From Dan Denning in St. Kilda:

It was a grim day. And it's about to get grimmer, thanks to democracy.

--That's right. From out of the blue, Greek president George Papandreou has called a referendum on whether Greece should accept the terms of financial and political surrender imposed on it by the "Troika" of interventionists from the International Monetary Fund (IMF), the European Union (EU), and the European Central Bank (ECB).

--The idea that the Greek people will be given the right to reject their indentured servitude goes so much against the current of events that it makes us wonder, what is going on here? Is this a principled stand that gives people a voice in their financial future? Will people really cease voting themselves more money they don't have and voluntarily accept "austerity"?

--How about a more direct explanation: the Greek referendum is a kind of "deus ex machina" that allows the Europeans to correct the great mistake they made last week. The mistake they made was not calling a 50% haircut in Greek government bonds a default. This prevented a "credit event" in which owners of Credit Default Swaps (CDS) on Greek debt would be paid. But it had the completely unintended consequence of undermining the entire European government debt market. Why bother buying government bonds at all if the insurance you purchase against default is worthless?

--The simpler solution is to let the Greek's default, pay off the CDS investors' $4 billion, and then try to put the fire out in Italian bonds. But now nothing is simple. The referendum isn't scheduled until early January. And meanwhile, 10-year Italian bond yields traded as high as 6.3% yesterday.

--The bond market is telling the ECB that it doesn't think Italy can pay its debts. The 10-year Italian bonds trade at a 45-basis-point spread to German debt. But you can expect that to get wider. And the higher it goes, the more difficult it will be for the Italian government to refinance its mountain of debt in 2012.

--This clearly ends the two weeks of peace and prosperity we wrote about two weeks ago. Now that Italian Mario Draghi is in charge of the ECB, we are one step closer to money printing in Europe. If no one else will buy Italian government debt, the ECB will have to.

--Draghi didn't say so in as many words yesterday. He said, "The eurosystem (of central banks) is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission."

--That statement is nearly incomprehensible. But what we think it means is that the ECB will do whatever it takes to keep borrowing costs down for European governments, even if that means buying government bonds that no one else wants with money no one else has. The only way to do this, of course, is to print money.

--Thus we have reached a point where the financial markets are stressed. If the world has too much debt - government debt and household debt - you'd expect deleveraging. The debt would be written down, defaulted on, or restructured. Asset prices that benefitted from lots of debt (houses, bonds, stocks) would fall too.

--This is probably what should happen. But the people who benefit the most from the expansion of debt - financiers, bankers, government - are fighting it. They are fighting to preserve their free ride at the head of the easy money gravy train. They have lots of tools, one of which includes a printing press.

--It's no wonder stock markets are range bound and paralysed by indecision. And here in Australia, things certainly won't be helped as the Mineral Resources Rent Tax (MRRT) takes centre stage in parliament this week. Green's leader Bob Brown wants gold added to the list of resources that gets taxed, along with iron ore and coal. And independent Tony Windsor says he'll refuse to vote for the tax unless a $200-400 million fund is set up to research the impact of coal-seam gas.

--What a great example of people who think something can come from nothing. The Greens want to tax coal, iron ore, and gold because those are the exports generating the most revenue for Australia. If you rob banks because that's where the money is, then you can understand why the Greens are after money from these commodities: it's where the money is.

--There is an element of pure greed to the tax. Parasites don't consider how the host organism got to be big and strong enough to support them. They just take what they want. In this respect, the MRRT isn't novel.

--What we find novel - maybe because we're a greedy, soulless, elitist, gold-eating, profit-seeking, tree-hating American - is how many Australian politicians take wealth creation for granted. What's worse, they seem to believe they are entitled in some moral way to take what they want from anyone on behalf of "the public".

--This gets back to our discussion of communal property, war, and the State. The State - in this case Bob Brown and Tony Windsor - feel entitled to tax miners because they are making money from "public lands". Nothing is said about the risks borne (consensually) by private capital, or the private expertise it takes to find and extract resources at a profit. It's as if those in government assume people will do all this anyway, and that there's no special skill, talent, or value in it.

--Perhaps Australia is just cursed. The Pilbara is a good example. There is iron ore there. Lots of it. It's just lying around. True, there are obstacles to getting it to market. BHP Billiton and Rio Tinto and Fortescue have had to invest in railroads and ports to get their ore to China. But for the most part, the ore is so red and so obvious that it makes it look easy. The apparent ease of mining coal or iron ore and selling to China is what makes it tempting to take the public's "fair share" of that money.

