Monday, November 28, 2011

Sunday, November 27, 2011

‘Animal spirits’ update

Recall that the theory of “animal spirits” that we channel from an obscure article in the Journal of Economic Psychology in 1996, “Adaptation level and ‘animal spirits,’ callously and dishonestly ignored in Shiller and Akerlof’s book on “animal spirits,” posits that the general level of confidence or “animal spirits” in America is largely determined by where the unemployment rate is relative to a recent adaptation level represented by an exponential moving average relative to the standard deviation of the unemployment rate over the past 48 months:

A = – (U – UMEAN)/Sigma(U)

where the minus sign makes the measure a positive confidence measure.

Currently the adaptation level of the unemployment rate is 8.8 percent, while the current reading is 9.0.  The adaptation level is also rising.  So the possibility that I have mentioned before of a secular exhilaration in 2012 is still before us; if the reported U3 unemployment rate falls to 8.8 or below before the election, “animal spirits” as proxied in this model will “go positive:”


As can be seen from the history, when the A metric crosses below the zero line from above the economy has generally been at the onset of recession (an acceleration and change of sign of the real growth rate).

The situation today, with the abysmal levels of survey-reported consumer confidence (the Michigan sentiment series is in green) most resembles late 1971-1972, when there was a brief swing into positive “animal spirits” during the election year, followed by up-till-then most serious recession of the postwar period.


In 1972 the A metric went positive in exactly the election month of November and continued upward until October 1973, almost exactly coincidental with start of the severe early ‘Seventies recession (when I was working my first job out of college, and was required to take a ten percent cut in pay from $8,000 annually in New York City—I went to graduate school).  Note the anticipatory pattern of the Michigan index, then created quarterly.

By whatever means—civilian labor force participation rate shrinking faster than employment contracts—the psychologically sensitive unemployment rate may decline in coming months enough to trigger a secular exhilaration, that is likely to be followed by deepening depression unless the unbalanced nature of the U.S. distribution is altered quickly, which appears unlikely.

2012 is going to be an interesting year.




Tuesday, November 22, 2011

Thank God for Bruce Bartlett

Here’s some tax truth from a Republican:

The truth is that the federal surpluses resulted from specific legislation enacted in 1990 and 1993 that virtually every Republican opposed. In particular, taxes were increased and tight budget controls were put in place that prevented taxes from being cut or spending increased unless offset by tax increases or spending cuts. These budget controls are commonly referred to as “paygo,” for pay-as-you-go.

What happened can be seen in Congressional Budget Office data. When the 1990 budget deal took effect in fiscal year 1991, federal spending was 22.3 percent of G.D.P. and revenue was 17.8 percent. The deficit was 4.5 percent of G.D.P. Revenue rose steadily to 19.9 percent of G.D.P. by fiscal year 1998 and spending fell to 19.1 percent, yielding a budget surplus of almost 1 percent of G.D.P.

Revenue continued to rise to 20.6 percent of G.D.P. in fiscal year 2000, and spending fell to 18.2 percent. The surplus reached 2.4 percent of G.D.P.

These results run 100 percent contrary to Republican dogma, which is that tax increases, especially on the rich, do not yield additional revenue because people will cease working and investing, and the economy will stagnate. Yet the hallmarks of the 1990 and 1993 budget deals were an increase in the top income tax rate; first to 31 percent from 28 percent, and then to 39.6 percent. Revenue clearly rose, as did the economy.

This is a must-read article: 

Balancing the Budget, for Real – New York Times

Bernanke serves his Wall Street masters

The Top 0.1% Of The Nation Earn Half Of All Capital Gains – Forbes

Capital gains are the key ingredient of income disparity in the US-- and the force behind the winner takes all mantra of our economic system. If you want  even out earning power in the U.S, you have to raise the 15% capital gains tax.

Income and wealth disparities  become even more  absurd  if we look at the top 0.1% of the nation's earners-- rather than the more common 1%. The top 0.1%--  about 315,000 individuals out of 315 million--  are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.

