable because of the risk exposure involved and the arbitrariness of its determination, notably the credit default swap, were subsequently taken up by those with more employer risk tolerance and/or less scruple.

The most immediate danger appears to lie in the private credit sector. This has arisen because of the tight restrictions on banks applied by the 2010 Dodd-Frank Act and the easy money that the Fed has allowed the banks to earn by borrowing at relatively high interest rates from them to bloat its balance sheet. Those two changes have led banks to be very wary of private sector credit exposure on their balance sheet, but enthusiastic for the bonus-enhancing front end fees that could be earned on large syndications, especially where they involved high risks in which the banks only modestly participated. Given the huge amounts of money seeking places to go under the decade of Bernankeism, private credit funds were formed to supply the debt financing that banks no longer would.

Since private credit funds achieved their own returns through leverage, financing themselves from the banking system (which could report those loans as low-risk, since they were taking only the top slice of risk from a financial institution’s portfolio), some of them became (as “Business Development Companies”, BDCs) almost the only source of medium-term financing available for small businesses, as the banks were no longer lending much. As the only source of funding for businesses that needed the money, BDCs were able to raise the interest rate “spreads” above Treasuries on their lending much higher than did the banks. This became still easier with ultra-low rates, since even with bloated spreads, the final borrowing cost was still relatively affordable by the small business incurring it.

Everybody involved rewarded themselves with large up-front fees and paid themselves equivalently large bonuses. Much of the BDC’s equity was raised from income-seeking retail investors, who did not realize – poor saps – that the juicy dividend yields on BDCs were achieved by giving retail investors all the credit losses on leveraged small business lending, so that the net asset value of their shares degenerated, often at a higher annual rate than their dividend yields. As always with financial engineering, somebody at the end of the chain is the sucker, and retail investors are very often that somebody. The same will apply to retail investors who invest in private equity; they are the parties in those transactions with the least political or financial pull, so will inevitably get the worst deals and the most disgraceful treatment.

Since 2022, interest rates have returned closer to market levels, with the U.S. government now paying a modest margin over the rate of inflation for its money, and yields on Treasury Inflation Protected Securities rising temporarily above 3%, an unheard-of rate since their inception in the late 1990s. Naturally, this is producing severe stress in the private credit sector. Small businesses are finding it more difficult to service their debt and, while private credit lenders will allow considerable optimism in business projections seeking debt renegotiations (which of course involve extra fees) there are limits to this, especially when the renegotiation is the second or third such confrontation for a particular borrower. Of course, each renegotiation has extracted substantial fees, so after multiple renegotiations the borrowing company may well be fatally wounded by its lenders’ repeated greed.

Private credit loan losses appear to be soaring and given the concentration of these loans in relatively few industries, the whole sector could soon come crashing down, in a similar way to the subprime mortgage sector in 2008.

There are other vulnerabilities resulting from financial engineering. Almost all public companies have engaged in exorbitant stock buybacks, benefiting their top management with stock options, but rendering their cash flows and balance sheets very unstable indeed. While interest rates were near zero, this was not especially problematic, indeed it was encouraged – companies were borrowing at low cost to invest in a higher-return asset, their own stock. The motivation for this activity was of course a derivative scam – top executives’ holdings of stock options, which benefited directly from the buybacks. These had been issued in wild profusion, without proper accounting of their costs to shareholders, after a truly idiotic 1993 piece of legislation that made base salaries above $1 million (a number that has not been indexed) not tax-deductible for companies, while allowing full deductibility of “Incentive Compensation” such as bonuses and stock options.

However, higher interest rates make stock buybacks much more of a problem and the ongoing destruction of balance sheets may in many cases have made further borrowing to stave off disaster impossible. At that point, there will be only one recourse: an emergency share issue, at a price far below that at which stock was repurchased. As always, retail investors will pay the price of this in further dilution of their holdings, while management simply reprices its stock options. Some substantial percentage of these disasters will declare bankruptcy, wiping out large amounts of debt and equity; the recent stresses in bond markets suggest we may be very close to that outcome.

Another derivatives usage that is likely to cause trouble is the use by “hyperscaler” tech companies such as Meta, Oracle and Alphabet of off-balance-sheet financing to fund their data centers. They create a shell “special purpose vehicle” which finances itself with 90% debt from private credit funds (which have fewer leverage restrictions than banks) and the other 10% by equity, albeit only say 20% of that equity from the hyperscaler itself, the rest typically from private equity funds. Credit support is given by an offtake agreement or a residual value guarantee (which is very likely indeed to run into trouble, given the glut of data centers being built currently). This allows the hyperscalers to retain essentially all of the risk of the data center without disclosing that risk on their balance sheets. The total volume of these deals outstanding is believed to run around $800 billion in total financial support currently and is growing very fast. For the historically minded, this is a structure similar to that used by Enron to finance its assets off-balance-sheet, and we know how that ended.
(Disclosure: I have a modest holding of Oracle put options.)

Leopold Aschenbrenner’s hedge fund Situational Awareness LP, which collapsed during the month of July from a value of $45 billion to under $10 billion, was sold to Citadel in a fire sale and cost the trading house Jane Street an estimated $15 billion in the same month. Its implosion indicates both the size and the potential speed of collapse of these hidden “financial engineering” structures.

With a grown-up now at the Fed in Kevin Warsh, but children still pretending to control the U.S. budget deficit, adding to it by unnecessary wars and utterly irresponsible Supreme Court decisions on tariffs, a near-term collapse is almost inevitable. After all, Silicon Valley Bank, the 16th largest bank in the U.S. collapsed in 2023 because of a simple holding of U.S. Treasuries in a period of gently rising interest rates. My guess would be October for the cataclysm’s occurrence — historically a very good month for financial disasters because of the seasonal monetary tightness at the Northern hemisphere harvest time.

Let me make it entirely clear, however. If a crash comes and proves painful, as is likely, the principal blame should be placed not on current policymakers, certainly not on the estimable Kevin Warsh, but on former Fed Chairman Ben Bernanke, who inaugurated the regime of negative real interest rates. Yes, he left the Fed after 2013, but in Shakespeare’s words attributed to Mark Antony: “The evil that men do lives after them.” As a result of his activities, we have owed a vast debt to sound financing since around 2010; that debt is finally coming due.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Deflating the Financial Engineering Bubble appeared first on True Blue Will Never Stain.

The free-market purist theory that government should never invest in the private sector has never been observed 100%. Even the admirably Tory governments of 1803-08 invested in the Portsmouth Block Works, which invented mass production, component standardization techniques and the assembly line to manufacture naval pulley blocks, essential components of the Napoleonic Wars fleet. Later in the century, Benjamin Disraeli nationalized the British telegraph industry in 1868, killing Britain’s potential lead in the electrical sector and leading the Post Office to become responsible for telegraphs, telephones and eventually radio broadcasting. Most Continental European governments nationalized their railways late in the century, because the great Helmuth von Moltke (the elder), with railway as well as military experience, had convinced them (correctly) that railways were an essential instrument of military mobilization.

Finally, in 1913 came the exception that proved the rule: the invention of the Haber-Bosch nitrogen fixing process was an entirely private sector affair undertaken by B.A.S.F.’s (FSX:BAS) Fritz Haber and Carl Bosch, yet it was crucial to Germany’s survival in the war that broke out the following year. Without this invention, when the Allied blockade cut off supplies of Chilean nitrates, Germany would have been unable to fertilize its crops, resulting in mass starvation in 1916-18. Thus, strategic imperatives, of more or less criticality, have very often led governments to make some private sector investments when the necessity arose.

The Chinese rare earths crisis is a classic example of what goes wrong when governments leave matters entirely to a Whiggish free market inflamed by artificially low interest rates. The Mountain Pass rare earth complex in California, containing rare earth minerals sufficient for U.S. needs for decades was closed in 2002 because environmentalist naggers had raised its costs inordinately, making it impossible for it to compete with Chinese producers. Repeated attempts to reopen the mine led to repeated bankruptcies; the fact remains that, without tariffs, environmentalist-free Chinese mines have a structural cost advantage.