--But creating wealth isn't easy. The mining companies aren't just "extracting" resources and profits. They are creating goods and jobs and revenues that wouldn't otherwise exist. It's Australia's curse that it's made to look easy.

--This apparent ease leads to pinstriped totalitarians like Bob Brown and Julia Gillard to make populist arguments that justify taking what isn't theirs. This is pure parasitism, which as we said, is nothing new. It is, though, amazing how nakedly greedy this kind of out-and-out theft has become.

--And to be fair, Tony Abbott is no friend to private property and individual rights either. In the debate over coal-seam gas (CSG), he initially backed the rights of farmers to have a say over what happens on their land. He then changed his mind once he realised billions of dollars had already been invested by industry. Politicians who last know where their bread is buttered... and who butters it.

--But the issue here is not political. The issue is whose rights come first: the State or the individual?

--The CSG debate baffled us until we understood that farmers in New South Wales and Queensland don't have private property rights the way we're used to understanding them. It is perfectly legal for a company, with the government's permission but not the landowner's consent, to come and drill for gas underneath a farm.

--That is, of course, outrageous. That companies would do so without being more sensitive to public attitude is surprising. That the government would sell exploration leases, bank the money, and then howl about the process is not surprising at all. That Australians don't really have full private property rights is a shocker.

--Of course, we know nothing about Australian law. So maybe there is a very sensible explanation of why the Crown (the State or Commonwealth government) has more say over what happens over your property than you. But in the absence of such an explanation we'd say the problem is pretty obvious: the State is more important than the individual under Australian law.

--If this is the case, it would explain a lot of things that have previously remained a mystery to your American-born editor. It would explain the high-handed manner in which Australian politicians act. It would explain the lack of legal protection for other rights, like free speech. And it would explain the confusion of whether the government gives you rights it can take away, or whether you have them to begin with.

--Those are all political and legal issues. But it has something to do with the cosmos

<http://clicks.portphillippublishing.net//t/AQ/AAfQgg/AAffnA/AAUNww/AQ/AgMlFg/BdtI> ,

too, or the order of the financial universe in which you live. If the rules in that universe are simple - low taxes, rule of law, free trade, private property rights, and sound money - the universe expands in an orderly, fair and just way.

--If, on the other hand, the rules are based on getting something for nothing (Greece) or on the idea that the State is more important than the individual and can take what it likes (Australia), well then, it's going to be a profoundly unfair and unjust universe. And it won't expand forever. It will probably blow up.

Dan Denning

for The Daily Reckoning Australia

And now over to Bill Bonner from Paris, France:

What’s happening to 2011? It’s disappearing...

Yesterday was warm and sunny in this part of the world. Today, it is raining and gloomy.

This is All Saints day. After the mass, we’ll go over to the cemetery to put chrysanthemums on a family grave. Why chrysanthemums? We don’t know. But everyone does it. The graveyard will be as busy as a subway station today.

Investors seem to have turned gloomy too. The Dow lost 276 points yesterday. Gold fell $22.

What’s behind it? Maybe this had something to do with it. From the Telegraph:

China has stressed it will not be a "saviour" to Europe as President Hu Jintao embarks on an official visit to the continent that will take in this Thursday’s crucial G20 summit in Cannes.

The warning came as European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy urged G20 leaders to use the meeting of major economies to address Europe’s debt crisis, saying measures proposed last week were not enough by themselves.

French President Nicolas Sarkozy has said Beijing had a "major role to play" in proposals to expand the European Financial Stability Facility (EFSF) to €1 trillion (£877bn), possibly through a special purpose investment vehicle that would attract backing from sovereign wealth funds.

The head of the bail-out fund, Klaus Regling, was despatched to Beijing to discuss terms, but travelled on to Japan at the weekend without an agreement.

China, holder of the world’s largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing.

The official Xinhua news agency, used to communicate Communist Party policy, said Europe must address its own financial woes. "China can neither take up the role as a saviour to the Europeans, nor provide a ‘cure’ for the European malaise," it stated. "Obviously, it is up to European countries themselves to tackle their financial problems."

Darned. Maybe the European rescue is not quite the done deal they thought it was. Europe’s heads of state said they would begin to commence to start putting together a plan to sort out the debt mess. That’s not the same as actually sorting it out. And it leaves out the essential bit of information

— who’s going to pay?

