From Fundación Libertad: Puerto Rico’s Precarious Public Finances

One day after President Obama signed H.R. 5278, known by its Spanish acronym PROMESA, as a legislative tool to begin fixing Puerto Rico’s fiscal and economic problems, the government of Puerto Rico finally published the audited financials that the US Congress had been asking for since early last year. More than a year late, the audited financial report gives us a clear indication of the financial position of the government after fiscal year 2013-2014, and the prognosis of our public finances are not good. The reports show us a government that cannot keep its future promises, spending too much and not collecting enough revenue to keep functioning. Furthermore it reveals in the short term this is a liquidity crisis (cash flow problem) rather than a solvency crisis (not enough assets to cover the liabilities). 

The audited financial reports include a statement of net position for governmental and business type activities, which encompasses the entirety of commonwealth assets, the basic services it provides, deferred outflows of resources, and liabilities and deferred inflows of resources. All appear to be deteriorating. 

The report reveals that for fiscal year 2012-2013, the net position was a deficit of $47.7 billion while in fiscal year 2013-2014, the net position was a deficit of $50.4 billion, an increase of over $2.7 billion. This increase in the deficit position is due to higher operating expenses outstripping operational revenues, and because of increases in the commonwealth’s liabilities, such as bonds and notes, net pension obligations, legal claims, etc. The expenses of the commonwealth’s governmental activities, which includes the general fund budget,federal transfers and COFINA funds were $20.8 billion, compared with $17.8 billion in revenues, despite a growth in revenues by $1.6 billion, leaving a deficit of $2 billion. This deficit has been filled by more and more debt, as the report highlights: “For more than a decade, the Commonwealth had significant deficiencies of revenues under expenditures (including debt services) that were mainly funded through issuances of bonds and lines of credits.” 

In the general fund budget, which funds the operations of the three branches of government, expenses were $9.2 billion, excluding the servicing of general obligation debts, while revenue was $8.7 billion. This represents a 7% decline in the original budgeted revenue figures. Moreover, the expenditure of $9.2 billion is approximately $400 million less than budgeted by the government, but it represents an increase of around $228 million from the last fiscal year budget. If the debt service payments of around $700 million are added, it leaves a large gap of $1.2 billion within the general fund budget. 

The report correctly states the difficulty of bringing the deficit under control: “The Commonwealth’s ability to continue reducing the deficit will depend in part on its ability to continue increasing revenue and reducing expenditures in the face of rising debt service and pension obligations, which in turn depends on a number of factors, including improvements in general economic conditions.”

The most startling part of the report is the severity of the upcoming pension system crisis. The report states that the employee retirement system, the judicial retirement system and the teacher’s retirement system will run out of funds between 2018 and 2019, meaning the assets they currently have cannot meet the obligations of the system, making the pension system insolvent. This may force the pension system into a “pay as you go” approach, as neither current employees nor the government are contributing enough to meet the cost of future payouts. It is important to point out that the financial statements still claimed a positive net position to the pension funds of $1.8 billion in 2014.

The rest of the article can be read here.

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Political Economy Quote of the Week for 20160711

“Why should you desire to take from any man or woman their own will and intelligence, their free choice, their own self-guidance, their inalienable rights over themselves; why should you desire to make of them mere tools and instruments for your own advantage and interest; why should you desire to compel them to serve and follow your opinions instead of their own; why should you deny in them the soul – that suffers so deeply from all constraint – and treat them as a sheet of blank paper upon which you may write your own will and desires, of whatever kind they may happen to be?” – Auberon Herbert, A Plea for Voluntaryism.

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How to Evaluate the Quality of Unsupervised Anomaly Detection Algorithms?

When sufficient labeled data are available, classical criteria based on Receiver Operating Characteristic (ROC) or Precision-Recall (PR) curves can be used to compare the performance of un-supervised anomaly detection algorithms. However , in many situations, few or no data are labeled. This calls for alternative criteria one can compute on non-labeled data. In this paper, two criteria that do not require labels are empirically shown to discriminate accurately (w.r.t. ROC or PR based criteria) between algorithms. These criteria are based on existing Excess-Mass (EM) and Mass-Volume (MV) curves, which generally cannot be well estimated in large dimension. A methodology based on feature sub-sampling and aggregating is also described and tested, extending the use of these criteria to high-dimensional datasets and solving major drawbacks inherent to standard EM and MV curves.

The entire paper can be read here.

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Abolish the FBI by Ryan McMaken

Like all employees of the FBI, James Comey lives off the sweat of the American taxpayer. His large salary, upon retirement, will be converted into a very generous pension. Like most federal employees in a high ranking position like his, Comey continues to look forward to decades of living at a standard of living far above what is experienced by ordinary people in the private sector. 

To maintain this life of comfort, all he had to do was agree to look the other way as a powerful politician clearly — by Comey’s own admission — broke federal law. 