This is just one of a huge number of ball and chains that the environmentalist movement has imposed on the U.S. economy in the last 50 years. Environmentalists have made infrastructure impossibly expensive and caused the U.S. to be thoroughly uncompetitive in sector after sector where the Chinese and others have forged ahead without such shackles. Europe is of course even worse in this respect, and Angela Merkel, who forced Germany to build innumerable windmills and shut down its nuclear capacity, thereby destroying its heavy industry, should be cursed before bedtime by every sensible German.

Mountain Pass is currently being operated by MP Materials Corp. (NYSE:MP) and is providing some of the U.S. rare earth requirements, although it would be unable to fulfill all U.S. needs if a complete Chinese cutoff took place. The possibility of a Chinese cutoff was widely reported in 2010 (I wrote on it at that time) but the dozy globalists who then ran the U.S. economy made no attempt to shore up what was clearly a major U.S. strategic weakness. The Trump administration has now invested in MP Materials and a few other rare earth companies, notably USA Rare Earths (NASDAQ:USAR) to provide sources of rare earths within the United States. This makes good sense, within reason; fairly unimportant market costs, especially in a world full of obstructive environmentalists, should not trump highly important strategic considerations.

The Trump administration’s loan to Sunrise Energy Metals is however eccentric. Scandium is NOT a rare earth, contrary to Nic Fildes’ claim in the Financial Times, being element 21 in the Periodic Table, well outside the lanthanide rare earths group (57-71). Scandium has strategic uses in the inevitable data centers, but its entire annual global production is about 60 tons, which appears, unlike with the chemically eccentric lanthanides, to be a tiny fraction of potential global availability. Apparently, Russia has a gigantic stockpile of scandium, which was collected by the Soviet GOSPLAN before 1990 (maybe they didn’t know it was not a rare earth either, which would be sad in a country that gave the world Dmitri Mendeleev). However, it would be sensible for the nominally capitalist Trump administration to avoid repeating too many of GOSPLAN’s errors.

That is the central problem with government investment in companies, whether directly or through a United States Sovereign Wealth Fund (which could only be funded by more borrowing, in the end landing on hard-suffering taxpayers or blowing the deficit out yet further). First, it increases the political direction of investment, almost always sub-optimally. One may be moderately happy at a successful businessman like Trump investing the nation’s wealth but think of the God-awful green boondoggles a Biden Sovereign Wealth Fund would have purchased, all of which would by now be worthless.

Second, government will invest mostly in what is fashionable at any given time. Of course, the stock market does that also, especially when it is bloated, as it is now, but the government will make this problem worse. Of the 30 investments the Trump Administration has made, according to a recent Cato Institute paper, ten have been in semiconductors and nine in quantum computing, surely an over-devotion of resources to sectors at which the stock market and private equity are already throwing money. Third, the government will tend to prop up dinosaurs, to preserve jobs or votes – we see this all the time in European government investments, but even with Trump, the leading semiconductor investment is in Intel (NASDAQ:INTC) surely at this stage the megatherium of the tech sector, to use a quaint Edwardian insult. As Joseph Schumpeter taught us, capitalism’s creative destruction requires some actual destruction, not the infinite preservation of zombie dinosaurs through government investment.

The government has other jobs, such as getting out of the private sector’s way. More value could have been achieved than in the government’s entire 30-company investment portfolio by the EPA getting out of the way of Northern Dynasty Minerals’ (NYSE:NAK) Pebble copper/gold project in Alaska. Pebble is potentially one of the largest and richest deposits of both minerals in the world, solving a major U.S. strategic problem (copper) if it goes ahead without idiotic government harassment and delays, which have already occupied a decade. (No, I don’t have shares in NAK; I have given up in despair!)

One throws one’s hands up! If government makes investments, it will make a frightful hash of them, as well as playing favorites and distorting the market. Conversely, the private sector, especially when a lunatic at the Fed has blown up the money supply and produced a decade of gross speculation, cannot be relied upon to take into account that not all countries are friendly or even rational, so that creating dependence for critical minerals is strategically suicidal. Equally, when looked at closely, the rare earths problem, a genuine strategic vulnerability, was caused not so much by the foolish market, but by the even more foolish government environmental regulators.

So, rather than encouraging government investment, it would appear that the rational observer or investor’s message to government should be that of Ayn Rand’s John Galt: “Get the Hell Out of My Way!”

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: When should governments invest? appeared first on True Blue Will Never Stain.

The Federal Budget sank into deficit under the influence of George W. Bush’s pointless and expensive wars (it had been in surplus when he attained office) but deficits were turbocharged, first by the 2007-08 financial crisis and its profligate resolution with mass taxpayer bailouts and then by the artificially low interest rate policies followed by Fed chairs Ben Bernanke and Janet Yellen. Those policies led to massive investment in unproductive assets, primarily real estate, sluggish economic growth for an entire decade and a Federal government that was incentivized to waste appalling amounts of money by real interest rates that were relentlessly negative, so imposing no penalty for borrowing. The Curse of Ben Bernanke will rest on the U.S. economy and its fiscal position for several decades to come.

More recent policies have made matters worse. The Big Beautiful Bill allowed businesses to expense capital investments, an economically pointless subsidy received largely by big corporations with their near-infinite access to finance in current conditions. As a result, the 27% decline in corporate tax revenues from the previous year recorded in March, which I wrote about in May, has become an $87 billion shortfall from the previous year in the 9 months to June, albeit only 24% in relative terms indicating a likely shortfall of well over $100 billion for the year to September.

There is nothing populist about a corporate tax cut; it was simply a case of the feeble Republican Congress caving to the big-company lobby, always a powerful force on Republican Congressmen because of their desperate search for election funding. As this column noted in April, corporate taxes have declined from 2.1% of GDP to 0.7% of GDP in the last thirty years, with the Bush and 2017 Trump tax cuts being especially corporate-heavy in creating new loopholes. In addition, this particular tax cut artificially subsidizes pointless capital investment, producing today’s enormous boom in data center construction. While data centers have an unquestionable economic purpose, the current tsunami of projects, having been undertaken so rapidly, has become undeniably a bubble, with substantial costs to the economy when it bursts, from badly designed, misplaced or duplicative data centers that have become “malinvestment” in the Austrian economists’ sense.

Corporations are thus the first place that Congress should tap to increase revenue and reduce the excessive deficit. Returning corporate taxes to their 1990s levels is long overdue – post-tax corporate profits appear to have reached a record level of 12.4% of GDP in the first half of 2026. Such a high level of corporate profits is not healthy; it inflates the stock market and thereby other asset prices beyond all reason and increases the most pernicious kind of “robber baron” inequality, whereby the middle class is unable to share the benefits generated by new wealth. The corporate tax levy of 0.7% of GDP is a mere 6% of the profits level; thus bloated corporate behemoths are paying far lower taxes than ordinary people.

This must be reversed, forthwith, yielding about 1.5% of GDP or some $500 billion a year towards reducing the Federal deficit, in other words eliminating a quarter of it. Corporate resistance to this reform could be quieted by threatening to introduce an SEC regulation whereby their book depreciation must match their tax depreciation; with current tax rules this would force the “Magnificent 7” to report massive losses, crashing their stock prices and rendering management’s stock options worthless.

The second major source of potential revenue is tariffs. Of course they are unpopular; they are taxes. However, they serve two very valuable purposes. First, they prevent U.S. companies from going bankrupt or outsourcing production unnecessarily; in future, only truly gigantic cost differentials will cause companies to outsource against a substantial tariff wall. Second, they provide revenue to reduce the Federal deficit, revenue that is all the more valuable because it comes from a separate source, not overloading the income tax burden on ordinary people. The Whiggish unilateral free trade ideal is utterly misguided in both these respects. Without a solid chunk of tariff revenue, governments are forced to place all their reliance on income and payroll taxes, especially when as at present the corporate behemoths have been all too successful in reducing their own tax burden.

Furthermore, corporations have in the last 30 years been encouraged to create long rickety supply chains involving unreliable Third World countries; these are of necessity temporary (because rising wages in the Third World make them eventually uneconomic) and a serious strategic threat in a world that is not composed of kumbaya-singing patsies. President Trump’s tariff policies are therefore correct, in moderation (very high tariff rates, like sanctions/embargoes, can be economically costly) and he should persist with Congress in establishing them beyond legal question.