You’ll notice that Europe’s envoy also paid a visit on the Japanese. That’s where this story becomes clear...and funny. Asking Japan for a loan is like asking a starving man for a piece of chocolate cake. Japan already has more government debt than anyone. Its public debt- to-GDP ratio is up to 230%.

Meanwhile, pressure is mounting on poor Silvio Berlusconi. Forget the Bunga-Bunga parties. Forget the underage prostitutes. Silvio’s problem is in the bond market, where yields on the 10-year note rose to 6.1% yesterday.

Almost all the developed nations have so much debt they can’t think about paying it back. They only worry about keeping up with the interest and refinancing costs. Japan only gets away with its debt burden because inflation and interest rates are both zero. It doesn’t cost anything to carry the debt.

But imagine that you have debt of 230% of GDP...and imagine that you have 6% interest. You can do the math. You’re paying 14% of GDP...just to keep up with the interest payments on money you spent years ago. In the US, that would be more than 30% of the entire federal budget. It would be 2/3rds of all tax revenues. It would be a disaster, in other words....

.it would also not happen. Because bond investors aren’t stupid. They would see immediately that they weren’t going to get their money back. They would sell bonds...forcing up interest rates even higher...and causing a meltdown of the whole system.

That’s the thing about debt. Somebody always pays. If not the debtor, as planned, then the creditor must pay. Or the taxpayer.

Debt never disappears. It represents resources that have been borrowed from the future. And the future never forgets. The future is a Shylock...always demanding its pound of flesh at the most inconvenient moment.

Here in France, there was a skit on TV that made its way to YouTube. It shows a cartoon character who looks for all the world like Barack Obama going up to an ATM machine. He puts in his card. But he finds he cannot get any money.

So, he goes to the Bank of China to get a loan. The Chinese banker, who bears a remarkable resemblance to China’s premier Hu Jintao makes the loan. But the Chinese want their pound of flesh too. In the next scene, Obama and French president Nicolas Sarkozy are both carrying a dragon in a Chinese New Year’s parade.

And yet, China has more than $3 trillion in savings. It is the rising star...the young, growing power. Like the US in the early 20th century, it is the nation to which the tired, old countries of the developed world look to finance their mistakes.

America financed Britain and France in WWI. But it did so for good reason

— the money it lent was largely used to buy supplies from the US. Same thing in WWII. Lending money was a good business decision. After the wars were over, the US wanted its pound of flesh too. Trouble was, the debtors didn’t have a pound left.

And more thoughts...

We begin another look at Zombieland with this editorial from Martin Wolf in The Financial Times:

Why did it take so long? It is over four years since the financial crisis began. Yet only now are anti-capitalist protests emerging, including at St Paul’s Cathedral. So is this the beginning of a resurgent leftwing politics? I doubt it. Are the protesters raising some big questions? Yes, they are.

Socialism failed as a way of running economies. It did, however, succeed in establishing welfare states. Socialism is a conservative force, dedicated to defending entitlements built up over a century. Meanwhile, organised labour is only strongly entrenched in the public sector. This gives it the same conservative agenda: defending the welfare state. Strikes by UK public sector workers against the fiscal cuts will demonstrate this.

We have promoted an insider form of capitalism which exploits and indeed creates subsidies and tax loopholes on which the insiders prosper. The need to rescue banks was horrifying. The role of money in politics is disturbing. The danger is that we are moving from what the Nobel laureate economic historian, Douglass North, calls an "open-access order" to its opposite, a system in which political influence is decisive.

The era of bail-outs must end.

We rarely agree with Mr. Wolf. But he is right...so far. Later in his editorial he proceeds to fall into gross and obvious error

— arguing that "we" need to find solutions to capitalism’s inherent excesses.

Humans seem prone to self-fulfilling waves of optimism and pessimism. Ways of mitigating the extent and the consequences of such instability always need to be found.

We see no reason to mitigate the instability of free markets. That’s what makes them so much fun!

But when The Financial Times undertakes to encourage its readers to fix capitalism, you realize how few real friends that disagreeable creed must have.

Few people really like capitalism

— even people who call themselves capitalists. The feds could probably round them all up and gun them down in an afternoon. Capitalism is too chancy...too unpredictable...and too uncontrollable. No wonder so few people are fond of it; capitalism is a poor friend. It is disloyal. It is mischievous and willful. It is hard to get along with.

Capitalism offers is no sure route to success. You can be smart, work hard, and go to the best schools. There is still no guarantee that you will succeed.

