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Financial Skeptic Bulletin, June 2011

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Slump of stocks and then recovery when oil reserves were released.

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[Jun 09, 2011] Galbraith, AoU, ep9 1-6 The Big Corporation

Very impressive !!! You should see all six parts... Read The New Industrial State - Wikipedia, the free encyclopedia and the_new_industrial_state [Abridge Me]

Very good series, he also wrote many good books my favorite which was titled money which told many amusing story of monetary abuse. The collapse of 2009 would have made another predictably amusing chapter in the book. He was ignored by the "establishment' due to his views in which he encouraged the comforting of the inflicted and the inflicting the comfortable. He saw the world as it really was, spoke openly of corruption, greed and spoke his mind irregardless of who he pissed off.


Thanks to whoever uploaded the nine episodes of the series.

As time passes, more admirable Galbraith seems to me. I like the irony that he uses to expose the inconsistencies of neoliberal economic thinking. We are so fortunate that Galbraith has been an author so prolific. Life goes on but the fact remains. Enric


[Jun 29, 2011] Andrew Sheng Says Sustainability Means Caging Godzillas

June 29, 2011 | naked capitalism

Philip Pilkington:

Yeah, smart guy — and honest too. But he’s way off on the whole debt thing. You can see from the way he touches on it that he’s confused.

“If I have 20 shillings and I spend 21 then someone somewhere has to loan me one shilling and… er… well… er… *trails off into another point*”

I just posted the following historical nugget in one of the other comments sections, but its worth repeating here:

“Chairman of the Federal Reserve Board, Marriner Eccles testified before the House Banking and Currency Committee September 30, 1941. He was asked by Congressman Patman, “Mr. Eccles, how did you get the money to buy those two billions of government securities?” Eccles replied, “We created it.”

Patman asked, “out of what?” Eccles answered, “out of the right to issue credit-money.” Patman then asked, “And there is nothing behind it, is there, except our government’s credit?” Eccles responded, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.””

[Jun 29, 2011] Feldstein- What’s Happening to the US Economy

Banks parasitic rent on the economy that was the reason on the current crisis can be somehow solved, but the "end of cheap oil" problem is more difficult solved: economy can't be the same with gas at $4 as it was with gas at $1. Changes in costs of  transcontinental products shipments already spells troubles for some sectors of the economy that rely on cheap oil. Gas over $5 will also hurt  suburban home prices.  
June 29, 2011 | Economist's View

Martin Feldstein sounds worried:

What’s Happening to the US Economy?, by Martin Feldstein, Commentary, Project Syndicate: The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. ...
Sarah Raskin is also worried, and seems to be one of the few Federal Reserve Board willing to "underscore" the employment part of the dual mandate (though I think Feldstein's right about further easing, that won't happen unless the outlook darkens considerably, and even then there's no certainty the Fed would take action):

Fed’s Raskin Paints Grim Picture of Recovery, by Luca Di Leo, Real-Time Economics: Federal Reserve Board governor Sarah Raskin Wednesday painted a grim picture of the U.S. economy and signaled support for the central bank’s easy-money policies aimed at boosting jobs.


"Monetary and fiscal policies cannot be expected to turn this situation around. "

Correction: Republicans cannot be expected to ALLOW fiscal policies that could turn the situation around.

It's well past time for economists to stop pretending that "policy" is some inscrutable thing that falls from the sky unbidden - there are PEOPLE making policy, and it's time to start naming names...

Patricia Shannon:

Matt, correct.

The Republicans have been deliberately holding back the economy for political gain. And it worked. In the 2010 elections, they won the House and made gains in the Senate.

Why shouldn't they continue to pursue a winning strategy?

Edward Lambert:

...“It is necessary for the strength of our nation’s recovery that low- and moderate-income Americans be able to more fully participate in the economy,” the Fed official said. ..."

They are getting close to figuring it out... It's the wealth inequality folks. Too much money and assets in the economy are far removed from the masses in the stratosphere of financial accounts that move between countries, corporations and the wealthy. There is no trickle down.

There has to be an increase in taxes upon the wealthy. There has to be a transfer of wealth as quickly as possible.

Excluding this transfer of wealth will insure sluggish growth of the US economy for years and years.

[Jun 26, 2011] guest-post-financial-profits-reduce-economic-prosperity by Lance Roberts

Street Talk Advisors

With today's release of the corporate profit data I thought it was important to remind you of the demise of America at the expense of Wall Street.   America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff.   We aren't talking about "namby pamby" stuff - we are talking about real stuff.   We used to produce everything from automobiles to steel to blue jeans; right here in America.   We ran telephone lines, built roadways and bridges, drilled for oil and constructed buildings.    It was the sweat of the brow and the strain on the back that built America into its former shining self.  A country of opportunity and prosperity with a solid moral foundation and a strong military to back it up.

That was then.   Beginning in 1980 our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of successful use of leverage.   However, what we didn't realize, and are slowly coming to grips with today is that financial engineering had a very negative side effect - it deteriorated our economic prosperity.  As the use of leverage crept through the system it slowly chipped away at the savings and productive investment.    Without savings - consumers can't consume, producers can't produce and the economy grinds to a halt as the cycle of economic growth is thrown into a "balance sheet recession" strangle hold that is slowly pushing the economy towards unconsciousness. 

Yet, even with the economy hobbled and struggling, the average American functioning as if we are still in a recession, the main focus of the current Administration continues to be the bailout of the very companies that not only got us into this mess to start with but are the very leeches on economic prosperity that we need to be ridding ourselves of.

As shown in the chart, as financial profits have risen over the past thirty years as a percentage of total profits the year-over-year change in our Gross Domestic Product has slowly deteriorated.   This is due to the "multiplier" effect of dollars spent.   If I manufacture or build something there is a large multiplication effect of each dollar spent as it flows through the economy creating ripples of aggregate demand in its path.   However, as money is shifted from these low margin businesses, which have a high multiplier effect, to high margin, low multiplier, devices and schemes on Wall Street such as securitization, products and "Ponzi schemes".   This shift of focus from manufacturing type "blue collar" jobs to high finance "white collar" masters of the universe has successfully created the largest gap in the history of the United States between the "Have's" and the "Have-Not's".

Not all financial services and businesses are bad, however, an excess of anything is harmful to the system into which it is introduced.   There has been plenty written since the financial crisis about the systemic risk that major Wall Street firms impose on the economy and the data tells the rest of the story.   We have done nothing to solve or resolve that which brought this country to its knees in the first place.   We have bailed out the culprits, turned a blind eye to the facts and leave the rest to hope and prayer that somehow things will turn out okay as the average American is slowly bled to death.

This is why we need real reform in government that leads to a smaller government, more clarity for businesses through pro-growth policies, real regulation of Wall Street which separates banks and brokerages, as well as programs and subsidies for bringing back to America those jobs that require a little hard work, a little bit of sweat and create a whole lot of pride and prosperity along the way. 

Stuck on Zero:

The payoff for companies, countries, and HNW individuals in producing goods and services is probably a 5-10% return on the dollar each year. The payoff from lobbying in Washington DC is between 50 and 100 times. A million spent appropriately can return $100 million. Why would you ever do the former? Take taxation for hedge fund managers. A few million wisely spent in DC resulted in an earnings tax rate of 15%. That's probably a 1000 to 1 return on your money.

A Man without Q...

Financial profits are for the most part a private sector tax on the value creating parts of the economy.

Whether through interest rate policy, through charges or simply fleecing investors every time they come to the market place, the amount of wealth that needs to be transfered to save the financial system in its current for is too great a burden for the underlying economy.

The other great mistake in our rigged financial system is that the markets are no longer a weighing machine - the investor no longer wins by placing money with those who can generate the best return on capital, and industrial innovation takes second place to financial innovation, which is merely playing around with moving money in a way that gives the appearance of success.

Caviar Emptor:

Financialization is one problem.

Oilization is an older, deeper and ultimately more sordid problem.

American taxpayers still support corporate welfare for oil companies through direct tax subsidies (!). And these are the richest and most powerful corporations on earth. Corporate welfare dwarfs social welfare in the US. The political reach of the oil cartels in national and international affairs is infinite. Financial companies are only their satraps. Americans will continue to pay their taxes and die for oil overseas as they have for a long time.

legal eagle:

I liked Reagan, he was an affable fellow. He also represents the genesis for national debt accumulation for 30 years that bankrupted our nation. In effect, he was one in a long line of spendthrift presidents. Deficits do matter and I do not think romanticing his presidency gives due respect to the ulitmate effects.


I'm surprised you didn't get junked for that. I agree with you. Carter, with all is foibles, said put on a sweater, drive 55 and a few other things for which the Peter Pan set despised him. Reagan basically said reality is for losers, bribed the Iranian hostage takers and supported a laundry list of killers in Latin America. I still can't figure out how Reagan gets such good press. Reaganomics became Bushanomics, Clintonomics and Obamanomics.


I still can't figure out how Reagan gets such good press.

He cut the highest marginal tax-rates a LOT. That's all anyone remembers.

Folks don't remember the huge expansion of government and the shift to constant warfare to subsidize big corporate interests.


No I don't want that much "freedom". The freedoms I enjoy are a benefit of living in a country where we don't have a third world underclass. If some of the money I earn is contributed to the common good, with free health care and education for everybody, so the next generation will be capable of leading, that is what I expect.

We need more regulations on the multinationals that outsource jobs so that the small businesses can play with a little advantage instead of disadvantage. We need to continue government transfers for things like food stamps to help the unemployed who can't even score the McJob until we are able to produce more jobs in this country. Then we need to subsidize the homegrown American business that creates jobs in our economy. More regulation and taxes on multinationals, less on small businesses. And figure out a way to limit the number of lawyers in this country. Pretty worthless for the most part. Spend all their time writing up legislative tax loopholes for their corporate bosses, who pass it on the the lobbyists. Time to put the subsidies where the do the most good. Small is good.


How has that worked out for you in the last fifty years? Looks like the harder you squeezed business to pay for your socialism the faster they shipped your father's job to China.


Multinationals have not been squeezed at all. Quite the contrary. They have been allowed to repatriate profits at very low tax rates, compared to those paid by small businesses, because they buy themselves a loophole. They did it once, used the money to prop up their stock price. Now they are trying to do it again, getting the Rahminator to say its a good thing to fund the "Infrastructure fund" with the quicky upfront cash. If there is socialism, why am I paying so much for health care and my kids college? Why do real socialistic countries have it so much better? We aren't socialistic we are crony capitalistic. The increasingly powerful multinationals are setting the next generation up to be low paid serfs.


Yeah, those socialist countries over in Europe are doing great...


Most of them don't have our resources. And France's health care system costs less than half of what ours does per capita for better outcomes.


I agree the health care system is screwed up. But it is foolish to get a government (even more) involved that has demonstrated it doesn't give a fuck about it's people.


The trick is to redirect government away from subsidizing big corporations and start subsidizing the job creaters. Until then, we need to provide for basic human needs of those with no jobs, no homes, no food and no health care. There is certainly no private interest who is interested in picking up the slack brought upon us by globalization and a lax financial regulatory structure. Only in taking out an ever increasing piece of rent out of those that can pay. But with the current bought & paid for politicians, real reform is still a dream. They take orders from Insurance and Big Pharm. Oh, the AMA has a little influence as well. Doctors need to keep their monopoly. Don't want to give those nurse practitioners too much power or salaries may go down. Much more profitable to be a revolving door, charging inflated fees for spending 5 minutes per patient and writing prescriptions. Don't want to see any of that easy money go away.


Until then, we need to provide for basic human needs of those with no jobs, no homes, no food and no health care.

What is this "we" stuff? Volunteer yourself, but DO NOT volunteer others to pay for your "fairness"


We all benefit when people aren't desperate. Taxes pay for the general welfare that benefits all. Its not like the most basic needs need to be addressed in extravagent ways. Just enough so people retain enough human dignity to want to lift themselves up.


I watched with amazement as the financial elite in the US captured both the US Treasury and the Fed, so that by the 90's, monetary policy was crafted purely for their benefit. The banner was "free trade." Except that there can be no free trade if currencies can be manipulated to avoid current account rebalancing. So while the US import-export deficit continued to widen, the "strong dollar policy" initiated under Robert Rubin was in essence a tariff on American producers. This assured outsized profits for the foreign investments. And when the dollar became "too strong" and countries began to default on their dollar-denominated debt, the same money center banks were bailed by various means, Brady bonds, etc. Meanwhile, America quietly deindustrialized, which was rationalized as "The New Economy."

In an ideal world, where currencies are measured against some stable metric like gold, free trade would work since current account rebalancing would naturally follow as countries with current account deficits would see their currency value fall, and vice versa. In the current international trade structure, this is not possible.

GATA-WTO allows a general tariff to be placed on a country that continues to have import-export surpluses if the issue cannot be settled by other means. I'm not a big fan of tariffs, but right now, I see no other way to revive American production.

Of course, this is not going to happen because money center banks would see an immediate drop in the value of their foreign investment. Ideologically, too many people have bought into the notion of "free trade" with managed currencies, an economic oxymoron. The fact that it has not worked out for the US and Europe does not seem to matter.

This book was prescient. KP illustrates the historical parallels of financialization of economies and their subsequent failure, looking at various examples around the world - Dutch, Spanish, English, etc. Unfortunately, his writing style makes for a difficult read.

Wealth and Democracy: A Political History of the American Rich by Kevin Phillips 


[Jun 25, 2011] The IEA SPR release: open thread by Euan Mearns

June 24, 2011 The Oil Drum

Drowning in debt, the OECD did have one little nest egg tucked away in the form of strategic petroleum reserves (SPR). Yesterday the International Energy Agency (IEA), an OECD organisation, decided to raid these meagre savings in order to try and keep the global growth party alive. The recognition that high oil and energy prices were threatening a weak and faltering recovery is an admission by the OECD that high oil prices were threatening recession.

The decision yesterday to release 60 million barrels from strategic reserves over a 30 day period sent already weak and falling oil prices through the floor with Brent futures down 8% at one point. This represents 4% of total OECD public stocks of crude oil and refined products that totals 1547 million barrels.

Many believe that the $900 billion of quantitative easing in the USA has underpinned the most recent commodities spike. Ask the question where the global economy would be right now without QE? Rising demand colliding with inelastic supply is the technical cause of high and volatile oil prices. The logical solution is to boost supply and reduce demand. Yesterday's action by the IEA is designed to do the exact opposite of that since the aim is to reduce price. This will boost demand and hurt high cost oil producers in the OECD.

My own view on the OECD economies is that anaemic growth in many countries has likely already turned negative mirrored by already falling oil prices. Higher taxes, reduced public spending and the burden of high energy prices lie at the heart of this problem. But there seems no way out. OECD consumers also face the ever present risk of higher interest rates which must rise some day when buyers of government bonds demand higher rents for growing risk of default. Countries like the UK require strong economic growth to repair their public balance sheets to avoid the risk of default. This growth requires growing supplies of cheap energy. 60 million barrels of oil, 18 hours of global consumption, is the latest sticking plaster to be rolled out.

This is an open thread to gather opinion on yesterday's move by the IEA.

Gail the Actuary

I think the SPR release was done to help fix the economic problems that many OECD members have. I wrote a post about this on Our Finite World about this called Release of Oil from the SPR – Desperately Trying to Fix the Economy.


Gail. Desperation seems to be an apt description when one looks at the economic/energy/political situation systemically, and, as I posted yesterday, this has all of the hallmarks of a Hail Mary pass. Since the home team is down by multiple scores, one can only deduce that the design is to save face. I can't believe these folks actually think that they can salvage the growth game. The playing field is in tatters, the rules corrupted, and the officials have lost any sense of fairness. Expect a new game soon, with different rules, played in the dark for most.

The fans have already started rioting in the streets.


 Obama's trying to get re-elected.

I don't know why, I wouldn't want to be Capt. of the Titanic as it's sinking. Hubris, I guess....

I believe it was Kunstler who said the U.S. would eventually elect lunatics. Sadly, it seems more true everyday.


 Yes, we know that we are running out of oil but we must use more oil to grow the economy which will use even more oil that we are running out of. The primary problem with our economy right now is that it does not provide sufficient employment and, for millions of people, it does not provide enough money to, you know, live. We have had continued growth in manufactured goods but, at the same time, we have had decreases in employment. Producing even more goods will not solve the problem because manufacturers have found a way to decouple manufacturing from employment.

The only "solution" on offer is even lower taxes and massive decreases in spending to somehow free up the animal spirits of the capitalist economy to do what it is clearly not doing right now. But nothing is being done, not even that, because our government is frozen in place, paying 535 congress persons to do nothing.

So, in spite of all this, the only action being taken is this desperate action of providing more oil for an economy that clearly will not need the oil after congress gets through with it.

It would seem that virtually no one gets the fact that this economy's ability to provide decent jobs for a middle class economy is virtually dead.

As you imply, the ship is going down and the current political system and level of deep thought is not equipped to provide most people a decent standard of living. If one believes that this economy cannot be successful without continued, increased injections of oil, then it truly has reached the terminal stage of utter desperation and hopelessness.

With this release of oil, the President has, in effect announced that America is doomed going forward. This would only not be true if he truly believes that oil production is headed upward and we are just in a little temporary rough patch that we can paper over with an SPR release.

tstreet :

The rape and pillage by the rich, especially the banksters, of the middle class and poor is well documented and is unceasing. I am a Democrat but freely admit that Obama has been instrumental in this sodomy. His primary achievement, the health care bill, was a gift from the very beginning to the health insurance companies. The bailout of the banksters was hideous and his appointments to financial related positions have been hideous. I don't share the Tea Partier's perspective, but nevertheless the health bill is approaching worse than nothing.

The Republican party is worse, but either way, nothing fundamental will be done to assert the power of the people over the corporations. The system is corrupt through and through but groups like the Tea Party do not know who the enemy is.

None of what you propose will occur, of course, as a very simple function of who is in charge. And those on the right, who are de facto running the country, because of the power of no, believe or pretend to believe that we need even less equality, even lower taxes, and even less regulation because the we have not reached maximum level of rape and pillage possible.

In a rational world, we could make an honest effort to assess reality and come up with policy prescriptions to deal with reality. In the mean time, we will be ruled by those who engage in fantasy economics.

The primary issue is that you believe in redistribution. You cannot even discuss this with the powers that be because they do not believe it is a problem and what we really need is even more inequality. And even when they admit that it is a problem, there solution is more trickle down economics through growth. This growth, according to them, can only occur with a full on laissez faire economy

I agree that GDP is caused by a number of factors, energy being critical but not sufficient.


The Banking Emperor Has No Clothes « The Baseline Scenario

June 11, 2011


Prof. Johnson is quite correct in his claims of illogic and historical inaccuracy on Geithner’s part. But Johnson forgets to mention whom Geithner represents, namely, big capital as a class; which is why the “completely segmented basis” (euphemism for “break up the biggest banks”) and higher capital requirements advocated by Johnson have about as much chance of implementation as honesty in a winning politician today. As long as our real rulers do not want such things, they will not come to pass. The “command economy” (state management, implied by Johnson’s various nostrums) works–you need look no further than the allotment of chores and rewards in a healthy family (if you can find one). But capitalism is not about the mundane economic task of arranging production so that needs are met. Rather, it is all about the endless accumulation of capital via the exploitation of profitable opportunities; an historical reality to which our politicians defer. This deference constitutes the concomitant reality that historian Simon also “forgets”–namely, the historically testable claim that politics is the vehicle of economics in class societies. In eliding this quite literally dominating fact, Johnson reveals himself as every bit as deceived and deceptive as Geithner. Indeed, they work in concert: Geithner, the direct agent, doing the bidding of big capital; Johnson, the indirect agent, telling the rest of us that we can have capitalism as a system but do without its evils if only we would heed reformists like himself. In the upshot, they serve the same masters; the rest of us are fools for believing otherwise. –It is a tale told by multiple idiots, full of sound, fury, lies, violence and pollution of every sort, signifying absolutely nothing of human worth.

Owen Owens

I wish I had your confidence Jeff, The phrase “space is the final frontier” is true. It has a limit which is close to being realized. Just where is this growth going to come from? The easily reachable resource are a thing of the past, to place an inefficient gvt as the last resort for manufacturing is questionable. The need to profit handsomely from such contracts can only increase costs. Tax rates will have to rise to meet obligations and someone (banks mostly) will have to pay those taxes on abandoned houses and property, squezzing an already tippy real estate mkt (the heart of the economy). It would take alot of money and power to overwhelm the current system, that constantly resists any change from the status quo. I’m not saying it can’t be done, but alot of powerful people will be extremely angry at their inability to control what had been smooth sailing for a more reasonable approach to this countrys problems. Should the debt ceiling be raised without serious concessions the next move is to say you can’t hold the economy hostage with spending bills, now that we can spend more of the taxpayers money. It a visious cycle that will take a God they don’t believe in to correct their mistakes.

Economist's View When has Stimulus Ever Been Politically Feasible


Obama is a Rockefeller Republican, not a New Deal Democrat.

Current Republicans are Randians.


Sadly Noahpinion is correct. The first thought that came to my mind was the automatic stabilizers that we do have. However, Democrats are bargaining away the automatic stabilizers we have in place, not pushing for more.

If we had elected a New Deal Democrat to deal with the crisis instead of Obama, we might have been able to stampede Congress into passing stimulus or long term automatic stabilizers. Instead we elected the clueless Obama and he blew it.


Reply Saturday, June 25, 2011 at 06:42 AM

beezer said...

Check out the Naked Capitalism post which includes the research piece Cracking the Credit Market Code.

Sometimes it's best to speak simply. Call a creep a creep type of thing.

This entire disaster came directly from an unregulated shadow banking system comprised primarily of hedge funds and investment bankers. They used mortgage backed derivatives to create huge leverage risks, under the cover of a trio of corrupt rating agencies, the total sum of which is yet to be accurately figured. This Ponzi scheme needed systemic fraud to even happen.

Noah should stop defending these creeps. Many of them knew exactly what they were doing.

And then they extorted the public, in your face extortion, in order to survive.

We have a real banana republic type of emergency here. Our government is ineffectual because it is totally compromised, not because no one knew what they were doing.


[Jun 25, 2011] Economist's View When has Stimulus Ever Been Politically Feasible

John Emerson
The American political system was designed to block and delay bold actions. It does this pretty effectively. (It also provides a lot of veto points from which shrewd Congressmen can extort graft, but constitution-worshippers never talk about this).