It's crystal clear that the Bush  tax reduction on capital gains and dividend income in 2003 was the cutting edge policy that has created the immense increase in  net worth of corporate executives, Wall St. professionals  and other entrepreneurs.

Bernanke Speech Moves Markets: No New Stimulus – ABC News

The effectiveness of first two QEs has been questioned. Critics acknowledge that easing has brought temporary benefits, but they argue those have accrued primarily to the stock market. They question whether flooding the markets with yet more cheap money is a good thing for the economy long-term.

Just so that it’s perfectly clear what’s going on.  The country’s markets are being looted by the central bank to benefit of the ruling class.  I personally, while supposedly a “sophisticated investor,” am terrified of our totally rigged and corrupt stock market.

Have a good day.

For Deficit Panel, Failure Cuts Two Ways -

For Deficit Panel, Failure Cuts Two Ways - "WASHINGTON — The latest Congressional failure to agree on a plan for balancing the government’s books could yield a surprising result: a sharp reduction in annual federal deficits, larger than anything contemplated by the special panel that reached its fruitless finale on Monday."

Leading from behind.

Saturday, November 19, 2011

Lenders Flee Debt of European Nations and Banks -

Lenders Flee Debt of European Nations and Banks - "Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral."

Either multiple miracles are going to occur--simultaneous resolutions of European and American debt crises--or this is a no-brainer from an investing standpoint.

The world appears to be entering a monumental clusterfork in the road.

Do not harden your heart, as the only thing that will keep you alive is love.

Thursday, November 17, 2011

The great sorting-out

Americans are becoming more and more divided along class lines, even geographically.  This does not bode well for social cohesiveness or the ability to execute effective social policies.  (And you can say “government is the problem” all you want, but I tell you we will have government for the rest of our lives, and I’d rather have government that works.)

Middle-class areas shrinking in US: study –

I recently reread my oldie-but-goodie, “On the coming neo-feudalism,” from two and a half years ago, and was amazed at its prescience.

Sunday, November 6, 2011

What Mankiw doesn’t teach: the costs of inequality

I posted on Wilkinson over a year ago, and I’m glad to see [corrected] covering his work.  This is an oldie but goodie, definitely must-watch even if you’ve seen it before.

Thirty-some years ago, having completed an honors English degree from Yale, I decided to get a Ph.D. in Economics to study the dominant mythology of our age.  It can’t fall soon enough….

Saturday, November 5, 2011

Review of ‘Margin Call’

Saw the hot new Wall Street movie “Margin Call” last night with a special appearance from New York City via Skype of the director, whose father, it turns out, was a New York City investment banker.

The movie sugar coats the cynicism of the investment bankers.  Kevin Spacey gives a nice portrayal of a long time investment banker and trader who knows that screwing one’s customers is not good for repeat business. 

But the movie merely makes the greatest sin of its Goldman Sachs-like fictional firm (GS-like because it doesn’t go bankrupt) the beat-the-crowd unloading of its tons of merde, toxic MBS assets that a young engineer quant has figured are going to bankrupt the firm in an environment of increasing levels of market volatility, due to the extreme leverage the firm has put on.

No, JC Chandor backs off of showing what really happened, which was that some investment banks and colluding hedge funds actually shorted the same securities they were selling at the same time.

Most people would call that fraud.

JC Chandor missed the opportunity to capture the truly depraved language of the traders, which has been displayed in transcripts of Enron’s traders’ conversations and emails. 


When a forest fire shut down a major transmission line into California, cutting power supplies and raising prices, Enron energy traders celebrated, CBS News Correspondent Vince Gonzalesreports.

"Burn, baby, burn. That's a beautiful thing," a trader sang about the massive fire.

Four years after California's disastrous experiment with energy deregulation, Enron energy traders can be heard – on audiotapes obtained by CBS News – gloating and praising each other as they helped bring on, and cash-in on, the Western power crisis.

