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Sunday, July 15, 2012

Does Europe plan to end "Too Big To Fail"?



Officials from rich northern countries, led by Germany, have said that taking joint responsibility for bank rescues is possible only if recapitalizations don't create major losses—a strong case for putting a heavier burden on private investors.
The EU... in June proposed a new legal framework for dealing with failing banks...Crucially, the new rules would force national authorities to force losses on—or "bail in"—all creditors, for instance by converting debt into shares, when a bank has to be recapitalized by its governments.
WSJ, 15 July 2012

It would appear that the EU and/or the eurozone are drifting in the direction of removing the safety net from senior creditors and thus ending Too Big To Fail (TBTF). If the proposal becomes law, bank resolutions would impose losses on senior creditors. This means that, if regulators can write off senior debts without a court-supervised liquidation, then senior debt is neither senior nor debt, it is capital. Real debtholders have the right to demand a liquidation, with losses assessed against more junior claimants. If regulators can simply step in and treat senior bonds the same as other capital instruments, then senior bonds are capital instruments. When a bank can default on its senior debt, it is not TBTF.

This is another example of the eurozone expressing its unconscious death wish. Earlier, the zone experimented with the idea of allowing Greek government bondholders to take losses, which caused huge yield spikes for Spain and Italy from which they have not recovered. Now it proposes the same experiment with bank bondholders. Let’s see if it works better this time.

I do not see how, if this policy is adopted and rating agencies react, that this will not permanently close the debt markets to weak eurozone banks. Indeed, the bond market has already punished such dodgy names as Bankia and Caixabank in Spain, Unicredit and Monte dei Pasche in Italy, Dexia Credit Local in France, and HSH Nordbanken in Germany.

Ending TBTF would mean that the only remaining source of refinance for weak European banks would be the ECB.

One might have thought that the object of policy would be to (1) recapitalize all weak banks; and (2) draw a safety net around these banks, such that they would be viewed as creditworthy by creditors. It would appear that the current object of policy is to do too little too late about solvency, while signaling to creditors that they are at risk. Stop me if I’ve said this before, but these people have a deathwish.





Fiscal monetization and the shibboleth of central bank solvency


There is only one institution with the resources to save the eurozone, and that is the central bank. Only a central bank has unlimited resources in domestic currency. Yes, the ESM can be granted a banking license and then borrow without limit from the ECB if you are looking for a clever end-run around the ECB’s charter, but that’s a gimmick. Either way, it’s the ECB’s money.

The eurozone can be saved with the combination of 5-6% nominal growth plus yield-targeting for eurozone government bonds. The ECB can target 5-6% nominal growth by engaging in asset purchases until such a growth level is reached. This would allow most eurozone governments to balance their budgets (if they so choose). The ECB can also set yield ceilings for the bonds of compliant governments, such that their current level of indebtedness can be made sustainable and thus, et voila, no more crisis. Thus, all of the PIIGS except Greece could be saved. (Greece can’t be saved except by outright philanthropy.) As I have explained before, if yield-targeting results in excess money-creation, this can be sterilized by the issuance of “ECB bonds”.

The consequences of these two operations would be above-target inflation (which is desired) and a substantial decline in the asset-quality of the ECB’s balance sheet. The ECB would be directly exposed to the creditworthiness of its member governments, some of which are already below investment grade.

Let us assume that, by taking on these credit risks, the ECB’s solvency is threatened. Although central banks do not mark to market, they are exposed to delinquency and default, as well as outright repudiation, as will occur in Greece. This is, we are told, why the ECB cannot rescue the PIIGS: because it will endanger its solvency and “credibility”. Should the EU lose credibility, the euro will lose credibility as well. However, none of this is, in fact, true.

Many German commentators (and officials) have used the ECB’s solvency as a rationale  to oppose fiscal monetization.  This is always stated as a truism without a shred of evidence adduced in its favor.

Central bank solvency is meaningless. In granting the central bank the monopoly of the issuance of fiat (paper) money, the government has granted it a license of inestimable value, the license to print money. The value of this license is not capitalized on the central bank’s balance sheet. Like the value of the Coca-Cola brand, it is an uncapitalized intangible (not even footnoted). Thus, should a central bank happen to write down its assets by an amount greater than its capital, precisely nothing has happened because it can still print money. Does the Fed have a unit that performs the credit analysis of its principal foreign counterparts? No.