Whenever there's a downturn, the collective reptile brain immediately kicks into the householder's belt-tightening reaction, as though government spending were just a lot of frivolity. Among political elites, there's also an ingrained fear against inflationary spending and government relief of the populace is also ingrained: "The lesson should be constantly enforced that, though the people support the Government, the Government should not support the people." (Grover Cleveland.)

The only exception is military spending.

John Emerson
"...there's also an ingrained fear of inflationary spending for government relief of the populace:"

[Jun 23, 2011] That Stalling Feeling by Nouriel Roubini

2011-06-21 | Project Syndicate

Optimists argue that the global economy has merely hit a “soft patch.” Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation. As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again.

But there are good reasons to believe that we are experiencing a more persistent slump. First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment. It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured.

Second, the factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.

Third, economic growth has been flat on average in the UK over the last couple of quarters, with front-loaded fiscal austerity coming at a time when rising inflation is preventing the Bank of England from easing monetary policy. Indeed, inflation may even force the Bank to raise interest rates by the fall. And Japan is already slipping back into recession because of the earthquake.

All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts. And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be.

If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending. And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.

This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called “quantitative easing” by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies.

If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.

Fed Watch: FOMC Reaction

Economist's View

Tim Duy reacts to the FOMC meeting:

FOMC Reaction, by Tim Duy: The two-day FOMC meeting ended largely as expected, with the Fed reaffirming the current policy stance. If you were looking for signs that QE3 is on the horizon, you were sorely disappointed. If anything, the FOMC statement shifted in a slightly hawkish direction, setting the stage for the next policy move to be a tightening. The Fed is trying to make it as straightforward as possible – in the absence of clear and convincing evidence that deflation is again a threat, they have nothing else to offer.

The statement itself made clear the Fed interprets much of the current data flow as reflecting temporary factors, either the impact of higher commodity prices or the disaster in Japan. Interestingly, though, temporary factors alone are not sufficient to explain the slowdown, as the 2012 GDP forecast was downgraded. Federal Reserve Chairman Ben Bernanke admitted this during his subsequent press conference. In response to a request for the forecast he brought to the meeting, he suggested that he was on the low side of expectations:

[The] “slowdown is at least partly temporary….can’t explain the entire slowdown…Growth at least in the near term might be a little bit less than we anticipate.”

Still, despite the slowdown, the Fed removed the “employ its policy tools as necessary to support the economic recovery” language, presumably because they have no intention of providing any additional support. Moreover, inflation trends are no longer “subdued.” Instead, they see a “subdued outlook for inflation,” another signal that they are not thinking about easing, but instead restraining themselves from tightening now.

As Mark Thoma notes, Bernanke made clear that the shift away from deflation concerns effectively ends the possibility of another dose of quantitative easing. So what happened to the Bernanke of a decade ago, when he chastised the Bank of Japan for inaction? Brad DeLong laments:

Those of us Democrats who were happy when Barack Obama reappointed Ben Bernanke as Fed Chair thought that we were getting the Ben Bernanke we knew--the student of the Great Depression and of Japan's Lost Decade dedicated to doing whatever was necessary to stabilize the time path of nominal GDP, up to and including dropping bales of money out of helicopters.

Whatever happened to him?

My first thought is that we forgot or overlooked the fact that Bernanke is a child of the Bush Administration, which should have been a red flag that he was not all that he was thought to be. My second thought is that I don’t see Bernanke as terribly out of line with the current Administration itself. Third, Bernanke made clear in his response to a Japanese reporter that he sees himself as exactly the Bernanke of a decade ago. His comments then meant that:

“…a determined central bank can always do something about deflation.”

Like inflation, deflation is a monetary phenomenon, and, as such is within the control of the monetary authority. He acted on that belief last fall with the Fed’s second large-scale asset program – a policy that had more to do with eliminating deflationary expectations than the path of growth. Those deflationary concerns have now been replaced by the more traditional inflationary concerns. To be sure, the growth forecast leaves much to be desired, and the unemployment outlook should arguably be seen as a crisis. But – and I think this is key – the Fed believes that they have little traction over growth at this juncture. Thus, additional policy yields no improvement on the employment outlook, but potentially adds to an already uncomfortable inflation tradeoff.

Simply put, from the Fed’s point of view, the balance of risks is clear. And that means we should expect nothing more from Constitution Ave.

Despite the clear direction from Bernanke, Bill Gross of PIMCO doubled-down on his failed bet that this statement would hint at QE3. Via Reuters:

Gross, the co-chief investment officer of PIMCO, the world's top bond manager, on Wednesday said on Twitter: "Next Jackson Hole in August will likely hint at QE3 / interest rate caps."

Consider the timeline. Today, the FOMC and Bernanke himself only further distanced themselves from another dose of easing in this cycle. That means he need a full 180 degree turn by August, less than two months away. Consider too that we would need a deflation threat to create such a turnaround. But, even if commodity prices stabilize, or even decline, the pass-through from previous price increases is still likely to be working its way through the core data. And it defies belief that, given the current attitude among FOMC members, they would entertain the thought of deflation with such inflationary pressure in the pipeline, even if you believe it to be temporary pressure.

Moreover, any commodity price declines are likely to provide a boost to growth. Moreover, so too will an easing of Japanese related supply issues. Which means a reasonable chance that growth looks stronger in comparison to recent weakness. Not terrific, mind you, but the level is unimportant. What is important is simply that growth does not deteriorate, and instead improves, however modestly.

All of this argues against Gross’s outlook. Which means you need a vastly contrarian actual outcome, and it needs to fall into place quickly. That outcome, as far as I can see, is some combination of a shift to deflation concerns, a dramatic downward shift in the 2012 growth forecasts, or massive financial contagion from the European crisis (best guess on this is that Europe kicks this can down the road for a few months anyway).

Which, in sum, means to need to ask yourself this question if you are going to jump into the Bill Gross camp: “Do you feel lucky, punk?” It seems like an awful lot needs to go wrong in the next few weeks to get QE3 at Jackson Hole. I am not saying that it can’t go wrong, and if it does I will happily give credit to Gross for his wisdom and insight. That said, the time horizon is remarkably short, and will shrink rapidly, to generate the kind of change of heart at the Fed necessary to prod officials into another round of easing. It would seem that financial crisis is the only event that could prompt such a shift in just two months.

Bottom Line: The Fed believes they are done easing, and policymakers now look toward tightening. I know, I know – they have said this before, which is reason enough to take their tough talk with a grain of salt. But the shift in the inflation outlook looks very much to represent the high water mark for policy. The data will need to dramatically deteriorate to shift the Fed’s focus away from tightening.

Mark A. Sadowski:
"Which, in sum, means to need to ask yourself this question if you are going to jump into the Bill Gross camp: “Do you feel lucky, punk?” It seems like an awful lot needs to go wrong in the next few weeks to get QE3 at Jackson Hole."

The 2 year inflation zero coupon swap closed at 1.837% down from yesterday's close of 1.9175% . This is also down from 2.7% in early May. So the markets are signalling a rapid decrease in inflation expectations. At this rate 2 year inflation expectations should be back to around 0.9% by Jackson Hole, the same rate they were when Bernanke suggested QE2 was a possibility last year at Jackson Hole.

There's literally nothing that is going to raise inflation expectations in the next two months. And all signs point to huge potential for further decreases (Europe and the US debt ceiling crisis.)

So yeah, I feel like a lucky punk. Bad luck for our nation's economy though.

"So the markets are signalling a rapid decrease in inflation expectations."

It's unclear who is signalling what. There is much so manipulation that the whole idea of existence of "signal from the markets" is now suspect.

As for the Fed, they painted themselves into a corner, plain and simple. Peak commodities further complicate the picture. Almost complete process of cutting to the bones of all corporate spendings and related quality of earnings issues is yet another interesting factor.

I don't see any technological break through on the horizon that can change this picture right now. Wireless "revolution" is almost over. Cloud computing is more a marketing gimmick then technological advance. There is really no technological drivers of the recovery. Or other factors other then "time heals all wounds" effect and money printing. Most of stimulus money went to banks. Banks remain sick or very sick and financial speculation based business models remain unsustainable. Old style banking is not that profitable and does not require this size of financial sector. Main street remains sick with few exceptions. Small businesses are in deep, deep hole. Now municipalities became sick. Three wars are yet another mixed blessing. Politically the country is dominated by deadly embrace of three major political forces: financial oligarchy, energy and military-industrial complex, and religious right.

Those are facts on the ground. So it's time for Bernanke to start taking antidepressants or stronger "cuckoo pills", unless he already started doing this earlier ;-).

How the Fed Could Set Off a New Recession

Now widespread weakness in recent economic data makes a double dip much more likely. In May, just 54,000 jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, and growth in manufacturing slowed sharply. Meanwhile, house prices continue to decline to new post-bubble lows,  home sales have slowed, claims for unemployment insurance have risen, and consumer sentiment has weakened. Both stimulus spending and QE2 are coming to an end, state and local budgets are still a problem, and corporate bond issuance “fell to its slowest pace of the year.” The fall in investment activity is particularly worrisome because business investment has been growing at near pre-recession rates and has been a key factor in bringing about the moderate output growth we’ve experienced recently. If business investment falls off, it’s hard to see what will replace it.

The recent data is not the only reason I’ve changed my mind about the possibility of a double dip. When the recession started, I was certain we wouldn’t repeat the mistakes of the past. One mistake in particular looms large right now, the deficit reduction and interest rate increases that sent the economy into a tailspin in 1937-38. Many people do not realize that there were two recessions within the Great Depression. The first, which came in 1929, is well known. This recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation – again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates, and the result was a second recession in 1937-38. This mistake prolonged the economy’s troubles considerably, and in part was why this became the “Great” Depression.

Fiscal policy makers today seem determined to repeat the mistake of cutting the deficit too soon, the only question at this point is the severity of the error. They also seem determined to make it worse by using the debt ceiling as a bargaining chip in deficit negotiations. If the people pushing the debt ceiling debate to the brink miscalculate, it could create serious economic difficulties.

The Fed’s Federal Open Market Committee begins its two-day meeting Tuesday. QE2, the Fed’s second round of purchases of Treasury securities, is coming to an end, and policymakers must decide what to do next. Should the balance sheet be expanded further with QE3 or kept on hold at QE2 levels? If the balance sheet is kept on hold for now, when should reversal of the quantitative easing policy begin? When will the Fed begin raising interest rates?

The Fed must be very careful not to increase rates before the economy can handle it, but getting the timing right is difficult. There are long and variable lags involved with monetary policy, and the Fed must make policy decisions far in advance of knowing the actual state of the economy. If it moves too soon, it could kill the recovery and even cause a double dip, especially with deficit reduction and spending cuts, troubles in Europe, or other problems we don’t yet know about. If the Fed moves too late, the result could be inflation.

Which should take precedence, economic output or inflation? The damage from a slower recovery or a second recession would be far greater than the damage from temporary outbreak of inflation, so the Fed should be more worried about output than inflation. But that doesn’t appear to be the Fed’s current stance. Inflation hawks on the policy committee have biased Fed policy in the other direction even though there’s very little to suggest an outbreak of inflation is imminent or even likely.

The problem goes beyond the inflation hawks at the Fed. Monetary policy has been increasingly politicized in recent years, and worries that the Ron Pauls in Congress will use an outbreak of inflation as an excuse to take away some of the Fed’s autonomy, and hence its effectiveness, are inhibiting a more aggressive attack on the output and unemployment problems.

The politics of fiscal policy are difficult and at times prohibitive. But the Fed is supposed to be above politics. I wish I felt more confident that the Fed is willing to invoke QE3 or whatever policies are needed to minimize the risks of a double dip. Monetary policy is the best hope we have to offset the fiscal insanity in Congress and keep the recovery going. However, at best, I expect the Fed to keep policy on hold for awhile, although there’s still the chance that the Fed will raise rates prematurely.

And even with the best possible policy from the Fed, the weak economy, problems in Europe, and the determination of fiscal policymakers to make things worse make it hard to shake the worry that we might be headed toward a second recession.

Related Links:
Key Question: Is the slowdown Temporary? (Calculated Risk)
Consumer Sentiment Slips in June (Reuters)
Investors Fret About a Post-QE2 World (The Wall Street Journal)

Until recently, it seemed unlikely that we were headed for a double-dip recession. We were clearly looking at  a very slow recovery, especially for employment, but there was little reason to worry about a second recession.

Now widespread weakness in recent economic data makes a double dip much more likely. In May, just 54,000 jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, and growth in manufacturing slowed sharply. Meanwhile, house prices continue to decline to new post-bubble lows,  home sales have slowed, claims for unemployment insurance have risen, and consumer sentiment has weakened. Both stimulus spending and QE2 are coming to an end, state and local budgets are still a problem, and corporate bond issuance “fell to its slowest pace of the year.” The fall in investment activity is particularly worrisome because business investment has been growing at near pre-recession rates and has been a key factor in bringing about the moderate output growth we’ve experienced recently. If business investment falls off, it’s hard to see what will replace it.

The recent data is not the only reason I’ve changed my mind about the possibility of a double dip. When the recession started, I was certain we wouldn’t repeat the mistakes of the past. One mistake in particular looms large right now, the deficit reduction and interest rate increases that sent the economy into a tailspin in 1937-38. Many people do not realize that there were two recessions within the Great Depression. The first, which came in 1929, is well known. This recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation – again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates, and the result was a second recession in 1937-38. This mistake prolonged the economy’s troubles considerably, and in part was why this became the “Great” Depression.

Fiscal policy makers today seem determined to repeat the mistake of cutting the deficit too soon, the only question at this point is the severity of the error. They also seem determined to make it worse by using the debt ceiling as a bargaining chip in deficit negotiations. If the people pushing the debt ceiling debate to the brink miscalculate, it could create serious economic difficulties.

The Fed’s Federal Open Market Committee begins its two-day meeting Tuesday. QE2, the Fed’s second round of purchases of Treasury securities, is coming to an end, and policymakers must decide what to do next. Should the balance sheet be expanded further with QE3 or kept on hold at QE2 levels? If the balance sheet is kept on hold for now, when should reversal of the quantitative easing policy begin? When will the Fed begin raising interest rates?

The Fed must be very careful not to increase rates before the economy can handle it, but getting the timing right is difficult. There are long and variable lags involved with monetary policy, and the Fed must make policy decisions far in advance of knowing the actual state of the economy. If it moves too soon, it could kill the recovery and even cause a double dip, especially with deficit reduction and spending cuts, troubles in Europe, or other problems we don’t yet know about. If the Fed moves too late, the result could be inflation.

Which should take precedence, economic output or inflation? The damage from a slower recovery or a second recession would be far greater than the damage from temporary outbreak of inflation, so the Fed should be more worried about output than inflation. But that doesn’t appear to be the Fed’s current stance. Inflation hawks on the policy committee have biased Fed policy in the other direction even though there’s very little to suggest an outbreak of inflation is imminent or even likely.

The problem goes beyond the inflation hawks at the Fed. Monetary policy has been increasingly politicized in recent years, and worries that the Ron Pauls in Congress will use an outbreak of inflation as an excuse to take away some of the Fed’s autonomy, and hence its effectiveness, are inhibiting a more aggressive attack on the output and unemployment problems.

The politics of fiscal policy are difficult and at times prohibitive. But the Fed is supposed to be above politics. I wish I felt more confident that the Fed is willing to invoke QE3 or whatever policies are needed to minimize the risks of a double dip. Monetary policy is the best hope we have to offset the fiscal insanity in Congress and keep the recovery going. However, at best, I expect the Fed to keep policy on hold for awhile, although there’s still the chance that the Fed will raise rates prematurely.

And even with the best possible policy from the Fed, the weak economy, problems in Europe, and the determination of fiscal policymakers to make things worse make it hard to shake the worry that we might be headed toward a second recession.

Related Links:
Key Question: Is the slowdown Temporary? (Calculated Risk)
Consumer Sentiment Slips in June (Reuters)
Investors Fret About a Post-QE2 World (The Wall Street Journal)

[Jun 22, 2011] The Costs of War

Economist's View

One of the costs of war is higher unemployment:

Gender Values: The Costs of War, by Susan Feiner: At ten years and counting, the wars in Iraq and Afghanistan are the longest in U.S. history. Not surprisingly, they are the most expensive, with total war spending poised to top two trillion dollars early this summer. ... The U.S. government's spent over $2,000 per capita on all aspects and accouterments of war. ...
Spending on the military counts for a huge share -- 58 percent -- of U.S. discretionary federal spending. If military funding were redirected to meet critically important social needs, the nation as a whole would reap enormous benefits. ...[gives examples]
This military spending has yet another negative economic impact, and that's on the labor market. The largest share of military spending goes to weapons procurement, not to pay soldiers or other military personnel. The consequence of this is that it closes off employment opportunities in fields where women are most likely to earn decent salaries.
Dollars spent on the military and dollars spent on domestic programs like health care and education call very different jobs into existence. According to an important study by the Political Economy Research Institute (PERI),... one billion dollars spent on education or health care would create many more jobs than does spending the same amount on military projects.

The military currently rips through more than $600 billion per year. If ... $300 billion were spent instead on education and health care, the employment picture would shift dramatically.

Also see Stiglitz and Bilmes.


What a great idea! After all the recession hit women much harder than men.... oh, wait, never mind.

Well at least it would help with the severe teacher shortage since our student/ teacher ratio is at a huge.....15.5 to 1.

Although most of the unemployed are highly educated and could easily shift carrers into health care or teaching.....ummm....well...if you look....forget it.

It's still a good idea, after all we need to fix our education system by having unemployed construction workers teaching math and science (I honestly can't show that they could do worse).

Seriously, I love the idea of cutting the military budget, but the idea that it would help the unemployed seems foolish.


Its not realistic to cut the military budget in half, but one can cut it significantly. Say, cut it by $150bn. Save $50bn in deficit reduction, increase health by $50bn and education by $50bn. The net impact on jobs: 715,000 new jobs. I.e. twin goals achieved: deficit reduction and job creation!!!

ilsm :


Cut is by 70% and it would be the same part of spending as in the UK. It is now nearly 5% of GDP 5 times the GDP ratio as Germany.

Bastiat in the 1840's said all this. War and preparation for war has huge opportunity cost, burden on economies. It takes resources away, drives up costs of commodities and creates a military industrial congress complex.

Worse it builds a society of lies. Enemies are created, fears spread, and the most "unlikely conflicts" are planned to be met with the most awesome and expensive socialized war machine.

The good profits buy congress and the cycle expands. Eisenhower said all this in 1953 and 1961.

US spending will be nearly 4% of GDP in 2021 according to CBO, on 16 Jun 11. Who knows why the war machine needs to be larger than during Vietnam in 2021????

Still spending 4 times the part of GDP as Europe.

It is waste and fraud.

And the system engineering and testing is not making sure any of it is "worth the taxpayers' scarce resources."

That OMB circular was rescinded to let the military industrial complex grow with no chance to be reined in.

Fred C. Dobbs

This always works...

'"Lysistrata" (Attic Greek: Λυσιστράτη, "Army-disbander") is one of the few surviving plays written by Aristophanes. Originally performed in classical Athens in 411 BCE, it is a comic account of one woman's extraordinary mission to end The Peloponnesian War. Lysistrata persuades the women of Greece to withhold sexual privileges from their husbands and lovers as a means of forcing the men to negotiate peace — a strategy, however, that inflames the battle between the sexes. The play is notable for its exposé of sexual relations in a male-dominated society and for its use of both double entendre and explicit obscenities.' ...

- Wikipedia


Cost of Wars a Rising Issue as Obama Weighs Troop Levels

As President Obama weighs America’s future in Afghanistan, his critics and allies alike are comparing the cost of the war to what is not being spent to bolster the sagging economy.


George Osborne refuses to reveal cost of Libyan operations
Chancellor's stance follows comments by Danny Alexander that intervention would reach 'hundreds of millions' of pounds
By Allegra Stratton - Guardian

George Osborne has refused to be drawn on the cost of the Libyan intervention, following comments at the weekend by Danny Alexander that it would reach "hundreds of millions" of pounds.

The chancellor and his chief secretary to the Treasury, both present in the Commons, were pressed to confirm the figure by the shadow chancellor, Ed Balls, during Treasury questions. Balls said that in March the government had said the operation would cost "tens of millions not hundreds of millions"....

[While the British government wages austerity at home, the cost of waging war abroad is held unknowable by the government.]


British Leader Rebuts Commanders’ Concerns About a Long Libya Campaign

LONDON — Prime Minister David Cameron issued a stern rebuke Tuesday to Britain’s top military commanders in the air campaign against Libya after they warned in the last week that British forces would come under heavy strain if the air operations continued indefinitely.

“There are times when I wake up and read the newspapers and think, ‘I tell you what, you do the fighting and I’ll do the talking,’ ” Mr. Cameron told a Downing Street news conference....

[War is not conducive to democracy.]

The military currently rips through more than $600 billion per year....

-- Susan Feiner

[This is an intolerable sentence, either purposely false for a reason beyond my understanding or wrong beyond excuse since basic military spending is easily and immediately knowable and basic military spending has been far above $600 billion since 2006 and was $817.7 billion in 2010.]


National Defense Consumption Expenditures and Gross Investment, 1992-2010

(Billions of dollars)

1992 ( 376.8)
1993 ( 363.0) Clinton
1994 ( 353.8)

1995 ( 348.8)
1996 ( 354.8)
1997 ( 349.8)
1998 ( 346.1)
1999 ( 361.1)

2000 ( 371.0)
2001 ( 393.0) Bush
2002 ( 437.7)
2003 ( 497.9)
2004 ( 550.8)

2005 ( 589.0)
2006 ( 624.9)
2007 ( 662.3)
2008 ( 737.3)
2009 ( 771.6) Obama

2010 ( 817.7)


I am distressed to find just how completely muddled the data are through Susan Feiner's article. Such an argument, such an examining of data is important, but get the data right, especially when doing so is simple. Similarly distressing is that this sort of data muddled article on military spending is typical.


 Recent history shows how going to war takes a toll on the economy.

The ill-conceived, illegal war on Libya drove a spike in oil prices, destroying consumer confidence. It was the final nail in the coffin of the stillborn recovery.

As if Obama didn't know it would happen? Bush 41's reelection was prevented by a recession caused by a gigantic spike in oil prices resulting from--you guessed it!--the Gulf War.

The second war on Iraq also drove a spike in oil prices, causing an anemic recovery, which Bush 43 managed to survive only by taking special measures to assure electoral votes in Ohio.

