The big lie

“Lower taxes cause higher economic growth.”  It’s making the rounds.

What causes robust economic growth—and a myriad of health and welfare benefits--is social justice, as reflected in a viable social contract that produces a much more equitable distribution of spoils than currently exists in the US, a state of the union where everyone is more or less pulling together rather than pulling apart, as the nation is currently.

Source:  www.washingtonpost.com

Truest statement made by a politician this week:  “You can’t change Washington from the inside.” – Barack Obama.

Mobilize, America!  Vote!  Amend the Constitution!  Clean up the mess!  You’re better off telling the rich to “love it or leave it,” than to fall into the neo-feudalism they would have your and your children and your children’s children live in.  The level of GDP is not the best measure of social welfare.  Most of what they tell you is lies anyway.

Ben’s bubble theory of monetary stimulus

Via:  www.zerohedge.com

I am quoting liberally because this coverage of today’s press conference gets to the heart of the matter, that the only tool the Fed has to deal with an economy struggling under a debt load it can’t handle is to inflate it out.  But Ben, the American people are scared stiff of the stock market and have come to the conclusion that Wall Street is a rigged game, are scared stiff of buying a home (if they can come up with the down payment).  The other prescient insight, this one offered by Charles Hugh Smith also on zero, is that the only monetary surprises left are negative, which taken together with the fact that last several stock market advances have been undergirded by QE or Twist activities, could mean either that (1) the market will take off now for an extended upward leg, or (2) it won’t; it will collapse as the economy undeniably goes into recession.  Speaking on behalf of John Q. Public, who is quaking in his boots about holding on to his job and possibly his house, I don’t find those odds appealing.  We are heading into a period of unprecedented monetary instability.

The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To Depression

If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.

From the official transcript:

QUESTION: My question is -- I want to go back to the  transmission mechanism, because speaking to people on the sidelines of the Jackson Hole conference, that seemed to be the concern about the remarks that you made, is that they could clearly see the effect on rates and they could see the effect on the stock market, but they couldn't see how that had helped the economy.

So I think there's a fear that over time this has been a policy that's helping Wall Street, but not doing that much for Main Street. So could you describe in some detail, how does it really different -- differ from trickle-down economics,where you just pump money into the banks and hope that they lend?

BERNANKE: Well, we are -- this is a Main Street policy, because what we're about here is trying to get jobs going. We're trying to create more employment. We're trying to meet our maximum employment mandate, so that's the objective. Our tools involve -- I mean, the tools we have involve affecting financial asset prices, and that's -- those are the tools of monetary policy.

There are a number of different channels -- mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they'll feel more -- more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they'll, you know, make a better return on that purchase. So house prices is one vehicle.

Stock prices -- many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend.

One of the main concerns that firms have is there's not enough demand. There are not enough people coming and demanding their products. And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason -- their house is worth more -- they're more willing to go out and spend, and that's going to provide the demand that firms need in order to be willing  to hire and to invest.

And there you have it.

Risk on!

‘Animal spirits’ update

My judgmental unemployment forecast with adaptation level:

Regardless of the fact that the unemployment rate is hardly the best indicator of labor market health, I assume it dominates people’s perception of labor market health, and that when it increases above an adaptation level formed by recent experience, confidence fails.  My best guess as to when the unemployment rate will cross above its adaptation level continues to be about halfway through next year, when America will experience an accelerating collapse of confidence.  Animal sprits will remains depressed until 2016 or so.

The situation continues to resemble the 1973-1974 period, especially with regard to the configuration of the Michigan consumer sentiment series and my imputed confidence measure.  One thing that my measure has done fairly  consistently is to signal the onset of NBER-defined recessions when unemployment rises above adaptation level.

After period doubling in the ‘Eighties, ‘Nineties, and Oh-Oh decades, the American business cycle seems to have reverted to a possibly chaotic shorter pulse more characteristic of the earlier postwar business cycle.

Graph of the day

Via:  arxiv.org/abs/1108.2455: The Food Crises and Political Instability in North Africa and the Middle East

Via:  MIT Technology Review

What causes riots? That's not a question you would expect to have a simple answer.

But today, Marco Lagi and buddies at the New England Complex Systems Institute in Cambridge, say they've found a single factor that seems to trigger riots around the world.

This single factor is the price of food. Lagi and co say that when it rises above a certain threshold, social unrest sweeps the planet.

The evidence comes from two sources. The first is data gathered by the United Nations that plots the price of food against time, the so-called food price index of the Food and Agriculture Organisation of the UN. The second is the date of riots around the world, whatever their cause. Both these sources are plotted on the same graph above.

This clearly seems to show that when the food price index rises above a certain threshold, the result is trouble around the world.

This isn't rocket science. It stands to reason that people become desperate when food is unobtainable. It's often said that any society is three square meals from anarchy.

But what's interesting about this analysis is that Lagi and co say that high food prices don't necessarily trigger riots themselves, they simply create the conditions in which social unrest can flourish. "These observations are consistent with a hypothesis that high global food prices are a precipitating condition for social unrest," say Lagi and co.

In other words, high food prices lead to a kind of tipping point when almost anything can trigger a riot, like a lighted match in a dry forest.

On 13 December last year, the group wrote to the US government pointing out that global food prices were about to cross the threshold they had identified. Four days later, Mohamed Bouazizi set himself on fire in Tunisia in protest at government policies, an event that triggered a wave of social unrest that continues to spread throughout the middle east today.

That leads to an obvious thought. If high food prices condition the world for social unrest, then reducing the prices should stabilise the planet.

But what can be done to reverse the increases. Lagi and co say that two main factors have driven the increase in the food price index. The first is traders speculating on the price of food, a problem that has been exacerbated in recent years by the deregulation of the commodities markets and the removal of trading limits for buyers and sellers.

The second is the conversion of corn into ethanol, a practice directly encouraged by subsidies.

Those are both factors that the western world and the US in particular could change.

Today, the food price index remains above the threshold but the long term trend is still below. But it is rising. Lagi and co say that if the trend continues, the index is likely to cross the threshold in August 2013.

If their model has the predictive power they suggest, when that happens, the world will become a tinderbox waiting for a match.

Quote of the day

Via:  ft.com   Ultra-Republican apostate Bruce Bartlett sez,

Mitt Romney holds no more attraction for me than Mr McCain did. If his speech to the Republican convention on Thursday night were to display the same Romney who governed the state of Massachusetts moderately and competently, he would have my vote. But he too has sacrificed his independence to pander to the GOP’s conservative base, substituting thoughtful policies for rightwing talking points that consist of little more than tax cuts for the rich, benefit cuts for the poor and war with Iran.

Thus my dilemma: both candidates are unsatisfactory. The choice is between a continuation of policies that have not worked and different ones that almost certainly will not. I may change my mind at the last minute but as of now my only choice seems to be “none of the above”. I expect to stay home on election day.

Tip-toeing toward totalitarianism