This would not be true, however, of central banks that make promises in commodities they cannot print, such as gold or foreign currency. Under those conditions, an analysis of their “cover” ratios is warranted. But if the bank is only printing its own liabilities, its resources are as irrelevant as they are unlimited.

Therefore, those who promote the falsehood that central bank solvency is necessary to the bank’s credibility, are using mythmaking to promote a different agenda. If the eurozone is to be saved, the ECB's solvency can be sacrificed without consequences.

Wednesday, July 11, 2012

The Fed's lame excuses for high unemployment


Below is my reaction to the release today of the minutes for last month’s FOMC meeting. Once again, they have an Orwellian (or Japanese) tone:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment...The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.  

First, Fed tradition requires the FOMC to bow to Mecca and intone that it “seeks to foster maximum employment”, in the same way that the city of Sverdlosk committed to meeting the goals of the 10th Party Congress, and the Archdioscese of Cincinatti seeks to promote greater holiness in the tri-county region. The words are cant, devoid of any practical meaning. A layman, uninitiated in the Fed’s secret rites, might imagine that a mandate to foster maximum employment would mean that the Fed would be obligated to target maximum employment, but he would be wrong.

Permit me to translate Fedspeak into English: “The Committee is in favor of maximum employment, thinks it’s an absolutely wonderful idea, and will keep doing the kind of things that it’s been doing which, it is hoped, will over an indefinite time horizon, increase employment”. The mandate is not to achieve full employment, but to bow humbly in its general direction.

Then, for the rest of the meeting, the FOMC engaged in a lot of hocus pocus about the yield curve, the low interest rate policy, swapping short paper for long paper, and worrying about whether low interests rates are hurting banks. Not once does anyone say “Gentlemen, we’ve been missing our employment mandate for almost four years; let’s talk about targeting our mandate”. That would produce an “awkward silence ensued” comment.

I do not mean to imply that Chairman Bernanke is not a good economist, or that he is unfamiliar with criticism such as mine. It’s not an intellectual failing; it’s a political one. When he was a Princeton professor, and even when he was a Fed governor, he was free to say similar things. But now that he is the pope, he has a different job: maintaining the Fed’s “institutional credibility”. This is analogous to Chief Justice Roberts’ job: to protect the institution and its authority.

Not only would targeting full employment require FOMC consensus, which isn’t there, but it would also require broad support from the economics profession and the relevant Congressional committees, such as the Monetary Policy subcommittee chaired by Ron Paul. So whatever Ben believes in the privacy of his own den, when he’s at work his job is to promote broad consensus both within and outside the Fed.

In 1933, there was near-unanimous consensus that the US needed to slash government spending in order to maintain the gold standard and the “credibility” of the United States. During his campaign, FDR said as much. But once he entered the Oval Office and saw the devastation being caused by deflation, he took the advice of some prairie college radicals and freed the dollar from gold, causing a sustained inflation (price-level targeting, as we call it today). He had so much power and authority at that moment, and things were so bad, that he could get away with something that would have gotten anyone else impeached.

The times today are not yet analogous, and Bernanke doesn’t have quite the authority that FDR had in 1933. But the issue remains the same: what are you targeting and how do you plan to get there?

The crucial distinction between manipulating inputs (interest rates, QE) and targeting outcomes is that the amount of input is not under discussion. When FDR decided to raise the price of gold, he had no idea what he was doing. Each morning he would arbitrarily set a new, higher price until he achieved his goal, which was higher commodity prices. He was targeting outcomes, not inputs. His more orthodox advisers were appalled.

The same policy should be pursued today. Since the Fed has conceded that the risk of inflation is very low, then it has no excuse not to target full employment. Better still, it should say so very loudly. The FOMC should announce that the Fed will engage in asset purchases until employment is restored to its 2007 level. Period. That is similar to what Bernanke repeatedly told the BoJ to do ten years ago.

But Ben will have to decide whether he is prepared to risk not only his own credibility, but that of the Fed itself. The Fed’s statutory independence is a creature of the government’s will. Given how many monetary nutcases there are now on the right, and given that the GOP might get full control of the government, he may decide that the Fed’s independence is more important than full employment. I could certainly understand that calculus.

I don’t mean to be cynical, but I would not be surprised if the GOP were to change its monetary tune were it to get control of the government in November (as happened to Nixon). I have been informed that, in his heart of hearts, Romney gets monetary policy. I certainly hope so.