Naturally, this same treatment would never be afforded to an ordinary taxpayer, who would likely be looking at years in federal prison for offenses similar to that which Hillary Clinton has apparently committed. Moreover, Comey even went out of his way to do his best to ensure no federal prosecutor would proceed with charges when he claimed that “no reasonable prosecutor” would proceed with charges. It wasn’t enough for Comey to simply not recommend charges. He had to pre-emptively condemn any prosecutor who might proceed with charges.

Some have claimed that Comey was forced to cave to Obama administration pressure in order to protect his family. Of course, Comey could have resigned his position rather than take a position he regarded as unethical. Then the task of clearing Clinton would have fallen to Comey’s successor. There are precedents for this. When ordered by Nixon to fire the special prosecutor in the Watergate scandal, Attorney General Elliot Richardson resigned rather than do what the president mandated. Comey could have done the same, but then he would have had to give up some of his comforts and privileges. To find work, he might have had to move to an unexciting place like Indianapolis or Albuquerque. 

Nevertheless, Comey has accidentally done us a great service by publicly exhibiting the true nature of the FBI: it is a political organization that expands the reach and prerogatives of the federal government over citizens and taxpayers, while protecting the powerful.

Of all federal police forces, the FBI is the most romanticized, and every FBI agent is assumed to be the modern embodiment of a fictionalized version of Eliot Ness: incorruptible, professional, and efficient. Decades of pop culture has driven this home with TV series and movies such as The Untouchables, The FBI Story, and This Is Your FBI have long perpetuated the idea that when local police fail, the FBI will step in to be more effective and simply better than every other law enforcement agency. Corruption cannot touch the FBI, we are told, and they apply the law equally to everyone. 

A History of Abuse

This was always obviously untrue to anyone not suffering from crippling naïvete, but Comey has helped make the political nature of the Bureau plain for all to see. 

The reality and the romance, of course, have always been two totally different things, and it’s helpful to remind ourselves that it was the FBI that was in charge of the Waco massacre where 26 children were killed. It was the FBI that led the raid on Randy Weaver’s house where an FBI sniper shot a woman dead while she was holding a 10-month old baby. It was the FBI that spied on Martin Luther King, Jr., and targeted peaceful anti-war organizations for political reasons during the 1960s and 70s. It was the FBI that came of age arresting opponents of the First World War. 

Naturally, in all of these cases, the FBI has actively covered up the facts and denied wrongdoing. 

James Bovard reported in his 2012 article “A Stasi for America“: 

A ripple of protest swept across the Internet in late March after the disclosure that the Federal Bureau of Investigation was teaching its agents that “the FBI has the ability to bend or suspend the law to impinge on the freedom of others.” This maxim was inculcated as part of FBI counterterrorism training. The exposure of the training material—sparked by a series of articles by’s Spencer Ackerman—spurred the ritual declaration by an FBI spokesman that “mistakes were made, and we are correcting those mistakes.” No FBI officials were sanctioned or fired for teaching lawmen that they were above the law…At least the FBI has been consistent. Since its founding in 1908, the bureau has rarely let either the statute book or the Constitution impede its public service. Tim Weiner, the author of a superb exposé of the CIA (Legacy of Ashes) has delivered a riveting chronology of some of the FBI’s biggest crimes with his new book, Enemies.

Violating the rights of ordinary people has been standard policy at the FBI for decades. But, who can be surprised that the FBI now seeks to protect powerful politicians from the same laws that the FBI would enthusiastically use to prosecute and imprison ordinary citizens?

The rest of the article can be read here.

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European Banks and Europe’s Never-Ending Crisis by Pater Tenebrarum

Italian banks are sitting on €360 billion in non-performing loans – including, so we are told, loans of the “extend & pretend” variety. Just one day after the Brexit vote, the ECB’s TLTRO II operation took place. Almost €400 billion were lent to euro area banks at negative interest rates. The banks also paid the bulk of the less generous TLTRO I loans back, leaving net new TLTRO additions at about €31 billion. Most of the new TLTRO II loans were taken up – you guessed it – by Italian and Spanish banks (details at Bloomberg).

1-TLTRO-IITLTRO -II: the ECB is subsidizing European banks by offering them fresh funds at negative interest rates, under the condition that they engage in the very thing that has produced the crisis in the first place: more credit expansion ex nihilo! The biggest borrowers are the very banks that are drowning in bad loans.

Below is the portion of the article that is a real gem. It is yet another restatement that fractional reserve banking is inherently fraudulent. Sadly, there are even members of the Austrian school who fail to understand this. If anyone is presented with the facts of fractional reserve banking but transfered to the context of a non-money warehouse, he would instantly understand the fraudulent nature of it. Yet, due to the “veil of money”, that same person will declare the same business practice legitimate as soon as money and banking are involved.

