Wednesday, June 4, 2014

On r > g

Here's what drives me up the wall about academic economists, and economists in general:

When we absolute know (and there is no credible disagreement about this) that wealth inequality has increased to Gilded Age levels, economists, even progressive economists like Jamie Galbraith and Yves Smith, quibble that "it isn't because r > g" or some other such blather about "Cambridge capital controversies," rather than looking at the facts staring them in the face, the actual causes of the acceleration of wealth inequality: our carry-traded capital markets and our winner-take-all compensation of chief executives (which extends to all who get bonuses based on stock price, a small fraction of employees).

But as the saying goes, you could put all the economists on the planet in a line and they would never reah a conclusion. Meanwhile the march toward either (a) security state neofeudalism, or (b) social and economic collapse that ushers in some form direct democracy.

Choose.

Sunday, May 18, 2014

Financial imperialism in the Ukraine

Michael Hudson’s masterful exposition of the forces of financial imperialism at play in the Ukraine, from both sides, came out a couple of days ago, but if you haven’t read it—it’s owrth the long read, as it covers the neocon/neoliberal “Great Game” strategy in historical context. Via nakedcapitalism.com

Michael Hudson: The New Cold War’s Ukraine Gambit

Saturday, May 17, 2014

Waiting for that Nixon-in-China moment

The US strategy toward Russia and the Ukraine is following the neocon playbook: contain Russia, prevent the pan-Asian trade zone from happening.

At one time I believe we fought (another illegal) war in Vietnam to “contain” China, a vast country on the brink of abandoning old-style Communism well before the Soviet Union fell.

Nixon went to China in 1972, before the fall of Saigon. Deng beat out Mao’s chosen successor in the late Seventies and started liberalizing the economy in about 1980, just as the US was abandoning capitalism for right-wing plutocracy.

Subsequently trade with China helped the diminishing American middle class via inexpensive imports, even as it aided its diminishment by taking some of its jobs.

Wouldn’t it be nice if, instead of vilifying Gorbachev, Putin could take Gorbachev’s advice and permit democracy to flourish? And if Obama could see that Russia, like China, is a huge market with little sovereign debt that we are going to lose?

But we seem to be on the downside of a long wave in a time when confidence fails everywhere, a time, as Martin Armstrong points out, in which governments almost everywhere exist in a state of sclerotic corruption and codependency with the international plutocracy that seems ultimately to serve only the families of the plutocrats.

May the meek inherit the Earth on the other side of this. And meanwhile, pity the poor broke Ukrainians, caught between two mad plutocracies who want the black Ukrainian soil but not their debts and who are trying to figure out if a war might give them clear title.

When will rates rise? -- reprise

Bernanke Shocker: "No Rate Normalization During My Lifetime" – Zero Hedge

As I pointed out recently in Interest rate reality check I agree that it will be quite a while until rates normalize. The analytical criterion is of course when the ratio of monetary base to GDP returns to longer term averages, which would require the ratio to drop to about 25 percent of its current level of ~0.22.

One way for this to happen would be for the Fed to charge off all the bad debt it is hiding for the banking system, and to stop paying them interest on fictitious reserves.

I don’t know how bad the debt in the monetary base is—no one does, even within the Fed, apparently—but this (absent a huge increase in GDP growth) is what would have to happen. And as base has been growing at >20 percent annual rates and GDP at… well, you know.

John Hussman deserves credit for saying that it is the illusion of solvency created by FAS 157 that has sustained the (stock market) recovery.

Will the Western banks do this? Not a chance. The Fed and ECB seem determined to kill their economies and start another world war.

Another indication that the big tiger may leapfrog us is Jim Rogers’ assertion that the PBOC is actually requiring banks to charge off bad debts. A sharp contraction followed by really robust growth (after a couple of years) would be the implied forecast.

Even Barry Ritholtz is questioning whether FAS 157 should remain in place.

But it won’t matter, if the Fed keeps buying up and hiding all the bad debt, will it? Thanks Alan, thanks Ben. Martin Armstrong says his sources in the big “banks” (i.e., Goldman et al., the hedge funds stealing money from the American people via the discount window and Fed largesse in general) tell him the Fed is saying they’re only going to bail out depositors next time—which is exactly what I said they should have done last time, which would have let the system clear and avoided a hell of a lot of moral hazard—and to get their trading risk models tuned accordingly.

We shall see. I hope Janet is up to the task.