"He just f---s California," says one Enron employee. "He steals money from California to the tune of about a million."

"Will you rephrase that?" asks a second employee.

"OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day," replies the first.


Though Mr. Tourre was a more junior member of the Goldman team, the S.E.C. case against him was bolstered by colorful e-mails he wrote, calling mortgage securities like those he created monstrosities and joking that he sold them to “widows and orphans.”

I have a number of investment banking and hedgie friends, and I find all of them extraordinarily double-minded when it comes to the ethics of what they do.  In that regard, Spacey’s character accurately reflects the tensions some, if not all, folks in the toxic Wall Street environment feel.

But the movie Disney-fies the moral dimensions of what Wall Street has become in recent years. 

Too bad. 

The tombstone blues

As of now, democracy and the rule of law are pretty dead in America.  Bill Black, who sent a lot of crooks to prison in the aftermath of the S&L crisis twenty years ago, knows from personal experience.  How far we have fallen.  Must watch.

Western economy growth rates portend recession


This indicator has been making the rounds.  Recession soon follows when real GDP year-over-year falls below two percent, as it has for the past two quarters.  The indicator has a pretty good track record over the past 60+ years, never having missed signaling an ensuing recession a year or so in advance with no false positives.

And the situation in Europe is similar, with a garnish of extreme political instability thrown on for seasoning:

euro area gdp growth rate

Friday, November 4, 2011

Growing Economies, Stagnant Wages -

Growing Economies, Stagnant Wages - "The United States was on the lower end. From 2000 to 2007, median pay increased at a quarter of the pace of output per capita. In other words, the typical American worker did not share much in the country’s growing wealth even when the economy was good."

Capital has become concentrated and internationally mobile. It is beggaring labor everywhere. The new ruling class is the international corporate elite, who have no national loyalties to speak of.

Wednesday, November 2, 2011

Move to amend

Move to Amend Header

The national campaign to Abolish Corporate Personhood and Defend Democracy.
Sign the Petition:

* * *

Good morning Benign

Last night Boulder became the second city in the nation to pass a ballot measure
calling for an amendment to the US Constitution that would state that corporations
are not people and the legal status of money as free speech!
At midnight, with 93%
of the ballots counted, the measure was handily winning with 74% of voters in support.

Boulder’s campaign is the latest grassroots effort by Move to Amend, a national coalition
working to abolish corporate personhood.

“From Occupy Wall Street to Boulder, Colorado and every town in between, Americans are
fed up with corporate dominance of our political system,” said Kaitlin Sopoci-Belknap, a
national spokesperson for Move to Amend. “Local resolution campaigns are an opportunity
for citizens to speak up and let it be known that we won’t accept the corporate takeover
of our government lying down. We urge communities across the country to join the Move
to Amend campaign and raise your voices

Earlier this year voters in Madison and Dane County, Wisconsin overwhelmingly approved
similar measures
calling for an end to corporate personhood and the legal status of money
as speech by 84% and 78% respectively. Next week voters in Missoula, Montana will have
an opportunity to vote on a similar initiative in their community.

Move to Amend volunteers in dozens of communities across the country are working to place
similar measures on local ballots next year.

“Working on this campaign was electrifying,” said Scott Silber, a local Move to Amend organizer
in Boulder. “We had such an outpouring of enthusiasm from our community. Folks were so thrilled
to finally have an opportunity to have their voices heard and resoundingly call for an end to
corporate corruption of our democracy. From here we’re taking the campaign to Denver, and then
on to Washington, DC.”

Move to Amend’s strategy is to pass community resolutions across the nation through city councils
and through direct vote by ballot initiative. “Our plan is build a movement that will drive this issue
into Congress from the grassroots. The American people are behind us on this and our federal
representatives will see that we mean business. Our very democracy is at stake,” stated



  • Kaitlin Sopoci-Belknap, National Field Director, (707) 362-0626 , Move to Amend,
  • Scott Silber, Boulder Move to Amend, (510) 485-6586 ,

    Move to Amend

    P.O. Box 260217
    Madison, WI 53726-0217
    United States

    End Corporate Rule. Legalize Democracy. Move to Amend.

