Wednesday, January 30, 2013

Effective fiscal policy

I’m going to keep this short and sweet.

It ain’t tax cuts.  Federal revenue as a percent of GDP is already way below long term averages, and it was already probably too low--we have a decaying infrastructure to show for it.

It ain’t “stimulus spending.”  The Princeton Clowns, Krugman and Bernanke (and remember, Princeton historically has sent more of their graduates to Wall Street than any other school in the country) with some fact-checking by the Berkeley Inequality Guru, Emmanuel Saez, have shown the rest of us that stimulus spending, like all other income types, goes mostly to the top 1 percent.  Saez showed that in 2010, a year when the stimulus package was active, 93 percent of the increase in income went to the top 1 percent.

I can picture Krugman and Bernanke as two nerds playing with the rubber nipples of a blow-up woman doll, one nipple labeled “fiscal policy” and the other labeled “monetary policy.”  Heads up their asses, fully captive to the status quo.

So what works?  Income redistribution.  You take money, whether borrowed or taxed, and give it to the people on the bottom.  They will spend every penny of it, and it have a multiplied effect on many other incomes.  While they may buy goods made in China by American corporations sold at Walmart, they are likely to spend a lot of it on goods made right here at home.

The Benign Brodwicz program has always been poverty level workfare for those that need work, and honest banking.  If the honest bankers in the world would think for a second, they might realize that it was playing extend and pretend to recapitalize after the Latin American debt collapse in the 1980s that started the country on its own debt run-up.

Sheila Bair gets it. 

File under kleptocracy, banana republic, fascism, theft

Monday, January 21, 2013

Where is the greener grass?

Assume that capital is mobile internationally, and it will seek the highest net rate of return. It is evident that consumption has been overweighted in the composition of American aggregate demand, because it was debt-funded. Increasing income and wealth inequality lower the average propensity to consume. Disposable income is being reduced by tax increases. Investment demand is largely derived from the demand for final goods, for which capital goods are used in production. With stable or decreasing final consumption demand, investment demand is largely put on hold. In this essentially deflationary situation, slack appears in labor and industrial markets. Capital sits on the sidelines, waiting to see what happens next, where the greener pastures may lie. Central bankers lower interest rates to the zero bound and sit around wishing and hoping for an inflation to get the debt under control. Sovereign governments, beholden to the banks, refuse to use the issuance of sovereign currency to put slack assets back to work. This is where we find ourselves.

The conventional wisdom, as given on personal finance websites and in corporate boardrooms, is to wait for the turn of the developing economies, and to put the money where the growth is. America is unattractive.

There is much damage being done to the world economy while playing this waiting game. One by one, developed economies are being sent into severe depression, for example, Portugal, Greece, Spain. These poor countries had unfortunately given away the right to manage their own currencies and were crushed by German creditors. The Japanese, under no such constraints, are gearing up to devalue their currency in an aggressive, mercantilist strategy. Can Brazil, Russia, and India be far behind? China is attempting to balance their domestic demand, and we wish them well. The United States has pushed its interest rates to zero but is frustrated by the status of its currency as the "risk-free" asset. The US has shown that it can blow asset bubbles but because it is intent on the continuing crucifixion of its labor class, it cannot get a sustained domestic inflation going. Pity the poor greenback.

The hidden shoals of the international financial system, the derivatives exposures so conveniently not on the banks' balance sheets, guarantee that the chances of international collapse of the deflationary type are still significant. At that point, should it arrive, some new form of money will almost certainly need to be created. The Fed buying up all Treasury issuance will not be enough.


Saturday, January 19, 2013

Multiple occupancy

I made a crack recently about how the Japanese will solve their overcommitted entitlements problem, given their increasingly top-heavy dependency ratio, and given that 95 percent of their sovereign debt is held domestically, namely, that they will solve it by the old Boomers hunkering down and taking whatever the kids toss to them, just to keep the kids on the islands.

Now, American sovereign debt is significantly held by foreigners, so the prescription applies doubly to American Boomers. Almost a third of the young adult kids are already at home, since the Boomers already blew the national wad and let the political system get sold to the highest bidder, the multi-nationals and the corporate gangstas who sit atop that pile, who promptly shipped the jobs overseas and in the name of free markets screwed everyone who wasn't a member of their club, i.e., labor, anyone working for a wage or salary who wasn't participating in the ridiculously rigged stock market as a major part of their comp, and established oligopolies in as many industries as possible, and Wall Street decided to get into the action by pulling a magnificent bait and switch on the American homeowner, a classic pump and dump, so that their friends the hedgies could become the landlords of America... yada yada yada, you know the story by now.