In this respect, the Supreme Court has played a malign part, intervening on a subject on which they are wholly ignorant, and forbidding a policy that has been central to American economic management since Alexander Hamilton. What is more, they have cost American taxpayers $100 billion in pointless tariff refunds, almost all of which have gone to the corporate behemoths. Retailers such as Walmart and others are ostentatiously giving discounts to their shoppers in recompense, but the true losers in this idiocy are as always small businesses, which buy foreign goods through intermediaries and are therefore unable to get refunds even though they have borne the costs concerned. Trump has now reimposed the tariffs on a different basis; it is to be hoped if only for the U.S. fiscal position that the Supreme Court will not be so asinine again. With well designed tariffs, about $400 billion per annum should accrue to the Treasury; together with a proper level of corporate taxation this will fill half the $2 trillion fiscal gap.

I have written previously about the other major avenue for closing the fiscal gap: disallowing the deductions and exemptions for charities and other nonprofits, which now represent a very badly directed 6% of GDP and would yield a further $500 billion if they were put on the same footing as people and corporations. If that were done, the current deficit would be almost closed, and only a little careful management on the expenditure side would close it.

There remains the problem of Social Security and Medicare. Part of this problem is short-term; the Baby Boomers are the largest generation in U.S. history and so will pose a strain on the Social Security system until they die off in the 2040s. The main need then will be to cut back sharply on low-skill immigration, both illegal and through the blizzard of loophole visas issued annually (as well as the appalling Bush “diversity lottery.”) New immigrants with less than the average level of skills and more than the average number of dependents will cost the welfare system money over the long run, almost by definition, as well as driving up real estate prices and overcrowding costs. The U.S. is no longer in the blissful position of 1850, with an entire continent and only 23 million population; it should cease forming policy as if land, water, electricity and housing were in infinite supply.

By restricting immigration, the U.S. will greatly improve Social Security and Medicare’s long-term solvency and reduce the overbearing cost of Medicaid. Further tweaks can be gained by a modest rise in the income “ceiling” for social security contributions, which has not kept up with the bloat in asset prices since the 1980s, although a large rise of that limit would clash with higher income tax brackets, making the marginal tax rate well above 50%, and deterring economic activity. Also, we should resume the policy, in force until 2026, of raising the retirement age by 1 month per annum in line with rising lifespans, putting it at 70 by 2062.

The U.S. cannot keep running budget deficits at this level. For one thing, it has already incurred debt levels well over 100% of GDP, historic highs for the country and worryingly on track towards Japan’s 250% of GDP, which appears to be the maximum sustainable. As Trump was inaugurated, it seemed possible that tariffs and higher economic growth alone would solve the problem, but that has not happened, and the expensive mess in the Middle East leaves little hope of significant succor from the expenditure side. The bullet must be bitten, large corporations must be taxed back into their box, the Supreme Court must behave itself about Trump’s latest tariffs and nonprofits must be brought fully into the tax net. Only with such actions will the problem be solved, and they have now become urgent.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Time to get serious about the Budget appeared first on True Blue Will Never Stain.

I have written previously about the evils of the GDP statistic as it relates to government, and suggested an alternative measure of Gross Private Product, in which government’s output is valued at zero. Private sector organizations that make losses are not allowed this benefit in GDP statistics; their output is valued at their revenue level, not their costs, and even in a Ben Bernanke funny-money economy, private sector organizations that make persistent losses are eventually put out of their misery by bankruptcy courts, though it may take decades for this desirable termination to occur. Of course, no power of heaven or earth can put a loss-making government out of business.

The truth is somewhere in between the Gross Private Product measure, in which government output is valued at zero and the official measure, in which every wasteful and bloated cost is included. Nations need defense, for example, and the correct level of defense provision is a political decision to be taken by Congress and the administration. Equally, the armed forces today have an excessive “tail” of bureaucrats – current estimates are that 40% of total spending represents administrative tail rather than equipment or fighting forces; if true this amount of $500 billion per annum should be excluded from GDP since it adds no value. At the other end of the usefulness scale, government departments such as the Environmental Protection Agency and the Occupational Safety and Health Administration exist solely to load additional regulatory costs on U.S. businesses; their budgets should thus be subtracted from GDP rather than added to it.

Kuznets, a lifetime Big Government man, would doubtless have been delighted that his GDP calculation led to the government’s aggrandizement. From the earliest years of the statistic, politicians have used GDP to measure their success; a healthy increase in GDP could be attributed to their wise policies. During the New Deal and again during the Great Society 1960s, this statistical anomaly encouraged Democrat administrations who wanted to expand government anyway. If their opponents questioned the wisdom of government expansionism, they could point to the expansion in GDP that accompanied it – this was especially useful during the 1930s, when poor economic policies left other sources of GDP growth hard to find. As Harry Hopkins was quoted in the New York Times in November 1938, they would “tax and tax, spend and spend, elect and elect” – even the New York Times columnist (Arthur Krock) described this set of policies as a “sinister combination.”

However, the construction of GDP aided Hopkins’ madness, and sharply hindered future Presidents such as Richard Nixon and Ronald Reagan, who attempted to restrain the insane bloat of government – by doing so they would knock the reported growth rate, and lay themselves open to attack by unscrupulous state-bloaters. Even in 2026’s second quarter figures, released this week, the uninspiring 1.5% growth rate was artificially low, held back by a blessed contraction in the Federal government. Only the missiles fired at Iran, whatever conceivable purpose they may have served, kept the headline GDP figure sustained. Revising the GDP definition, either to GPP or to something that accurately measures the actual economic benefit (or more likely damage) generated by each bureaucrat is an essential economic reform.

By the 1970s, bloating government still further was threatening to do serious damage to the economy, so the Left came up with an alternative strategy to grow reported GDP without improving people’s lives: feminism. If married women could be coerced into the workforce, reported GDP would increase, even though the married couples would now require daycare, numerous expensive takeouts, an unattractive but costly “work wardrobe” and perhaps a cleaning lady, all of which would be counted as output. Indeed, in an absurd example of the GDP statistic’s folly, if a lonely bachelor married his cleaning lady, reported GDP would decline, even though exactly the same goods and services were being provided.

Looked at in this light, 1970s feminism, from Betty Friedan on, can be seen as yet another sinister socialist plot. If women could be coerced into re-entering the workforce, all sorts of government-provided services such as daycare could be established, increasing both GDP and government control of everybody’s lives, even though the living standards of married couples would have been sharply hit. Since most rational men have no wish to be married to the harridan Betty Friedan, nor rational women wish to emulate her, the welfare of both sexes was badly damaged by the feminist movement, but government was further bloated and reported GDP was increased.

In principle, therefore, we must reform GDP to include the output of tradwives. Their contribution to the family is a very important part of economic output, especially in cases where the husband has a high-powered job that would be impossible without his wife’s support. (By all means, the same applies to high-powered women with “trad-husbands,” provided the husbands look after the house and children, cook adequately and do not just sit around playing video games.) This reform will lead public policy, social mores and lifestyle choices back towards the 1950s ideal of a traditional suburban family, with the non-working partner shepherding numerous children to their various activities in a gigantic Buick estate wagon or minivan.

The decline in U.S. fertility over the last half-century is very largely due to the trend towards two-career families. It has made all but the highest-earning, most dreamy men unattractive to women who are already supporting themselves, thus delaying marriage until the fertility Doomsday Clock is standing at three minutes to midnight. The couple with two established careers and no children may enjoy a wonderful series of exorbitantly expensive vacations, but they are likely to be unhappy in old age, and there is always the chance that one or other will run off with a male/female bimbo. Society has taken a wrong turn, and Kuznets’ warping of economic statistics is very largely responsible.

In the long run, of course, robots and AI may solve all this. The difficulties of measuring household activities will end when robots and AI can perform them directly. That performance will entail a certain cost for purchase or rental of the appropriate equipment and of course electricity charges, and those costs can be used as a proxy for the value of the services performed. This will be a much more accurate estimate than in the case of government services, which are valued at cost with no market control of whether the services are merited. Of course, there will always be exceptions to the valuation – the exquisite homemaker who keeps her house spotlessly clean and looks after several children in a low-income family, or the rich dilettante married to a billionaire who sits around eating bonbons, but at a macro level, averaged over the entire population, this measurement should be sufficiently accurate.