Sad to say, whenever the imperatives of militarism conflict with those of the economy, it's the economy that loses.

If Obama wants to find someone to blame for the economy, he only need took in the mirror.


The underlying assumption of the article seems to be that arranging things for the benefit of women is justification in itself for those arrangements --

"The positive benefits of such a change for women can't be understated."

I see no problem with identifying specific problems for women that need to be addressed and devoting public resources to addressing them. Assuming that advantaging women is a good argument for any old policy is a bit parochial. I happen to think that less military spending and more social spending would be dandy, but not because it advantages women over men, any more than I'd support military spending because it advantages men over women.


There are construction management jobs available for Americans - in Afghanistan.

[Jun 22, 2011] We simply do not know! by John Gray


The fact that markets are flawed seems novel only in the context of the economic orthodoxy that prevailed between the wars, and in the run-up to the recent crisis. It is wrong to imply, as Akerlof and Shiller do, that the classical economists believed otherwise. ‘Just as Adam Smith’s invisible hand is the keynote of classical economics,’ they write, ‘Keynes’s animal spirits are the keynote to a different view of the economy – a view that explains the underlying instabilities of capitalism.’ Here they are endorsing the caricature of Smith propagated by neoliberal ideologues anxious to confer a distinguished patrimony on an illegitimate intellectual offspring. Certainly, the ‘invisible hand’ is one of Smith’s central ideas, but he never saw it as working in a mechanical fashion. A network of hidden adjustments whereby conflicting interests could be reconciled, in a complex process that always involved human emotions, the invisible hand was neither all-powerful nor uniformly benign. It could be thwarted by collusion among businessmen, and when given free rein its social effects could be seriously harmful.

Like other thinkers of the Scottish Enlightenment, Smith understood the imperfectability of human institutions. He was concerned about the ways in which free markets detached people from communities, and some of these worries fed into the theory of alienation developed by that other celebrated classical economist, Karl Marx.

If Akerlof and Shiller’s grip on the history of economic thought is shaky, they also fail to grasp why Keynes rejected the idea that markets are self-stabilising. Throughout Animal Spirits they portray him as reintegrating psychology with economic theory. No doubt this was one of Keynes’s goals, but it is not his most fundamental revision of economic orthodoxy. Among his other accomplishments he was the author of A Treatise on Probability (1921), in which he tried to develop a theory of ‘rational degrees of belief’. By his own account he failed, and in his canonical General Theory of Employment, Interest and Money (1936) he concluded that there was no way anyone could make forecasts. Future interest rates and prices, new inventions and the likelihood of a European war cannot be predicted: there is no ‘basis on which to form any calculable probability whatever. We simply do not know!’ For Keynes, markets are unstable less because they are driven by emotion than because the future is unknowable. To suggest that the source of market volatility is unreason is to imply that if people were fully rational markets could be stable. But even if people were affectless calculating machines they would still be ignorant of the future, and markets would still be volatile. The root cause of market instability is the insuperable limitation of human knowledge.

[Jun 22, 2011] Bhidé Cites “Rampant, Extensive Criminality” As Proof That Bank Reform Has Gone Down the Wrong Path

naked capitalism

Bhidé also managed the neat trick in his recent book, A Call to Judgment, of annoying both the right and the left. He uses Hayek to argue that that banking industry has evolved in a way that leads to bad decisions and it now destroys value on a large scale. He calls for a return to what he depicts as “primitive banking” and it has a lot in common to the utility banking model we have discussed here. And Bhidé, who was briefly a proprietary trader and continues to be a successful investor, really means “primitive”.

For instance, he thinks stocks should not be publicly traded; the only relationship that makes any sense for a legal promise as ambiguous as that of equity ownership is a venture capital/private equity relationship, where the investor knows the management of the company and is meaningfully involved in its affairs.


“…if the top brass is incapable of doing its job, that means the banking industry needs to be radically restructured.”

Priceless discretion. Or you could say, understatement of the the last few centuries -since the French revolution ‘off with their heads.’


Just a little walk down memory lane to add a little perspective, and common sense, which seems to be in critically short supply these days:

Again and again during the preceding year or two there had been local bank panics; the Federal Reserve had come to the rescue, RFC money had been poured in, and a total collapse had been averted. Now a new panic was beginning, and it was beyond the power of these agencies to stop. Perhaps the newspaper publication of the facts about RFC loans was a factor in bringing about this panic—though to say this is to beg the question whether a banking system dependent upon secret loans from a democratic government is not already in an indefensible position. Probably the banks would have collapsed anyhow, so widely had their funds been invested in questionable bonds and mortgages, so widely had they been mismanaged through holding companies and through affiliation with investment companies, so lax were the standards imposed upon them in many states, and so great was the strain upon the national economy of sustaining the weight of obligations which rested in their hands. At any rate, here at the heart of the national debt-and-credit structure a great rift appeared–and quickly widened.


…In The “Folklore of Capitalism”, Thurman W. Arnold tells of a conversation he had, before the bank panic, with a group of bankers, lawyers, and economists. They were one and all aghast at the possibility of a general bank closing. “My mind,” said one of them, “fails to function when I think of the extent of the catastrophe that will follow when the Chase National Bank closes its doors.” Mr. Arnold told his friend Professor Edward S. Robinson about this conversation, and found him unaccountably cheerful. “Do you think,” asked Professor Robinson, “that when the banks all close people will climb trees and throw coconuts at each other?” Mr. Arnold replied that this seemed to him a little unlikely but that a bank crash of such magnitude suggested to him rioting and perhaps revolution. Whereupon Professor Robinson said, “I will venture a prediction. . . . When the banks close, everyone will feel relieved. It will be a sort of national holiday. There will be general excitement and a feeling of great interest. Travel will not stop; hotels will not close; everyone will have a lot of fun, though they will not admit that it’s fun at the time.”

Despite the fact that indirectly the bank holiday brought new distress, through new curtailments of business and new layoffs, and intensified the suffering of many people who were already hard hit, Professor Robinson was essentially right. The majority of Americans felt a sense of relief at having the lid of secrecy blown off. Now everything was out in the open. They felt that this trouble was temporary. They felt no shame now in being short of money–everybody seemed to be. They were all in the same boat. And they responded to one another’s difficulties good-naturedly.

The grocer lent credit (what else could he do?), most hotels were glad to honor checks, shops were cordial about charge accounts. The diminished advertising columns of the newspapers contained such cheerful announcements as “IN PAYMENT FOR PASSAGE WE WILL ACCEPT CHECKS OR PROPERLY AUTHORIZED SCRIP” (this was in the early days of the bank holiday, when the issue of clearing-house scrip appeared likely); “RADIO CITY HAS CONFIDENCE IN AMERICA AND ITS PEOPLE– until scrip becomes available our box offices will accept checks”; “WE WILL TAKE YOUR CHECK DATED THREE MONTHS AHEAD for a three months’ supply of Pepsodent for yourself and your family.”

True, the shopping districts were half deserted; on the upper floors of department stores, clerks were standing about with no customers at all; there was a Saturday air about the business offices, trains were sparsely filled, stock exchanges and commodity exchanges were closed. But in the talk that buzzed everywhere there was less of foreboding than of eager and friendly excitement. “Are they going to put out scrip?–and how do we use it?” “What’s a ‘conservator’–is that a new word?” “You say you had thirty dollars on you when the banks closed? Well, you’re in luck. I had only three-fifty–I’d planned to go to the bank that morning.” “They say the Smiths stocked their cellar with canned goods last week–three months’ supply; they thought there was going to be a revolution!” “Did you see those pictures of the gold hoarders bringing bags full of gold back to the Federal Reserve Bank? Those birds are getting off easy, if you ask me.” “Mrs. Dodge beat the bank holiday all right–overdrew her account last Friday. No, not intentionally. Just a mistake, she says. Shot with luck, I call it.” “Stop me if you’ve heard this banker story: it seems that a banker died and when he got to the gates, St. Peter said. . . .”

To this public mood President Roosevelt’s first fireside chat was perfectly attuned. Quiet, uncondescending, clear, and confident, it was an incredibly skillful performance. (According to Raymond Moley’s “After Seven Years”, the first draft of this chat was written by Charles Michelson of the Democratic publicity staff; Arthur Ballantine, Under Secretary of the Treasury for Hoover, completely rewrote it; Roosevelt revised it.) The banks opened without any such renewed panic as had been feared. They might not have done so had people realized that it was impossible, in a few days, to separate the sound banks from the unsound with any certainty, and that errors were bound to be made. The story goes that one bank had been in such bad shape that its directors decided not even to put in an application to reopen; through a clerical slip this bank was put on the wrong list, received a clean bill of health, and opened with flying colors! In some places, to be sure, there were bank runs even after the opening–runs which had to be met unquestioningly with Federal funds, lest the whole trouble begin over again. And so many banks had to be kept shut anyhow that ten per cent or more of the deposits of the country were still tied up after March 15, and the national economic machinery thus remained partially crippled. On the whole, however, the opening was an immense success. Confidence had come back with a rush; for the people had been captivated and persuaded by a President who seemed to believe in them and was giving them action, action, action.

The New Deal had made a brilliant beginning.
▬Fredrick Lewis Allen, Since Yesterday


    [Jun 19, 2011]  Lawyers and Accountants Helped to Cause the Financial Crisis

    Economist's View

    Financial reformers need to cast a wide net:

    Lawyers and Accountants Once Put Integrity First, by Mark Everson,. Commentary, NY Times: ...It will take decades to fully untangle the causes of the 2008 financial crisis, but ... it would be prudent to ask whether lawyers and accountants offer the same protection against corporate misconduct that they once did.
    Three or four decades ago, investors and regulators could rely on these professionals to provide a check on corporate risk-taking. ... To be sure, you lived well. But moving up the ladder, you didn’t expect to get rich. ... One’s stature derived from the respect accorded an independent professional. The mission ... was clear...: help clients adhere to professional standards and follow the law. Beyond that, do your best to differentiate your firm based on superior service

    lonesome moderate:

    Of course accountants aren't as trustworthy as they used to be. I know this largely thanks to several years of, yes, reading save_the_rustbelt's postings. One quote of his in particular from several years ago has stuck in my mind (quoting from memory, probably not 100% accurate):

    "If you understand that liabilties must be carried on the company balance sheet, then you can make a solid upper-middle-class income in corporate America. If you understand that liabilities need not be carried on the company balance sheet, then you can make all kinds of money on Wall Street."

    I stopped putting my money into stocks then.

    Why must the amount of leverage be limited?

    Leverage loans against the future economy. There are limits to how fast the future economy can expand.  Leverage makes claims against assets of the future economy. If the amount of claims made by leverage against the future economy are too great one or two things must happen.

    1. Future prices must be inflated to pay off the future claims with inflated assets.
    2. Borrowers cannot repay and must default.

    The Greenspan Fed allowed the banksters to over leverage by FAILURE to adequately regulate mortgages. Our policy has been to allow the banksters keep their unearned claims against future wealth on the backs of our economy and the unemployed.

    There is no cramdown (2) which would diminish future claims of the banksters based on past inflated housing prices (which are primarily the fault of the banksters in the first place).
    There is not enough spending to create jobs and set a rate of inflation high enough to allow inflated housing prices to reset to fair value in relation to the rest of our economy.

    The agreement to keep inflation low should be predicated on controlling the amount of leverage allowed the BigF. The BigF was allowed to over leverage. They should not be protected from inflation until their claims against future wealth are reset. They also need to be taxed so that their unearned gains are redistributed.

    "The Greenspan Fed allowed the banksters to over leverage by FAILURE to adequately regulate mortgages."

    Not to mention derivatives. Not to mention Greenspan's apparently naive but actually ideological belief that financial markets regulate themselves, that the Invisible Hand reveals fraud.

    Curt Doolittle
    1) the nobel committee awards a prize for a fallacious formula that promotes financial innumeracy
    2) a generation of data miners and programmers replaces investors
    3) an insufficient number of people from the older generations who remember the causes of crises are in decision making authority
    4) illiteracy of the limits of quantitative analysis is rampant among lawyers and finance people
    5) regulations aren't in place to protect us from their innumeracy
    6) the transaction processing infrastructure is privately owned, which makes bankes too big to fail
    6) we will have a crisis.


    I have never met a banker or lawyer, and very few finance people, even in private equity markets, who understand how money moves through the economy. They are paid to execute tactically, not restrain themselves strategically. THe vast majority of macro economists are even worse.

    [Jun 19, 2011] The Best Way to Rob a Bank Is to Own One How Corporate Executives and Politicians Looted the S&L Industry

    Raymond Blohm (Oregon): A New Pertinence, April 3, 2009

    Bill Black's "The Best Way to Rob a Bank Is to Own One" has a new pertinence. He was just interviewed on 'Bill Moyers Journal' on April 3, 2009. Both video and transcript are available at the PBS 'Bill Moyers Journal' site. They are well worth viewing and then reading (and then buy the book).

    I do hope that Mr. Black lives to write a new book about the current scam, as Bill Moyers quotes from Black's earlier investigations, " enraged was one of those bankers, Charles Keating -- after whom the senate's so-called 'Keating Five' were named -- he sent a memo that read, in part, 'get Black -- kill him dead.' Metaphorically, of course. Of course." I wish Mr. Black well and safe, after this interview...

    From the transcript:

    BILL MOYERS: "...his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."


    WILLIAM K. BLACK: "Well, the way that you do it [large corporate failures and scandals] is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road."

    5.0 out of 5 stars Cracks in the Empire, April 15, 2006 By Austrian Economist "Barry" (Hampton, NH) - See all my reviewsThis review is from: The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry (Hardcover) William Black's book, The Best Way to Rob a Bank is to Own One,is on the one hand an act of courage, and to an excellent journey into the morass and collapse of the Savings & Loan industry. Bill Black should know better than anyone, as he was one of the inside attorney's trying to coral bankers gone wild on highly speculative ventures...

    Mr. Black walks us down the chamber of horrors of the Savings & Loan collapse, and gives us a bird's eye view of bank corrupt. What is most interesting is that Mr. Black finds the trends within in the industry itself, that it was actually CONTROL FRAUD were bankers, accountants, appraisers, bank executives and politicians colluded together to bring an already shaky and weak industry down. Everyone who wants to understand that the Savings & Loan was the first cracks in the empire, civilizations have always been brought down by poorly run fractional reserve fiat currency bankig systems.

    What was the cry from people from Alan Greenspan was for more deregulation, and at the time, Greenspan, a banker who was with Morgan Stanley prior to his excellency/chairmanship/ at the Federal Reserve System, was that the Lincoln Savings & Loan, was one of the best run S&Ls in the country...

    What resulted was deregulation and desupervision... Attorneys and accountants for hire, audits performed on Savings & Loans which made them look like a picture of financial health when in fact the S&L industry had terminal cancer...Massive insolvency, virtually no reserves, coverups, and famous politicians genuflecting to the Savings & Loan industry, the Keating Five; John Glen, John McCain, Alan Cranston, Dennis DeConcini, Donald Riegle..All pressuring the Bank Board for leniency...

    Every American should read this book...this control fraud of the eighties in the Savings & Loan industry makes Enron look like a game of childrens marbles..We learn little, we remember little in this United States of Amnesia..

    The Best Way To Rob A Bank Is to Own One, by William Black is a true sign that there is a crack in the American empire's treasury.. A recommended read if your really want to understand what happened in the Savings & Loan collapse, which the AMERICAN TAXPAYER WILL PAY FOR $200 BILLION OR MORE.

    As Thomas Jefferson once said, "Banking Establishments Are More Dangerous Than Standing Armies." Hats off to Bill Black.

    Barry J. Dyke, RIA, Hampton, NH


    Financial Parasites Have Killed the American Economy

    Hudson has frequently described Wall Street as "parasitic". For example, in a 2003 interview, Hudson said:

    The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host's brain as well. The parasite tricks the host into thinking that it is feeding itself.

    Something like this is happening today as the financial sector is devouring the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called "wealth creation," as if it were what progressive economic reformers envisioned a century ago. They condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry.

    More recently, Hudson said:

    You can think of the financial sector as being wrapped around the real economy, almost like a parasite, and that's why it's been called parasitic for so long. The financial sector extracts interest from the economy, the property sector extracts economic rent, as do monopolies. Now the key thing about parasites, is that it's not simply that they extract nourishment from the host. The parasite takes over the host's brain, to make it think it's part of the economy, to make it think it's part of the host's own body, and, in fact, that's it almost like a child of the host, to be protected. And that's what the financial sector has done today.


    You have Obama coming out and saying, "We have to save the banks in order to save the real economy". The fact is, you can't serve both the parasite and the host.

    Sky-High Oil Will Make U.S. Go Broke -

    Another blast from the past. Bernanke effiect: low real interest rates are correlated with high real commodity prices: when real interest rates are low, the opportunity cost of keeping large inventories of commodities goes down.

    Stratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy.

    Based on income tax withholdings data from the Daily Treasury Statement, the wages of all U.S. workers on payrolls were unchanged on a year-over-year basis in the past two weeks (Friday, June 6 through Thursday, June 19) and rose 1.1% year-over-year in the past four weeks (Friday, May 23 through Thursday, June 19). Both of those growth rates are well below the 2.8% year-over-year in May, and they are consistent with an economy that is contracting sharply.

    As long as oil prices stay above $120 per barrel, the economy is more likely to slow than strengthen, and companies are not likely to announce much float shrink. With real wages falling, large numbers of jobs being shed, gas prices exceeding $4 per gallon almost everywhere and home prices falling about 1% per month nationally, this year is going to be tough for American consumers.

    ... ... ...

    The U.S. consumes 21 million barrels of per day. At $135 per barrel, the U.S. spends $1.0 trillion per year on oil, which is equal to 15% of the $6.8 trillion in take-home pay of everyone who pays taxes. If oil prices rose to $200 per barrel, the U.S. would spend $1.5 trillion per year on oil, which would be equal to 22% of take-home pay. Moreover, those percentages of 15% and 22% do not even include the cost of coal or natural gas. In other words, the U.S. will be broke long before oil prices hit $200 per barrel, and the rest of the world would be sure to follow.

    If regulators raised the margin requirement for oil futures to 25% from no more than 7.5%, the oil market would crack. Unfortunately for oil users, regulators are unlikely to boost the margin requirement, unless outside pressure becomes unbearable, because the income of commodity exchanges and traders would plummet.

    The first is requiring major players in the oil futures market to disclose their total positions of all kinds in crude. Given the importance of oil to the U.S. economy, everyone should be able to know who is going long crude oil in a big way. Institutional owners must report what stocks they own at least semiannually. Why should they not be required to report the amount of crude oil they are long?

    The second solution is for oil consumers to make a concerted effort to go short oil futures. The U.S. government has been spending $280 million per month, pumping 70,000 barrels of oil per day into salt caverns. Instead of buying oil, why not go short 35,000 contracts monthly at $8,000 per contract, in other words selling high the crude we bought relatively low? What if other major crude oil users also went short oil futures each month? What if the Japanese government, airlines, trucking companies and utilities spent several billion dollars to go short oil futures each month until the oil market came to its senses?

    Excerpted from the current issue of Trimtabs Weekly Liquidity Review. Charles Biderman is founder and CEO of TrimTabs.

    [Jun 19, 2011] Facebook facing cash issues – after raising $516M last year?

    Blast from the past...  I don't understand facebook model. It is AOL in disguide and logically should bite dusk sooner or later.


    October 31st, 2008 |

    Facebook’s CFO was recently seen in Dubai trying to raise capital.  Why you ask? It seems that Face is growing to fast and all that new hardware costs serious bucks.  Techcrunch has a great analysis of the issues facing Facebook.

    The highlights are that Facebook has grown 118% in the last year!  To support these visitors, the company is spending $100M on 50,000 servers and another $120M annually additional staff.  Throw in another $100M for desks, computers etc.

    Company revenues are $265M…but most of the international visitors don’t generate revenue.  But at the rate company is spending cash, they are going to run out money soon!  Compounding the problem is that ad-spending with dive in the recession next year, so now we are looking at reduced revenues.

    [Jun 19, 2011] Lawyers and Accountants Helped to Cause the Financial Crisis?

    Economist's View

    Financial reformers need to cast a wide net:

    Lawyers and Accountants Once Put Integrity First, by Mark Everson,. Commentary, NY Times: ...It will take decades to fully untangle the causes of the 2008 financial crisis, but ... it would be prudent to ask whether lawyers and accountants offer the same protection against corporate misconduct that they once did.
    Three or four decades ago, investors and regulators could rely on these professionals to provide a check on corporate risk-taking. ... To be sure, you lived well. But moving up the ladder, you didn’t expect to get rich. ... One’s stature derived from the respect accorded an independent professional. The mission ... was clear...: help clients adhere to professional standards and follow the law. Beyond that, do your best to differentiate your firm based on superior service.
    Necessarily, the actions of outside professionals were guided by a cautious orientation. ... Recent decades have seen a new model take root: a business plan tied to partner earnings. Obviously, to pay employees more and to increase partner pay to its present, staggering levels, billings needed to grow. ...
    Understandably, corporate clients are reluctant to pay through the nose for advice on how to color safely within the lines. ... Lawyers and accountants who were once the proud pillars of our financial system have become the happy architects of its circumvention. Nowhere is this more the case than in the world of tax law. ...
    Just what role outside professional firms played in the genesis of the financial crisis has not been adequately explored. ... But at a minimum, we know that the widespread documentation problems associated with bank foreclosures demonstrate that in too many instances, attorneys and accountants abandoned their duties to assure integrity. Further, it seems unlikely that professionals will, of their own initiative, return ... to their traditional posts as vigilant sentries...
    What should be done? ... Big businesses have always sought to gain competitive advantage over others and certainly to minimize taxes... Fair enough. But we have seen that globalization, business complexity and an unworkable tax code have obscured the understanding of risk. Politicians ... should look at all the moving parts in our financial system — starting with the outside professionals — not just Wall Street and Washington.

    [Jun 18, 2011] Are we in for a Double-Dip

    Yahoo! Finance

    Over the past few weeks various economic indicators have been building a coffin for the U.S. economy. Is the last nail about to be hammered in?

    Before we entertain the much dreaded D-D word (Double Dip), let's take a look at some of the economic numbers and see if it's really that bad.

    Housing Market

    May's data for housing was all bad. It started out with weak housing starts reported on May 17 and continued with worse than expected pending home sales (May 27) and an S&P/Case-Shiller Home Price Index that dipped to the lowest level since March 2003.