Monday, July 9, 2012

The ECB is guilty of malpractice

There is a theory (known as market monetarism) that central banks can control nominal growth. Predicated on the Quantity Theory of Money,  it asserts that the central bank, by controlling M (with V assumed to be within a bounded range) can control nominal GDP*.

Politicians can tune up the engine and improve efficiency (the supply side), but they do not control the throttle (aggregate demand); only the central bank does.

If one steps back and looks at the developed countries today, what is the #1 problem that they all have in common? Answer: low nominal growth, resulting in inadequate employment and tax revenue.

Global nominal growth levels have been falling for thirty years. During the non-recessionary years of the Clinton-Bush era, the US enjoyed nominal growth of >6%%. Today, post-crash, the US remains stuck in second gear at 4%, which had been considered recessionary.

Southern Europe, which used to enjoy modest nominal growth, now has zero nominal growth almost four years after the crash. To paraphrase a prominent market monetarist, you can’t have 5% real growth with 0% nominal growth.

I will now introduce a derivative thesis, which is that fiscal deficits are not primarily caused by the government’s failure to raise taxes and cut spending, but rather by inadequate nominal growth. This is certainly true of the world today. Nominal growth and nominal government revenue growth are historically quite low for a “recovery”, causing high unemployment and fiscal deficits. Higher nominal growth would automatically translate into lower deficits and lower unemployment.

Obviously, real growth is not a linear function of nominal growth, any more than agricultural output is a linear function of rainfall. There can be too little, just the right amount, or too much. It appears that, for modern economies with inflexible labor markets, low nominal growth is not enough, 5-7% is just right, and double-digits is inflationary. Right now, no major developed economies have nominal growth in the optimal range, and most are far below, especially in the eurozone.

The market monetarist theory is potentially Copernican in its implications. If accepted intellectually, it means that fiscal policy is much less important than previously believed, and that central bank policy alone can create or retard growth. It also means that the single central bank mandate of “price stability” is inadequate, since it can be satisfied with very low nominal growth.

We could profitably discuss the Fed and the BoJ in this context, but right now their economies are not on the verge of a collapse. That would be the eurozone, where monetary policy will make the difference between survival and depression.

Today, the ECB has one positive mandate (price stability) and one negative mandate: no fiscal monetization, even if governments cannot otherwise finance themselves.

The evidence suggests that the ECB’s governing council is not divided on this issue. They all would appear to agree that not only do they have only one mandate, but also that there should be only one mandate. Although the Fed has a growth mandate, the ECB doesn’t have one and doesn’t want one--not even now, with the eurozone in extremis.

Draghi told the European Parliament this morning (July 9th) that "I think to have one mandate is already so difficult that to have another would make our life even more impossible”. God forbid that one would want to make the ECB council’s job more difficult, what with all the other important things that they have to do, such as picking out the drapes for their new conference room.

If central banks control nominal growth, and weak nominal growth causes unemployment and fiscal deficits, then the ECB’s governing council and its chairman are guilty of monetary malpractice (which goes beyond nonfeasance since it is deliberate). This is not about arcane technical issues; it is about millions of lives and the futures of nations. The ECB council cannot shirk its moral duty because it is too busy, or because unorthodox monetary policies are “risky”. What we know for certain is that the ECB’s orthodox policies are not only risky, they are suicidal.

If the eurozone is to be saved, it will require a responsible central bank. To stay in the zone, Southern Europe will need at least 5% nominal growth as well as fiscal monetization (yield targeting). These goals are compatible. If fiscal monetization expands the monetary base too quickly, the ECB can mop up excess liquidity up by issuing its own bonds and thus limit the impact.

This would require a decision to amend or ignore the ECB's charter, just as the eurozone has ignored the fiscal and debt provisions of the Maastricht treaty. Such treaties were made to be ignored when necessary. The ECB can provide the eurozone with adequate nominal growth while limiting government bond yields, if it so chooses.

It would be one thing if the ECB council attributed its helplessness to its charter; it is quite another when it explicitly asks that its charter not be changed. That’s the criminal part.
_____________________________________________________________
*The “market monetarist” thesis* is a derivative of the classical Fisherian quantity theory of money, which can be summarized as M x V = P x T, or (Money supply) x (money Velocity) = (Price level) x (real economic Transactions).

If V (velocity) is held within a bounded range, then changes in M can bring about changes in P x T, which is nominal GDP. Therefore, the central bank, by controlling the quantity of money in the economy, can control the level of nominal GDP (NGDP).