The MAGA crowd are not wrong in believing that the increase in national wealth since the 1970s has done very little for them – much of it has been eaten by government or is an artificial creation of their long-suffering 2-career families. However, reforming GDP accounting, and ensuring that such reform takes priority over the traditional GDP statistic, will allow the benefits of the idyllic 1950s lifestyle to be available to all who want them, and personal satisfaction of the entire population, of course with a few eccentric minuses, will thereby be greatly increased.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: GDP should include Housewives, not Government appeared first on True Blue Will Never Stain.

At their most basic, lawyers are necessary, as is the law. Civilization would be impossible without the rule of law, and modern industrial civilization even more impossible. Fans of Christopher Nolan’s “Odyssey” movie would mostly not claim to be capitalists, but one of the many unhistorical features of that movie, as I gather from the reviews, is that it updates the Bronze Age ethical world about which Homer sang to a late mediaeval Christian world, in which one can imagine Shakespeare’s Merchants of Venice doing good if risky business. Odysseus is burdened with a conscience, not something known in the Homeric era, where misdeeds were punished by the Gods, not internally.

Technologically, it is true, there was not much difference between the two eras, but in outlook there was a huge difference; life in the real Bronze Age was nasty, brutish and short, in Thomas Hobbes’ memorable phrase. Conversely, the merchants of Shakespeare’s and Hobbes’ time had the protection of established legal systems, with lawyers to protect both their contracts and if necessary, their physical existence by deterring the thugs that infest every age. Dick the Butcher who wanted to “kill all the lawyers” in Henry VI Part II was supposedly a ringleader in the 1450 Jack Cade’s Rebellion and represented a more primitive social view. At an Early Modern level, therefore, we need lawyers and should be grateful for their existence.

The English legal system under the great Lord Chancellor Earl of Eldon worked well, despite innumerable complaints of the law’s delays and costs. Criminal law trials were quick and simple, generally over in a morning, with the parties involved knowing their fate immediately. The death penalty and transportation to Australia were available as punishments to deter miscreants (though as Liverpool said in 1819, New South Wales was becoming so pleasant that transportation to it was no longer a sufficient deterrent – there were cases of savvy London rogues committing crimes so they could be sent there free of charge).

Eldon’s legal system had lengthy and economically damaging civil trials, notably that of Jennens vs Jennens, arguing the claim to William Jennens’ 1798 fortune of £1.5 million, serious money in those days, which ran until 1915, a total of 117 years, by which time the fortune was (of course) exhausted – Jennens had prepared a valid will, but being 97 when he died, had forgotten to sign it. However, these cases were prompted simply by the need for lawyers to make a living; they had no significant economic effect beyond the unfortunate parties concerned and the lucky or greedy lawyers.

In Eldon’s legal system, the law did not attempt to come after citizens who said things the authorities did not like. Even though there were fanatic Whig judges and clever and unscrupulous Whig lawyers like Henry Brougham, they had no power to block the Liverpool government’s laws simply because they did not like them – although they did delay George IV’s Coronation for a year because his estranged wife insisted on being present. Eldon’s legal system did not invent fresh constitutional rights to flood the country with “birthright” immigrants. The British constitution was what the Earl of Eldon said it was; he was a 1-man Supreme Court, greatly simplifying the appeals and law writing processes.

Eldon’s legal system did not impose massive delays on new infrastructure; you had to get an Act of Parliament to build a railway, because of the Eminent Domain it needed over landowners’ property, but even Eldon himself objecting in a memorable speech did not significantly delay the construction of Brunel’s Great Western Railway. There were no “trial lawyers” seeking to sue business for imagined transgressions against woke regulations or environmental fads – any such lawsuits would have been thrown out of court. Medicine was primitive, but its costs were not inflated by fanciful lawsuits seeking to prove that some medical procedure undertaken in good faith had been mistaken.

In short, the Eldon legal system worked. The railway from London to Manchester was completed in eight years from its first Parliamentary authorization (in two parts, joined at Birmingham) and cost a total of £7.1 million, equivalent to about £2.13 billion today, despite all work being carried out without any kind of power digging equipment, and with the inefficiencies (substantial on the London-Birmingham portion) of its being the world’s first major railway project. Compare that with the projected cost of the HS2 railway over the same route of at least £87.7 billion without the extension to Manchester and its projected completion time of 23 years from final Parliamentary authorization in 2020. That 41-fold plus increase in real construction costs, despite massive new technology, is almost entirely caused by lawyers and their pernicious allies in the environmental movement and the NIMBY NGOs.

Not only do lawyers and their nefarious non-profit allies make infrastructure inordinately expensive, but they often prevent it altogether. The state of New York does not allow fracking, despite having a major shale deposit south of Binghamton, in a very depressed region of the state, and it has now placed a 1-year moratorium on data centers — which could end up looking clever, as the data center bubble may well burst before then. However, the fracking ban has done huge damage to New York’s economy and the unfortunate mostly welfare-recipient inhabitants of Binghamton, while a parallel ban on gas pipelines may well cause the state’s electric utilities to cease operating, some hot or cold day.

There are worse crimes to attribute to lawyers than merely adding delays and costs. During the Biden administration in the U.S., and more seriously in quasi-democratic leftist countries such as Brazil, Ukraine and possibly now Hungary and Poland, lawyers have sought to imprison or ruin their political opponents, and given the number of politically extreme, unscrupulous judges on the Bench, they are quite often successful. This undermines the central pillars of democracy or any other kind of legitimate state, because it undermines the rule of objective law, on which that legitimacy is based. The damage wrought by such legal shenanigans cannot be quantified as can cost overruns in railway projects; it is essentially infinite. Judges who provide gigantic quantities of glue in the works to any administration whose policies they dislike are another pure cost center in the economy. Naturally, the worst legal excesses are seen in institutions that have no democratic control and consist entirely of the worst lawyers, such as the EU, the UN, the International Criminal Court and other supranational bodies.

Lawyers at the early modern Eldon-period level of simple criminal trials (by all means enhanced today with DNA and other modern evidence, so the false conviction rate would be lower) are unquestionably valuable and should be counted positively in output. Lawyers to squabble in the innumerable lucrative private disputes that are inevitable in a rich society are not adding economic value but are probably necessary in a world not entirely inhabited by rational men and women. However, the lawyer/regulator/environmentalist/nonprofit nexus is wholly damaging, has grown grotesquely in the last century, and subtracts both from the wealth of society and its economic dynamism. If Britain was not spending £87 billion on HS2, it could buy something useful with the money, though under its current management, it would probably merely find an alternative way to waste it.

Let’s not “Kill all the lawyers” – but let’s send the younger ones to welding or plumbing school, where they can learn skills that are genuinely useful!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Lawyers Subtract Economic Value appeared first on True Blue Will Never Stain.

For the last 35 years, the world has been operating on Whiggish assumptions, that the optimal tariff policy is free trade and that tolls on narrow bodies of water, being impediments to free trade, were illegitimate. This idea gained currency in the early 19th century, when economists such as Friedrich List were faced with the remnants of the Holy Roman Empire, with 1,800 independent states, each of which imposed their own tariffs and tolls, so that there were 32 separate tolls on the Rhine from the Swiss border to the mouth. List came up in 1819 with the idea of a Zollverein (customs union) covering as much as possible of Germany to solve this problem.

However, as List pointed out himself in his 1841 masterpiece National System of Political Economy: “Gradually, I satisfied myself that the whole (free trade) doctrine was applicable and sound only when adopted by all nations. Thus, I was led to the idea of nationality; I found that the theorists kept always in view mankind and man, never separate nations.” List’s idea, adopted by Bismarck, became the foundation of Wilhelmine Germany, the most successful economy of the 19th and early 20th centuries.

The time has come again for the United States, run by the German-ancestry Donald Trump, to take its economics from the Kaisers. With China Communist and Russia and Iran hostile, all of them significant players in the world economy, we clearly do not live in the globalist dreamworld postulated by Whiggish and other free trade fanatic economists. Furthermore, the EU’s tendency to impose ever more damaging regulations, for “climate change” and other idiocies, which destroy those countries’ own economies but are increasingly aimed at damaging U.S. interests, brings a new factor into the equation undreamed of in traditional free-trade ideology.