    We're on Facebook & Twitter!

  • Tuesday, November 1, 2011

    Mexican standoff

    We have entered one of those periods when things are happening so fast it’s difficult to update one’s mental maps in a meaningful way.  You know what was there, but you don’t know what’s there now.  The last time I felt this way was in the fall of 1990 when the Iron Curtain fell.  The map was crumbling.

    In the past week we’ve learned that because of “language arbitrage,” another word for sharp business dealings, the entire CDS market is compromised.  The Greek default may be deemed “voluntary” by the banks who wrote the worthless paper, and, surprise surprise, also comprise the “regulatory agency” that makes the rules about what is and is not a default.

    As the formidable Reggie Middleton says, the CDS market is shot to hell one way or the other, and the five big banks that hold the vast majority of the trillions of dollars of exposure and now effectively unhedged.

    It’s a Mexican standoff.  Can we trust bankers to honor the rules of Mutual Assured Destruction?  Not hardly.  Look at how Hank Paulson took advantage of the opportunity to nuke Lehman.  At the first whiff of blood in the water the sharks will attack.

    The miracle cure of inflation, which really would have been a better way to get out from under bad debt, is not going to happen in a debt deflation.  In the banks unwillingness to recognize that their bad debt is not going to be repaid in full, and the whorish accounting profession’s willingness to let them carry it at fictitious values on their books, the downward spiral of debt deflation is guaranteed. 

    One of the scariest things I’ve seen this Halloween was an interview with Larry Fink of Blackrock Investments on FT in which he (licking his lips) expressed a willingness on the part of the trillions of dollars of Big Money parked on the sidelines worldwide to participate in the rebuilding of some of these troubled economies at equity-like rates of return (with credit enhancements provided by governments and the IMF, if they could only learn how to behave and keep mostly out of the way)…. 

    If the Greeks are smart they’ll tell the EU to shove and just default on their debts.  Once bad debts are written down, it’s amazing how quickly new money can appear.

    The world economy will stagnate and tend toward war until honesty returns to the financial statements of the big banks.

    As John Hussman has pointed out recently, and as I’ve pointed out all along, the failure of big financial institutions does not necessarily mean the economy falls into depression.  In the 1930s, the problem was that deposits were wiped out.  All the Feds had to do when the crisis hit was to tell Americans their deposits were insured.  When a bank fails, the biggest change from a depositor’s point of view is that the sign changes. 

    Would the investors in the bank, equity holders and probably most bond holders, have been wiped out?  Sure.  That’s what risk taking is all about. 

    But our leaders elected to send good money after bad, and bail the banks out on the taxpayers’ backs.  The Germans and French and Americans should just admit they made some really bad loans—and were stupid enough to believe the toilet paper CDSs they were selling each other were actually going to protect them from anything.  But then, the big banks were stupid enough, in some cases, to hold the “AAA'” securitizations of sub-prime mortgage paper that Wall Street conned them into creating on their own balance sheets.

    There’s plenty of equity-backed liquidity sitting on corporate balance sheets. 

    Can the global financial oligarchy survive a Mexican standoff?  That’s what this historical moment will decide.

    And if the oligarchs turn to fratricide, and the strongest become even stronger, and exercise their greed even more, how long until the population of the world coalesces into a hard-edged resistance to financial feudalism through outright rebellion?

    See also:

    Consent Needed for Debt Repayments Michael Hudson, Credit Writedowns

    In Praise of Papandreou's Referendum Decision; Eurocrats Terrified of Democracy; Parade of Cowards – Mish

    Give the People a Vote on Bank Bailouts? Markets and Politicians Horrified at the Thought – Economic Populist