    The discrepancy between the performance of real estate (NYSEArca: IYR - News), REIT ETFs (NYSEArca: VNQ - News), and the actual real estate market has long highlighted the absurd power of QE2 to lift stocks but leave the rest of the economy in the dust.

    The chart below shows the performance of the S&P/Case-Shiller Home Price Index (20-Composite).


    This weekend's Wall Street Journal put a positive spin on the jobless report and simply stated: 'Job market loses momentum.' If you really look at the numbers, you'll see that the jobless recovery never had any momentum.

    It's taken a lot of lipstick and statistical alchemy, such as excluding workers that have been out of a job for more than 99 weeks and simply decreasing the workforce, to keep this 'pig' more presentable than it really is.

    Consumer Confidence

    Consider this for a moment. In May 2011, small caps (NYSEArca: IWM - News) and mid caps (NYSEArca: IWR - News) reached an all-time high. I won't spend time pointing out how contradictory this is to the global economic (NYSEArca: EFA - News) picture.

    Despite certain segments of the market being at all-time highs and the Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC), and Nasdaq (Nasdaq: ^IXIC) at new recovery highs, the Consumer Board's Consumer Confidence Index was at a dismal 60.8 in May.

    As the above chart shows, the average reading since 1967 is 94.5. The current reading is lower than it was after the 9-11 attacks and about as low as in 2002. Consumer spending accounts for 75% of GDP. What happens if the consumer doesn't feel confident?

    Worse than Expected

    Other worse than expected numbers in May came from the Empire State Manufacturing Survey, Redbook Retail Survey, Philly Fed Survey, Durable Goods Orders, GDP, Chicago PMI, and the ISM Manufacturing Report.

    They were worse than expected because economists - who are generally bullish at the top and bearish at the bottom - expected much better numbers. Thanks to Citigroup, it is now possible to quantify just how right or wrong economists are.

    The Citigroup Economic Surprise Index measures actual data outcome relative to consensus expectations. A positive index reading means that economic releases have, on balance, been beating consensus estimates. As of June 2, the index was at -91 (see chart below). By June 16 it had dropped to -101.

    Dare to be Different

    Unlike most economists, the ETF Profit Strategy Newsletter expected the market to peak out after an April rally. Following a low-risk entry against major Fibonacci support at 1,255 in March, the S&P formed a rare bullish dragonfly doji. The Newsletter's forecast for the month of April (issued on April 3) read as follows:

    'A dragonfly doji generally carries bullish implications. Considering the overall technical picture and the bullish April seasonality, higher prices seem likely and odds favor a buy the dips strategy over the next 1-3 weeks. There is a fairly strong Fibonacci projection resistance at 1,369. In terms of resistance levels, the 1,369 - 1,xxx (reserved for subscribers) range is a strong candidate for a reversal of potentially historic proportions.'

    The importance of 1,369 was re-emphasized again on May 1, with a recommendation for aggressive investors to short the S&P against 1,369. Following a 46-month low in the VIX (Chicago Options: ^VIX) on Friday April 29, the S&P topped on Monday May 1, at 1,370 and hasn't really looked back since.

    Adjusting the Sensors

    The purpose of any sensor, gauge, or indicator is to signal trouble before it happens. A 'Check Engine' light doesn't help much if it lights up after the engine blows. The proverbial canary in the coal mine is vital because it smells toxic gases before anyone else does.

    Unfortunately, Wall Street doesn't subscribe to the concept of prevention, and neither do economists. If they did, there wouldn't have been a 2002 tech crash (NYSEArca: XLK - News), a 2005 real-estate crash, or a 2007 financial crash (NYSEArca: XLF - News).

    Many economic indicators (and the economy) never really recovered. Normally this is reflected in stock prices. However, like a muzzle, QE2 has restrained the stock market from expressing its feelings freely. Investors may hope that Mr. Bernanke will unleash some version of QE3, but now is not the time to base investment decisions on hope. After a 100%+ rally from the 2009 low, the easy money has been made.

    Profiting in the years to come won't be a piece of cake and may require more than the Wall Street Journal's list of 1,000 biggest stocks and a dart. For the short-term, however, there is a silver lining that may give investors stuck with long positions some breathing room (more details in the brand new July ETF Profit Strategy Newsletter).

    The ETF Profit Strategy Newsletter applies an 'out-of-the-box' approach and carefully monitors and interprets the market's internal signs to formulate short, mid and long-term forecasts. Analysis includes support and resistance levels such as the crucial 25-month trend line right around current prices.

    [Jun 16, 2011]  Stephen Roach: America is a Zombie Nation just like Japan

    "Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment."
    Cross-posted from Credit Writedowns

    Stephen Roach has written an Op-Ed in today’s Financial Times that is worth reading. He outlines his version of Richard Koo’s Balance Sheet Recession theorem, opining that “the global economy is being hobbled by a new generation of zombies – the economic walking dead.”

    His main points are:

    Roach’s conclusion:

    Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.

    The aim is to get zombie consumers to ignore their festering problems and start spending again – irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.

    This is certainly the conclusion I have drawn both regarding Japan and regarding the US.

    First, on Japan:

    If one wants to see what happens when you use stimulus to help keep zombie companies alive and to resist reform efforts, look no further than Japan.

    For twenty years now, Japan has been dealing with the consequences of a burst asset bubble in shares and property. And for twenty years, the body politic has been unwilling to make the necessary reforms which would eliminate zombie companies while still helping to repair balance sheets in the private sector. Instead, the Japanese have piled government deficit upon deficit like Sisyphus trying to get consumers to reflate the economy. It has not worked…

    What this illustrates is that stimulus cannot be seen as a cure-all in an economy which lacks in domestic demand or in which debt burdens are high. I see this as a cautionary tale for The Europeans and Americans looking at stimulus as some magic bullet which will make structural problems disappear.

    I increasingly ask myself whether any advanced democracy has the foresight to implement a targeted monetary stimulus campaign without knee-capping efforts to induce more private sector savings – fiscal stimulus is a whole different affair. Right now, the savings rate in Japan is even lower than in the United States, a direct result of easy money.

    In my view, fiscal or monetary stimulus are bridges to a sustainable economic future built on the back of deleveraging, a purge of malinvestments and industry consolidation. Right now, the stimulus in Japan is looking more like a bridge to nowhere.

    -Japan: stimulus without reform leads to a policy cul de sac, Nov 2009

    Second, on the US:

    If the US wants job growth, it will need to reduce private sector debt levels – and that takes time. It does not follow "that the central objective of national economic policy until sustained recovery is firmly established must be increasing… borrowing and lending," as Larry Summers asserts. The government can act as a counterweight to the demand drag but I am very sceptical of claims like Summers’ that doing so would solve a jobs crisis borne out of a debt crisis.

    -The jobs crisis is not just about demand, Jun 2011

    Third, in general:

    in theory, fiscal stimulus can cushion the downturn and hasten real recovery by preventing a spiral into a non-equilibrating economic state.  However, in practice, stimulus has been used as an excuse to maintain the status quo, prop up zombie companies and forestall the inevitable.  This only lengthens the downturn, misallocating even more resources to less efficient uses. And all of the worries I had about social unrest, populism, and protectionism are coming true nonetheless…

    Rather than use the period of fiscal stimulus to promote private-sector deleveraging and saving and to purge malinvestment, politicians will simply use this period as a way to continue business as usual, making the problem even bigger down the line

    What about monetary policy? Well, in a depression where the constraint is overinvestment, leverage, and debt, the question is not a monetary one.  As Marshall recently suggested, it appears Fed Chairman Bernanke doesn’t understand the basic economics of central banking. Throwing more money into the system will not make credit-worthy borrowers borrow more. Nor will it necessarily induce banks to lend when they fear that many of their prospective borrowers are not credit-worthy.

    By lowering interest rates and expanding the money supply, central banks are not inducing more lending; they are trashing cash. You are not promoting saving with 0% rates; you are looking to re-create the asset-based status quo ante. And when there are insufficient lending opportunities, banks are either forced to sit on billions of cash earning nothing or try other ways of making money (proprietary trading, investment in Treasuries, maybe even lending to non-credit worthy borrowers).  Moreover, investors are earning next to nothing as well.  How many people have looked at their money market fund statements with the 0.00% interest staring them in the face and decided to switch into bond, equity or commodity funds? It’s what’s called liquidity seeking return – a major reason the stock market has been buoyed.

    -Moving away from stimulus happy talk to focus on malinvestment, Dec 2009

    Don’t be fooled by economists telling you the risks of a Japan disease are not real. They are. And when economists are honest like Janet Yellen has been, they will tell you that it is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage. Moreover, Larry Summers is quite direct in telling us that he views the purpose of fiscal policy is to promote aggregate demand via “borrowing and lending, and spending”. How is that consistent with private sector deleveraging? Doesn’t this actively promote the preconditions for the Japan disease?

    Here’s how I framed it two years ago as we headed into recovery:

    1. Even if economic and monetary policy have poor longer-term consequences, it does not mean that policy won’t gain traction in the short-term. I see the potential for a cyclical upturn due to the massive stimulus campaign… Ask Alan Greenspan regarding his 2001-2003 easy money campaign. This is what happened in Japan before Yamaiichi’s demise in 1996 – and again before Daiwa and Nikko were merged out of independence.
    2. Even if economic and monetary policy have stimulative short-term consequences, it does not mean that the structural problems have disappeared. They are merely lurking underneath, waiting for the next downturn to re-assert themselves. Again, the Japanese scenario is a cautionary tale on this score.
    3. Asset prices will respond to an upturn, but that does not mean we are about to embark on a new bull market. Japan is the right precedent here again. After the upturn in the mid-1990s, property prices continued to collapse in Japan, sucking many more individuals into the deflationary spiral.

    -Turning Japanese and understanding the consequence of policy half-measures, Apr 2009

    Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously. Policy makers should aid the economy in reallocating scarce resources to areas that will sustain longer-term productivity growth while doing this. In America, that means fewer resources in finance and housing and perhaps more in technology and infrastructure.

    As Stephen Roach writes:

    A failure to learn the lessons of Japan – especially that of post-bubble zombie congestion – leaves the US and the global economy in a very tough place for years to come. Growth-hungry financial markets could be very disappointed.

    Source: Global economy menaced by return of living dead, Stephen Roach, FT

    [Jun 15, 2011] Bad Samaritans The Myth of Free Trade and the Secret History of Capitalism by  Ha-Joon Chang

    Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.) -February 4, 2008 Time to Update Economics

    "Free Trade" has been progressively wrecking America's economy for at least two decades. Meanwhile, economists in our colleges continue, almost without exception, to warn of protectionism while extolling the writings of Adam Smith and David Ricardo - written long before today's gross wage imbalance between Asia and the U.S., instant communications, and fast, economical international transportation. Finally, a Cambridge economist, Ha Joon Chang, brings facts and common sense to the debate - aided considerably by the free-trade ignoring successes of his native country, South Korea - eg. Samsung, and Pohang Iron and Steel. (And then there's Toyota - started out in textiles, was protected by auto tariffs, and now the world's #1 auto manufacturer and teacher of advanced management techniques.)

    "Bad Samaritans," as Chalmers Johnson points out, refers to "people in the rich countries who preach free markets and free trade to the poor countries in order to capture larger shares of the latter's markets and preempt the emergence of possible competitors." They are saying "do as we say, not as we did" and take advantage of others who are in trouble. He also points out that all of today's rich countries (INCLUDING the U.S.) used protection and subsidies to encourage their manufacturing industries - anathema in today's economic orthodoxy and contrary to the WTO, IMF, and World Bank. As a result, third-world nations' growth rates have fallen to less than half of that recorded in the 1960s (1.7 percent instead of 4.5 percent).

    As for corruption being incompatible with high growth, Chang points to Zaire vs. Indonesia. Both suffered from murderous corruption, yet the former's living standards fell two-thirds while Indonesia's tripled. The difference was that corruption funds in Zaire fled to Swiss banks, while those in Indonesia remained in the country to help create additional jobs.

    "Level playing field" rhetoric is often used to justify WTO and IMF prescriptions. Chang, however, reminds us that this is inconsistent with our practice of segregating sports by size and age, and that it is similarly unrealistic to expect eg. Honduras to compete evenly with the U.S.

    Capital markets have a bias towards short-term gains, not risky, large-scale projects with long gestations. This is especially pronounced in the earliest stages of development - thus, government support is kick-starting, not replacing capitalism. In France, Renault, Alcatel, Thomson, etc. used to be SOEs. Brazil's EMBRAER was also, and the state (lower Saxony) is VW's largest shareholder. Taiwan began with key industries owned by the state; even after 1996 privatization the government maintains a controlling stake (average = 35%) and appoints 60% of their directors.

    Absent government support in developing economies is akin to becoming frozen in the status quo. Break-out requires government intervention, including subsidies, tariffs, regulation (eg. maintain quality), infrastructure, prohibiting exportation of raw materials, exempting imported raw materials from tariffs, currency controls. IMF, WTO, and World Bank decrees associated with loans have been a disaster.

    Communists early-on saw private ownership as not just the source of distributive injustice but also economic inefficiency. Too many capitalists routinely invested in the same things because they did not know their competitors' plans, or overestimated future potential. Communism failed as a system, but that does not demonstrate that SOEs don't work. Conservatives argue that the imbalance of information between principals and agents makes it very difficult to appropriately pay/incentive managers. The 'free-rider' problem also essentially eliminates citizen monitoring. 'Soft budget constraints' (mid-year added subsidies) is another problem impeding SOEs, per conservatives. Change, however, contends these same problems confront private enterprise, with the 'soft-budget' issue becoming 'too big to fail,' and the 'Greenspan put.'

    China's TVEs are a hybrid ownership form - owned by local authorities but usually operated as if privately owned by powerful political figures.

    SOEs can be ideal where 'natural monopolies' exist - utilities, railroads, communications, etc. where the main cost is that of a distribution network. Assuring equity is another reason - eg. mail service in rural areas. Regulation is an alternative, but not always satisfactory - eg. California's electricity deregulation, England's defacto re-nationalization of rail tracks. Corrupt SOEs are difficult to sell off without even greater corruption (eg. Russia); privatization of natural monopolies without appropriate regulation can bring new problems (eg. Bolivia's 1994 sale of a water company to Bechtel brought a tripling of rates, riots, and re-nationalization). SOE performance can often be improved without privatization by simplifying and prioritizing goals. Simplifying regulation by consolidating agencies is another alternative. Requiring SOEs to export and compete internationally or setting up another SOE for competition also are used. There are no hard and fast answers as to when an SOE is best.

    Chang also points out the strong agricultural subsidies in Europe (milk), the U.S. (corn), and Japan (rice). The good news is that these subsidies keep farming viable in those areas and the nations involved more independent; the bad news is that U.S. corn is exported to Mexico - making economic survival impossible for their farmers and driving them to illegal immigration into the U.S.

    Free-trade reduction of tariff revenues also plays undermines national budgets in poor countries because they lack efficient tax collection capabilities and tariffs are the easiest taxes to collect. Combined with free-trade-caused damage, the struggling nations are left far less able to fund health care and education for their citizens.

    Still another Chang insight is his pointing out that pursuit of copyrights and patents are simply a sophisticated form of protectionism that again works against third-world nations by preventing their starting important new industries (eg. drug manufacture) that boost not only their economy but citizens' health as well. (97% of all patents and the vast majority of copyrights are held by rich countries - these are also a special problem for poor countries wanting textbooks. IMF also insists on enforcement mechanisms, further adding costs to poor nations.) Chang sees the U.S. as the worst offender in this area. Chang asserts that self-development of new technology is difficult in third-world nations, using North and South Korea as examples. North Korea has tried to be self-sufficient (and done poorly), while South Korea has assiduously copied wherever possible and is now an industrial powerhouse.

    Chang suggests that third-world countries use tariffs to protect their developing industries. However, he does not propose that the U.S. do likewise - perhaps in his next book. Nonetheless, "Bad Samaritans" punches enough holes in free trade thinking to help others rethink America's self-destructive commitment to it.

    [Jun 15, 2011] 23 Things They Don't Tell You About Capitalism.

    William Podmore (London United Kingdom) Excellent introduction to economics

    Ha-Joon Chang, Reader in the Political Economy of Development at Cambridge University, has written a fascinating book on capitalism's failings. He also wrote the brilliant Bad Samaritans. Martin Wolf of the Financial Times says he is `probably the world's most effective critic of globalisation'.

    Chang takes on the free-marketers' dogmas and proposes ideas like - there is no such thing as a free market; the washing machine has changed the world more than the internet has; we do not live in a post-industrial age; globalisation isn't making the world richer; governments can pick winners; some rules are good for business; US (and British) CEOs are overpaid; more education does not make a country richer; and equality of opportunity, on its own, is unfair.

    He notes that the USA does not have the world's highest living standard. Norway, Luxemburg, Switzerland, Denmark, Iceland, Ireland, Sweden and the USA, in that order, had the highest incomes per head. On income per hours worked, the USA comes eighth, after Luxemburg, Norway, France, Ireland, Belgium, Austria and the Netherlands. Japan, Switzerland, Singapore, Finland and Sweden have the highest industrial output per person.

    Free-market politicians, economists and media have pushed policies of de-regulation and pursuit of short-term profits, causing less growth, more inequality, more job insecurity and more frequent crises. Britain's growth rate in income per person per year was 2.4 per cent in the 1960s-70s and 1.7 per cent 1990-2009. Rich countries grew by 3 per cent in the 1960s-70s and 1.4 per cent 1980-2009. Developing countries grew by 3 per cent in the 1960s-70s and 2.6 per cent 1980-2009. Latin America grew by 3.1 per cent in the 1960s-70s and 1.1 per cent 1980-2009, and Sub-Saharan Africa by 1.6 per cent in the 1960s-70s and 0.2 per cent 1990-2009. The world economy grew by 3.2 per cent in the 1960s-70s and 1.4 per cent 1990-2009.

    So, across the world, countries did far better before Thatcher and Reagan's `free-market revolution'. Making the rich richer made the rest of us poorer, cutting economies' growth rates, and investment as a share of national output, in all the G7 countries.

    Chang shows how free trade is not the way to grow and points out that the USA was the world's most protectionist country during its phase of ascendancy, from the 1830s to the 1940s, and that Britain was one of world's the most protectionist countries during its rise, from the 1720s to the 1850s.

    He shows how immigration controls keep First World wages up; they determine wages more than any other factor. Weakening those controls, as the EU demands, lowers wages.

    He challenges the conventional wisdom that we must cut spending to cut the deficit. Instead, we need controls capital, on mergers and acquisitions, and on financial products. We need the welfare state, industrial policy, and huge investment in industry, infrastructure, worker training and R&D.

    As Chang points out, "Even though financial investments can drive growth for a while, such growth cannot be sustained, as those investments have to be ultimately backed up by viable long-term investments in real sector activities, as so vividly shown by the 2008 financial crisis."

    This book is a commonsense, evidence-based approach to economic life, which we should urge all our friends and colleagues to read.

    M. A. Krul (London, United Kingdom) Popular anti-orthodoxy

    Ha-Joon Chang, economist at Cambridge University, is a familiar author to many in the general public by now for his persistent and eloquent efforts (when writing) to combat the economic orthodoxy on several major policy points. In particular, he is known for his defense of protectionism as a means to promote economic growth and for his rejection of the idea that 'free trade' and 'free markets' lead to better outcomes than alternatives such as government dirigisme. In "23 Things They Don't Tell You About Capitalism", he attempts to make the lessons of heterodoxy familiar to as wide a public as possible, addressing 23 orthodox economic clichés that are often accepted by a skeptical general public only because they seem to be supported by all in the economic field. In making the counterarguments accessible and generally known, Chang has done the English-speaking world a great service.

    The 23 things he discusses can be roughly clustered into a number of groups: he discusses the orthodoxies of free trade as against protectionism, the orthodoxies of free markets as against government intervention, the orthodoxies of wage policy (particularly the idea that wages are infallibly determined by individual marginal productivity), the orthodoxy that inequality of income and outcome does not matter, and finally the idea that financial managers and economists know best. On all of these points, he has very important lessons to convey to policymakers, civil servants, and the general public to show that these things should either be rejected out of hand or be taken with a large truckload of salt. Using the strengths of economic history, he accessibly shows in each of these cases how the cliché is either refuted by the facts or itself an incoherent idea, or both.

    That said, sometimes his critique does not go quite far enough, and this shows the limitations of Chang's own economic theory standpoint. As he makes clear, the book itself is intended to criticize the orthodoxies of 'free market' capitalism, but not capitalism itself. As a result, his critique is not as powerful and does not convey as many important popular lessons as it could. For example, although he is quite right about the relation between protectionism, government intervention, and growth, he does not criticize the concept of growth itself as the only goal in economic policy, nor does he point out the essential fact that growth can in fact be bad for the median living standard if it causes the distribution of wealth to be more unequal. He also, because of his market economy predilections, vastly understates the success of planned economies historically, despite referring at one point of the book to Robert Allen's excellent research on Soviet industrialization policy. He also does not point out that the strong capitalist investor state he favors itself historically has tended to impede the development of more egalitarian outcomes and tends to be repressive of unions and collective action. Finally, he does not critique any of the assumptions of microeconomics, only macroeconomics.

    Nonetheless, most of the 23 lessons are well taken and although I have some disagreements with a number of them, they are exceedingly well formulated for public understanding and indeed much closer to a real picture of how capitalist economies work than any of your average macroecon textbooks. It is therefore to be hoped that this book will have a wide audience. Help other customers find the most helpful reviews Was this review helpful to you?

    Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.) Excellent Data-Based Perspectives!