Regulations and embargoes are the most damaging possible interference with free trade, because they impose an infinite cost on it, making it not merely expensive but impossible. Probably the only useful global body would be a “Deregulatory Commission” whose sole purpose was to shoot down national and supranational regulations that immiserate the world’s people – the Commission should not have the power to impose any regulations of its own, of course.

In this light, Trump’s proposed (and subsequently withdrawn) 20% levy on shipping through the Straits of Hormuz is well considered. The United States is being forced to devote huge resources to keeping the Straits open and should be paid for doing so. The U.S. does not need Middle East oil and has little need for anything else that transits through the Straits of Hormuz. Conversely, the EU, China and India have an existential need for Middle East oil, yet pay nothing to protect the Straits, even interfering to obstruct and damage the U.S. work in protecting them.

That is not to say that the Iran War was well conceived; it was not, any more than were the other U.S. interventions in the Middle East that have littered history in the past quarter-century. The Middle East has always been a backward and hostile region, in which the U.S. lacked sufficient understanding to “regime change” successfully, and where every U.S. intervention has ended and is likely to end in a quagmire. The U.S. had some need for Middle East oil between roughly 1970 and 2020, but the invention of “fracking” and the U.S.’s general acquiescence in it (with some utterly foolish exceptions like New York and California, as always) has removed that need. The EU, conversely, is utterly dependent on the Middle East, because of its bigoted regulatory refusal to tolerate fracking in, for example, the Polish/Galicia oil/gas fields, the world’s first, whose development preceded by half a decade Colonel Drake’s activities in Pennsylvania.

One understands the need to defend Israel, but that should be done by supplying arms and defensive support if needed, entirely without offensive operations. Otherwise, Israel far from being America’s “greatest ally,” becomes a highly equivocal one, constantly dragging the U.S. into trouble in a region where it has no interests, without contributing anything at all to solving U.S. problems in other regions.

The most effective way of paying the U.S. for its work in keeping the Straits of Hormuz open is through a toll, which can be shared with Iran and the other Hormuz-bordering states once the cost of the war has been recouped and peace has broken out. This will encourage initiatives such as Dubai’s opening a port outside the bottleneck and other states building pipelines, etc., which is all to the good, removing an economic bottleneck/vulnerability. There is no reason why the oil consumers in the EU, India and China should not bear the cost of assuring their own supply, especially when, as in the EU’s case, the need for Middle East oil is through sheer leftist witlessness.

Tariffs are also an excellent means of recouping costs of military operations, and indeed are better in this respect than embargoes, especially partially-enforced embargoes such as those on Russia. The current ineffectual embargo imposes huge costs on Russia without doing anything to recoup the costs to the West of supporting Ukraine; it would be much more economically efficient to impose a high tariff on both sides, which could be reduced once military costs had been reimbursed. Russia, as a primarily free-market economy with abundant natural resources, should be re-integrated as soon as possible into the global economic system; the sanctions have gone on far too long.

Economic sanctions have shown themselves always ineffectual and politically damaging ever since in 1936 an emotional speech by Emperor Haile Selassie caused the League of Nations to impose sanctions on Mussolini’s Italy, thereby driving him into the arms of the much more dangerous Hitler. When imposed for decades at a time, as on Iran since 1979, they prevent the possible openings to the regime that could have caused it to move in a more Western-friendly direction, greatly improving the lives of 90 million Iranians. I wrote this opinion as a lone voice in August 2001, when the U.S. Iran-Libya Sanctions Act had just been renewed and Iran had the reformist Mohammad Khatami as President. Needless to say a freak terrorist attack shortly thereafter sent U.S. policy idiotically in the opposite direction for what is now a quarter of a century.

The U.S. Supreme Court therefore needs to butt out of the tariff argument, on which it has no expertise (also that on birthright citizenship, on which the Founding Fathers, seeing today’s circumstances, would undoubtedly vote the opposite way to the Justices). The President needs to set tariffs, which are an important tool of foreign policy and a moderately important source of revenue (only not dominant because the Federal government has grown so bloated).

The one control on the President, ideally imposed by Congress, is that he should not be able to grant exemptions to his buddies and the Fortune 500 – such exemptions bias the U.S. economic system even further in favor of large corporate bureaucracies than it is already, damaging the ever-beleaguered entrepreneurship.

With full tariff powers, an economically competent and enlightened administration (and after the last quarter century, let us pray that we get no more examples of the opposite) can manage the world’s difficulties, deploy U.S. forces where they are most needed and apply useful economic pressure to dragoon the world’s bad actors into behaving themselves.

Friedrich List pointed out the idiocies of free trade Whiggery almost two centuries ago. It is time to apply the lessons he taught us, in the intelligent tradition of Otto von Bismarck and the ever to be revered Kaiser Wilhelm I (his grandson, alas was less enlightened).

Hoch der Kaiser! Hoch der Drumpf!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Global Policing Fees Make Sense appeared first on True Blue Will Never Stain.

This column looks closely at Latin America about once a year. Its attitude depends crucially on Latin American electoral trends; the continent is like many countries in the 2020s in having a very wide ideological spread between its better governments, who are competent and occasionally more, and its worst governments, who are destructive Marxists, with a tendency to cement themselves in power indefinitely (see Chavez, Hugo). In 2023, the run of elections had been so bad (and I was dispirited by the Biden administration) that I seriously suggested we might see a Latin American Comecon, an association of Communist countries that blocked any democratic impulse to escape and cemented the continent in utter Stalinist poverty, albeit with less efficient secret police with more colorful uniforms.

Then last summer, I was more optimistic, seeing the chances for electoral change ahead and wondering whether Latin America could make history run backwards, towards a destiny of small governments and free markets.

Intellectually, there have been two leaders of the recent rightist Latin American renaissance, Javier Milei of Argentina, elected in December 2023, a year ahead of other rightist successes and Nayib Bukele of El Salvador, in office since 2019 and bidding next year for a third term in power. They have followed different paths, so much so that many supporters of one object to the other, but in the complex situations of Latin America a mix of both approaches seems optimal.

Bukele has concentrated on reducing the appallingly high crime and homicide rates in El Salvador, due to the prevalence of drug gangs and the tendency of previous administrations to be on the drug gangs’ payroll. By building prisons, increasing police forces and disrupting gang finances he appears to have conquered El Salvador’s crime problem, making the country one of the safest in the hemisphere. His economic policy has been less notable, pursuing a moderate free market policy, notable for adopting Bitcoin as the Salvadoran currency (the country has been dollarized since 2001). Internationally, he supports the reunification of Central America, which was united in the Federal Republic of Central America from 1823 to 1841; he also refuses to recognize Communist regimes, such as the Maduro regime in Venezuela but also in Nicaragua and Peru.

Javier Milei in Argentina has governed with free market even Austrian principles more rigorous than any other leader of recent years, even President Reagan – not since Calvin Coolidge and Neville Chamberlain has there been a leader so fully committed to free markets. In economic principles, he is the reincarnation of Ludwig von Mises, not just the wimpy partial sellouts Milton Friedman and Friedrich Hayek. Milei’s “Long Live Freedom, dammit” is a breath of fresh air the world has long needed, particularly at the time of his inauguration, when it appeared that the dead hands of President Biden and the EU bureaucracy were subjecting the world to authoritarian socialism, under the heel of China on calm, cloudy days when the windmills did not work.

In practice, Milei has no secure majority in Congress, so cannot reliably pass his preferred policies into law. Nevertheless, in his time in office, he has cut Argentine government spending by 30% in real terms, the most important reform that was needed on his advent to power. He has also achieved important macroeconomic victories by abolishing rent controls, and has seen the real price of Buenos Aires apartment rents substantially decline. He is now attempting to move to a U.S.-type system in which the government shuts down if no agreement is reached on a budget, instead of the current Argentine system whereby last year’s budget is extended. The latter is a recipe for continued government bloat once inflation has been reduced to moderate levels, which is by far Milei’s greatest success, in the eyes of the Argentine public.

