A diplomatic solution in the Ukraine

US Secretary of State John Kerry meets with Russian Foreign Minister Lavrov in Paris next week to talk about a negotiated settlement in the Ukraine, even as some 60,000 Russian troops mass on the eastern Ukrainian border.

An optimal negotiated settlement, in my view, would be approximately as follows:

• Voting in May determines a federal structure for the country;
• West and Russia let portions that want to join EU join; NATO membership not an option;
• Russia is assured it can keep its navel bases in the Crimea (they already had them); while a second plebescite if necessary validates the Crimea returning to Russia; all such voting needs to be internationally monitored and squeaky clean;
• Russia provides as close to an apology as possible to the Ukraine for its invasion of the Crimea, accompanied by a large chunk of the IMF money that has flowed to it in aid to the federated Ukraine.

The costs of war would fall on innocents, the profits would flow to plutocrats on both sides. I hope Putin sees this. Russia is collapsing demographically (see this); it is an early-dying nation of drunks and Putin is holding on to power only by increasing domestic repression and fanning the flames of nationalism.

Should Putin invade eastern Ukraine before May as many expect, NATO will surely arm the Ukrainian forces, which can be described as rag-tag (Vice News has great video reporting from the Ukraine). This war would be pathetic in the extreme. NATO could send in drones, no boots on the ground. The Ukraine would be torn up for a generation. There would be further losses to Western banks, who have just coughed up a bundle to keep the gas flowing, and who, through London, have a huge interest in seeing the Russian and Ukrainian plutocrats stay whole. So I can only imagine that the banks are doing their best to sweet talk both sides into playing nice.

When the bankers don't want war, it's not likely to happen. When it does, the bankers generally try to line up on the side that will win. If the hawks in the West push for war and get it, Russia might collapse, and another Russian revolution might easily be the result--the Western banks can't count on a stooge like Boris Yeltsin this time to let them come in and loot. Anyway, the Russian plutocrats already have their positions, are being serviced by the London banks, and would probably be happy to run the country as regional war lords. If the West can turn the Russian plutocrats against Putin by telling them what a sweet deal they could have if Russia fell to the West, then Putin might find himself odd man out. I wonder if the Russian plutocrats still in the country can leave if they want to.

Would the plutocrats trust the Western banks and the CIA? Well, they did pretty well working with them 23 years ago.... But can Russians ever make democracy work, or do they need an authoritarian Father figure? The neo-cons might not care, so long as they weaken Russia for another generation.

Who or what would come after Putin? That is the question.

Putin collects his chips

With an IMF deal in the neighborhood of $18 billion on the fast track, and Putin asking for about $16 billion amount in payment for gas much already delivered and other obligations, it would appear that Putin is coming out ahead financially so far on his Crimean adventure.

While President Obama authorized the sale of some of America's Strategic Petroleum Reserve, oil prices seemed to up this morning when I checked.

After QE; Piketty and neo-feudalism

There is a lot of nonsense going around about interest rates going up post-QE. Following John Hussman's lead, in a recent post I showed the empirical regularity governing the relationship between central bank balance sheet as a percent of GDP and long-term interest rates proxied by the 10 year T-bond.

Recently Base/GDP has been about 0.22, so we are way out on the right end tail. It would take a reduction of the ratio of about 15 percent of GDP to begin to raise long rates, or about $2.6 trillion at current rates of GDP. The St. Louis base is currently at $3.7 trillion, and has been growing at over 20 percent a year since the last recession.

Now, "tapering" is a reduction in the rate of increase of additions to the base, not a reduction of the base. The chart looks to me like a very strong empirical regularity indeed. So the chance that long rates will rise anytime soon is remote in the extreme, as the Fed has no announced plans whatsoever to actually reduce the base.
Long rates will remain low and the bad debt clogging the banking system will remain impacted, that much seems assured for years to come.
What is a somewhat lower probability outcome is that the dump-the-dollar movement internationally gains sufficient momentum that the Fed has to buy up more and more (perhaps virtually all) new Government debt. This might be called the MMT-by-force-majeure outcome, as there is little chance that such additions to the Fed's balance sheet will ever go away.

