Archive for the ‘Institutions’ Category

In Which I Abandon Many of My Previously Held Beliefs and Attempt to Steer My Liberal Brothers and Sisters Towards The Harsh But Comforting Glow of Reality (and the conservatives can come along for the ride too, but frankly I think most of them are weird, and if you are socially conservative, I wonder why you even read my blog unless you just like getting angry)

September 14, 2011 Leave a comment

I’ve come to the conclusion that most self-styled liberals have confused or combined two distinct questions in economics: how do we best divide the pie? how do we best make the pie bigger? The answers to these questions are distinct. Any piece of policy can have effects on both, but to use a single policy to address both issues is to ignore the fundamental difference between the two questions. I think that the problem many liberal leaning economist have gotten themselves into lately is that they have let their desire for social justice overshadow their understanding of market fundamentals.

As a progressive and a social Marxist, I understand and sympathize with their passion. The equitable distribution of society’s resources is a noble cause, and one that shouldn’t be abandoned. Unfortunately for us, the current ruinous state of the economy cannot be fixed by redividing the pie. It also can’t be fixed by government directed intervention.

They may be able to prop up employment temporarily with additional spending, but any of the jobs the government can create in this way are not sustainable. All of the contractors repairing schools and bridges are out of work again when the job is done. The liberal thesis is that the economy will somehow self-correct in the interim, but this correction will not take place because the strategy of financing these stimulus projects with deficit spending and tax hikes exacerbates the root cause of the countries structural economic problems: we are broke. Our country’s balance sheet is sagging to the right, which is the side that all of the debt is on if you are not familiar with accounting.

I am going to do a 180° on what I have written before and say that the government can’t afford to do more spending. I’ve called for it in the past, because of the low interest rates and excess capacity of our economy, but my outlook has fundamentally changed based the economic happenings around the world and the political ineptitude right here at home. The specific ineptitude I am referring to is the Republican Party’s debt-ceiling hostage fiasco and Obama’s latest Job Program theatrics. I think the damage done by the debt ceiling debate is self-evident. As for Obama’s latest policy objective, it is a half-assed jobs program that is more than a day late and trillions of dollars short. It might have been an okay idea if we hadn’t bailed out the banks, and if he had gotten it passed when he first came into office instead of pursuing his disastrous health care overhaul, and if it were about 3 or 4 times as big. But now, the window of time where it would have been effective has closed, we can’t afford it, and in it’s current incarnation, it’s not designed to actually pass anyway. It is a political ploy for him to blame the Republicans for his failed economic policy. The truth is that neither party is doing anything of substance. Everything has been reduced to a zero-sum game because of political squabbling. S&P knows this, the markets know this, and you and I should know it as well.

My interest rate argument, which essential went “we should borrow money now at 2% and spend it on projects that have a return of greater than 2%”, I think it is a pipe dream in this political environment that the money would get to where it needs to be. Furthermore, doing more research about the economy outside of the United States has led me to believe that interest rates are artificially low. The relative weakness of other currencies and the lack of safe assets has created a scenario where interest rates in the US are being held low because treasury bills have come to be viewed as a financial safe haven due to the overall shittiness of the developed world’s macroeconomic conditions. Current rates are not a reflection of the fundamental strength of the US economy or the dollar, but of our relative perceived strength in comparison to the Eurozone and equity markets. In addition to foreign capital flowing into treasury bills, we also have the Federal Reserve injecting trillions of dollars into the treasury market to maintain these artificially low rates. The continued injection of trillions of dollars into the economy will create inflation as soon as demand picks up. The reason it hasn’t created inflation yet is because banks, and the few corporations that have some, are parking their cash on their balance sheets or giving it back to the government by buying treasuries. The government is using this cash to pay off the interest on the treasuries that are already outstanding and to prop up the economy with its weak and ineffective “stimulus” policies.

(Even my “brilliant” “a trillion dollars for fusion energy plan” would probably end up destroying more jobs than it creates, as the entire energy sector would probably shed more than half of its work force after widespread fusion energy became available. It is not what the economy needs right now; when we are back standing on our own two feet, instead of being propped up by the Fed and China, it would be an excellent idea, but for now we need a fundamental change in the government’s balance sheet.)

Capital needs to be in private hands where it can flow freely to the enterprises that can put it to the best use. This is the only way the economy can be restored. Hatred of bank bailouts is not a reason to keep capital out of private hands… if anything, it is a reason to keep capital out of the government’s hands, because the government is the one who bailed out the banks! If the banks that made bad mortgages were allowed to fail three years ago, it would have caused a larger recession, but it also would have given us a solid foundation to recover from. We currently have no such foundation, and we are now headed towards an even more monumental collapse because of our failure to address these issues in 2008.