    The 2008 'Great Recession' demands re-examination of prevailing economic thought - the dominant paradigm (post 1970's conservative free-market capitalism) not only failed to predict the crisis, but also said it couldn't occur in today's free markets, thanks to Adam Smith's 'invisible hand.' Ha-Joon Chang provides that re-examination in his "23 Things They Don't Tell You About Capitalism." Turns out that the reason Adam Smith's hand was not visible is that it wasn't there. Chang, economics professor at the University of Cambridge, is no enemy of capitalism, though he contends its current conservative version should be made better. Conventional wisdom tells us that left alone, markets produce the most efficient and just outcomes - 'efficient' because businesses and individuals know best how to utilize their resources, and 'just' because they are rewarded according to their productivity. Following this advice, countries have deregulated businesses, reduced taxes and welfare, and adopted free trade. The results, per Chang, has been the opposite of what was promised - slower growth and rising inequality, often masked by rising credit expansion and increased working hours. Alternatively, developing Asian countries that grew fast did so following a different version of capitalism, though to be fair China's version to-date has also produced much greater inequality. The following summarizes some of Chang's points:

    1. "There is no such thing as a free market" - we already have hygiene standards in restaurants, ban child labor, pollution, narcotics, bribery, and dangerous workplaces, require licenses for professions such as doctors, lawyers, and brokers, and limit immigration. In 2008, the U.S. used at least $700 billion of taxpayers' money to buy up toxic assets, justified by President Bush on the grounds that it was a necessary state intervention consistent with free-market capitalism. Chang's conclusion - free-marketers contending that a certain regulation should not be introduced because it would restrict market freedom are simply expressing political opinions, not economic facts or laws.
    2. "Companies should not be run in the interest of their owners." Shareholders are the most mobile of corporate stakeholders, often holding ownership for but a fraction of a second (high-frequency trading represents 70% of today's trading). Shareholders prefer corporate strategies that maximize short-term profits and dividends, usually at the cost of long-term investments. (This often also includes added leverage and risk, and reliance on socializing risk via 'too big to fail' status, and relying on 'the Greenspan put.') Chang adds that corporate limited liability, while a boon to capital accumulation and technological progress, when combined with professional managers instead of entrepreneurs owning a large chunk (eg. Ford, Edison, Carnegie) and public shares with smaller voting rights (typically limited to 10%), allows professional managers to maximize their own prestige via sales growth and prestige projects instead of maximizing profits. Another negative long-term outcome driven by shareholders is increased share buybacks (less than 5% of profits until the early 1980s, 90% in 2007, and 280% in 2008) - one economist estimates that had GM not spent $20.4 billion on buybacks between 1986 and 2002 it could have prevented its 2009 bankruptcy. Short-term stockholder perspectives have also brought large-scale layoffs from off-shoring. Governments of other countries encourage longer-term thinking by holding large shares in key enterprises (China Mobile, Renault, Volkswagen), providing greater worker representation (Germany's supervisory boards), and cross-shareholding among friendly companies (Japan's Toyota and its suppliers).
    3. "Free-market policies rarely make poor countries rich." With a few exceptions, all of today's rich countries, including Britain and the U.S., reached that status through protectionism, subsidies, and other policies that they and their IMF, WTO, and World Bank now advise developing nations not to adopt. Free-market economists usually respond that the U.S. succeeded despite, not because of, protectionism. The problem with that explanation is the number of other nations paralleling the early growth strategy of the U.S. and Britain (Austria, Finland, France, Germany, Japan, Korea, Singapore, Sweden, Taiwan), and the fact that apparent exceptions (Hong Kong, Switzerland, The Netherlands) did so by ignoring foreign patents (a free-market 'no-no'). Chang believes the 'official historians' of capitalism have been very successful re-writing its history, akin to someone trying to 'kick away the ladder' with which they had climbed to the top. He also points out that developing nations that stick to their Ricardian 'comparative advantage,' per the conservatives prescription, condemn themselves to their economic status quo.
    4. "We do not live in a post-industrial age." Most of the fall in manufacturing's share of total output is not due to a fall in the quantity of manufactured goods, but due to the fall in their prices relative to those for services, caused by their faster productivity growth. A small part of deindustrialization is due to outsourcing of some 'manufacturing' activities that used to be provided in-house - eg. catering and cleaning. Those advising the newly developing nations to skip manufacturing and go directly to providing services forget that many services mainly serve manufacturing firms (finance, R&D, design), and that since services are harder to export, such an approach will create balance-of-payment problems. (Chang's preceding points directly contradict David Ricardo's law of comparative advantage - a fundamental free market precept. Chang's example of how Korea built Pohang Steel into a strong economic producer, despite lacking experienced managers and natural resources, is another.)
    5. "The U.S. does not have the highest living standard in the world." True, the average U.S. citizen has greater command over goods and services than his counterpart in almost any other country, but this is due to higher immigration, poorer employment conditions, and working longer hours for many vs. their foreign counterparts. The U.S. also has poorer health indicators and worse crime statistics. We do have the world's second highest income per capita - Luxemburg's higher, but measured in terms of purchasing power parity (PPP) the U.S. ranks eighth. (The U.S. doesn't have the fastest growing economy either - China is predicted to pass the U.S. in PPP this coming decade.) Chang's point here is that we should stop assuming the U.S. provides the best economic model. (This is already occurring - the World Bank's chief economist, Justin Lin, comes from China.)
    6. "Governments can pick winners." Chang cites examples of how the Korean government built world-class producers of steel (POSCO), shipbuilding (Hyundai), and electronics (LG), despite lacking raw materials or experience for those sectors. True, major government failures have occurred - Europe's Concorde, Indonesia's aircraft industry, Korea's promotion of aluminum smelting, and Japan's effort to have Nissan take over Honda; industry, however, has also failed - eg. the AOL-Time Warner merger, and the Daimler-Chrysler merger. Austria, China, Finland, France, Japan, Norway, Singapore (in numerous other areas), and Taiwan have also done quite well with government-picked winners. Another problem is that business and national interests sometimes clash - eg. American firms' massive outsourcing has undermined the national interest of maintaining full employment. (However, greater unbiased U.S. government involvement would be difficult due to the 10,000+ corporate lobbyists and billions in corporate campaign donations - $500 million alone from big oil in 2009-10.) Also interesting to Chang is how conservative free marketing bankers in the U.S. lined up for mammoth low-cost loans from the Federal Reserve at the beginning of the Great Recession. Government planning allows minimizing excess capacity, maximizing learning-curve economies and economies of scale and scope; operational performance is enhanced by also forcing government-owned or supported firms into international competition. Government intervention (loans, tariffs, subsidies, prohibiting exports of needed raw materials, building infrastructure) are necessary for emerging economies to move into more sophisticated sectors.
    7. "Making rich people richer doesn't make the rest of us richer." 'Trickle-down' economics is based on the belief that the poor maximize current consumption, while the rich, left to themselves, mostly invest. However, the years 1950-1973 saw the highest-ever growth rates in the U.S., Canada, Australia, and New Zealand, despite increased taxation of the rich. Before the 'Golden Age,' per capita income grew at 1-1.5%/year; during the Golden Age it grew at 2-3% in the U.S. Since then, tax cuts for the rich and financial deregulation have allowed greater paychecks for top managers and financiers, and between 1979 and 2006 the top 0.1% increased their share of national income from 3.5% to 11.6%. The result - investment as a ratio of national output has fallen in all rich economies and the pace at which the total economic pie grew decreased.
    8. "U.S. managers are over-priced." First, relative to their predecessors (about 10X those in the 1960s; now 300-400X the average worker), despite the latter having run companies more successfully, in relative terms. Second, compared to counterparts in other rich countries - up to 20X. (Third, compared to counterparts in developing nations - eg. JPMorgan Chase, world's 4th largest bank, paid its CEO $19.6 million in 2008, vs. the CEO of the Industrial and Commercial Bank of China, the world's largest, being paid $234,700.) American CEOs do not get...

    [Jun 13, 2011] Karl Smith: Capital vs. Labor

    Karl Smith makes a good point:

    Capital vs. Labor, by Karl Smith: Catherine Rampell is exploring a thesis about the hiring practices. A sample

    On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

    Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.

    Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price. That means that its actually cheaper to create each piece of welded metal. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin.

    However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders.

    On the other hand suppose that I am an airline considering whether to have more booking agents or whether to invest in more sophisticated booking software. Specialized software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents.

    So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers. Moreover, it would take some fancy math to show this, but until capital can do everything labor can do – that is until the singularity – some types of jobs must be complements to capital.

    Those jobs will always be in more demand as capital get cheaper. The question is how much skill you need to do those jobs. This is the whole issue of skill-biased technological change.

    Let me add that within this framing of the question, one fear is that technology is producing more and more substitutes for labor than ever before, digital technology in particular, and there is uncertainty about what that means for the future.

    [Jun 13, 2011] How Cooperation Evolves

    Economist's View

    Daron Acemoglu argues that social norms "are critical factors in the growth and prosperity of societies," and he explains his theory that "prominent agents" play an important role in determining how and why these norms change over time:

    How cooperation evolves: History, expectations, and leadership, by Daron Acemoglu, Vox EU: Social norms, which create self-reinforcing expectations and patterns of behavior, are the foundation of social life. In many economic, political, and social situations where coordination is important, different social norms, with sharply varying consequences, may emerge and persist. Different norms regarding how much others should be trusted constitute one important example. For instance, Banfield (1958) and Putnam (1993), among others, point out how social norms concerning trust in others and public institutions as well as participation in civic activities differ between the south and north of Italy. As such norms are critical factors in the growth and prosperity of societies, it is essential to understand their formation and evolution.
    Though much existing research on these issues emphasizes the "cultural" origins of social norms including differences in the extent of trust between different societies or different parts of the same nation, social norms are not cast in stone and do change. Locke (2002), for instance, provides examples both from the south of Italy and the northeast of Brazil, where starting from conditions similar to those emphasized by Banfield in the south of Italy, trust and cooperation appear to have emerged. Recent events in the Middle East underscore this point. A very long period of lack of collective action led many commentators and social scientists to conclude that collective political action, particularly in favor of democracy, were inconsistent with the cultural values of the Middle East. Yet, many countries in the region are now in the midst of highly coordinated protests and associated changes in social norms of political participation. In the examples of changes in social norms emphasized by Locke, as well as in the recent events in the Middle East, actions by a small group of individuals who assumed leadership positions in coordinating expectations and behavior appear to have played a pivotal role.
    Why do similar societies end up with different social norms, and why and how social norms sometimes change? A common approach to answering these questions is to use coordination games, which have multiple equilibria corresponding to different self-fulfilling patterns of behavior and rationalize the divergent social norms as corresponding to these equilibria. For example, it can be an equilibrium for all agents to be generally trusting of each other over time, while it is also an equilibrium for no agent to trust anybody else in society. We can then associate the trust and no-trust equilibria with different social norms.
    Simply ascribing different norms to different equilibria has several shortcomings, however. First, it provides little insight about why particular social norms and outcomes emerge in some societies and not in others. Second, it is similarly silent about why and how some societies are able to break away from a less favorable (e.g., no trust) equilibrium. Third, it also does not provide a conceptual framework for studying how leadership by some individuals can help change social norms.
    In recent research (Acemoglu and Jackson 2011), we tackle these questions. We develop a theoretical framework in which social norms shape inferences about past behavior and also regulate expectations of future behavior. These inferences and expectations are particularly relevant since individuals only have imperfect information about the behaviors of others. Social norms determine how individuals interpret their imperfect information, and also imply that others in the future will interpret their own imperfect information in a similar manner, thus ensuring some degree of coordination. This coordination is not necessarily all good, however, since it can be on actions such as lack of trust or corruption that fail to exploit gains from cooperation within society.
    We examine settings in which individuals interact with others from both older and younger generations. An individual’s behavior is determined by what they infer about past behavior on the basis of their imperfect information and what they expect future behavior to be. Thus, history – in the form of a shared common interpretation of past behaviors – plays a central role in anchoring these expectations and shaping social norms. A particularly important form of history in our analysis is the past actions of "prominent" agents who have greater visibility (for example because of their social station or status). Their actions matter for two distinct but related reasons. First, the actions of prominent agents, impact the payoffs of the other agents who directly interact with them. Second, and more importantly, because prominent agents are commonly observed, they help coordinate expectations in society. For example, following a dishonest or corrupt behavior by a prominent agent, even future generations who are not directly affected by this behavior become more likely to act similarly for two reasons; first, because they will be interacting with others who were directly affected by the prominent agent's behavior and who were thus more likely to have followed suit; and second, because they will realize that others in the future will interpret their own imperfect information in light of this type of behavior. The actions of prominent agents may thus have a contagious effect on the rest of society.
    Even if a social norm of dishonest or corrupt behavior emerges, it is not in general permanent. First, imperfect information about behavior subsequent to prominent behaviors also implies that starting from such an unfavorable social norm may lead to realizations of events and information that gradually lift the society towards a more cooperative outcome. Secondly, prominent agents can play a leadership role by leveraging their greater visibility and their impact on the expectations of others. Knowing that the visibility of their behavior can shape future expectations and behaviors, prominent agents can have strong incentives to deliberately break an unfavorable social norm and switch society towards a more cooperative one. This analysis thus provides a working model of leadership.
    In addition to leadership by prominent agents, social norms can also be affected by policies that encourage more cooperative behavior. Such policies can be particularly effective if commonly understood and believed, as in this case they change not only incentives but also expectations. One example is a publicly announced amnesty that forgives past bad behavior, thus encouraging a switch towards more cooperative behavior in the future. Such an amnesty, like the truth and reconciliation commissions that are sometimes used to erase (or at least ameliorate) the effects of past of processes in many countries, can only work if it is widely understood and believed, so that the agents adjust their expectations about others' behavior in light of the amnesty.

    [Jun 13, 2011] Asia Times Online PAY, PROFIT AND GROWTH Low wages and revolutions

    Low wages and revolutions
    By Henry C K Liu

    This is the 13th article in a series.
    Part 1: Stagnant wages leading to overcapacity
    Part 2: Gold shows its true metal
    Part 3: Labor markets delinked from gold
    Part 4: Central banks and gold
    Part 5: Central banks and gold liquidity
    Part 6: The London gold market
    Part 7: Political response to weak regulation
    Part 8: Gold and fiat currencies
    Part 9: Low wages take their toll
    Part 10: Rise and decline of institutional economics
    Part 11: Critical theory
    Part 12: Failed revolutions

    No economy, whether modern or ancient, monarchist or democratic, capitalist or socialist, can rely solely on market forces to meet all the needs of society or to direct the development of the nation toward a desired destiny.

    A properly regulated market performs many important economic functions that are necessary for any economy, feudal, capitalist or socialist. However, market forces, when unregulated or undirected by government, as neoliberals advocate for capitalist market economies, naturally allocate resources most efficiently toward efforts and investments with the highest potential return on capital rather than where it is needed most by the nation and its people.

    The Washington Consensus has been largely discredited since the Asian Financial Crisis of 1997 as an effective strategy for economic development for developing economies. Its 10 propositions are:
    1) Fiscal discipline;
    2) Redirection of public-expenditure priorities toward fields offering high economic returns;
    3) Tax reform to lower marginal rates and broaden the tax base;
    4) Interest-rate liberalization;
    5) Competitive exchange rates;
    6) Trade liberalization;
    7) Liberalization of foreign direct investment (FDI) inflows; 
    8) Privatization;
    9) Deregulation; and
    10) Secure private-property rights.

    These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic. (See the World Order, Failed States and Terrorism series of reports Asia Times Online, February 3, 2005.)

    Generally, highly efficient markets, particularly modern financial markets, aside from their fault of misallocating financial resources based on maximum return on capital, do not produce sustainable or balanced financial or economic outcomes if left unregulated by government.

    Minsky's Financial Instability Hypothesis

    Hyman P Minsky (1919-1996), American economist and professor of economics at Washington University in St Louis, developed the Financial Instability Hypothesis (FIH) in the 1960s, linking financial market fragility in business cycles with speculative investment bubbles endogenous to financial markets, in a direct challenge to the Efficient Market Hypothesis (EMH), which had been developed by Eugene Fama at the University of Chicago Booth School of Business.

    A basic rule in EMH in the field of behavioral finance says that trading profit has always and will always come from reducing financial market inefficiencies. EMH states that prices of stocks reflect the market's aggregate response to information. Any one market participant can be wrong about price levels; even every market participant can be wrong. But the market as a whole is always right. After the dot-com bubble burst in 2000, apologists for the EMH defended it by arguing that the dot-com bubble operated within the EMH; only the information behind the rational expectation was false. It was an argument that the operation was a success but the patient died.

    By 2008, the EMH has been largely discredited by real data on the credit market crisis that had started in mid-2007 when the financial market was spectacularly wrong about the sustainability of the housing price bubble. But the market's glaring error in defiance of common sense was not detected by most mainstream free-market economists until credit markets around the world began to melt down in the short period of a few trading days in mid-2007. In EMH's place, mainstream economists, including those in central banks, have since rediscovered Minsky, after having ignored his insightful warnings for almost five decades.

    Minsky's FIH is based on his model of credit market cycles, which he identified as consisting of five sequential stages: displacement, boom, euphoria, profit taking and panic.

    In the current credit and financial crisis, the displacement stage began in the early 2000s when the Federal Reserve under chairman Alan Greenspan kept short-term interest rate (the fed funds rate target) dangerously low to first allow the dot com bubble to form and then lowered the fed funds rate to 1% in July 23, 2003, the lowest in 45 years, and kept it there for a whole year to feed a housing price bubble after the dot com bubble burst. The housing bubble eventually burst in mid 2007.

    The fed funds rate target has been set at 0 to 0.25% since December 16, 2008 by the Ben Bernanke Fed to try in vain to revive the gravely impaired economy on its third year of recession.

    The Greenspan debt bubble

    On Greenspan's 18-year watch (August 11, 1987 - January 31, 2006) as chairman of the Fed under four presidents (Ronald Reagan, George H W Bush, Bill Clinton, George W Bush), assets of government-sponsored enterprises (GSEs) ballooned 830%, from $346 billion to $2.872 trillion. GSEs are financing entities created by the US Congress to fund subsidized loans to certain groups of borrowers such as middle- and low-income homeowners, farmers and students. Agency mortgage-backed securities surged 670% to $3.55 trillion. Outstanding asset-backed securities exploded from $75 billion to more than $2.7 trillion.

    Greenspan presided over the greatest expansion of speculative finance in history, including a trillion-dollar hedge-fund industry, bloated Wall Street firm balance sheets approaching $2 trillion, a $3.3 trillion repurchase agreement (repo) market, and a global derivatives market with notional values surpassing an unfathomable $220 trillion.

    Granted, notional values are not true risk exposures. But a swing of 1% in interest rate on a notional value of $220 trillion is $2.2 trillion, approximately 20% of US gross domestic product (GDP). (See Greenspan: The Wizard of Bubbleland, Asia Times Online, September 14, 2005).

    The Federal Reserve's extended loose monetary policy stance enabled serial debt bubbles to sustain the protracted US trade deficit, which was circularly financed by an influx of trade-surplus dollars from countries exporting to the US, such as China, Japan, the European Union and oil exporting countries. These countries could not spend their trade-surplus dollars earnings in their local economies because to do so they must first convert the dollars to their domestic currencies, which would immediately create inflation because the goods behind the new domestic currencies had already been shipped to US market to earn dollars.

    The exporting nations must then buy US government debt with the dollars they earned as trade surplus from the US because of dollar hegemony. (See US dollar hegemony has got to go, Asia Times Online, April 11, 2002.)

    The boom stage of Minsky's FIH was set off by the easy availability of low interest rate subprime mortgages, which drove up house prices to unrealistic levels. Securitization of mortgage debt allowed banks to sell huge amounts of risky loans to the credit markets in the form of structured finance instruments of varying degrees of risk with commensurate returns to investors with varying risk appetite that allow banks to take the toxic subprime mortgage debt off their balance sheets, so that banks could lend more loans without having to increase the reserves or capital. This housing bubble boom led to the euphoria phase and the smart money began to take profit by selling at the height of the price cycle and caused the debt bubble to burst. The selling panic caused credit markets to fail from the absence of buyers at any price. Suddenly, all market participants were driven to on the sell side by panic. Markets fail when there are no buyers at any price. (See Why the US subprime mortgage bust will spread to the global finance system, Asia Times Online, March 16, 2007 - posted four months before the crisis broke out in July 2007.)

    FIH states that in the boom phase of the business cycle when cash flow rises beyond what is needed to pay off debt, a speculative euphoria naturally emerges to take on debts in excess of what borrowers can pay off with their normal income. This excess debt in turn leads inevitably to a financial crisis, a "Minsky Moment", when the debt bubble bursts and liquidity dries up to cause a systemic chain reaction of credit defaults, causing credit market failure in which even financially healthy borrowers are forced into default as a result of a severe general liquidity drought in the market.

    The role of government

    Government regulatory intervention is needed to prevent the emergence of recurring Minsky Moments in financial markets before they occur, and massive central bank monetary easing, which is not without long-term negative consequences, will be needed to provide a failed market with liquidity should a Minsky Moment develop despite regulatory constraint.

    In addition to state regulation to prevent financial market failure, state subsidy must be available to support and nourish needed economic activities and financial transactions that are important to long-term growth of the economy both quantitatively and qualitatively when such economic activities and financial transactions are not supported by private investment responding to market forces.

    The most egregious deficiency of financial markets, and the most ignored, is its structural tendency to depress wages as the necessary condition for generating high return on capital. This tendency naturally prevents adequate consumer demand, which leads to excess productive capacity, which in turn causes nations to seek new markets through export. Lenin's theory of imperialism being the final stage of capitalism is based on the failure of capitalistic markets to raise wages along with rising productive capacity.

    World trade through globalization in its current form is an unsustainable game of cross-border wage arbitrage to depress wages world wide in order produce at low wage locations to export to economies with higher wages. This global trade is denominated in dollars that the US can produce at will, not because the US has sufficient assets of intrinsic value to back up her dollars, but because US geopolitical prowess has compelled the world's trading of basic commodities, such as oil, or other basic commodities, to be denominated in dollars.

    When trading of oil is denominated in dollars, the US essentially owns all the oil in the world, regardless of who happens to be the intermediate holder of oil at any particular moment.

    Debt bubbles caused by low wages

    The single most damaging outcome of globalized trade and finance in the past three decades had been increasingly low wages compared with asset prices in every economy that participated in cross-border wage arbitrage.

    The failure of wage income to keep up with rising asset prices, particularly home prices, created a deficiency in consumer purchasing power that left all economies with productive overcapacity. Monetary policymakers then compensated for this overcapacity with serial monetary easing to provide easy consumer credit and low-interest home mortgages that stagnant wage income could not sustained and had to be refinanced by additional asset value from continually rising home prices.

    The gap between mortgage payments and wage income was closed by sharp rise in home prices that would in turn allow lenders to release more loan proceeds to borrowers to finance higher payments and everyday consumption.

    On the other side, lending institution employed all manners of structured finance to pass the liability in the form of tradable instruments of varying credit ratings with commensurate returns to investors of varying risk appetite in the credit markets to expand the total debt bubble.