In this latter case rates will not go up because of the empirical regularity shown above, but as the dollar falls on the foreign exchange markets due to weak demand to hold or trade in dollars, there will be import inflation domestically in the US. This will cause a further collapse of effective demand--already afflicting the bottom 80 percent or so of Americans--as real purchasing power of consumers is decimated. The US will become an even less attractive place to invest, and capital flight will occur. The US's status as a banana republic will be cemented.

This is the essence of the dreaded global currency reset: the dollar falls on international markets, import inflation slams domestic real demand, but neither short-term nor long-term interest rates rise (short rates exhibit a similar empirical regularity to that shown above). A domestic stagflation occurs. The Fed, ever the servant of Capital, will fight the inflation with modest rises in short rates (this can be done administratively in the short run) sufficient to beat any thought of asking for higher wages out of the heads of workers even though labor cost-push inflation exists only as a curiosity in economic history textbooks.
In the final chapter plutocrats of various "nationalities" (with allegiance to none) will divvy up Plantation America, keeping the best parts of it private, for themselves and their would-be-royal progeny.

Enter the Anti-Mainstream Economist

Certainly Thomas Piketty is the most important economist of the past 80 years, since the last Fourth Turning (Keynes got it that time). I highly recommend The New Yorker's review of his big book (here). A Frenchman, Picketty came to the US at 22 as a young economics superstar and to his great credit, became immediately disenchanted (disgusted is a better word, probably) with the status-quo-supporting mathematical fictions he encountered at MIT. (Disgust afflicted your correspondent upon entering economics at the graduate level in search of "science" after an undergraduate career studying literature.) Son of a leftist French couple, Piketty imbibed the Marxist notion of capital increasingly displacing labor leading to the reserve army of the unemployed and set out to study the issue of the distribution empirically, probably sensing that only real world data could displace the mathematical fictions of the self-congratulating, narcissistic mathematical economist-priests ruling policy in the West.

Piketty's concerns over where the world is going are as dire as mine. He is the Anti-Mainstream economist on the white horse that I thought could never possibly arrive. The New Yorker disappointingly pooh-poohs Piketty's suggestions that we need to raise taxes on the incomes and wealth of the plutocrats as politically infeasible. (But of course The New Yorker’s readership inhabits the status quo, so what else could they say?)
Democracy will have to be reborn to prevent a return to out-and-out feudalism.
It couldn't happen here, of course (although Piketty now has a stateside ally in fellow French-born Berkeley economist Emanuel Saez). Piketty turned tail after a couple of years in the US and returned to Paris, where he has remained since.

[Editor: spelling of Piketty's name corrected 3/27/2014]

“Pushing on a string”—because the status quo

When I learned my macro, it was accepted that increasing reserves of the banking system when it was already in a substantial excess reserves position would have no effect on real output; hence it was called “pushing on a string,” an expression that I believe was coined in the Great Depression with respect to the excess reserves of the day.

In the Liquidity Trap, monetary policy was considered to be useless.

Now we have the trickle up theory of asset inflation, openly acknowledged by the Fed. Janet Yellen says the trickle down happens after the trickle up. But of course, the Fed does not acknowledge that asset inflation is inflation; it’s just wealth effect. John Hussman has pointed out that even the wealth effect is caused by an illusion, that the banking system is solvent, courtesy of FAS 157. Nevertheless, the Fed feels compelled to sweep the bad assets under the carpet before they can be audited. In the end we’ll have Good Bank, Bad Bank, with the Bad Bank being the Fed.