The point being that multiple occupancy, whether in the extended family way or otherwise, is probably the future of real estate in America, especially for the Boomers.


Tuesday, January 15, 2013

On the moral superiority of blogging hedgies

While I am an avid follower of several financial blogs written by folks who make their money managing money, I at times become impatient with their unrelenting condemnation of the messed up world situation while they are actively trying to arbitrage it.  As Dmitri Orlov has said, the financial types are the ones earliest to understanding of the extent of the rape and pillage of Main Street by Wall Street, and the complicity of Washington—the Fed and the federal government.

I get tired of the attitude of moral superiority, even as I appreciate the information and knowledge flow provided, that just isn’t reliably going to occur in the MSM.  I do hope these people are doing something with their money for charitable causes.  We salarymen can hardly imagine the amounts of money they make.  A young friend who just moved to London took a flat in Notting Hill with another young American working in The City, who casually allowed that he was in the habit of spending 300 pounds a night when he goes out. The stories of financial sector excess are rife, but they sting when it comes close to you.

In sum, these folks are part of the problem, exacerbating the inequalities that are tearing the world apart.  Cassandra recently schooled those peers who let their moral indignation get in the way of making good investment decisions.  Of all the financial bloggers, Barry Ritholtz stands out as having the best follow-through on policy recommendations, informed by legal training and a proudly middle class, up on your merits, background.  Barry’s positioning in the New York and Washington media outlets suggests some higher levels of support.  Yves is good but lets her cynicism get the better of her too often; likes to carp too much.  Kyle Bass keeps forecasting doom for the Japanese but doesn’t seem to recognize that only about 5 percent of Japan’s government debt is owned by foreigners, so the MMT refrain of “print to pay” applies.  Japanese life expectancies have been rising during their supposedly lost two decades, which I’ve never heard Paul Krugman acknowledge.  The Japanese take care of each other as a big family.  Japanese boomers may very well come up with methods of forgiveness to keep the kids on the islands, so long as the boomers can eat and have a roof over their heads.

Make a nonrandom act of kindness today. 


Monday, January 14, 2013

Links worth clicking

A few from that hit the mark, from my POV:

John Hussman’s remarks on QE are especially trenchant this morning. 

I suspect a deflationary shock is in the cards.

Sunday, January 13, 2013

Austerity nonlinearities

Before the crisis Spain had a tiny deficit as a percent of GDP, much smaller than the US's roughly 10 percent. Spain's initial austerity measures were in the same range as those contemplated or forecast for the US in 2013, a few percentage points.


Discount rate dissonance

There has to be a huge cognitive dissonance occurring in investor's minds right now around the issue of hurdle rate. Everyone who ever took a managerial finance course knows that a reasonable discount rate for any Capex project is 10%. Sure, nominal interest rates are zero and real interest rates are negative, but who can really believe this when it comes to capital budgeting? Hence, the concentration on nominal spreads, or as Rosie puts it, "cash flow is king." But everyone knows the dangers of investing in stocks based on dividend yield only. Are investors really aware of the probability of capital loss in real estate investment? What happens when mortgage rates go up by a few hundred basis points?

It is common to talk about uncertainty as the cause of investment insufficiency in a liquidity trap, but the fact remains that capital losses are built into a zero interest rate environment. Last one out is a rotten egg. But it may be a while. Last time we had zero interest rates it lasted well over a decade. We might well have them until the end of this decade, or close to it.

This is really a golden age for privately held firms. They don't have to answer to that green eyed monster, the stock market. For the kleptocratic managements of publicly held corporations, the current environment simply fosters a get rich quick mentality to a greater extent than ever before. Why not take on some low-cost debt and buy back even more stock? Yet another reason that the stock market has become a suckers' game.

Friday, January 11, 2013

Another comment on Modern Monetary Theory

I continue to believe that the attraction of MMT to modern liberals like Jamie Galbraith and Warren Mosler (I consider myself a classical liberal) is that something like the trillion dollar coin enables an end run around the fecally impacted banking system to get an inflation going, when the debt-deflationary forces in the private economy and banking system—in which, it is true to say, all money is debt—are overwhelming even Helicopter Ben’s attempts to get a nice, mild inflation going.

It might work, especially if accompanied by starting (or expanding) a significant war effort, but of course the fundamental problem is the Fed, especially since that great conservative Richard Nixon took us off the gold standard (he also opened the door for that gi

Source:  Rogoff via

The fact an establishment economist like Rogoff could present such material at the annual economics meetings, and that Krugman and the White House won’t issue non-denial denials that they are taking this seriously, tells me that we are very close to the unraveling of the Bretton Woods II monetary system, and possibly to some fundamental change in the way the Fed operates.  There are rumors of a new monetary system in the works, and the way this is being sent out suggests to me it’s a trial balloon—so that they can come up with “the better idea.”