    This credit crisis has been thoroughly analyses, its causes identified and listed as among others market deregulation, excessively high leverage, underpricing of risk through structured finance, and so forth. These causes were real and were all contributing to market failure. But the fundamental cause was the imbalance between wage income and high consumption needed to prevent productive overcapacity in the economy. In a word, the current credit crisis was fundamentally caused by insufficient wage income world wide.

    The low-wage trap in China China today is a visible example of economic growth driven by global cross-border wage arbitrage that has kept wages low. In theory, the socialist market economy in China seeks a balanced public/private interphase through market regulation and direct investment participation by government. The policy aim is to fill the investment gap left by the short-term preoccupation on the part of private capital to invest only in projects that can produce the required immediate return on capital. Another policy aim is to regulate the market against self-induced failure. A third policy aim is to direct the economy toward national goals of long-term economic development of the nation and all its population.

    Projects designed for long-term economic growth will not offer short-term profit within the short operational timeframe of private investment. Government credit and investment must be made to finance these projects of long-term growth and development.

    Still, despite appearances of success, the Chinese economy is far from being a trouble-free engine for long-term growth and development. The regulatory framework is far from being adequate and the market is far from being efficient. The private/public interphase is still underdeveloped. There appears to be two separate economies in China, one state-owned and the other operated by private enterprises. The two economies work against each together, rather than complimentarily. The state-owned enterprise economy, though much improved, is still plagued by residual structural inefficiency, and the private enterprise economy is grossly unruly.

    What is needed is to continue to improve the efficiency of the state-owned enterprises through better management and accounting, particularly social and environmental accounting. This cannot be done through privatization. Much improvement will come from strengthening management and planning skills of state-owned enterprises, and not merely forcing management to adopted models of successful private enterprise. Measurement of state-owned enterprises' performance should be based on their real contribution to long-term economic growth and development of the national economy and to social welfare and environmental restoration, rather than on short-term profit.

    At the same time, private enterprises must be required to be better corporate citizens and be guided by socially responsible business ethics to serve the needs of society and the population, rather than to seek maximization of profit by exploiting legal and regulatory loopholes to engage in counterproductive speculation and to externalize the social costs of business operations.

    But the most critical shortcoming of China's economic development policy in the past three decades has been its passive acceptance of low wages as a key prerequisite of competitive advantage for its export sector in world trade. Chinese policymakers can take lessons from the case of Germany, a successful export economy with high wages. High wages in the export sector is an effective way to make export trade contribute to the domestic economy.

    Furthermore, China will not be able to develop its domestic market unless Chinese wages rise to the level at which Chinese workers can afford to buy the products they produce with their own labor.

    Export of surplus production after domestic demand has been satisfied is a positive economic strategy, but export of goods because domestic workers cannot afford to buy them with their wages is a dysfunctional strategy. The problem is made worse if export is denominated in dollars, a foreign fiat currency that the export economy cannot spend at home without automatically generating inflation.

    The Age of New Monarchs Starting in the mid-15th century, a new group of kings in Europe, known in history as the "new monarchs", succeeded in laying the foundation for a world order of independent sovereign nation states. The new monarchs offered the institution of monarchy as a guarantee of law and order against aristocratic abuse of the peasants and the rising bourgeoisie, who were willing to pay taxes to the king in return for peace and protection, and to let the king dominate parliament, which had been a stronghold of the aristocracy.

    The new monarchs created stable and centralized governments which made possible an era of worldwide colonization and conquest in the 16th century, and paved the way for rapid economic growth in Europe. But they failed to understand the stagnant wages would eventually be the cause of their political demise.

    The new monarchies broke down the legal system of inherited feudal "common law" through which the rights of the feudal classes were entrenched, by reinstituting Roman law, which was being rediscovered and actively studied in the new universities in Europe. The new monarchs proclaimed themselves as sovereigns by divine right and required their subjects to address them as "your majesty".

    According to lex regia in Roman law, the sovereign incorporates the will and the welfare of the people in his person, and upholds the principle of salus populi suprema lex (the welfare of the people is the highest law). The sovereign can make law, enact it by his own authority regardless of past customs or historical liberties by the principle of quo principi placuit legis habet vigorem (what pleases the prince has the force of law), provided that the sovereign's law upholds the welfare of the people.

    By their proclaimed role as defender of the people against aristocratic oppression and abuse, the new monarchs derived their legitimacy of absolutism. In the name of all their subjects, the new monarchs raised their political status as legitimate supreme rulers by divine right, changing the sovereign's feudal role as merely first among equals in the aristocracy to that of an absolute monarch of the people above the aristocracy.

    But the new princes, while breaking down the obsolete feudal socio-economic structure and fixed economic relationships among participating groups in feudal society and economy, were not pleased by rising wages of commoners and peasants in the new emerging market economies, and thus invited a wave of revolutions that eventually overthrew their new monarchies and swept them into the dustpan of history.

    Ideas associated with the new monarchy spread from France to Spain and England. Such ideas were also at work in the Holy Roman Empire in Germanic lands, with the difference that unlike the Three Estates in the new monarchies in the West, in Germanic lands the new monarchism took the form of princely states, duchies, margraviates, bishoprics and abbacies.

    The Holy Roman Emperor was the holder of an imperial office elected by seven electors. In 1356, the Archduke of Austria, a Hapsburg prince, was elected emperor. The Hapsburgs remained the principal royal power clan in Europe, until after the Thirty Years' War, which started in 1618 and ended in 1648.

    The Reformation and the rise of nation states The Reformation was a misnomer. Protestantism, as espoused by Martin Luther (1483-1546), was revolutionary because its doctrines held not merely that abuses in the church must be reformed but that the Roman Catholic Church itself, even if perfect as measured by its own ideals, was wrong in principle. Protestants aimed not just to restore the medieval church from Renaissance abuses, but to overthrow it and replace it with a new church founded on principles drawn from the Bible. Such principles should not be decreed by church ecclesiastics but by the individual believer's own conscience.

    This anti-central-authority spirit in theology was political music to the budding German princes, who responded positively to Luther's invitation to the princely states within the Holy Roman Empire to assume control of religion within their borders. Protestantism became entwined with social and political revolution in the Holy Roman Empire.

    Charles V, as Holy Roman Emperor, was obliged to defend the faith because only within a Catholic Christian world would the Holy Roman Empire have legitimacy or even meaning. The princely states within the Holy Roman Empire saw the emperor's effort to suppress Luther as a threat to their own political freedom. The imperial free states and the dynastic states of northern Germany insisted on ius reformandi, the right to determine their own religion. They became Lutheran and secularized (that is, confiscated) church properties to enrich themselves as secular sovereigns.

    Stalin a diehard Lutheran

    Thus Luther, in placing theological protest under the protection of secular power politics, exploited the political aspirations of budding German principalities in the 16th century. In return, he conveniently provided the Germanic princes with a theological basis for political secession from the theocratic Holy Roman Empire.

    Luther exploited the political aspirations of German princes to be politically independent from the theocratic claim of sovereignty by the Holy Roman Emperor to bolster his (Luther's) theological revolt from the Roman Catholic Church. But he came to denounce peasant rebellion against the Protestant German princes. He did so even though such peasant uprisings against the Germanic princes claimed inspiration from the same theological ideas of the Reformation that had motivated the political revolt against the Holy Roman Emperor by the same Germanic princes for political independence.

    Such radical ideas had been advocated by Luther as a universal principle. However, even Luther's professed personal sympathy for peasant demands for improved treatment from their oppressive princes did not persuade him to endorse peasant uprisings. The working poor of Europe would have to wait another century, until the revolutions of 1848 to seize their own destiny.

    In fact, Luther could be considered a Stalinist. Or more accurately, Joseph Vissarionovich Stalin (1879-1953) would in fact fit the definition of a Lutheran diehard, at least in revolutionary strategy if not in ideological essence. Like Luther, Stalin suppressed populist radicalism to preserve institutional revolution, and glorified the state as the sole legitimate expeditor of revolutionary ideology.

    The rise and fall of the Germanic states The Holy Roman Empire under the Hapsburgs extended from Spain in the west to Poland and Hungary in the east, including the Czechs of Bohemia and a sizable French-speaking population in present-day Belgium, Lorraine, eastern Burgundy and western Switzerland. In the east, the main population was German and German-speaking. But for the Holy Roman Empire, language was less important than religion. Yet by the 17th century, Protestantism was already widely practiced in the empire.

    In the 1500s, Germanic lands were the advanced parts of Europe. Yet by 1600, evidence of backwardness and provincialism were plainly visible. The German language failed to flower further. Compared with Italian, French, or even English, German literature stagnated. Where both Catholics and Calvinists maintained international affiliations and read with interest books on foreign ideas written in other languages by foreign authors, Lutherans were xenophobic and suffered self-imposed isolation. German universities, both Catholic and Protestant, saw a decline in enrollment as intellectual energy was consumed by combative dogmatic and unenlightened arguments on absolute doctrinal truth. Superstition was rampant in German society, with gruesome fairy tales of vampires and demons dominating popular culture and with the educated elite fascinated by astrology.

    Commerce in south Germany and the Rhineland was in decay due to trade shifting from mainland central Europe to the Atlantic coast. The mouth of the Rhine was controlled by the Dutch Republic of the United Provinces. Baltic trade was growing, but the old German Hanseatic towns did not benefit from it, because the king of Denmark controlled the Baltic Sound while the king of Sweden controlled the shores around the Baltic Sea, and these two monarchs favored trade with the Dutch and the English, against which the German towns could not compete. German bankers, such as the Fuggers, lost their dominance as capital markets shifted to Western Europe.

    The Peace of Augsburg and religious self-determination The Peace of Augsburg in 1555, with its principle of cuius region eius religio (Whose realm, his religion) provided that each sovereign state could prescribe the religion of its subjects. Small wars were breaking out for the control of Aix-la-Chapelle (1593) and of Cologne (1600) over whether a Protestant or Catholic successor should assume a post vacated by death of the occupant.

    After the Peace of Augsburg, the Lutherans made considerable gains in putting Lutheran administrations into Catholic church states to secularize them into lay principalities, in violation of the Ecclesiastical Reservation clause of the Peace of Augsberg. The Calvinists were also gaining control of German states, with the key state of Palatinate, one of the seven elector states, strategically placed in the center of the Rhine.

    In 1608, the Elector Palatine formed a Protestant union to protect its political gains by negotiating separate treaties with the Dutch Republic of the United Provinces, with England and with France under Henry IV. In 1609, a league of Catholic Germanic states was organized under the leadership of Bavaria to seek help and protection from Catholic Spain. France, the Dutch United Provinces and Spain all harbored geopolitical intentions on the possible breakup of the Holy Roman Empire, while the Hapsburgs of Austria were stirring to eradicate Protestantism within its own domain and to revive the Holy Roman Empire into a modern imperial state based on geopolitical power rather than theological legitimacy. Austrian intentions forced Catholic France to act as protector of Protestantism outside of France in Eastern Europe, while it persecuted extremist Calvinist Huguenots domestically.

    The Thirty Years War and the Westphalian world order The Thirty Years War, resulting from diverse geopolitical and religious pressures, was an exceedingly complex affair. It was a German civil war of political secession in the name of religious independence. It was a war fought over constitutional issues between the Holy Roman Emperor and the Protestant Germanic princely states struggling for political independence. The two aspects of the civil war, religious and political, were not congruent, giving rise to peculiar geopolitical and religious alliances. It was also an international war between the Bourbons of France and the Hapsburgs of Austria, between France and England, between Spain and the Dutch United Provinces, with the involvement of the kings of Denmark and Sweden and the prince of Transylvania.

    The Peace of Westphalia, agreed to on May 15-24, 1648, by 109 recognized sovereign entities of Europe, was based on a series of peace treaties signed between May and October of 1648 in Osnabruck and Munster. These treaties ended the Thirty Years War (1618–1648) in the Holy Roman Empire, and the Eighty Years War, also known as Dutch War of Independence, (1568–1648), between Spain and the Dutch United Provinces, which became the Dutch Republic.

    The Peace of Westphalia did not bring peace to Europe, but it initiated a new world system of geopolitical order in central Europe, known in history as Westphalian sovereignty, based upon the concept of a world order of sovereign nation states governed by independent sovereigns who answered to no higher authority outside of rules established by the Peace of Westphalia. The terms of the treaties became integral to the constitutional law of the Holy Roman Empire. Peace throughout Europe, however, was not restored. France and Spain remained at war for another 11 years, making peace only in the Treaty of the Pyrenees of 1659.

    The French economy under Louis XIV Louis XIV (1638-1715) inherited the French throne in 1643 at the age of five. Twenty years later, in 1661, at age twenty-five, he assumed personal direction over affairs of state after the death of his Prime Minister, Cardinal Mazarin (born 1602, regent 1643-1661). Louis XIV reigned over France for seventy-two years, and personally ruled his kingdom for fifty-two until his death in 1715 at age seventy-seven. No other monarch in modern European history held legitimate absolute sovereign power for such a long time.

    Louis XIV was much more than a titular royal figurehead. In his adult life as king of France, he was the actual working government head of his rising nation for more than half a century. Inheriting the political and economic achievements of Cardinal Richelieu (born 1585, first minister 1624-1642) and later those of Cardinal Mazarin, Louis XIV made France into the greatest power in Europe, culturally, economically, politically and militarily. He personified the age of absolute monarchism and was an early instigator of balance of power geopolitics, economic planning and economic nationalism.

    Louis XIV owed much of his economic policy successes to the dirigisme of Jean-Baptiste Colbert (born 1619, minister of finances for France (1665-1683). Dirigisme is a policy of government direction of the economy. Even free-market economies must involve government regulation to prevent the market from self-destructive failure, and involve also some aspects of central planning, through which the state effectively controls areas of the economy where private enterprise and market forces cannot meet the needs of society or direct economic activities to fulfill the destiny of the nation.

    In France under Louis XIV, Colbert's policy of state intervention in the market economy made him a respected and effective minister in the French court of royal absolutism. He achieved recognition by his contemporaries and historians for his work in improving and strengthening French manufacturing and in bringing the French economy back from the brink of bankruptcy caused by the king's massive military expenditure.

    Colbert went beyond Richelieu's mercantilist policy on international trade. In its place, Colbert aimed at taking taking advantage of the large size of the domestic market in France to make it a large, mostly self-sufficient economy, free of internal tariffs between different regions within France. He introduced a unified commercial code to replace outdated medieval local customs and manners. He instituted a national tax collection system to reduce the commission of tax farmers, which greatly increased tax revenue directly to the king's treasury.

    Some historians argue that, despite Colbert's spectacular efforts, France actually became increasingly impoverished because of the Sun King's extravagant spending on incessant wars. Yet it is indisputable that the wars waged by Louis XIV, though no doubt costly, actually enriched the French nation in the long run by enlarging the French economy. Whether expansion of territory by war is an acceptable means of growth is a legitimate question of political philosophy, but expansion of territory being a positive factor in economic growth is unchallengeable. Colbert worked to create a favorable balance of trade within France proper and greatly increased French economic territory within Europe and colonial holdings outside Europe. His policy contributed greatly to the growth of the French economy.

    Colbert neglected wages The one area that Colbert failed in his economic development strategy was a conscious effort to raise French wages as the Industrial Revolution spread to France from England. The failure of French wages to keep up with rising wages in England was a key factor in the comparative gradual decline of the French economy and a direct economic cause of the French Revolution.

    In 1789, a farm peasant or a unskilled laborer earned a wage of 15 to 30 sous a day. The price for a loaf of bread rose from 9 sous to 15 sous in 1789 due to bad harvest. A family of four needed two loafs of bread to survive, meaning that starvation wages were regular and common place while the aristocrats and the bourgeoisie lived in luxury with expensive goods provided by a small group of high-wage artisans in guilds and middle-men merchants.

    Colbert's market-reform strategy included the founding of the Manufacture royale de glaces de miroirs in 1665 to supplant the importation of Venetian glass, which would be forbidden in 1672, after French glass manufacturers were on a sound footing to replace foreign competition. He also encouraged Flemish textile manufacturers to set up production in France with the purpose of technology transfer so that France could benefit from the more advanced Flemish technical expertise. Colbert founded the royal tapestry works at Gobelins and supported those at Beauvais and Aubusson under his policy of national economic development.

    He worked to develop the domestic economy by raising tariffs on imports and by supporting major public works projects. Colbert also introduce policies and programs to ensure that the French

    East India Company, founded in 1664 to compete with the British and Dutch East India Companies in colonial India, had protected access to foreign markets in Asia, so that they could always obtain imports needed to sustain rising living standard and luxury in French life, such as coffee, cotton, dyewoods, fur, pepper, and sugar. In addition, Colbert founded the French merchant marine by providing state support to the construction of ocean-going ships.

    In international commerce, Colbert imposed tariffs to protect domestic enterprises, while currency exchange rates were standardized in different provinces in a policy of unification of the French monetary system to serve a national market. Colbert's policy of dirigisme improved roads and canals to facilitate travel and trade.

    The problem with guilds Colbert issued more than 150 edicts to regulate the guilds of craftsmen. While guilds created social capital of shared norms, common information, self regulation, self-imposed sanctions against misbehavior and collective political action that benefited guild members, they hindered technological innovation and transfer, and slowed economic development and growth. The most serious obstacle to economic development was the role guilds played in keep general wage levels low, particular those for unskilled workers. While income of guild members continued to rise, the aggregate income of guilds as a class did not expand due to strict membership admission policies.

    Both Adam Smith and Karl Marx, for different reasons, criticized guilds for their rigid gradation of social rank and for the role they played in solidifying the structural relation between the oppressed and the oppressor. Smith criticized guilds for acting as a constraint against free trade, while Marx criticized guilds for being a system that prevented a general rise in wages.

    State-directed commerce and culture Having thus introduced into the role of government the responsibility of maintaining a measure of socio-economic order and development, Colbert then worked to restructure the sleepy feudal economy of France to bring about the enrichment of the kingdom by the promotion of dynamic commerce. But he neglected to establish a national income policy of rising wages.

    The state, through Colbert's dirigiste policies, fostered manufacturing enterprises in a wide variety of fields, but Colbert and his policy makers did not understand the need for and benefit of rising wages in the economy. The authorities established new industries, protected inventors, invited into France skilled artisans from foreign countries while prohibiting French workmen from emigrating to higher-wage locations outside France. The lower classes remained trapped at subsistence levels, contributing eventually to the popular discontent over the high price of bread that fueled the French Revolution which broke out in a century later 1789, despite the fact that France had the richest economy in Europe.

    To maintain the high quality of French goods in foreign markets, as well as to provide a guarantee of supply to consumers at home, Colbert had the quality and measure of each article fixed by law, punishing breaches of the regulations by public exposure of the delinquent and by destruction of the substandard goods. While the quality of French goods improved by government standard, the prices of goods were kept low by fixed wages to provide the rich with low-cost luxury at a price that the low-wage working population could not afford.

    As the bourgeoisie as a class worked to provide the aristocracy with new luxury lifestyles, the cost of which was increasingly denominated in money, replacing the traditional feudal economic relationship of lord and peasants sharing fairly the produce of the land. The new need for money by the aristocracy and the rising cost of new luxurious life style created a two-pronged pressure of rising costs on the one hand and dwindling revenue on the other due to the bourgeoisie siphoning off increasingly larger portions of the aristocrats' fixed feudal income as trade profits.

    The aristocracy had to made up the income deficit in the new economy operating on the exchange of money with increasingly harsh demands on the peasants who worked on the lord's land. Peasants began to get paid in cash rather than a portion of the farm produce they grew. Much of the new wealth created by the early phase of the industrial revolution, and denominated in money, went to the bourgeoisie as a class, coming largely from the loss of income on the part of the peasants, who became wage earners. In the end, the French Revolution was a socio-economic restructuring instigated by the bourgeoisie against the aristocracy by exploiting the discontent of the peasants, which the bourgeoisie created by keeping wages low while blaming it on the high spending of the aristocracy.

    Pierre Paul Rique (1604-1680), was an engineer and a tax farmer responsible for the collection and administration of the gabelle (salt tax) in Languedoc-Roussillon for the king, with permission granted by the king to Rique to also levy taxes for Rique's own account. This gave Rique great wealth in an economy intermediated through money which he used to execute grand infrastructure projects with engineering expertise to increase wealth for the French nation. But most of this new wealth went to the bourgeoisie as management fees and return on capital, and very little went to the workers as rising wages.

    Under Colbert's patronage and the support of Louis XIV, Rigue planned and supervised the construction of the Canal du Midi, which connects the Bay of Biscay in the Atlantic with the Mediterranean. The 240-mile-long artificial waterway links the southern coast of France to Toulouse to link to the canal/river system that ran across to the Bay of Biscay. It was one of the great engineering projects of the 17th century. The logistics were immense and complicated, so much so that engineers of earlier times, including the ancient Romans, had discussed the idea but failed to carry it out. Louis XIV gave strong support to the project to reduce the high cost and danger of transporting cargo and trade around southern Spain where threats from pirates were serious and incessant.

    Effectively deploying the ample resources of French prosperity and superior culture, both of which he added to their spectacular flowering by his royal vision and policy, Louis XIV arranged a network of Francophile allies in every country of consequence in the then known world, from England to Russia to Turkey. French foreign policy and anti-French counter foreign policies of other countries set the pace of world events all through 17th and 18th century.

    Sophisticated French methods of government and public administration, of war and diplomacy, of finance and commerce, of social protocol, etiquette and manners, became a model for other countries to imitate. French language and culture, thought and literature, art and architecture, landscape and garden design, etiquette, cuisine and fashion set the standard for European society and the rest of the world for centuries after. French was adopted as the language of the European aristocracy and of diplomacy.

    Thanks to the long-range policies of cardinals Richelieu and Mazarin, Louis XIV succeeded in halting the further expansion of Hapsburg supremacy by constructing a network of pro-French alliances based on a balance of power strategy headed by French leadership, resulting in the Thirty Years War that changed the geopolitical shape of Europe. Louis XIV personified the zenith of the Age of the Absolutist Monarchs that evolved from the Age of the New Monarchs.

    The Westphalian Peace The Westphalia Peace of 1648 succeeded only because of an economic policy of trade protection and directed sovereign credit, patterned after the dirigisme aimed at creating strong sovereign nation states, as designed by France's Cardinal Jules Mazarin and his protege, Colbert.

    Colbert's dirigiste policy of fair trade was the most effective weapon against the liberal free-trade policy of the British and Dutch oligarchies supported by national banking and maritime power.