The non-economists readers of this blog need to be aware that current Fed policy, QE, goes against everything the entire mainstream macroeconomics canon says, but you won’t find an academic economist to admit it. If they’re conservative, like the Establishment Blowhard Gregory Mankiw, they like it because it lines the pockets of their clientele, the 1 percent (the “because capitalism (the banks want it) otherwise martial law” argument). If they’re liberal, like Paul Krugman, they like it because liberals always like accommodative monetary policy; it always serves their clientele, government, through monetization of the debt.

So mainstream academic economics has aligned itself with the status quo, and established its lack of intellectual integrity beyond any doubt.

The two political parties and their mainstream economist cheerleaders both support the status quo, while the structural rot continues. You just need to know they’ve abandoned everything the discipline has been saying for over thirty years in doing so.

Comment posted on another website

Posted this morning in comments at FabiusMaximus.com

Fab,

You amusingly take your contrarian tendencies to meta-levels of self-revolution that virtually are always entertaining! But you must be dizzy at times. Thanks for being so entertaining!

Two comments semi-germane to today's post:

1. As I've pointed out before, the rehearsal of catastrophe is always good entertainment (Aristotle), but that doesn't mean it's wrong! W.r.t current forecasts of collapse, my personal take is that the economy still exhibits the signature of pre-collapse seen before the Great Depression: excessive debt/GDP, mostly bad debt not being cleared by the banks; and very high income inequality. So I expect another financial collapse. This is a judgment call resulting from 30 years post economics PhD following the economy and learning to separate the mainstream propaganda from "the truth" as far as I can discern it.

2. John Robb is out with a proclamation that the problem with the world is that "the American dream" (that one should be able to get ahead by working hard) and that it needs to be reborn. I assert that it is excessive greed of the "managerial capitalist class" and their focus on profit (i.e., usually by screwing labor; record high profit/GDP etc.) that is the problem, and until all corporations face regulations similar to those in Germany and Scandinavia recognizing that employees are valid stakeholders in a corporation the problem won't be solved.

Back in the 'Seventies when regulation was in its heydey businesses used to say (re: environmental protections, for example) that they couldn't do it by themselves, that it needed to be required of all or they couldn't make a decent profit. Same thing applies today. Employee rights need to be enforced via law around the world in a reasonable way.

In my more optimistic moments I speculate that, as the most powerful form of social organization on the planet today, that corporations will naturally evolve to optimize their internal distributions a la Wilkinson (see his great TED talk on inequality) to maximize health and welfare benefits of all.

Interestingly, Putin has encouraged his oligarchs to register their businesses for tax purposes in Russia to support the nation. Radical concept.

Petrodollar alert

In case you missed it, ZeroHedge caught the announcement of a non-dollar-denominated energy deal between Russia and China:

Petrodollar Alert: Putin Prepares To Announce "Holy Grail" Gas Deal With China

China will sell US Treasuries to buy Russian oil, and Russia will stop borrowing from Western banks, is the general idea.

Janet Yellen interview

I have just watched the Janet Yellen interview (available here) from forthcoming movie, Money for Nothing: Inside the Federal Reserve, and I must say I found Ms. Yellen's Brooklyn folksy I'm-your-friendly-Berkeley-macro-teacher persona absolutely nauseating.

Questioned aboat the steps taken to resolve the financial crisis in 2008 she presents the same tired "we had to do something of the system was gonna collapse" without the slightest seeming awareness that when FDR, one of her putative heroes, I would guess, attacked the same structural problem in the 'Thirties he took structural actions to remedy them.

She certainly has never made a loan and has no understanding of what bad debt is, debts that will never be repaid and should be charged off by the bank with the bank taking the loss.

It's the same old Hank Paulson, either/or, bail Wall Street out, ignore the fraud, let them increase their bonuses in coming years on the backs of the taxpayers--or it's martial law.

And these macro people still think the Phillips Curve works!

I could go on, but I can't. It was just sickening.

Janet Yellen will do Wall Street's bidding and like Bernanke cash in afterwards.

I hope I outlive the Fed. It will be great day for America when the Fed is abolished.