Tuesday, May 13, 2014

Why I’m probably on a watch list

From the Guardian reporting on Glenn Greenwald’s new book:

One document from the Snowden files, dated 3 October 2012, chillingly underscores the point. It revealed that the agency has been monitoring the online activities of individuals it believes express "radical" ideas and who have a "radicalising" influence on others. The memo discusses six individuals in particular, all Muslims, though it stresses that they are merely "exemplars".

The NSA explicitly states that none of the targeted individuals is a member of a terrorist organisation or involved in any terror plots. Instead, their crime is the views they express, which are deemed "radical", a term that warrants pervasive surveillance and destructive campaigns to "exploit vulnerabilities".

Among the information collected about the individuals, at least one of whom is a "US person", are details of their online sex activities and "online promiscuity" – the porn sites they visit and surreptitious sex chats with women who are not their wives. The agency discusses ways to exploit this information to destroy their reputations and credibility. […]

All of the evidence highlights the implicit bargain that is offered to citizens: pose no challenge and you have nothing to worry about. Mind your own business, and support or at least tolerate what we do, and you'll be fine. Put differently, you must refrain from provoking the authority that wields surveillance powers if you wish to be deemed free of wrongdoing.

This is a deal that invites passivity, obedience and conformity. The safest course, the way to ensure being "left alone", is to remain quiet, unthreatening and compliant.

Are you going to remain quiet because you are afraid of being put on a watch list? You are part of the problem. Reform will require an expansion of consciousness to the point where people can begin actually think about things as deeply troubling as whether Building 7 which wasn’t hit by anything at the World Trade Center didn’t collapse because of the little fire on the third floor, but was professionally demolished….

It is frightening to contemplate what our government has become. Follow your conscience.

First they came for the Socialists, and I did not speak out--
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out--
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out--
Because I was not a Jew.

Then they came for me--and there was no one left to speak for me.

--Pastor Martin Niemöller

Saturday, May 10, 2014

The "government bad" meme

It's so easy to say that "government is bad, government is worthless, all government does is accumulate debt that it will never pay off. Martin Armstrong, an entertaining writer, is chiding the Pope for saying that some redistribution of the world's ever more concentrated wealth to the poor is called for. Armstrong says "even God is not on the Pope's side," citing the commandment not to covet thy neighbor's wealth. This is a biased use of citation to say the least.

It takes a rare strain of delusion to think that government is going away in this world. The libertarians are de facto shills for the status quo, no matter how much they say they'd like to tear it all down.

We still seem to be heading toward total dysfunctionality.

Thursday, May 8, 2014

Interest rate reality check

There is a lot of talk about when “the Fed” is going to “raise rates.” Rates are actually determined mostly by supply and demand in the money market. Without getting into an academic fracas, I am going to present some graphs representing very strong empirical regularities that suggest interest rates, long or short, are not going up any time soon.

I’ve presented one of these before, the long term chart; here I’ve added the 3-month T-bill. These graphs show the relationship between interest rates and the ratio of the St. Louis monetary base to GDP. Data is to April or first quarter 2014. The ratio of base to GDP is ~0.23 currently.

image

image

Here is the trajectory of the base/GDP ratio. Can you spot the taper?

image

Here is the trajectory of base:

image

From these empirical regularities I draw the following conclusions:

  • Interest rates aren’t going up any time soon. The “taper” is really a reduction in the rate of addition to base, not a reduction of base.
  • Nor is inflation taking off any time soon, except for stagflationary cost-push. Negative real interest rates will continue. The labor market has no power; the reserve army of the unemployed (whether they are categorized as such or “not in the labor force”) is growing. There is no wherewithal for a wage-price spiral to get started.

This mirrors the experience of the Thirties. ZIRP in that period lasted until near the end of WWII. It took a war to get the inflation started. Federal debt exploded. But America had relatively less sovereign debt going into that war; we are already at comparable levels.

So people who suggest that the Fed “raise interest rates” are really asking the Fed to reduce the size of the monetary base a huge amount. There is no question the Fed would crash the stock market if they did this, purely because of the “optics,” so it won’t happen. Moreover, if the Fed sent all those bad debts back into the banking system they’d be subject to “stress testing” (heaven forbid they were actually marked to market) that I somehow doubt the Fed does on the stuff they hold. (Comment if you know better than I, please.)

Plutocracy World, the Global Casino, rocks on for years to come. The banking system hangs like an albatross around the neck of the world economy. China seems to be making the same mistakes; it will be interesting to see what they do with all their bad debt.

The great economic task of the first half of the twenty-first century will be to reform the world’s monetary system.