A Legal Dance on Eggshells

As we have pointed out in our previous missives, the EU has at least tried to do something to prevent tax payers from having to involuntarily fund future bank bailouts. Instead, investors and depositors are supposed to shoulder some risk. Given that there is no way the EU will return to honest money and a free market in banking, this is a kind of “second-best solution”, i.e., it is better than nothing.

The problem is however that fractional reserve banking remains a fraudulent practice. Leaving aside the central bank backstop for a moment, let us consider a simple example:  Anna pays 100,000 euro into her bank account, as a demand deposit. The next day, the bank creates a deposit of 90,000 euro in favor of Tony as a loan (we are assuming a 10% reserve requirement – in reality it is just 1% in euro-land!). Tony immediately pays the money into Richard’s current account, to pay for a rickety second-hand sailboat allegedly moored in Malta somewhere.

Now the account slip of Anna says: “You can have 100,000 euro on demand” (i.e., anytime). Richard’s account slip says “you can have 90,000 euro on demand”. Tony meanwhile owes the bank €90,000 – but he obviously doesn’t have the money at the moment. Neither does the bank have it. No-one paid in 90,000 euro in additional deposits.

If Anna and Richard both come in to withdraw their €190,000, they will find that only €100,000 are actually there. So now two people apparently have a perfectly valid legal claim on the same money. The bank never told Anna “we’re going to lend your money out the next day, and actually, it’s not going to be available on demand, not really, anyway. Only under certain circumstances”. In other words, Anna’s money has been misappropriated. This, in short, is fraud. At least it is when anyone else but a bank does it.

So while the EU’s Bank Resolution and Recovery Directive (BRRD) at least restores some degree of normalcy by prohibiting willy-nilly bank bailouts, there is a bit of a problem when it comes to “bailing in” depositors – because their deposits are largely fictitious, something they are as a rule not even aware of.


Ulpian (1)Roman Jurist Ulpian, AD 170 – AD 223. In the Digest, a part of the Corpus Juris Civilis, he writes on bank insolvencies: “…once a banker’s goods have been sold and the concerns of the privileged attended to, preference should be given people who, according to attested documents, deposited money in the bank. Nevertheless, those who have received interest from the bankers on money deposited will not be dealt with separately from the rest of the creditors; and with good reason, since to loan is one thing and to deposit is another.” – Ulpian is clearly establishing the legal difference between demand deposits and time deposits, resp. loans.

Photo credit: Antonio Ponte

It is an edifice that stands on extremely wobbly legal ground, particularly in view of the fact that the practice of lending out demand deposits has been rightly deemed fraudulent in European legal tradition for most of the time from antiquity onward (there even exist 20th century court rulings upholding this view).

The entire article can be read here.

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The Tom Woods Show: Episode 692 – Why Are Those 28 Pages on 9/11 Classified?

Brian McGlinchey, creator of, joins me to discuss the much-discussed, but entirely redacted “28 pages” of an important intelligence report on 9/11.

Additional information can be found at the show notes page.

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“Gun Violence” as a Rhetorical Trick in the Gun-Control Debate by Ryan McMaken

In its most recent attack on gun ownership, The New York Times went out of its way to confuse gun homicides with homicide in general. As I noted here, this is a rhetorical trick used to mask the true homicide rates in other countries in order to make the United States look like an outlier. 

Another trick employed by gun control advocates is to lump gun-inflicted suicides in with gun homicides as in order to inflate the total number of “gun violence” events. 

This tactic was employed by CNN after the Orlando shootings, as can be seen in this video. The host, Carol Costello, states “more than 100,000 people are victims of gunshot wounds.” Costello reports that the number is “stunning” and clearly believes 100,000 to be a very large number. Note that Costello does not present the number as a percentage or ratio. If she did, she’d realize that 100,000 people (in a country of 318,000,000) is 0.03 percent of the population. Moreover, the way it’s phrased might lead viewers to believe that Costello is talking about 100,000 fatalities. Viewers would be wrong in assuming this, since fatalities from gunshot wounds, according to the CDC, equaled 33,636 in 2013, or one-third the number Costello quotes. Costello is obviously including all non-fatal injuries in an effort to use more dramatic-sounding numbers. (See Table 18 in this document.)

Costello also admits that this number “includes suicides.” That’s fair enough, but how much of that “gun violence” is due to suicide? Well, it turns out that a solid majority of it is suicides. Indeed, in the 2013 data, there were nearly twice as many firearm suicides (21,175) as there were gun homicides (11,208). So, Costello begins a discussion about the Orlando shootings by talking mostly about suicide, which is irrelevant to the purported topic of discussion which is mass shootings at night clubs. 

[RELATED ARTICLE: “Guns don’t Cause Suicide“]

Other commentators have even attempted to claim that suicide rates are notably higher where there are higher gun ownership rates. Looking at the international data on gun ownership from the Small Arms Survey, it’s hard to see how anyone could make this assertion seriously. Indeed, if we look at suicide rates, we see that the US is not especially notable for its suicide rate

The rest of the article can be read here.

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