I just can’t imagine that the better idea will not involve some attempt to accelerate inflation, given the grip of the creditors on the sovereigns, and aggregate inability to clear bad debt out of the system.

Europe is showing the world what austerity looks like, and it ain’t pretty.

Wednesday, January 9, 2013

Today’s depressing arithmetic

Say you have an income of $96,000, under the payroll tax ceiling.  How much will the 2 percentage point payroll tax increase affect your paycheck?

Your gross monthly income is $8,000.  If your take-home is 65 percent of your gross, a standard assumption, then your take-home pay will be reduced by (0.02*8000)/(0.65*8000) = 0.031 or 3.1 percent.  The dollar reduction in monthly take-home is $160. 

Combine this with a health care premium increasing 6.3 percent (source) and the hit to take-home pay climbs to $200 or more.  Combine this with pay raises that approximately match the actual rate of inflation, and you have a situation where most people’s take home pay is dropping in purchasing power.

I can’t help but believe that when the first pay stubs of the new year arrive, that a considerable amount of belt tightening will ensure.

The 1 percent that runs the country is blissfully unaware of all this, and thinks there is no problem with stiffing the American people year after year.

Tuesday, January 8, 2013

RIP: The American Republic

Via:  This is a site by a bunch of ex-military.  The Republic is dead, long live the Republic!  Worth reading.  Especially critical of Obomba’s recent appointments.  These neo-cons (including Obomba) are so stupid.  With cowardly drone attacks that routinely kill women and children they gain no strategic advantage, and turn an entire country into potential terrorists (e.g., Pakistan).  But the War Machine needs its wars, and if the natives won’t attack by themselves, they need to be provoked.

The Devolution continues, to crest by about the end of the decade. 

We’ve worked through all 5 stages of grief for the Republic. Now, on to The New America!

8 JANUARY 2013

by Fabius Maximus

Summary:  As the Republic dies, its opponents become bolder.  They move from subtly working to undermine it, to outright advocacy of its overthrow.

“We’ve spawned a new race here … We’re a new nationality. We require a new nation.”
— Benjamin Franklin speaking at the Continental Congress, 7 June 1776 (in the film 1776)


Perhaps we’ve become a new race, so that the America-that-once-was no longer suits us.
Perhaps we require a New America.


  1. Five stages of grieving for the Republic
  2. A new Republic for a plutocracy
  3. A Marine speaks against the Constitution
  4. For More Information


On the other hand, Hegel appears to have some strategic sense (not sure why Fabius Max doesn’t like him).  He opposed the Iraq “war,” and seems to favor getting out of the graveyard of empires as quickly as possible.  Perhaps he could talk the Prez out of being assassin-in-chief.


If Confirmed, Hagel Likely to Favor Swift Withdrawal From Afghanistan
On Iran and Syria too, Hagel appears reluctant to commit troops

by John Glaser, January 07, 2013

Former Senator Chuck Hagel, nominated on Monday by President Obama to be the next Secretary of Defense, would be “likely to favor a sizable drawdown in Afghanistan, more frugal spending at the Pentagon and extreme caution when contemplating the use of force in places like Iran or Syria,” if confirmed, Reuters reports. […]

Sunday, January 6, 2013

Tinder in place


With a buildup of 16 Russian warships carrying thousands of marines on the Syrian coast “to deter the West from deploying ground forces in Syria,” Syrian Bashar Assad could afford to brazen it out in his first public speech in seven months. Speaking at the Damascus opera house, Sunday, Jan. 6, Assad said Syria no longer takes dictation from anyone and called on Syrian citizens to defend the country against “a war fought by only a handful of Syrians and many foreigners.”

He rejected dialogue with the opposition which he referred to as “puppets fabricated by the West.”


Tuesday, January 1, 2013

Economic and Distributional Effects of the Senate Tax Bill

Via: (links to study page)

House passed it. Can you say, “Slow is beautiful”?  I am sticking with my forecast that the next NBER-defined recession will [be determined to have] begi[u]n in mid-2013, whenever the NBER gets around to determining it.

A few nuggets: 

  • impact on GDP, –1.38 percent;
  • effect on deficit, $37.2 billion reduction (on a ~$1000 billion deficit);
  • $GDP/delta $Tax , –8.0X



Note that the table above obviously doesn’t include the effects of the payroll tax cut expiring.  I have emailed the author and asked him to revise it.