Scott Sumner’s seminal paper on market monetarism:
http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed

Thursday, July 5, 2012

France deathwatch


There is a good bit of anticipatory gloating and schadenfreude about France in conservative anglosaxon circles.

We enjoy the spectacle of the French people electing a socialist government in the midst of a sovereign debt credit crisis. We are excited by the new government’s array of taxes which will throttle any prospect of animal spirits in that lovely country. We are amused by the government’s new law against plant closings. We await impatiently the inevitable “missed” fiscal targets, the “unexpected” decline in revenue and the “unexpected” rise in spending. We gnash our teeth at  the bond market’s dereliction, refusing to rise up and do to France what it is doing to Italy and Spain. But we know, in our heart of hearts, that France is going down.

No one wants to see Hollande fail more than I do. But I have to be honest: it isn’t really his fault. Yes, of course raising taxes and cutting spending may help to keep the bond market happy, but it will not succeed; France is going down.

Thanks to the wonderful folks at the St. Louis Fed, we can readily access French financial and economic data in God’s own language. The picture isn’t pretty. Yes, debt/GDP is headed in the wrong direction, and yes, the public sector is gigantic. But that’s not the problem. The problem is nominal growth (real growth plus inflation). Nominal money is the currency in which the world does business; “real” money isn’t real.

France’s nominal GDP growth is dangerously inadequate. Having fallen to -4% during the crisis, it crawled back to 2% and is now falling once again. Right now it’s at 1.5%, and falling. No country can prosper and maintain fiscal balance without better growth than that. Since EMU, NGDP growth has ranged from 3% to -4%, with an average that is way too low.

NGDP growth of 1.5% necessarily limits government revenue growth to ~1.5%, and it is not possible to run a socialist economy on that level of growth. Yes, Northern Europe has done so. But Northern Europe has already reformed itself, and shed an awful lot of socialist dead weight in the process.

France has not reformed itself, and just voted for more left-wing utopianism. To live in a world of very low nominal growth requires heroic budget discipline and flat real wage growth. It requires docile labor unions and public-sector layoffs. It requires an efficient private sector that can restructure itself to compete despite a strong currency. That France doesn’t have.

France needs at least 4% if not 5% NGDP growth to start digging out of its hole. Hollande could usher in his socialist paradise if he had that kind of growth. But he’s not going to get it, the way things are headed. France is going down, but he is too dumb to know it. (Has he ever bothered to read an American economics textbook?)

France needs inflation now. There are only two ways to get it: eurozone exit or a change in the ECB’s mandate. France is not going to leave the eurozone prior to its default, which leaves the ECB charter. The problem there is that the charter treaty can’t be changed without a unanimous vote of the 17 eurozone members, and the North isn’t buying it.

That means that France faces a future of anemic growth, continuing fiscal deficits, rising debt ratios, riots (of course) and, at some point, a bond market revolt. The ECB will do everything it can to prevent a sharp rise in French bond yields, but it is limited by its “no fiscal monetization” charter. That is why I expect France to go down, probably at the end of next year, when the fiscal targets are “missed”.

Wednesday, July 4, 2012

The Declaration of Independence: A conservative critique


Note: As stated in this blog's charter, I reserve the right to comment, from time to time, on political subjects. Below is my contribution for the Fourth of July.

For many years I have struggled with the language of America’s founding document. As a conservative, I have found it hard to justify revolution against one of the freest and best-governed countries on earth, and I have found it especially hard to buy the justification in the Declaration.

I am familiar with the colonists’ growing sense of identity and consciousness of nationhood, and with their endless complaints against the King and Parliament. But these grievances were minor (prior to the revolt), and nothing like the complaints of the preceding century when the British government really was a disaster.

The colonists could have simply said “we want to be our own country”. The world would have understood if not sympathized. But instead, the colonists cooked up an entirely new philosophy of government that was supposed to justify their actions. They wanted to be more moral than the British, to be the good guys.

I can understand the desire for moral justification (found in all revolutions, no matter how gruesome). But their arguments were specious, hypocritical and subversive of their true political goals. They invented universal rights that they had no intention of ever granting to most of their inhabitants or to any foreigners. They invoked abstract authorities (God and Nature) who had no ability to express differing views.

The founding fathers broke the first law of civilization (the surrender of the right of private violence) in the supposed pursuit of a higher level of civilization. In fact, the only relevant authority for their assertions was the majesty of English law, which they cast aside in favor of invented and abstract reasoning.