Nor, once you’ve succeeded, is there any sure way to maintain your wealth, power and status. Wealth has no fidelity, neither to any one person, group, or family. It goes where it wants. It is fickle and unreliable.

Nor does it go necessarily to the strongest, fastest, or smartest. As it says of the race in Ecclesiastes, time and chance play a big roll. Neither can be made to stay put. Once you have made a lot of money, the same wheel of fortune that brought it to you can take it away from you. It never stops turning.

The rich tend to be even bigger anti-capitalists than the poor. As soon as they get some wealth they try to put the brakes on. They set up tests and hurdles...designed to keep the hoi polloi off their tennis courts and out of their businesses. They use every means possible to separate themselves from the masses

— language, education, dress, customs, geography. They tend to speak differently...sometimes even using a completely different language. Probably the most recent and best known example comes from Britain, where the upper classes still speak a heavily Latinized version of English, called "RP" for ‘received pronunciation,’ while the lower classes speak a more Germanic, more archaic version. A thousand years earlier, the upper classes actually spoke a different language all together — French.

In France itself, the development of "French" was itself a long process; until the 19th century the language was foreign to most people who lived in France. It, and Latin before it, was used almost exclusively by the rich, the powerful, and the well-educated.

Education is another common means of helping the rich to hold onto their money. Special schools typically cater only to the upper classes, teach the right accents and attitudes, and help young people make the sort of connections that will keep them, and their money, in the same group. These schools were rarely hermetic, however. They usually allowed a few particularly bright people from the lower orders to enter into the moneyed classes. This had three beneficial effects. It nourished the gene pool of the rich. It provided them with the top talent they needed to stay rich. And it drew in ambitious and able young people who might otherwise compete against them.

Of course, the rich

— especially if they are a coherent cultural group — tend to live together, socialize together, and do business together. These things too help to keep money "in the family" and out of the hands of strangers.

Nor do the rich typically stop at honest means. They also avail themselves of the police power of the state. Many laws, edits, and rules have been announced to regulate everything from the professions people must practice to the clothes they wear. "Serfs" were shackled to their farms, masters, and their station in life by law as well as by custom. Sumptuary laws forbade new money from imitating the fine dress of old money. Licensing requirements, tariffs, and regulations generally make it more difficult to enter into a profitable trade or business, thereby protecting those who are already in it.

The rich are not above using the tax code either. In pre- revolutionary France, for example, the aristocracy and the clergy were exempt from taxes. Even today, most taxes are taxes on getting rich, not on being rich. Governments tax income, not wealth. France is an exception with a wealth tax. But it is a relatively modest one

— never exceeding 2% of assets. Compare that to the top marginal rate on income. Combined with social charges, it rises to more than 71%.

Warren Buffett has famously pointed this out, indirectly. He claimed that he paid a lower tax rate than his secretary. That was because his taxes were paid at rates levied on people who were already rich

— capital gains and dividends — rather than income. The poor secretary had to pay taxes on the fruits of her own labors.

Does that mean the rich like government? Yes, of course they do. The state is a rich man’s best friend. The rich return the friendship, in cash.

As Bill Gross reported in January of 2010, what is amazing is not that politicians can be bought, but that they can be bought so cheaply. He wrote that "public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return."

But while hardly anyone actually likes capitalism, there’s a problem with the alternative. Efforts made to hinder, tame, and put a ball and chain on it always make things worse. They lead to zombification.

What’s that?

Here is the foundation of our General Theory of Zombieism:

1. All (or almost all) people want wealth, power and status.

2. They want to get it in the easiest way possible.

3. The easiest way to get wealth is to steal it, which is why all groups turn to the government, the only institution which gets to steal lawfully.

4. Over time, more and more groups are able to use the system for their own ends.

If they are poor, they implore the government to ‘tax the rich’ and give the money to the poor. If they are rich, they want the government to protect their wealth and status

— with every means available to them. Democratic governments generally do both. They support the poor with loud attacks on the rich combined with whimpers of money (for the poor can generally be bought — vote for vote — much cheaper than the rich). As for the rich, their support is more subtle and underhanded. There are tax credits and loopholes for anyone who can afford them; sugar-laden contracts for the insiders and plenty of jobs for well-credentialized blowhards.

The rich complain about the poor. The poor complain about the rich. Both complain about the government. And everybody hates capitalism.