    The Westphalian world order is a concept of independent nation state sovereignty based on two conditions: territoriality and resistance to external agents in the domestic polity of sovereign nation states. Its has been the organizing concept of world order since 1648 within which the concept of nationalism emerged. Contemporary globalists, from empire builders to neo-liberals globalization advocates, to al-Qaeda militant Islamic jihadists, have one thing in common: the abolition of the Westphalian world order of sovereign nation states in the name of universal human rights, though the definition and methods each group prefers are vastly different.

    Balance-of-power international geopolitics The aim of 17th and 18th century statesmen pursuing a balance-of-power strategy generally focused on preservation of full independence and maximum option of state action, the basic rule of which was to build ideologically diverse geopolitical alliances against any state on the path to world domination. The purpose of balance of power strategy was not to preserve peace, but to preserve the independence of sovereign nation states within the Westphalian world order. During this period, geopolitical alliance were routinely entered into by nation states of opposing religious ideologies. The Richard Nixon/Henry Kissinger opening to China in 1972 was a classic balance-of-power play.

    Thus the post-Cold War US "transformational" foreign policy of "regime change" to spread US ideology globally is no different strategically than the ideological global strategy of al-Qaeda. In the aftermath of the March 11, 2004, Madrid terrorist attacks, Lewis Atiyatullah, who claimed to represent al-Qaeda, declared that "the international system built up by the West since the Treaty of Westphalia will collapse; and a new international system will rise under the leadership of a mighty Islamic state."

    The difference between US ideology-based "transformational" foreign policy and al-Qaeda global terrorism is only one of degrees of tactical extremism. In that respect, senator Barry Goldwater's famous declaration in his acceptance speech of his nomination as candidate for the presidency at the 1964 Republican convention: "I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue," is tailor-made defense for Al-Qaeda extremism. While the US electorate rejection of Goldwater's bid for the presidency can be viewed as rejection of extremism by Americans as a people, Goldwater, in losing his bid for the presidency, gained control of the Republican Party and fundamentally of US foreign policy.

    In the 17th century, the expansionist foreign policy of Louis XIV led the Dutch to pursue a balance-of-power strategy against a rising France. England was the only nation west of Poland that did not participate in the Congress of Westphalia, during which time England was preoccupied with a civil war.

    Next: The English Civil War

    [Jun 13, 2011] Protest Madison Wisconsin Day 13

    [Jun 13, 2011] Where Do You Fall on the Income Curve -

    Incomes grow much, much faster at the top end of the income distribution than in the middle or at the bottom end. That is, the disparity in income between one percentile and a consecutive percentile is bigger among the very rich.

    For example, the difference in income between a household at the 50th percentile and a household at the 51st percentile is $1,237 ($42,327 versus $43,564). But the difference in incomes between a household at the 98th percentile and the 99th percentile is $146,118 ($360,435 jumps up to $506,553).

    The gaps become even wider at the extreme top of the income ladder: A family at the 99.5th percentile makes $815,868; its neighbor at the 99.9th percentile makes more than double that, at $2,075,574 a year.

    In fact much of the rise in inequality over the last few decades has been because of the increasing inequality isolated among the very top members of the income distribution, as America’s wealthiest have pulled further and further away from their slightly less wealthy peers.

    (Addendum: “Income” in this case refers to cash income, without energy assistance, imputed corporate income tax liability and the employer’s share of payroll taxes.)

    [Jun 13, 2011] Steve Keen: Dude! Where’s My Recovery?

    June 12, 2011

    By Steve Keen, Associate Professor of Economics & Finance at the University of Western Sydney, and author of the book Debunking Economics. Cross posted from Steve Keen’s Debtwatch.

    I initially planned to call this post “Economic Growth, Asset Markets and the Credit Accelerator”, but recent negative data out of America makes me think that this title is more in line with conversations currently taking place in the White House.

    According to the NBER, the “Great Recession” is now two years behind us, but the recovery that normally follows a recession has not occurred. While growth did rise for a while, it has been anaemic compared to the norm after a recession, and it is already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be substantially higher than this to make serious inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trending down.


    Reinhart & Rogoff: “…what we have really shown here is that severe banking crises are associated with deep and prolonged recessions and that further work is needed to establish causality…” (p. 173)

    Doubt I’m the only NC reader who believes that more banking crises are in store before the decade’s gone. Would like to hear opinions on validity of Keen’s analysis when applied to, say, Ireland and Spain.


    Even if you disagree with some of the premises, the conclusions are reasonable. Specifically, that QE has funded speculation in commodities and has done nothing to improve employment. Would you care to elaborate on what you think is invalid regarding Spain and Ireland, or is it that obvious?


    There is much to like here, but I have to wonder why if Keen can say it is all a Ponzi why he can’t go the rest of the way and call it kleptocracy.

    I also find his notion of the Debt Accelerator gimmicky and probably too broad a brush. For instance, how does the Accelerator relate to the Obama stimulus, cash for clunkers, the credit for first time homebuyers, the decision of banks, sometimes voluntarily, sometimes in response to political and legal pressure, to reduce the number of foreclosed homes coming on to the market, and the ZIRP and QE blown bubbles in asset and commodities markets. Now some of these seem amenable to this Accelerator schema and some do not. Also not all of these are the same in the sense that some of these were creatures of the real economy while the asset bubble was part of the paper economy. And the commodities bubble while part of the paper economy still had large scale effects on the real economy.

    Keen himself notes that his Accelerator model can’t explain the most recent conditions, except by playing around with it. If I had to choose a central driver behind our economic conditions, I would go for theft instead of Keen’s Accelerator. I tend to view these things in much simpler terms. People are maxed out on debt. The government’s fiscal and the Fed’s monetary stimuli are wrapping up. The various kleptocratic Ponzis and bubbles are consequently running out of juice, and this explains how we can have a deceleration of debt along with declining housing prices and high unemployment.


    Oops, I should have said acceleration of debt in that last line, since as Keen says the Accelerator is currently still strong.

    A final point: Keen criticizes Bernanke and Krugman for equating debt and assets, but I think he makes a similar mistake with debt. Debt in the real economy seems to work very differently than debt in the paper economy. So all debt is not the same.

    Toby :

     Steve Keen: “Unemployment is therefore rising once more, and with it, Obama’s chances of re-election are rapidly fading.”

    The “therefore” bothers me. The tight correlation between GDP growth and growing employment needs to be looked into more deeply. Using figures from the ILO’s 2009 Annual Report you can see strong global GDP growth over a decade alongside falling global labour participation rates. We have also experienced flat to falling wages during periods of GDP growth as well as rising ‘natural’ unemployment levels for many decades. Why? Here’s a post attempting to answer this I made a while back (with a couple of graphs!):

    I won’t address the lump of labour fallacy here (though I will say I believe it debunked) but do want to mention one of my bugbears in this debate about growth, which is technological unemployment. The neat coupling of GDP growth with growing employment does not exist, and the data to demonstrate such a correlation, looking over decades, really isn’t there.

    Two things:

    1. A for-profit debt-money system will always experience fierce economic oscillations because money expansion and destruction are built in systemically, due to simple things like amortization, debt-build up when ‘growth’ slows or leading to a slowing, and wealth concentration through usury. This oscillation causes the illusion of a GDP-employment bond, but it’s nothing more than the relative availability of credit-money.

    2. While we’ve had the surplus energy of fossil fuels we’ve been improving our technical ability to automate/replicate human economic activity. A human being, mere flesh, blood and brain, can only do so much for the economy. This gamut, though in terms of imagination perhaps infinite, is to a very large and growing degree replicable technically. As our ability to replicate and improve on what humans can do economically acceleratingly improves, so the economy’s need for human labour falls. The data strongly suggests something along these basic lines is happening.

    Finally, Perpetual Growth, another ‘wonder’ foisted on us by debt-money, is impossible. In the end it’s not economic ‘growth’ we need, but a sensible system which has human and environmental concern at its heart. A system which works for us, not the other way around. In short, until we’ve sorted out the money-system we’ll continue to head over the cliff and experience ever worse crashes, while steadily degrading the natural environment which enables us to perpetuate this suicidal madness, this blind pursuit of ‘growth.’


    Toby I think you hit the nail.

    Technologically induced unemployment (computers are huge part of this trend), peak oil,rising “useless” production (fake perma growth or GDP for the sake of GDP in best the USSR tradition) as well as “suicidal madness” of the current regime are important factors that we now face.

    There might be some way to alter that but it is equally possible that mankind will commit mass suicide.


     Technical analysis aside, and as one comment stated, theft explains why there is no recovery, and why there won’t be a recovery until fraud and corruption ore addressed. An open system cannot function for long with the aberrations of Congressional corruption and Wall Street fraud. Elections can correct both of these.

    It is clear employment has not improved with the $T’s spent on bailing out banks and public works projects, because trickle down economics, i.e. Reagonomics, doesn’t work, not voluntarily, at least. When was the last time GWB ever paid anyone for work who wasn’t a servant?


    Where’s Hyman Minsky’s Nobel Prize he was trying to warn everybody about Ponzi finance for many a long year ?

    Paul Tioxon

    The profits of industrialization was the driver of the Western Capitalist system. Now, in Post-Industrial America, there are few industrial corporations left to produce profits, having shifted this function from the core to the semi-periphery economies, that do the heavy industrial manufacturing and the periphery economies, that do the lowest value added work. We have the most sophisticated form of production, the financialized capitalism of the 21st century. And of course, a de-industrialized economy must be adequately described, explained. The credit accelerator, circulates the needed money for consumer and corporate demand, in lieu of rising wages as a per cent of rising profits. Since over 40% of the wages and jobs came from the manufacturing sector up until the mid-1970′s and now as few as 5% of jobs are in manufacturing, it comes as no surprise that changing facts leads to changing analysis to explain what is going on in the economy. The fact that today, total debt in the US is around $52Trillion, and 75% of that is private consumer and corporate, not government debt, the need for credit is necessary, more than profits and wage increases from profits to expand the economy or just keep it operating.

    And since there is an out right refusal, capital is on strike, to reinvest capital in plant, equipment or payroll or public infrastructure for that matter, the credit goes into assets other than the technology industrial complex of modern society. Most of it goes into financial instruments, stocks, derivatives and other stellar innovations, but not material prosperity that can be distributed widely to improve the standard of living for the citizenry. Various asset bubbles of the last 15 years have only served to erode the standard of living for the vast majority of Americans, the 80% who have been downsized, outsourced and temped into 2nd class citizenship, all because they can not trade on Wall ST or maintain high frequency trading server farms that now generate over 40% of all profits and are retained exclusively in the hands of the elite corporate cadres with ever expanding tax cuts, loopholes, and out right removal of wealth off shore altogether.


    Am I incorrect in concluding that this is the crux of your argument?

    Keen: “Neoclassical economists ignore the level of private debt, on the basis of the a priori argument that “one man’s liability is another man’s asset”, so that the aggregate level of debt has no macroeconomic impact. They reason that the increase in the debtor’s spending power is offset by the fall in the lender’s spending power, and there is therefore no change to aggregate demand…

    “…The empirical fact that “loans create deposits” means that the change in the level of private debt is matched by a change in the level of money, which boosts aggregate demand. The level of private debt therefore cannot be ignored—and the fact that neoclassical economists did ignore it (and, with the likes of Greenspan running the Fed, actively promoted its growth) is why this is no “garden variety” downturn…”

    OK that makes sense. I wish you could prove it empirically (mathematically), because then a checks and balances framework could be created that would help moderate the proliferation of future speculative bubbles. But you can’t (no disrespect intended).

    You know better than I that your charts and graphs clearly highlight only “potential” correlations, causal relationships and tendencies. Although it’s a really interesting way of looking at our current predicament, unfortunately the conclusions drawn have not been confirmed beyond reasonable doubt.

    The real question becomes how could you mathematically confirm your theory about the credit accelerator? Is that even possible?

    Just Tired:

    I agree with Mr. Keen’s analysis as to there being a potential effect on aggregate demand based on a change in nominal private debt. The issue of measuring the change is somewhat more difficult. Let’s say that debt decreases on the group consisting of what’s left of us po’ middle class folks and increases on them thar’ rich folks. That means that aggregate demand may fall (the po’ folks can’t spend and the rich folks just don’t spend it) no matter if total private debt increases or decreases. (I know, I know, economists have some voodoo nonsense about rich folks saving and investing, but they have many more problems with their analysis of those effects on aggregate demand. And,I would argue that this is precisely why we have bubble after bubble while the phony CPI flatlines.) The bottom line, IHMO, is that in the real world, subject to my comments about who actually holds the private debt, Mr. Keen is quite correct. On the other hand, the neoclassical school is wrong, whether or not Mr. Keen’s theory is correct.

    Steve Roth:

    As Steve said in comments over on his blog, the policy solution is to engineer inflation (especially wage inflation).

    I couldn’t agree more. Demand Inflation Now!

    [Jun 12, 2011] Chris Dillow: The Importance of Class

    What do you think of Chris Dillow's ideas on class, power, and ideology?

    Class, power & ideology, Stumbling and Mumbling: “Nothing makes sense without class” says Owen Jones. He’s right, if we understand “class“ in its Marxist sense.

    To Marx - though the idea was implicit in other classical economists such as Ricardo - class was not about lifestyle, but about one’s relationship to the economy. If your income comes from wages, you’re working class. If it comes from capital, you’re a capitalist.

    You might reply that, by this criterion, we are almost all working class now. True. Even people who think of themselves as “middle class” are in many cases only a P45 away from poverty. They are objectively working class even if they are not subjectively so.

    In this sense, Marx was right to predict that capitalism would produce an increase in the numbers of the working class. Remember, 200 years ago the yeoman farmer, the master craftsman, or the comfortably off idle wife were all significant social roles. They are, I suspect, less significant now.

    What’s more, class in this sense is correlated with power: capitalists have it, workers don‘t*. This is because economic power flows to scarce resources and capital is scarcer than labor.

    This perspective yields answers to three key questions which cannot be answered without the concepts of class and power:

    This raises the question. If class is so central to an understanding of the economy, why is it so little discussed?

    The answer lies in another of Marx’s insights - that false consciousness prevents people from seeing how capitalist power operates. In this sense, the cognitive biases research program throws up some new theories that vindicate Marx. For example:

    And here, I part company with Owen. We cannot have a reasonable debate about class, because cognitive biases such as these are ubiquitous. Successful power structures persist in large part because the way in which power is exercised is hidden from us. The importance of class and the lack of discussion of it are two sides of the same fact.

    * I’m simplifying horribly here. Many workers - most obviously the bosses who control firms owned by external shareholders - do have power. I’ll leave this for another time, as I don‘t think it much affects the main thrust of my point.

    [Jun 12, 2011] Rule By Rentiers (Déjà vu Edition)

    This column and related blog posts by Paul Krugman motivated me to poke around a bit on the subject and, lo and behold, I found the following, from May 1993, by John Kenneth Galbraith:

    There are the many who live in recession with a wholly secure livelihood and with a lessened fear of price increases, of inflation. They are in no real danger of loss or diminution of income. Present here are the more secure parts of the modern corporate bureaucracy. Its members see their brethren being shed. (The corporate elite is never fired or sacked; in the interest of efficiency, in is only shed.) However, those who are truly influential have no fear. They, always in the interest of efficiency, are the ones who do the shedding.

    Similarly secure are many in the professions, professors, needless to say, some public servants, lawyers, doctors and media stars. Also very important is the modern large rentier class. And many who live on Social Security or pensions.

    For all these, recessions mean stable or even falling prices and no serious reduction of income. Relatively secure also are those Kansas farmers, constituents of Senator Bob Dole, whose prices are guaranteed by the Government, whose expenses and labor costs are now stable.

    Also, in an economy where services are increasingly important, a recession means a more willing and pliant labor supply, an underclass more available for the unpleasant toil that makes life for the rest of us more agreeable. And for employers. [...]

    But monetary policy works against recession by reducing interest rates and therewith rentier income. This is by no means welcomed by those who enjoy such income. They are not without political influence. Any talk of an easier monetary policy automatically brings grave and urgent warnings of the danger of inflation. This, too, is a threat to those on stable incomes.

    A recession in modern times is also for many far more attractive than remedial action against it.

    It is hard to argue that this is not exactly what we are currently experiencing.

    [Jun 12, 2011] Economist's View Romer versus Geithner

    eightnine2718281828mu5 said...

    Geithner says 'no sugar' for workers while Ben shovels crack to the financial industry.

    What the plutocrats obviously believe (but will not publicly state) is that America's prospects are dwindling and someone must take it on the chin.

    It's obviously not going to be our betters in the financial industry, so America's designated losers in the unemployment lottery will have their careers and incomes sacrificed on the altar of Geithnerism.


    The fear is that the wealthy special interests have spent decades rolling back spending on social programs. The wealthy special interests were not willing to give up those political gains even if it means a decade of double digit unemployment and a slow growth economy. The wealthy special interests would rather have cheap domestic labor than rapid domestic economic growth. They can take their investments to other countries that are growing rapidly to get their desired ROI. Since they are investing in other countries, why would they want to pay taxes in the US?


    "wealthy special interests" you mean the establishment who has run things since they conned the regular folks to toss King George aside.

    Ron said in reply to ilsm...

    Sad but true. Democracy still needs a little work. The capitalists and industrialists used Horace Mann's little invention to perpetuate their control by dumbing down the masses, which was the only way to fully control a democratic republic. Despite their efforts the middle class had become far too literate with ideas by the beginning of the twentieth century, so they used politicians to lower educational expectations during the Great Depression and again during the early seventies amidst forced integration and increased white flight. During such times of social unrest, then the additional dumbing down would go unnoticed. Well that is more or less the way John Taylor Ghatto tells the story and it appears correct to me.

    [Jun 09, 2011] Galbraith, AoU, ep9 1-6 The Big Corporation

    Very impressive !!! You should see all six parts... Read The New Industrial State - Wikipedia, the free encyclopedia and the_new_industrial_state [Abridge Me]

    Very good series, he also wrote many good books my favorite which was titled money which told many amusing story of monetary abuse. The collapse of 2009 would have made another predictably amusing chapter in the book. He was ignored by the "establishment' due to his views in which he encouraged the comforting of the inflicted and the inflicting the comfortable. He saw the world as it really was, spoke openly of corruption, greed and spoke his mind irregardless of who he pissed off.


    Thanks to whoever uploaded the nine episodes of the series.

    As time passes, more admirable Galbraith seems to me. I like the irony that he uses to expose the inconsistencies of neoliberal economic thinking. We are so fortunate that Galbraith has been an author so prolific. Life goes on but the fact remains. Enric

    [Jun 09, 2011] Ron Paul on Debt Ceiling -- Boehner Will Cave

    Mish's Global Economic Trend Analysis

    Link if inline video does not play: Ron Paul Interview on Debt Ceiling

    Select Interview Highlights

    Al Hunt: Do you think Congress will pass an Extension.

    Ron Paul: I do. This will go up until the last minute, then they will raise the debt ceiling.

    Al Hunt: Your speaker John Boehner says he will absolutely insist on a dollar of spending reduction for every dollar the debt ceiling goes up. Do you take that seriously?

    Ron Paul: I don't take that seriously. President Reagan wanted 2 dollars of cuts. The deficit exploded. Do you think the American people will believe that we are going to cut in the future? The only budget that counts is this year. 10-year programs are pie-in-the-sky talking. This year our obligations are 5 trillion dollars.

    Al Hunt: The idea of a spending cap that takes place in 10 years does not appeal to you?

    Ron Paul: A 10-year spending cap is too little, too late. No one is going to believe it. All governments when they get this far into debt, default. They don't default by not paying the bills. We will always pay the bills. The default comes from the devaluation of the currency.

    Al Hunt: On Libya, Afghanistan, it looks like most are taking the John McCain line.

    Ron Paul: Politically they are making a big mistake. I have been arguing to bring the troops home. I did not want them to go in the first place. The people now know we cannot pay for this. A lot of conservatives are coming to that direction. I've said over the years that I will win this argument because we will run out of money. That is how all great nations and empires end. They cannot afford it any longer, and that is what is happening right now. I have proposals that are different. As much as I am opposed to all spending, if you want to cut purposely in deliberate fashion, then have priorities. My priorities is cut all all foreign welfare and foreign militarism, and corporate welfare before you go after child healthcare. That sells. You don't have to just address health-care for poor people, rather than looking at atrocious spending overseas.

    Al Hunt: You would bring home troops from Afghanistan, Libya, Pakistan?

    Ron Paul: Res, I believe in strong national defense and that hurts our defense. I would bring them all home. We have no reason to be there. The soldiers we have in Korea went there when I was in high school. How long are we going to stay there?

    Al Hunt: Do you see any other candidate [for president] who is talking about a full audit of the Federal reserve?

    Ron Paul: No way. But they won't laugh as much as they did last time. They won't laugh any longer. Just think of the difference no on the attitudes of the people on the Federal reserve.

    Al Hunt: Is the Federal Reserve in retreat?

    Ron Paul: (laughing) Have you ever anticipated over the years, Bernanke would be holding press conferences defending his position? He can't defend it because it is a failed policy. You can't print money to get yourself out of trouble. Grade school kids know this. We will win when the system comes unglued.

    Bernanke's Self-Serving Lies

    The Ron Paul interview was recorded June 3. Bernanke poured on the lies yesterday in his US Economic Outlook. Bernanke tried to absolve the Fed of all guilt. Please see Bernanke's Self-Serving Bold-Faced Lies for details.

    In regards to spending in general and military spending in particular, Ron Paul is correct. This is "how all great nations and empires end".

    A similar sounding statement attributed to Margaret Thatcher goes like this: "The problem with socialism is that eventually you run out of other people's money to spend." The statement is true whether or not Thatcher ever said so explicitly.

    Republicans need to stop US militarism and focus on the US economy.

    In regards to the debt ceiling, unfortunately I too think Boehner will cave. Please see my video discussion on Yahoo Finance regarding the debt ceiling and the bond market: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

    [Jun 08, 2011] Down in the Hole – Is America Becoming the Next Japan by Philip Pilkington

    June 8, 2011 | naked capitalism

    Everyone who is anyone is saying it: the US looks set to become the next Japan. Yet the particulars of the argument are never really trashed out. Certainly both countries suffer from the same malady – namely, a bursting asset bubble punching gigantic holes in private sector balance sheets. This leads to similar policy approaches – not to mention similar policy failures. But beyond this overarching comparison people tend not to tread.

    ... ... ...