This is precisely the same Cartesian reasoning that led to the French Revolution, communism, fascism and the near destruction of Western civilization. The founders were intellectual dilletantes intoxicated by their own fancy words and imported philosophy. In the end, they established a remarkably well-conceived form of government, but that government is built on the seeds of its own demise: abstract rights.


IN CONGRESS, July 4, 1776.
The unanimous Declaration of the thirteen united States of America,

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

The revolutionaries assert that the “Laws of Nature and of Nature’s God” entitle them to revolt against Britain. There are no known laws of nature which speak to human political organization, and God has not taken a clear position on the right of revolution. What little we have is that the Biblical Jesus advised the Jewish people to “render unto Caesar that which is Caesar’s”, which is not a revolutionary sentiment.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

This iconic passage is another unsupported assertion, seeking abstract authority for a dubious political argument. Few truths are self-evident, and the “truths” asserted are patently false. It is was obvious in 1776 that “all men” are not created equal, to which the revolutionaries’ slaves would readily attest. It is a convenient sentiment that the revolutionaries’ slaves entered the world with inalienable rights, but one is hard pressed to say what they were, and certainly not those enumerated.

I am not referring to the hypocrisy of owning slaves while expressing libertarian sentiments; I am using the institution of slavery to disprove the notion that men have inalienable rights. One might argue that their slaves possessed some latent “human” rights, but clearly those rights had been alienated. Liberty and the pursuit of happiness were explicitly and lawfully denied to negro slaves.

It is reasonable to interpret this famous passage as referring not to all men, but rather to all enfranchised British subjects (male, free, adult and landed), with “all”  having a geographic character, as opposed to a class or racial meaning. It was an assertion that a British subject living abroad in a British colony does or should enjoy the same rights and an Englishman in England. This may be a reasonable argument, but it contravened British law at the time.


--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

In non-utopian reality, governments are not established for the purpose of securing alleged rights. Governments are established by the powerful for the maintenance and preservation of the existing social order. They derive their power from the monopoly of violence, not from the consent of their subjects. Nothing prevents the powerful from organizing a political system on quasi-democratic lines, but nothing requires them to do so. The thirteen colonies were not notably more democratic after the Revolution than before. (In fact, the British Empire abolished slavery thirty years before the U.S. did.)

--That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

The right of revolution may exist in philosophy, but not in law. The people in general, and British subjects in particular, have no right to abolish their government. No government on earth provides a legal means for its own dissolution. An attempt to overthrow an established government is, by definition, treason. The British Crown was not a temporary measure designed to be superseded at a later date, any more than was the United States (as demonstrated four score and seven years later).

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

This is sound advice for would-be revolutionaries, advice that was successfully followed elsewhere in the self-governing parts of British Empire to no ill-effect. The reason that governments should not be overthrown for light and transient causes is that revolutions are bloody and destructive. The list of “rights” demanded by the American revolutionaries did not extend to those colonists who disagreed with them. They, their wives and children were driven from their lands and often murdered for daring to remain loyal to the government.

But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

We have, I trust, already dispensed with the notion of imagined “rights” that apply only to those with whom one agrees and with whom one is a social equal. A British subject (unlike a French or Spanish subject) was indeed granted certain rights by the Crown, but such rights were forfeited when the subject made war upon the lawful authorities. Revolutions often provoke martial law (see Lincoln), but such a lawful response does not evince a design to impose “absolute Despotism”. It is exigent and temporary.

--Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States.

Once again, the Crown should not be libelled as tyrannous for taking lawful actions to maintain civil order and suppress insurrection. Any subject people can make a list of grievances. But for such a list to rise to the level of justification for violent revolution, it should include more than a few trivialities. The colonists’ pre-revolutionary complaints were trivial in relation to their proposed remedy. Few people on earth were freer than British subjects at that time. The signers of the Declaration were not exactly down-trodden.

To prove this, let Facts be submitted to a candid world.

Examine below the revolutionaries’ catalog of grievances. Some of them are trivial, some are false, and the most egregious are the government’s lawful  response to insurrection. In fact, many of the abuses listed below (in bold) were subsequently inflicted by the federal government upon citizens resident in the states that sought to secede from the U.S. in 1861.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.

He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For Quartering large bodies of armed troops among us:

For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefits of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:

For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty & perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our Brittish brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us.

We have reminded them of the circumstances of our emigration and settlement here.

We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity.

We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do.

And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.