Most of the new Latin American governments need to adopt a mixture of Milei and Bukele policies, with the mixture varying. In Chile, where leftist unrest is only moderate, Jose Antonio Kast should follow Milei fairly closely – Chile of course has its own proud tradition of imposing free market Austrian economic policies, in 1973-90. Conversely in Colombia, Abelardo de la Espriella faces a situation in which economic policy has deviated only modestly from Colombia’s tradition of fairly small government, but the security situation is truly dire, with drug gangs and a revitalized leftist guerrilla movement, supported by the outgoing President Gustavo Petro. Consequently, Espriella must cut back the bloat in Petro’s budget, which will be difficult since he does not control a solid Congressional majority, but the most important issue is restoring Colombia’s internal security, which will require a strong Bukele-like approach.

Peru’s situation is less difficult than Colombia’s, though drug gangs are strong also, but Keiko Fujimori has the example of her admirable late father’s Presidency in the 1990s to guide her. Alberto Fujimori in 1990-2000 won a civil war and set Peru on the road to free market growth before he was ousted; his policies were more Bukele than Milei, but they worked. His daughter should follow him, ideally with help from an Argentine economic mentor where necessary.

Some other Latin American countries got decent election results but are not yet fully secure. Bolivia elected the moderate rather than the out-and-out rightist last year and is now finding the downside of that approach in that the hard left under former President Evo Morales, are attempting to remove him by force. Ecuador also has a strong revanchist movement from former President Rafael Correa. If Colombia and Peru can be secured, this will hopefully stabilize the positions in Bolivia and Ecuador, which are situated between the two.

That leaves, Brazil, Mexico, Venezuela and Nicaragua, the continent’s basket cases, in all of which it seems unlikely that a sufficiently free election will be allowed for the right to regain supremacy. The most urgent of these is Brazil, because of its economic and demographic size, in which elections are due later this year. Hopefully the U.S. will work as hard to produce a right-wing victory in 2026 as it did to restore the loathsome Lula to power in 2022, an election that was clearly rigged.

The most important thing the U.S. can do to help the process is to defund as far as possible the innumerable subversive Western-funded agencies, NGOs and supranational organizations that do their utmost to destabilize and de-legitimize right-wing governments and entrench left-wing ones. The Trump administration made a substantial move in this direction when it defunded USAID, which had been financially supporting all kinds of subversive Marxist NGOs whose main purpose was to block the right in Latin America – you can see the result of their efforts in Brazil’s 2022 election, after which U.S. funded lawfare has been used to imprison both the main opposition candidate Jair Bolsonaro and his son.

There is much more to be done in this direction. A really rigorous IRS audit of George and Alex Soros and their network of “charities” and NGOs would undoubtedly turn up much of interest, hopefully enough for indictments to be brought. The U.S. should also work to defund the World Bank, the International Monetary Fund and the Inter-American Development Bank. Those organizations were always basically on the side of the Left, but with the radicalization of the worldwide Ivy League equivalent colleges and their graduates in recent years, they have become fanatically anti-capitalist, anti-free market and supportive of all kinds of leftist subversion and wreckage.

The IMF in particular has been run since 2019 by a Communist-trained Bulgarian with good Party connections Kristalina Georgieva. Its new Chief Economist Silvana Tenreyro was on the dovish leftist side at the Bank of England, which of course has form in de-stabilizing rightist governments in the form of the unfortunate Liz Truss. Since the IMF was historically the least manically leftist of the three Washington institutions financing Latin America, we can bet that the World Bank and the IADB are worse.

Supranational institutions are structurally both socialist and authoritarian, as they seek to accrue more power to themselves – they are the clinching argument against a world government, which would be a universal tyranny that would undo the Industrial Revolution and plunge us back into impoverished perpetual warfare. The U.S. taxpayer needs to stop paying for the subversion of the economic system on which the country depends.

Much of Latin America is currently enjoying a new morning of hope, partly because of the superior policies of the Trump administration and its example. Let us help its recovering economic alcoholics to work together, preserve economic and social sobriety and finally lead their people into the prosperous future that they deserve but for so long have been denied.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Time for Latin American Capitalism appeared first on True Blue Will Never Stain.

The win of the quasi-Communist Darializa Chevalier in the Democrat primary for NY-13, for example, was not caused by the oppressed rising up against the capitalist system. Her opponent Adriano Espaillat, the incumbent Democrat, won majority Hispanic precincts by 17 points, and lower-income areas by 9.5 points and broke even in majority Black precincts, but Chevalier won majority college-educated areas (mostly in very affluent Manhattan) by almost 25 points. To be fair, even Espaillat is a thorough leftie whom you wouldn’t want even as a Democrat President, but the fact remains that the vote for pure Marxism was from the over-educated rich, doubtless with massive college debt but also with million-dollar trust funds or incomes far into six figures.

The problem of welfare recipients voting to grant themselves more welfare is well known. Less studied has been the problem of the over-educated deliberately voting for candidates who want to bring down the economic system. But consider: what stake do many of them have in that system? If they rent in New York, they may well live in a rent-controlled apartment (on which the New York Rent Guidelines Board has just voted to freeze rents for two years despite substantial inflation). Many of them derive their income from their parents or student loans which they are unlikely to repay (like Ms. Chevalier, in her 7th year of a PhD at the age of 32) or from jobs at “nonprofit” political or charitable institutions whose very existence is an affront to free market principles, being based largely on charitable tax deductions and exemptions.

Of course, there are always some who work at Goldman Sachs and whose Marxist vote derives from youthful rebellion or sheer eccentricity. However, given that the rest of our welfare depends on a sound economy, such frivolity ought also to be discouraged. The lady who lost her diversity job at J.P. Morgan for stealing a filthy used New York City trash can with a Knicks logo on it was symptomatic of their worldview and their ability to survive usefully in the modern world.

A property franchise, whereby the ownership of a modest property was required to have the right to vote, was used in all the countries that industrialized rapidly in the 19th century. Britain, famously, had the “40-shilling freehold” franchise before the Whig gerrymandering 1832 Reform Act raised the property qualification to £10, a rampant act of class legislation that over time reduced the quality of Britain’s government, causing it to lose its initial industrial lead. Bismarck’s Germany had a property franchise in the Prussian Landtag, far more important in his time than the pan-German Reichstag, which was made constitutionally impotent. Most significantly, the Meiji government of Japan, home of the most impressive march to industrialization of the 19th century, also had a property franchise for almost 40 years from 1889 – the abolition of the property qualification in 1925 turned Japan’s governments towards militarism and folly.

A property franchise gets the incentives right. Welfare recipients who own no property are unable to vote themselves additional welfare. Ideologues who cannot hold down a proper job or buy a property are reduced to waving placards at us, rather than being able to vote their nonsense into Congress. With congressional districts based on eligible voters, not population, the biggest cities, with their excess of welfare recipients and ideologues and where property is excessively expensive get a lower representation relatively than outer suburban and rural areas where property is cheap and most people own their dwelling. To the extent that the franchise encourages renters to buy their own property, this is a good thing; by owning their dwelling they become more stable members of society, more secure in their old age and in the long run happier.

The other much needed reform is to remove all the nonprofit tax loopholes, both on the donors and the charities themselves. Nonprofits consume around 6% of US GDP and are increasing their relative size rapidly, which is not surprising as they do not have to pay any of the taxes from which the rest of us suffer. The revelation this week that Mackenzie Scott (formerly Bezos) has spent $26.3 billion of her divorce-court fortune, not on helping the homeless or alleviating world hunger, but on funding a huge number of subversive leftist NGOs is unsurprising and indicates the rot in the system. Ms. Scott of course should be able to spend her money however she likes (you can argue whether it should really have been hers under a sensible divorce court system) but she should not receive a subsidy of about 40% of the amount she spends on her subversive leftist fantasies; both she and the fantasies should be taxed at the full normal tax rate, like ordinary citizens and businesses.

This should apply also to subversion routed from China through tax havens, like that of Neville Singham. If Singham’s money is given to U.S. organizations, whether directly or indirectly, it should be fully taxed at the recipient level, whether or not Singham has paid tax in China, the U.S. or anywhere else. Of course, it should also be registered as foreign-sourced subversion, under the appropriate laws; if our adversaries wish to subvert us, they should at least disclose their activity and pay tax to the U.S. fisc for doing so. Overall, the status of “non-profit” should be abolished, so that at both the donor and organization level, those entities pay full U.S. taxes. Only in that way can their inexorable growth be stymied; otherwise in a decade or two they will represent 20% of U.S. GDP, with consequent permanent unbalancing of the budget and turbocharged subversion. With full taxability, nonprofits or the for-profit corporations that succeed them after their death will contribute some 2% of GDP ($700 billion annually) towards closing the U.S. Budget deficit, help it very much needs.