I know I have called for additional infrastructure spending and a Manhattan Project for renewable energy on these pages, but I am now forced to temper these beliefs with my conviction that the government is not capable of efficiently allocating resources. The projects created by government spending have all been designed to boost consumption rather than investment, and they have done a poor job even at that. This past couple of weeks , I’ve been reading Keynes for the first time since college (actually I never read him in college, I just got the encapsulated version presented to me in textbooks). This reading has given me the insight that the biggest problem in the economy right now is a lack of investment. The easiest way for the government to incentivize investment is to lower taxes and reduce spending. We need lower taxes to generate private industry investment, and we need reduced spending to keep the deficit under control and send signals to the markets that we are finally getting serious about getting our economic house in order.

This means that social safety nets will get cut. It means that real wages will fall. But there is no way around it at this point. The facts on the ground stay the facts no matter how deep we have our head stuck in the sand, or how much we hate the other party. The United States is essentially insolvent and the only thing keeping us afloat right now is our collective lack of desire to acknowledge it. We can shellac more layers of debt onto the problem, but it’s only going to give us a sharper hangover when we finally have to wake up to the next morning in America.

I know that lower taxes, especially on the rich, is a hard pill for progressives to swallow. The entire narrative of evil bankers and corporations require that we punish them, that they be made to contribute towards the maintenance of our social capital, social capital that has been eroded by our elected officials because of corporate malfeasance. The problem with this narrative is that it is wrong. It is not the corporations that are evil, it is the elected officials who let them be bailed out, who stuffed the regulatory agencies full of corporate cronies, who choose to cut the social safety net instead of let their corporate sponsors go bankrupt. The “leaders” on both sides of the aisle are guilty of these same transgressions. It is not a case of the Democrats being for the working joe union member, and the Republicans being for responsible governance. They are both the parties of corporate America. That is why an independent, outside candidates like Ron Paul or Jon Huntsman or Ralph Nader or Dennis Kucinich don’t get a fair shake in the media. That is why the big banks and corporations donate to both parties instead of just the Republicans or just the Democrats. That is why senators and representatives from both parties voted for the bailouts. The only reason the Republicans have flipped over to being against the bailouts and against more band-aid style stimulus spending is because there energized base is standing up and demanding it (believe me, the Republicans would love to bring home the bacon, especially the ones who were there for the Bush administration).

The Democrats could learn a lot from the Tea Party bozos that they love to deride. They may be stupid and bigoted, but at least they are loud and make things happen.

The Democrats masquerade behind the moral, populist high road, but it is all a charade. The Democrats have used this story of evil bankers to distract us from dealing with the fundamental realities of our country’s political economy. Obama hasn’t delivered anything to us, except a disastrous health care plan that makes huge concessions to the drug companies and medical equipment manufacturers (guaranteeing them outsized profits and artificial monopolies), and a stimulus bill that has rescued politically favored corporations at the expense of the tax payer, all the while tacking on another trillion dollars of the fundamental problem (debt) and doing nothing to create sustainable jobs, jobs that will still be here when the stimulus money runs out (if you think he has, or if you are the type of person who likes to quote how many people have health insurance now, or you’ve ever linked anyone to this site, please read this post that I wrote especially for you).

The Republicans are no better than the Democrats. They do a good job of speaking as if they understand the fundamentals of market capitalism, and pretending that they are for smaller government, but then when they are elected they shift their policy agenda to social issues and give favors and breaks to their corporate benefactors. They spend just as irresponsibly as the Democrats, and they do it in ways that are to the benefit of a selected few rather than the majority of this country’s people. I’m not going in as hard on them because I am really wanting to focus this piece on my friends and readers who are liberal democrats, because I feel like I have a greater chance of saving you than I do of turning a Tea Partier into a born again liberal. So yes, Republicans are very bad.

The bad news is that things are going to have to get a lot worse before they can get better. The good news is that things can get better, we just have to stop lying to ourselves, and stop believing the lies being told to us by the charlatans that we keep putting into office.

Of all the deficits we have, I think the biggest one is a deficit of leadership. The problems in both our economy and our government are structural, and they are related to each other. It is an addiction to spending and abuse of the power of appropriation that has given us these structural defects; the toxic mortgages were just the termites. Neither party wants to address the real issues because they know they are part of the problem; the biggest part.