    So, there’s quite a bit of consensus among serious, non-hysterical types about the approach needed to fix the Japanese problem: high-levels of government spending to facilitate the private sectors net saving desires (in this case: private-sector deleveraging).

    That means that when Mr. Jagger asks “will all your money/keep you from madness/keep you from sadness/ when you’re down in the hole”? We can answer pretty definitively: yes, yes it will. The government certainly does need to create new money to keep the US from falling any further down the hole.

    There is one other argument that is worth considering. One able representative is occasional NC writer Ed Harrison. I like to refer to this as the ‘smash the technostructure’ argument. The idea is that there is too much overcapacity in Japan and bankrupt or ‘zombie’ companies need to be allowed to fail.

    I think this argument – which I think is more so moral than economic – is both naïve and destructive. Modern industrial economies like Japan and the US are not made up of small businesses with minor capital outlays that can easily be replaced by others that spring up when the ostensibly rotten ones fail. Instead these economies are, to a significant extent, dominated by huge corporations that are structured entirely differently to the small business of neoclassical and Austrian lore.

    These are the entities that have incurred huge debt-loads and find it difficult to function while Japanese consumers have inadequate resources to purchase their wares. If the Japanese were to ‘smash the technostructure’ – which would be politically impossible anyway – the result would probably be mass unemployment and a serious economic depression.

    To drive this point home because, conflicting as it does with market-mythology, I fear it will be lost on many: Corporations with mass capital outlays aren’t formed by heroic entrepreneur-types overnight. They are highly evolved social institutions that take much time and collective effort to build. If these are destroyed you would likely end up with a sort of ‘cowboy capitalism’ filling the void; a system geared toward short-term profit – perhaps even criminality – rather than long-term growth and stability. (Something broadly similar happened in Russia after the fall of Communism but for different reasons – which ‘shock therapy’ then exacerbated).

    But as we have highlighted, the crisis in the US, while similar to that in Japan in many respects, is not quite the same. In the US the problem is more so to do with unemployment and stagnant aggregate demand. So, even if the ‘smash the technostructure’ argument wasn’t completely poisonous, it would still be inapplicable (unless of course, you substitute ‘zombie’ companies with ‘zombie’ banks – but that’s another argument and another story).

    This probably means that the fiscal solution is even more applicable to the US than it was to Japan. While the Japanese economy needed to be kept on life-support for a few years while they got their collective house in order, the US citizenry just need more bucks.

    As Martin Wolf points out in another piece back in 2009:

    “The big US debt accumulations were not by non-financial corporations but by households and the financial sector.”

    Wolf goes on to highlight the skyrocketing debt incurred by the financial sector throughout the period. What he should be highlighting is that, more often than not, fastened to the end of the financial sector’s debt-chain is a low to medium-income human being. And that is where most of these debts ultimately land. That, in turn, is why this is, when we strip away the complexities, a fairly straightforward crisis of aggregate demand.

    Households have been pushed into debt because their wages haven’t been allowed to keep pace with productivity growth for decades. Add to this the maniacal desire that possessed certain Democratic administrations to run budget surpluses in relatively good economic times and you’ve got a pretty explosive mixture.

    So, it’s clear that the US citizenry need more bucks; but where should they get them? Why, from the government of course. After all, they’re the only realistic source right now. They can do this either through tax-breaks – for the working man, NOT for the rich – or some sort of employment program (I favour the latter, but I recognise that the former is probably more politically realistic).
    “Yippee!” cries the Yankee Doodle Naked Capitalism reader. “We’re not nearly as badly off as the Japanese were a few years ago; this’ll be easy.” Not so fast. The US is probably in a much worse position than the Japanese were back at the beginning of the 90s. Why? Eh… because crazy people run the country… duh.

    Bill Kay

    What has not been quantified on anyone’s charts is: the investor confidence factor!

    Just as Japanese government chose to save its banking system over its citizens, US government is following this exact example.

    Definition of stupidity, is repeating the same action and expecting a different result.

    Japan, at bubble burst had surplus, US-DEFICIT!!!

    Homeownership rates in Japan at bubble burst, were some of the lowest… US-THE HIGHEST!!!

    Japan in 1990 barely had any consumer debt, it is mostly a cash society, US-ABOUT $40K PER PERSON!!!

    US will not become like Japan… US will be so much worse, its unimaginable!

    I welcome all comments at:

    Pat :

    Some good ideas here, but I’m afraid you don’t understand the American political system. Politicians won’t vote for lower taxes only for low-earners (which in fact is the best way to stimulate demand), because they are bought off by corporations, esp the financial sector. Nor will politicians support government-created job programs for the unemployed. Stiglitz, Krugman et al have argued for New Deal style jobs programs and they are completely ignored. Politicians only support tax breaks for corporations and infrastructure things like high-speed rail, which are the most ineffective ways to create employment and/or stimulate demand. Actually, nobody in the political class really cares about poor and/or unemployed people, because they don’t vote. And in fact they like to have high unemployment, because it drives down wages. Systemic change is next to impossible because American society is so fragmented and self-centered (some might say narcissistic). Americans don’t care about a problem unless it directly affects them. So, for instance, unemployment is not a problem unless it affects you, and that is only 20% of the population. Unpayable housing debt only affects 30-40 million at most – the rest of the country doesn’t care much. Health care prices don’t excite the public too much, because most people get health care as part of their jobs. Rising gasoline prices, on the other hand, that’s something that worries most people. And Social Security and Medicare too, because most people get it now or will get it in the future.

    Tao Jonesing

    We had an internet stock bubble, followed by a housing stock bubble. A lot of the damage caused by the collapse of the housing stock bubble was masked by swapping out the components of the S&P 500 and Dow Jones 30 to purge them of the most housing-centric stocks, which took major hits and have never recovered (assuming they’re still around).

    Yearning to Learn:

    What he should be highlighting is that, more often than not, fastened to the end of the financial sector’s debt-chain is a low to medium-income human being. And that is where most of these debts ultimately land. That, in turn, is why this is, when we strip away the complexities, a fairly straightforward crisis of aggregate demand.

    Hmmm… is this true? Yes, a lot of the debt is eventually “held” by the average joe.

    But an AWFUL lot of that debt is also held in the corporate sector as well. Last I checked, there is a huge overhang of debt from the LBO market and Commercial RE as well. Not to mention the debt from the derivatives market. Or are we pretending that is held by the average joe because the govt is backstopping it.

    I would like to see data on how much debt is held by the common guy and how much debt is held based on LBOs and CDS and margin and leverage etc.

    Yearning to Learn:

    To drive this point home because, conflicting as it does with market-mythology, I fear it will be lost on many: Corporations with mass capital outlays aren’t formed by heroic entrepreneur-types overnight. They are highly evolved social institutions that take much time and collective effort to build. If these are destroyed you would likely end up with a sort of ‘cowboy capitalism’ filling the void; a system geared toward short-term profit – perhaps even criminality – rather than long-term growth and stability.

    Ahh… but it’s a catch 22 isn’t it?

    the longer we prop up zombie banks (and corporations) with Governmental guarantees and subsidies the more uncompetitive our market becomes squeezing out new players.

    thus: if we don’t bail out: cowboy capitalism (I like that phrase). if we do bail out: starving new entrepreneurs and allowing TBTF to get worse. (which is what was done… look at the monster that as become of BofA, Wells, Goldman, et al).

    there is a third option you don’t mention however… it’s a dirty little word. Nationalization. Sorry… “pre privatisation”.

    we need to nationalize to kill the zombie banks. then we can slowly open up the market again to allow new entrepreneurs to take their place without the Shock Doctrine that Naomi so eloquently discussed in her book.

    [Jun 06, 2011] Stock Market Adjustment

    6/02/2011 | Angry Bear

    The stock market is adjusting to weaker 2011 economic and earnings growth. Business executives, analysts and economists have yet to reduce their 2011 estimates, So the important question is how much of the lower growth is already discounted. The consensus had been for double digit earnings gains in 2011. But now it appears that earnings growth will be less than nominal GDP growth -- the low single digits.

    The revised first quarter GDP deflator of 1.9% appears to be weaker than what other measures of inflation are reporting.

    It is low. Within the report the deflators for both gross domestic purchases and the personal consumption expenditures ( PCE) rose at a 3.8% rate.

    The low GDP deflator stems from the way GDP is calculated.  GDP subtracts imports from final demand to indirectly estimate production. When you buy an imported car it is reported in PCE.  But GDP measures production, not consumption. To go from consumption to production that imported car has to be backed out
    of the data by subtracting imports. So subtracting imports is the right way  to calculate GDP.

    But when import prices surge -- in the last quarter they rose at a 21.8% rate -- this methodology tends to distort the GDP deflator and causes it to understate inflation. It happens every time oil prices spike.

    So the reported low 1.9% inflation rate should be taken with a grain of salt and viewed as a data distortion.

    If the inflation rate is really 3.8%, not I.9 % it strongly implies that the dominant cause of the economic and stock market weakness is higher inflation, not supply chain disruptions.

    This analysis strongly reinforces my belief that as long as wage gains are as  weak as they are, the economy can not sustain higher inflation. If and when inflation accelerates it generates weaker economic growth, not a self reinforcing inflationary spiral.

    Moreover, unit labor cost is now rising faster than the non-farm business deflator. Last year strong productivity and falling labor cost meant that firms could absorb higher commodity prices and still report strong earnings growth. That is no longer true. Firms now need to try to pass these cost increases through and the revised first quarter data implies that business executives, economists and analysts are still too optimistic about firms ability to raise prices.

    [Jun 06, 2011] Fed Watch: Circling the Drain

    Economist's View

    Tim Duy has lost some of the optimism he had earlier in the year (hope he's enjoying himself):

    Circling the Drain, by Tim Duy: It is beginning to look like the economy is circling the drain. To be sure, I hate to make too much of one report, but the May employment report comes at the end of a series of bad reports stretching back to nearly the beginning of the year. There looked to be solid hope the recovery was on a better track as 2010 drew to a close, and that momentum appeared to carry through into January. But then we hit a wall.

    What wall? Theories abound. Temporary weather and tsnumai induced disruptions for one, but we should be trying to look through such short term events. The crisis in Europe, although to be honest I don’t think this is having much of an impact on the decision making of the average US citizen or firm. I tend to think the rise in commodity prices, particularly oil, was the primary culprit, as consumer spending faltered and businesses struggle to pass increasing costs onto consumers. But what it really comes down to is that we have only had one good quarter in this recovery, and that simply was not enough to provide sufficient resilience to the sheer number of shocks the economy has weathered this year.

    And let’s face it, even with that one good quarter, forecasters were still looking forward to a protracted recovery. That, however, did not stop the policy environment from turning remarkably contractionary. The debate in Washington quickly turned to how quickly to cut the deficit, how quickly to withdraw monetary stimulus. All with the goal of assuaging the invisible bond vigilantes, who have apparently been helping drive the 10 year Treasury yields back down to 3%. The turn toward contractionary policy - and monetary policy arguably turned contractionary when Fed policymakers questioned the wisdom of continuing QE2 - is surely one of the shocks that hit the economy.

    Will the Fed respond with anything more?

    [Jun 06, 2011] us-jobs-crisis-here-stay

    "US economy now close to stall speed. From anemic recovery to tipping point to stall speed and growth recession. Is a double dip next?"
    Pension Pulse

    John Talton of the Seatle Times reports, Why the US is in a jobs crisis:

    The situation is nicely encapsulated by economist Nouriel Roubini's tweet this morning: "US economy now close to stall speed. From anemic recovery to tipping point to stall speed and growth recession. Is a double dip next?"

     The economy only created 54,000 jobs last month. It takes between 125,000 to 150,000 net new jobs a month just to keep up with the organic numbers of people entering the labor force, much less make up for the losses of the Great Recession.

    Unemployment "officially" stands at 9.1 percent, the real rate much higher. "To remind us what a healthy unemployment rate looks like, four years ago, in May 2007, the unemployment rate stood at 4.4 percent, and 11 years ago, in May 2000, the unemployment rate was 4.0 percent," according to economist Heidi Shierholz of the Economic Policy Institute. "The U.S. workforce needs the pace of job growth to accelerate dramatically in order to re-establish full employment within any reasonable timeframe, and instead, the recovery is on pause."

    Put another way, by the blog Zero Hedge, the U.S. would have to create 250,000 jobs a month for 66 months just to return to where unemployment stood in December 2007 by the end of President Obama's second term. But why is job creation broken?

    It's an area where we need urgent research and sober debate. I can think of these reasons:

    For all the political theater, America has a jobs crisis much more than a debt crisis. Until it fixes the former and creates broad-based growth, it can't meaningfully address the latter.

    I totally agree with many points expressed in this article, especially the last point on America's jobs crisis being far more important to fix than the debt crisis. Right-wing pundits have been busy spinning the debt crisis but the reality is unless there is a meaningful and sustained jobs recovery, the debt crisis will never be addressed. And don't believe anyone who tells you otherwise.

    How do I know this? Just look at Greece. Austerity is a disaster, pushing their economy to the brink. Greece doesn't have a manufacturing base and relies almost exclusively on tourism and shipping as the pillars for its economy. Young and smart Greeks are leaving the country not because they want to, but because there are simply no opportunities in the private sector. Greek policymakers are doing absolutely nothing to address serious structural issues in their economy.

    That brings me to my next point. The real crisis behind the jobs crisis in the US and pretty much the rest of the developed world is the leadership crisis. Politicians and policymakers are spewing the same old ideas. Liberals want to increase deficit spending while conservatives want to decrease taxes and cut spending. Same old, same old. There is nothing new in these policies based on ideology. Nobody has the courage to take on interest groups and admit that there is a fundamental problem with the current trajectory.

    What really worries me from a social perspective is that the disconnect between the financial system and the real economy is widening income inequality. QE2 hasn't done much for the real economy yet, but it's been a boon for traders and money managers. The financial oligarchs couldn't care less about what's going on in the real economy, and neither do America's corporate titans. All they care about is their total compensation which continues to rise to record levels while millions struggle with unemployment.

    Unless something is done to address structural issues in the labor force, including the ever widening income gap between the haves and have-nots, a whole generation of workers will suffer from chronic unemployment and along with it, loss of job skills, loss of dignity, and most worrisome, chronic mental and physical health problems that will put additional pressure on public spending.

    Now is the time for our political leaders to step up to the plate and address the jobs crisis. If they don't act quickly and forcefully with fresh and courageous ideas that work, then capitalism as we know it is doomed. If this sounds too "Marxist" for you, then you're ignorant of history and how human beings always repeat the same mistakes. Somewhere down there, Marx is grinning in his grave. I leave you with an interesting discussion from ABC's This Week on the prospects for the class of 2011.

    [Jun 06, 2011] Goldman Apologizes For Its Horrendous December "US Economic Renaissance" Call, Begins QE3 Discussion by Tyler Durden


    Back on December 1, 2010 Goldman announced it was "fundamentally" shifting its "bearish" outlook on the economy, when Jan Hatzius said "This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years" we accused the Goldman economics team, which we had previously respected, of "jumping the shark" and in describing the piece of fluff said it was nothing but "Hopium", concluding that "Jan Hatzius used to have credibility." Ten minutes ago, Hatzius just threw in the towel and apologized for this horrendous call. "Six months ago, we adopted the view that the economy was transitioning to a more self-sustaining recovery and predicted sequential real GDP growth of 3½%-4% (annualized) in 2011-2012. There were three reasons for our shift: a) a pickup in “organic” growth—GDP excluding the estimated impact of fiscal policy and inventories—to more than 4% in late 2010; b) visible signs of progress in private sector deleveraging, and c) another round of fiscal and monetary stimulus....It hasn’t happened." Needless to say, this apology has made us regain some confidence in Hatzius. Of course, we fully expect that he and his entire team will relinquish their 2011 bonus (and possibly a 2010 bonus clawback) following this massively wrong call, which only Zero Hedge had the guts to call out. Anyway, we can now move on... to QE3. Just as we predicted in January (but were late by a month, expecting this preliminary discussion would occur in May at the latest), Hatzius has just launched the first shot across Bill Dudley's bow. "So what is the hurdle for QE3?" Hatzius asks... And a very dovish Bill "You can't eat iPads" Dudley will answer very shortly. Next up: QE 3.

    [Jun 06, 2011] Michael Hudson Replacing Economic Democracy with Financial Oligarchy « naked capitalism

    The moral is that when it comes to bailing out bankers, rules are ignored – in order to serve the “higher justice” of saving banks and their high-finance counterparties from taking a loss. This is quite a contrast compared to IMF policy toward labor and “taxpayers.” The class war is back in business – with a vengeance, and bankers are the winners this time around.

    ... ... ...

    Finance is a form of warfare. Like military conquest, its aim is to gain control of land, public infrastructure, and to impose tribute. This involves dictating laws to its subjects, and concentrating social as well as economic planning in centralized hands. This is what now is being done by financial means, without the cost to the aggressor of fielding an army. But the economies under attacked may be devastated as deeply by financial stringency as by military attack when it comes to demographic shrinkage, shortened life spans, emigration and capital flight.

    This attack is being mounted not by nation states as such, but by a cosmopolitan financial class. Finance always has been cosmopolitan more than nationalistic – and always has sought to impose its priorities and lawmaking power over those of parliamentary democracies.

    Like any monopoly or vested interest, the financial strategy seeks to block government power to regulate or tax it. From the financial vantage point, the ideal function of government is to enhance and protect finance capital and “the miracle of compound interest” that keeps fortunes multiplying exponentially, faster than the economy can grow, until they eat into the economic substance and do to the economy what predatory creditors and rentiers did to the Roman Empire.

    ... ... ...

    My own memory is that socialist idealism after World War II was world-weary in seeing nation states as the instruments for military warfare. This pacifist ideology came to overshadow the original socialist ideology of the late 19th century, which sought to reform governments to take law-making power, taxing power and property itself out of the hands of the classes who had possessed it ever since the Viking invasions of Europe had established feudal privilege, absentee landownership and financial control of trading monopolies and, increasingly, the banking privilege of money creation.

    [Jun 01, 2011] Did The Fed Just Give The Green Light To Sell The Stock Market?

    Submitted by Tyler Durden on 06/01/2011 21:54 -0400

    Remember when the president uttered the magic words back in March 2009, when he said that "profit and earning ratios [whatever the hell those are] are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it" giving the green light for the 2 year bear market rally? Well, if that was global market Risk On, Janet Yellen just gave the Risk Off command. To wit: "forward price-to-earnings ratios in the stock market fall within the ranges prevailing in recent decades, and are well below the early-2000 peak, although corresponding measures for small-cap equities (not shown) appear somewhat elevated....special questions included in the March 2011 SCOOS suggest an increase in the use of leverage by some traditionally unlevered investors (such as pension funds and insurance companies) as well as hedge funds during the previous six months. " Yup: small caps, aka the Russell 2000, aka the Economy according to the Fed's third mandate. Ironically, the Fed realizes the Catch 22 it is caught in, which we noted earlier, namely that stocks are pricing in QE 3, but for QE 3 to happen stocks have to drop 20% from here. Well, this may be the last warning from the Fed.

    [Jun 01, 2011] Cash Levels at 30 percent By Barry Ritholtz

    June 1, 2011

    How much cash are you holding?

    That seems to be the dominant question I am getting from readers.  Our long/short portfolio was as long as 86% not too long ago.

    We have been doing selective trimming over the past few weeks, but nothing too aggressive. As of this morning, we were about 70% long, 30% cash.

    We have no shorts at the moment. Our selling has been selective, based on individual names — not a market call. Markets remain in their range, and within 5% of recent highs.

    Our last bear call (February to March) never really reached the deep levels we were hoping for. The next two levels that bear watching are SPX 1313, and 1249.

    I am more inclined to be a bear here than the metrics suggest, but over the long haul, I have learned to trust the data rather than my instincts.

    How the Common Man Sees It Says:

    I’m about the same as you (we must have similar trading styles because it seems you are always near my allocations) 25% cash in gold, maximum allocation in energy. The energy trading position is not fully built yet, that is this year’s project. I’m trading with a partially built death star at this point. The gold position is fully built and functional and I’m blowing up planets with it as we speak.

    RW Says:

    June 1st, 2011 at 3:37 pm I’ve been too much of a pessimist this rally so I never got above 70% net long in equities (including hedges) and am now about 50% — 10% gold was a high as I ever got and have been trimming there too.

    The flip side of that pessimism is I was never in a hurry to liquidate long bond positions and going slow with that has made money all along. Bill Gross may be proven correct this year (although underlying economic trends suggest maybe not) but there is little question now that he was early in bailing on long treasuries.

    Not as early as notorious inflationistas like Niall Ferguson of course but then, unlike Gross, I don’t get the sense Ferguson puts his money where his mouth is. Ferguson has been calling for hyperinflation “any day now” for, what, maybe three years now? There just seems to be something about empirical evidence that elites don’t care for; at least they don’t seem to pay much attention to it.

    NB: Speaking of which, good post at Juggling Dynamite ( on the meme that China is ‘diversifying away’ from US bonds.


    The cyclically adjusted P/E ratio (shiller, hussman) is approximately at the level where prior bear markets have started.

    Any advance from here would be speculative and limited, in my opinion.

    My response has been to raise cash and move to high quality dividend growth.

    Sechel :

    Don’t see how one can be bullish here.

    1) Market is at very rich cyclically adjusted P.E

    2) Bonds are suggesting weak economic growth

    3) Consumer are spending more on Food & Energy which leaves less for everything else

    4) Home equity the ATM growth engine of the past is not coming back

    5) We just got confirmation of a double dip in housing so take housing away from contributing to GDP

    If we assume earnings grow 6% over the next decade and the Schiller Cape declines from 24 to 12 1.06)*(12/24)^(1/12)-1 then we’re talking about zero return over ten years.

    Suddenly the Ten Year Treasury paying 2.95% doesn’t seem so bad….. relatlively speaking of course


    ‘I have learned to trust the data rather than my instincts.’

    Today’s DATA confirmed my instincts re QE1, QE2 and their ineffectiveness in solving the problems of housing bubble and it’s aftermath!

    Many TRILLIONS later, those ‘problems’ still remain, those (criminals) who caused the problems are ‘still’ in charge of finding solutions!

    Investors have bought this ‘euphoric’ market on the idea that the Fed (Barnake) can spend it’s way into prosperity believe that ‘Debt on Debt’ can solve ALL the problems b/c of Debt!

    Is today, the beginning of unraveling of ‘ castles built up in the air’ after the initial House of cards collapsed?



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