It may be argued that genuine charities, which today represent only a small percentage of “non-profits” would be grievously harmed by this tax change, but consider the reality. The local dogs’ home, surviving on charitable donations from those who adopt dogs and others, generally operates at close to break-even, so would pay little or no tax if it were fully taxable. While its donors would be disadvantaged by the tax changes, that could be solved by putting a low cap on charitable tax deductions, so that middle class donations to their churches and dogs’ homes would remain tax-deductible. The dogs’ homes could also apply for modest grants from their states, whose income would be swollen by the abolition of charitable tax-deductibility, thereby receiving state tax payments from their local nonprofits.

It would not hurt to tax Harvard and its endowment; if Ivy League colleges are going to devote themselves full-time to subversion rather than education, as currently, they should at least pay full tax for doing so.

There are other reforms that are badly needed. Birthright citizenship has to go, as in almost all other countries – it is a relic of 18th century travel times and costs. The Senate filibuster and the U.S. budget process both need root-and-branch reform, to remove the damage done by the pernicious 1970s. Overall, immigration policy needs iron-clad Constitutional protection against the policy of Vortigern, the 5th century British King who invited a few Saxons to stay and triggered an overwhelming tsunami of foreign immigrants who massacred his countrymen and sent them fleeing into the Welsh hills. Hopefully President Biden-Vortigern has finally retired from U.S. politics.

However, the two reforms proposed above: a property franchise and full taxability for the nonprofit sector, are most fundamental. With them, the incentives to bad policy will be eliminated, the Budget will be closer to balance and other reforms will follow in due course.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: How to stabilize the political system appeared first on True Blue Will Never Stain.

Gordon and Ryu’s figures are a little dodgy; they suffer from the typical academics’ delusion that official inflation figures overstate true inflation, when it is painfully obvious to any careful observer that they understate them. Without their spurious “price correction” (which makes productivity growth rates entirely implausible in the earlier period – even Japan in 1890 was not getting prolonged 5% productivity growth) manufacturing productivity growth has slowed from 3.6% annually in 1987-2010 to minus 0.3% annually in 2010-23 – they have an entirely reasonable point that 2009 was a funny year, distorting the figures, but don’t give unadjusted productivity growth with a 2005 break.

Given the God-awful U.S. economic management of 2010-23, Bernanke, Obama, Biden and all, I would be very surprised if annual manufacturing productivity growth was as high as minus 0.3%, even accounting for Trump’s blessed first term. A blizzard of idiotic “climate change” and other regulations were combining with Ben Bernanke’s ziggurat-encouraging negative real interest rates to make it very difficult to do anything productive at all.

Gordon and Ryu outline several mechanisms by which outsourcing can reduce productivity. Invasions of imports produce stagnation in domestic industry growth, which reduces its margins and starves it of the investment funding needed to modernize and retain its customers. A second mechanism is the outright closure of domestic producers, whose survival is made impossible by foreign competition. A third is the compounding negative effect of reduced investment in firms being subjected to increased foreign competition. Finally, offshoring renders domestic engineers unfamiliar with the manufacturing process, hugely reducing their ability to make improvements through a process about which they lack knowledge.

The Gordon/Ryu thesis makes perfect sense and exposes the fallacy of several myths we have been sold for the last quarter-century. The “Apple Strategy” proclaimed by Tim Cook in 2015 of offshoring all manufacturing, while keeping product development in California is completely idiotic. Once manufacturing is offshore, the product developers in California will know nothing about how products are made or what changes are practical, and so will spend abundantly paid person-centuries debating the color of the next model and dreaming up epic surges of wokery to inflict on the unfortunate buyers of their products. It would make much more sense to return the actual manufacturing to the U.S. and outsource the product developers to some idyllic spot like Democratic Republic of Congo, where they could learn a little about the strictures of real life.

Another disastrous free trade effect, which Gordon/Ryu have not covered, has occurred in the rapidly expanding field of software, which is mostly excluded from manufacturing statistics, being “research and development.” Around 2000, we were told that IBM and other large users of U.S. software could outsource the less complex lower tiers of software development to Bangalore, while keeping the more skilled levels entirely in the U.S. Much was made of David Ricardo’s 1817 Comparative Advantage principle, whereby low-wage countries should produce goods and services for which their comparative advantage was greatest – in Ricardo’s example, Portugal should produce port wine, while Britain should produce cloth, in which its already mechanized industry was more efficient. The example gained additional force from the respective quality of the goods exchanged – have you ever TASTED British port?

We know what happened. Far from low-skill software being confined to India, the Indians both in India and through the damaging H1B visa program in the U.S., swarmed up the value chain and ate American software companies’ breakfast, depressing wages for highly-skilled U.S. computer scientists to a Third World level. This caused all the brightest U.S. students to head to law school, to enter a career where legal barriers made such competition impossible. The result has been a massive U.S. shortage of STEM graduates, caused entirely by insane government policies and the actions of dopey corporate behemoths. Of course, the H1B low-wage-lobby scammers now want to increase the number of H1B visas, to make the problem even worse.

This miserable chain of events has happened before – in 19th century Britain, which abolished tariffs unilaterally in 1846-60 and to everyone’s surprise watched Britain’s industrial lead disappear as if by evil magic, while the British workforce after 1870 or so watched its wages steadily descend down the international comparisons. Also like today, late 19th century Britons were subjected to spurious environmental homilies from William Jevons about how their coal was about to run out and unpleasant moral lectures from William Gladstone and others claiming that, however damaging free trade appeared to be to their welfare, it was for Britons’ moral good.

The fact that this has happened twice, in two different countries more than a century apart, indicates that these are not random examples, but represent a firm economic law, one of the many so far undiscovered by the conformist and socialist-oriented economics profession. Free trade only works between countries of roughly similar wage and technological levels; outsourcing large portions of manufacture, software or any other high-skill activities to countries with much lower labor costs, risks losing one’s technological lead and even the capability to perform the activity at all, as students retrain to enter other activities and the low-wage country acquires mastery of the value-chain tidbits one had attempted to keep for oneself.

Today the disadvantage of free trade is seen in AI; as I remarked three weeks ago, China has acquired a highly competitive position, mostly through the United States outsourcing most of its capabilities relating to this new field, which bids fair to resemble electric power in its contribution to human welfare. Now the U.S. is lumbered with a gigantic collection of regulatory detritus that leftist governments have imposed on it, which makes it very difficult for the U.S. to compete even in this new field that it invented, since it cannot build new data centers without fighting crazed NIMBYism and cannot build new power stations in less than a decade or two.

Again, we have been here before. Britain’s Locomotives on Highways Act 1865, passed in response to the noble Goldsworthy Gurney’s steam road carriages, already thirty years in the past, provided that any such device must move at no more than 4 mph, with a man with a red flag walking in front to ensure compliance. As a result, despite Britain having invented the steam engine, being the world’s leader in textile machinery through Platt Brothers, and inventing the turbine in 1884, the German Benz/Daimler invention of automobiles produced no British response. Ten long years were allowed to pass before the 1865 Act was repealed, at which point a typical witless stock market bubble ensured that innumerable British automobile companies were financed, nearly all of them scams devised by the swindler Henry John Lawson, who satiated the market’s thirst for automobile companies through his worthless promotions. Regulation likewise delayed and restricted Britain’s entry into electric power, electric lighting and telephony.

The solution to the productivity decline and to China’s competitive threat is a mass bonfire of regulations, at Federal, state and local levels – local regulations such as California’s electric vehicle mandate that regulate imports to the state are attempts to police Interstate commerce; a wise Supreme Court would declare them unconstitutional. Repealing no more than four especially foolish pieces of 19th century British legislation in the economic sphere – even without bringing back the Corn Laws — would have allowed Britain to compete effectively in electric power/light, telephony (they only got radio because Guglielmo Marconi ignored the Telegraph Act of 1868 and did a quick IPO to gain public investors and supporters) and automobiles, in all of which the country should have held a premier position. Similarly in the United States today, repealing regulations that can delay construction for a decade and multiply its cost fivefold would enable it to regain the productivity growth levels of 1987-2005 and thereby assure its citizens a permanently brighter future.