They are going to trick you into voting for one of them next year by making the other party into a boogieman, and it is going to scare you, and you are going to vote for a candidate who you think will do a less worse job than the other one… and your candidate may win, and you will look at his or her future policy accomplishments and say: “that’s not too bad… imagine what would have happened if the other guy got into office!” and you will feel good about yourself and your vote, or about as good as you can feel about such a thing, but deep down inside you will know that something is wrong, that the system is rotten. You will justify your candidates inefficacy by blaming democracy (“its the worst system, besides all the other ones! hahaha Churchill”), the two-party system (“well I can’t let that other bozo get into office”), the corporate interests (“it’s the greedy corporations that mess everything up”), the lobbyists (“it’s not really the corporations that are bad, but all the money they put into politics”), the banks (“they screwed us over by giving me a mortgage I can’t afford… why did they let me do that?”). It will be anybody but your candidate’s fault. Mainly it will be your fault, because you’ve read this piece, and now you know that the two major parties aren’t going to do jack shit for you (or maybe you don’t believe me… if so, leave me a comment or send me an email heftionezip(at) and tell me why not).

Vote for anyone but an establishment candidate.

If you want to vote for a liberal politician, vote for Ralph Nader.

If you are sick of politicians, vote for yourself, or your mom, or your best friend.

I’m going to be voting for Dr. Ron Paul. I don’t agree with the man on everything he has to say, but I believe his conviction in what he says, and I can’t say the same thing about Obama… I’m sure you remember from the last election cycle all the empty sloganeering and smooth rhetoric that whetted the media’s collective pussy and probably yours too. How many of those promises has Obama delivered on? How many has he even tried to deliver on? I’ll give him health care (for now… I’ll crack that coconut on another day), but Guantanamo? The Wars? Gay Marriage? The Economy? Wall Street/Banker Bonuses? Ron Paul has a 30+ year record of sticking to his principles that you can see in his voting record in congress. Get the man elected, and you know he is going to do what he says he will. And if you are still scared that he is going to criminalize abortion, or that disbanding the DoED will somehow hurt America, or that he is going to let corporations run amok and pollute all over the place… if those are the only things holding you back, keep coming back here and listening to what Dr. Paul has to say, because I think that 14 months might be enough time to assuage those fears and change your mind.


On Greece and the Market Psychology of Bailouts

September 12, 2011 Leave a comment

“You know the first time someone plays poker they are afraid to bluff. The second time they decide bluffing is great. By the third time they are so confused about who is bluffing and when that they might as well just hand their chips to the best player at the table and save everyone the time and effort or taking the chips.  I think the central bankers and governments have gotten so confused they are bluffing with a few low off suit cards and don’t even realize the cards are face up.”

More here at Zero Hedge.

Categories: Economics, Institutions, Money

The Feta is About to Hit the Fan

September 12, 2011 Leave a comment

I’ve been pretty busy on the internet today. To my intellectual detriment, I haven’t really been paying attention to the EU this year, so I caught up on things today. My worry meter is at about a 9/10. European politicians aren’t all that different from the ones here in the USA. The conservatives are essentially holding the economy hostage by not bailing out the troubled sovereign economies. I am not sure if they don’t understand what is at stake, or if they do and just don’t care because it is all part of some diabolical plot. In either case, things are not boding well for any type of political solution.

Spain, Italy, France, and then the entire EU are at risk, in that order. I would wager that if any country’s beside Greece default, we will be in for another sharp recession, and if they all go down (I have to believe the ECB or even the Fed would step in before this happened) we will be witnessing the final curtain for the Western finance, The Greater Depression. I don’t like sounding so melodramatic, but its warranted given the circumstances. How many politicians are willing to double down on another bailout? How many people would take to the street if such a thing came to pass? I know I would…

We’ve been hearing this possible chain of events for almost three years now, but the chickens have come to roost finally. The time frame for this happening is before the end of year; Greece may default as early as this week.

Governments are not Households

September 11, 2011 2 comments

There is a lot of rhetoric in the media, particularly in conservative outlets, that equates the government’s balance sheet with that of a household. I believe such a comparison is useless: it is much more accurate to compare the government’s balance sheet to that of a corporation.

Corporations and governments are ongoing concerns. Households are not ongoing concerns; families may be, but younger generations eventually strike out on their own and form new households. This assumption that businesses and government go on forever is an important concept to understand because of its implications for revenue streams, and the debt that can effectively be saddled by a particular entity.