But over time, the giveaways, bribes, regulations, intercessions and meddling on the part of the government have a big effect on the economy. The more the government interferes with market signals and market-based capital allocation, the less able the economy is to produce real wealth. More and more resources are purloined by the insiders before the truck reaches its destination. Paperwork, lawyers, administration, regulation, taxes take a toll. So does misallocation of capital investment to huge, unproductive industries such as education, health, and defense. There is also a shift of wealth generally from those who earn it to those to whom it is redistributed...and from capital formation to consumption. And gradually the economy becomes paralyzed and parasitic...and nearly everyone gets poorer. And often, the state...and the mobs that support it...become desperate for more money. Then...the rich had better watch out!

We’ve already seen how zombieism overtook the education industry. Now lee’s look at another one

— health.

The health care industry is demonstrably unproductive. We know that because we can compare the spending with the results. For our purposes we will measure ‘health’ by life expectancy. They are not exactly the same thing; but close enough.

The relationship between spending money and living long is weak, if there is any at all. Singapore spends about $1,000 per person on health care. Its people live longer than those in the US, which spends about $5,000. In fact, the US stands out in health care...as it does in education and defense. It spends more and gets less. Money is invested badly, with either no return...or a negative return. The people of the US are not very different culturally, racially and economically from the people of the United Kingdom. Yet the British live longer while spending less than half as much on health care.

Most of the health improvements in a society can be achieved by simple procedures at modest cost. This is another thing we can thank the communists for. They demonstrated that "barefoot doctors" in China, or poorly supplied, underpaid doctors in Cuba do about as well as the expensive professionals that fill South Florida. Cuba spends barely $100 per capita for health care; in terms of life expectancy, it gets the same results that Florida gets, 90 miles away. In Florida, however, people spend 45 times more on health care.

But isn’t the US a free economy? Why would people spend so much and get so little for it. Why don’t competitors step up to the plate and offer a better product? Why doesn’t someone start a "Pretty Good Health Care 4 Less" franchise? You have a problem? We can imagine how it might work. You walk in. You don’t see a doctor. You see someone with a computer who has been trained for 6 months on how to use it. He listens. He gives you an exam. He asks questions. He reviews your symptoms. He feeds the data into a computer. The computer is programmed to draw upon the entire world’s medical experience and give you an answer. Or...to pass...and tell you to go see a real doctor.

Most people do not have strange ailments. They have the problems that most people have. Those are the ailments that a person with modest training could recognize and treat with simple procedures and cheap generic drugs. Aided by electronic tools...and perhaps a few good doctors in India, connected by Skype...you could probably get as good advice as you could get anywhere. Maybe better.

You would pay about as much as you would pay to have your muffler changed. You would agree not to sue anyone. In and out. No muss. No fuss. Nothing fancy about it. And if you had a brain tumor you should probably go elsewhere. But if you want cheap medical care...it would be the place to go.

Soon, there would be competing nationwide chains...giving customers a choice...and a range of prices that would accommodate each income bracket. Employers would pay a modest fee to enroll their employees. If the employee wanted to spend more, he could enroll in a more traditional program.

Why won’t that work? Really, dear reader, sometimes you surprise us. Were you born yesterday? It’s against the law! The feds reward their protected industries with almost boundless wealth. And they punish interlopers. You can’t practice medicine without a license. And you wouldn’t be re-imbursed by insurance programs...and certainly not covered by Medicare or Medicaid. And even though your clients had specifically agreed not to sue, you’d be pursued by every shyster lawyer in the country.

Health care is a protected industry. It’s a zombie industry, which cushions life for the people who profit from it. And based on the numbers...it squanders at least $2,500 per person per year. That’s the equivalent of the entire Pentagon budget...or nearly half the entire 2011 deficit. It’s spent on unnecessary and ineffective tests and treatments

— not to mention a mountain of patent medicines. And these costs do not include all the indirect costs of lawyers and court time, caused by the medical malpractice industry.

Why can’t a patient agree not to sue in return for lower medical costs? Where have you been, dear reader? Tort lawyers, those who bring these sorts of cases...and who advertise on billboards in poor neighborhoods...are among the biggest campaign contributors to the political system. They, along with doctors, pharmaceutical companies, hospitals, insurance companies

— all support lobbyists. All have an interest in keeping the industry alive — as it is. None wants to see an upstart competitor bringing destruction to his zombie life. None wants to give up his edge...his subsidy...or his privileges. None wants capitalism in the health industry.

More to come...

Regards,

Bill Bonner