Free Trade is a demonic Pied Piper, leading to perdition. Don’t follow it!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: The Whig Free Trade Myth is Baloney appeared first on True Blue Will Never Stain.

Fifty years ago, the 1973 Arab oil crisis awakened the world to the importance of the Middle East. Previously, colonial regimes had installed puppet monarchies in the region, although even by 1973 those puppet monarchies were in the process of being ousted by leftist or military coups. Israel had been installed in 1948, arbitrarily for the Palestinians already living there, and that had already caused a succession of wars, notably in 1973 itself, but there seemed no reason why the West should get involved, beyond supplying Israel with enough arms to defend itself.

This changed because U.S. oil production had gradually been declining, and the environmentalists inserting glue in the works of Alaskan and other oil development made the U.S. and the West in general dangerously dependent on Middle East oil – by 1979 less than half the oil consumed by the United States was produced there. Had the Middle East been a reliable supplier, there would have been no need for oil prices to rise as much as they did, but by 1980 the oil market only cleared at a dollar price roughly ten times that of 1972 (though inflation and the dollar’s decline had eroded some of that gain).

With their additional market leverage, the oil producing Middle Eastern countries started asserting themselves, while the non-oil producing Middle Eastern populations developed a resentment of the West that led many of them into terrorist groups. The first and most damaging change was the rebellion against the Shah of Iran’s rule – the Iranian population thought oil wealth was so automatic that even the rule of fanatic Islamist mediaeval clerics could not stop it. How wrong they were! Those clerics began by fighting an impoverishing eight-year war against an equally oil-producing neighbor, Iraq, ruled by a secular despot and carried on squandering oil money without the slightest regard to the welfare of the people they ruled.

Meanwhile the neocons had been trending politically rightwards – only a few of them lived past 90, but the hereditary element in their leadership allows us to treat them as one movement, despite its 80-year duration. The 1948 Progressive Presidential candidate Henry Wallace emerged from the same American left milieu as many of the neocons’ intellectual forebears; at that time many of them were not merely socialist but Communist-adjacent. Wallace himself was more interesting. Not so much politically – he had never really understood capitalism and as Agriculture Secretary was responsible for the expensive and economically damaging agriculture subsidy programs that still disfigure the U.S. economy and fiscal position. Then as Vice President he had been seduced by a visit to the Soviet Union in 1944 into believing that Communism worked, a belief he foisted on the U.S. public, whether it wanted it or not, for the next five years. As a politician, he was both a failure and thoroughly pernicious, as is well brought out by Benn Steil in his excellent 2024 biography “The World That Wasn’t.”

Wallace, however, had a life beyond politics, as few politicians do. As a young man, he had edited “Wallace’s Farmer” a family-owned journal for the agricultural community and had become interested in the possibilities of breeding hybrid corn varieties. He founded a hybrid seeds company “Pioneer Hi-Bred” which eventually became a Fortune 500 corporation. Then as Vice President he had visited Mexico in 1943, taking hybrid seeds with him and explaining how Mexico could raise the yield of their maize crop using hybrids. Since he was Vice President of their northern neighbor and a man with whom the socialist Mexican government felt comfortable, they took his advice and planted Wallace’s seeds widely. The following year Norman Borlaug arrived in Mexico, spent the next two decades spreading hybrid seed technology there, and from the middle 1960s took it worldwide as the “Green Revolution.” Wallace meanwhile was not done; in retirement he revolutionized the breeding of U.S. hybrid chickens.

The neocons, alas, did not follow Wallace into plant or chicken genetics. Instead after the 1956 Hungarian uprising they turned against Communism and became especially militant in pushing U.S. attempts to overthrow it, calling themselves “neo-Conservatives” — to distinguish themselves from those lonely souls who had been Conservative all along — and remaining leftist Big Government supporters on domestic policy. President Reagan’s U.N. Ambassador Jeane Kirkpatrick was a notable acolyte. Once Soviet Communism fell in 1989-91 (almost completely independently of any neocon efforts) they looked around for other wars to start and found the Middle East.

Initially, the neocons had only moderate influence on U.S. policy, but the 9/11 attacks and George W. Bush’s hysterical over-reaction to them gave the neocons essential control of much of the U.S. government, especially the security services. Any attempt to reduce the size of the U.S. government was abandoned, and instead legislation such as the Patriot Act was passed to increase the neocons’ reach. Unsuccessful and very prolonged wars in Iraq and Afghanistan, neither with a comprehensible casus belli, gave them control of the U.S. government, whether Republican or Democrat, for the next 15 years.

Two factors combined to dent their control. First, from around 2000 fracking became feasible to extract oil and gas, of which the U.S. became an exporter in LNG form. The Left tried hard to forbid it (and succeeded in some of their “rotten borough” jurisdictions such as New York state) but by 2020 it had made the U.S. self-sufficient in oil. The Biden administration threw all the roadblocks in its way that it could think of, but once Trump was re-elected in 2025, U.S. self-sufficiency in oil was assured and it was able to supply LNG to the Europeans whose Russian supplies had been cut off.

Second, much to the neocons’ horror, a Republican maverick candidate appeared, Donald Trump, smashing the neocon favorites Jeb Bush, Marco Rubio or in emergency Ted Cruz. Initially, this was not too much problem; the neocons were able to control Trump’s cabinet appointments (since he knew nobody in Washington) and, aided by a great deal of chicanery, thereby ensure that his first term made little dent in their overall control, even if no new wars could be started.

With their two impeachments, the first materially aided by the new Ukrainian President Volodymyr Zelenskyy, the neocons thought they had got rid of Trump, aided by the Democrat shenanigans in the 2020 election. Then a new playground opened up for them with Russia’s invasion of eastern Ukraine in 2022. Since their advent to power in 2001-02, the neocons had demonized President Putin, treating him as if the Soviet Union had never fallen and Russia was still Communist. During the Obama administration they had expelled Russia from the G7 group of leading nations, while their inexorable eastward expansion of NATO threatened Putin in the same way it would have threatened Tsar Nicholas I, the previous Russian ruler whom Putin most resembles. With their EU bureaucracy allies and the help of the Castroite dictator Zelenskyy, the neocons have been able to prop up Ukraine and prevent any kind of peace with Russia from being concluded.

The neocons’ latest stunt was to embroil the U.S. in war with Iran, despite President Trump’s base voters’ deep antipathy to yet another futile war in the Middle East. Israel’s Benjamin Netanyahu assisted with this, presumably seeing it as a unique opportunity to remove Iran as a threat to Israel; I would guess he now realizes his mistake. With no plan to restore the Shah, the only possible genuine governmental improvement in Iran, there was no upside to the war and very severe “tail risk” downsides for both the U.S. and Israel — one for Israel possibly being that U.S. public support of Israel could deteriorate from unwavering to equivocal.

The United States was unable to defeat either Iraq or Afghanistan, though it spent decades trying; Iran has a population larger than that of both those countries put together and terrain with the difficulties of both. Fortunately, President Trump and his advisors had the sense to realize that a ground invasion of Iran for an attempted “regime change” might very well not succeed, even given a decade, and that the American public’s patience would wear out years before victory was even conceivable.

The Middle East is now condemned to market a commodity that is in global surplus, given the possibilities of fracking, and that a large political faction in the West wants to taper out of using. They have wasted their wealth on conspicuous consumption of flashy, pointless monstrosities like the Burj Dubai, and have glutted their population with unwanted immigrants of two types: Third World helots to do the actual work and the sillier type of Brit, who think paying zero income tax and suffering through the occasional Iranian drone attack will make them rich. While Europe needs either the Middle East or Russia, the United States does not, and Vladimir Putin’s Russia is in any case a great deal easier to deal with.

With a bit of luck, it will soon be not merely twilight for the neocons, but the dead of night, and they can go back to being unheeded Communists, a political direction in which many of them appear to be heading. For the rest of us, long may President Trump and his rational advisors rule!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Nighttime for the Neocons appeared first on True Blue Will Never Stain.