Debt itself is issued against the expectation that it will be paid off with the future revenues of the debtor. In the case of a household, this revenue stream is the income of its members. It’s members’ income can only be projected out for a certain number of periods, after which there is the expectation of retirement, and then death. These revenue streams are definitively finite in duration. Governments and businesses, on the other hand, are not subject to mankind’s short lifespan. The projected revenue streams extend forward much farther into the future. While there is certainly a degree of uncertainty about whether a certain corporation’s goods will still have a market, or whether a country’s government will continue to hold enough popular support to survive into the future (and steward the economy in such a way as to preserve a large enough tax base), it is possible for corporations and governments to adapt to changes in their operating environments, and certainly easier for them to do so than it is for a household’s main earner to change careers near the end of that person’s life.

A household cannot easily become saddled with a debt that it is incapable of paying off in a single generation, because creditors will not lend someone more money than he can reasonably be expected to pay back in his life time. By the time the main income earner dies, the house is generally paid off. While it is certainly true that corporations go bankrupt and governments get overthrown and replaced, the concept of an institutional balance sheet as something beholden to the same constraints of mortality as a human being is foolish. Human lifespans are significantly immutable, but there is no biological aging process that predetermines the lifespan of a state.

Categories: Economics, Institutions

“Americans have been historically less inclined than Europeans to explosions of social rage, despite suffering more poverty than most other wealthy democracies.”

September 11, 2011 Leave a comment

This article makes an important point about the burning luxury cars in Berlin and the American proletariat’s general inaction against its bourgeoisie. It could be America’s strong anti-communist cultural values, but I think an even more likely cause is the large number of lower income, fiscally conservative Republicans. Whether they are fiscally conservative because they are Republican or Republican because they are fiscally conservative is of little consequence: the strange assortment of characters under the GOP’s formerly big tent is united by their unyielding belief in ideology, whatever that ideology may be. You have a mixture of people who don’t understand what tax bracket they are in, or how progressive taxation works.  or else they have noneconomic reasons for voting the way they do: morality (include both Christians and Minarchists here), racism, last place aversion, etc.

If the Democrats were the gun nuts, rather than the Republicans, we might be seeing protests here that are more riotous and violent in character, similar to what tends to happen in Europe as of late (France 2005, UK 2010/11, Germany 2011). For now, perhaps the banker’s sleep better at night knowing that the party of our nation’s proletariat is also the party of its peaceniks.




This is What Plutarchy Looks Like:

September 8, 2011 Leave a comment

This is What An Oligopoly Looks Like:

This is What A Plutocracy Looks Like:



EDIT: According to this, the four big banks only have 34% of the market as measured by total deposits.

How many of you were pissed off at the bailouts and still keep your money with one of these banks? Going down to your local credit union and opening an account is a better form of social protest than doing nothing.



If you read one thing about political economy all year, read this interview with Michael Hudson

Stumbled across this interview with one of my favorite economists, Michael Hudson. He is not from Harvard or MIT or Chicago, so he doesn’t get as much attention as the Paul Krugman’s of the world, but he punches well above his weight when it comes to his abilities to articulate what is happening within the political economy of the world.

The interview is long but you should read the entire thing. It is honestly the best piece I have read on political economy in at least 2 years. The tl;dr version is that Obama long ago sold out the Democratic constituency to Wall Street, the deficit debate is all political theater, the bailouts vested the power of Wall Street in the same way that the railroad land giveaways vested the power of the robber barons, Greece will default and get kicked out of the EU, the financial estate is essentially at war with the public… it’s all stuff you’ve probably heard before, but Hudson does an exceptional job of tying it all together.

I feel like most people are still asking “How did it all happen?”, when what we really need to do is ask “What is happening right now?”. The vast majority of people believe the propaganda pushed out by the media. No one reads or listens with skepticism and objectivity anymore, and I don’t mean to rant, but maybe they never did. Is there just too much noise? How can you explain the entire political economy without debasing your argument by making it sound like a wild conspiracy?

I think this is the point that a lot of mainstream middle Americans don’t get: it isn’t that there is a group of Illuminati who sit in a lair somewhere and have discussions about how well their plan is going, it is that there are outsiders and insiders: the insiders understand what is happening and do their best to work within the system and profit from it, while the outsiders, some of whom know what is happening, are the majority who get screwed.

The only thing we can really do about it is stop caring about money; stop caring about year-over-year GDP growth; most of all, stop believing what you are told. You are not “informed” because you watch both MSNBC and Fox News, you are not one of the people who “get it” because you vote Democrat, read the Huffington Post, and have a Noam Chomsky book or two sitting on your bookcase that you probably never read. I’m stoked that you are at least a social progressive, and I am glad that you read more books than the Bible, but do yourself a favor and divorce your conceptions from the pop cultural memeosphere. We all have an emotional and cognitive investment in the world as we see it, but we are often unaware of exactly how and when these investments were made… and we sure as hell don’t check on them with half the alacrity we reserve for our financial investments.