Saturday, August 28, 2010
I haven't been able to get a comprehensive guest list and of course no bloggers were invited. I assume my old Richmond buddy Kartik Athreya made sure of that:http://cal48koho.blogspot.com/2010/08/kartik-athreya.html.
http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165/ref=sr_1_1?ie=UTF8&s=books&qid=1283036244&sr=8-1 which analysed financial collapses over the past few centuries. Neoclassical clowns never look through the retrospectascope of history or even consider the possibility that it might be different this time. I doubt if Ben read has it. If he had, he would be having second thoughts about more stimulus like QE(money printing), peddling and trading mortgage securities for Treasuries, changing reserve requirements, fiddling with interest rates and so forth. Ben needs to look over the edge . If he did he would see that he is looking into a veritable Black Hole which has sucked into its maw all his bright ideas and trillions dumped into Wall street banks and all the other bullets from his six shooter. Ben says he has more bright ideas like buying long dated treasuries now that our old pals like China and Japan aren't.How that will restore growth to a country and a banking system that is bankrupt is beyond me. The American people are way ahead of the Federal and State governments. They piled up huge debts and are now not borrowing and not spending. They are paying down debt and saving. The national savings rate is up to 6% from negative percent a few years ago.Outstanding credit card debt is dropping. They are doing the only sensible thing. It may not be austerity but it is the next best thing. The American family has the massive advantage of far less complexity and not having economists advising them what to do. This is precisely what Mr Trichet told the Symposium but who knows if Ben and the Feddies were listening. If you always do what you've always done, if you always think how you've always thought, then you'll always get what you've always gotten. We are in a depression now and talking bobble heads never tire of asking : Is this a recession or a double dip recession? I say paraphrasing Gertrude Stein: this ain't no recession, there ain't gonna be a recession, there never has been a recession, that's your answer.
Wednesday, August 25, 2010
My friend F--- just returned from a trip to visit family and he described sitting in the Minneapolis airport being stunned by the mass of people waddling by. Not masses mind you but by the mass of the individuals! Being a very rational systematic fellow with a background in statistical analysis, he decided to try to model the population. His conclusion was that more than 75% of the population he observed were overweight. some alarmingly so. I listened with some skepticism but knowing that F--- has never been prone to exaggeration, I accepted his data on face value. I rarely travel by air for a myriad of reasons which should be obvious and as a result I am spared the spectacle of fast food courts and trinket shops all enclosed within the charming ambiance of a cattle car. F---, seeing my skepticism, emailed me statistics from the CDC which validated his survey which I will present shortly. The same day face book friend James Howard Kunstler published his Monday blog entitled: “What I did on Summer Vacation" in which he recounted a motor trip around northern New England. Here is a sample from his blog:
"We stopped for lunch in a clam bar, naturally. The dining room was populated by a new race of humanoid behemoths, great lumbering brutes the size (and shape) of giant sloths, only dressed in the raiment of clowns, downing heaps of battered fried things, purportedly of-the-sea -- except I honestly don't see how there can be anything alive left to catch out there with the industrial-strength trawlers scraping the ocean floor as if they were Zamboni machines grooming the rink at the Boston Garden. I would like to tell you that we ordered cucumber sandwiches but it would be a lie. We got the clam strips -- that is, clam rolls minus the rolls. For all I know, someone in the kitchen is shredding old Michelin inner tubes for the Fry-o-later, but it's all about the cocktail sauce anyway. There were more giant sloths wading curiously in the surf (still hungry perhaps?) as we crossed the border into Maine, where you really want to weep for your nation." Jim is known for his dark sarcastic humor , but I was taken that Jim had unwittingly provided a second data point. Now Here are the shocking statistics with an abstract of the CDC data as well as the link:
Prevalence of overweight, obesity and extreme obesity among adults: United States, trends 1960-62 through 2005-2006
Results from the 2005-2006 National Health and Nutrition Examination Survey (NHANES) indicate that an estimated 32.7 percent of US adults 20 years and older are overweight, 34.3 percent are obese and 5.9 percent are extremely obese.http://www.cdc.gov/obesity/data/index.html
Some definitions are in order to enhance understanding and readability. Overweight is defined as a body mass index(BMI) 25 to 30. Obese as a BMI30-40, and morbid obesity as BMI>40. As an example a 6' male weighing over 300 lbs would be morbidly obese.
Now if you do the math: 73%!!! A nation of Giant Sloths.
Tuesday, August 24, 2010
And now it's over. Housing as an investment has been dealt a death blow, probably for a generation. This fall has put the taxpayer on the hook for over $5 trillion in obligations related to Fannie and Freddy, a bizarre hybrid of the worst features of crony capitalism and bungling government bureaucrats who now along with the FHA own over 90% of a mortgage market riding down the backside of Schiller's graph. As prices drop, losses mount at Fred's Fannie and it aint over till it's over. And it ain't over. Over 40% of homeowners are bereft of equity or underwater on their mortgages.One in 7 is facing foreclosure. Supply of existing houses is at 12 months. Nothing that our bungling politicians are doing has had any effect except propping up the unpropable, the unsustainable and the unworkable with a dreary succession of failed and foolish schemes purportedly to help the home buyer but secretly propping up the failed insolvent banks with money while spouting platitudes,
lies, and promises. Larry Summers a few months back said the economy was reaching "escape velocity." Barak a week or so said "The economy is on track." Are these guys delusional , incompetent or just pathological liars? What seems to be self evident is that this deflationary depression is deepening as the malignant web of leverage continues to unwind as debts vaporize , jobs disappear and moronic politicians posture and finger point.
Monday, August 16, 2010
In previous blogs I have piled opprobrium upon Neoclassical economists, the high priests who whisper in the ears of our politicians and corporations. In my attempt to try to tease out the influence of these priests , I have discovered some surprising historical facts from the early days of economics. In my previous blog I provided some of this early historical background, as well as mentioning some of the concepts underpinning neoclassical economic theory, the theory governing our contemporary political and economic life. There are of course many variations upon what passes for neoclassical economics and my tacit if poorly expressed assumption is that my perception of neoclassical economics is of a linear construct. The laws and assumptions of neoclassical economic theory rest upon that assumption. George Sugihara, a biologist at Scripts Institute who has an interest in Chaos Theory writes:"A nonlinear system can exist in one configuration for a long period of time during which it is well understood, but it can switch gears suddenly, due to the interdependence of a multitude of shifting variables, and seem to become a totally different system governed by new laws. Superficially, everything has changed, but on the deepest level,nothing has." Hyman Minsky, an economist who studied the nature of financial crises had a famous expression"stability breeds instability." I have not read any of Minsky's articles in which he stated whether he thought of economics as a linear or a non linear discipline but I have concluded that his famous quote implies that economics is anything but linear.
Chaos theory was first described by Henri Poincare in the 19th century when he was grappling with what was called the “Three body Problem.” In physics, the problem refers to measuring position, mass, velocity, momentum of certain particles or masses and then trying to devise a method to calculate the position of these particles in the future thought to be governed by classical Newtonian laws and laws of gravitation. He was unable to devise a successful method.
Chaos theory as I understand it, deals with the observation that small differences in initial conditions can have widely varying outcomes in chaotic systems. In a stable, linear system which can reach equilibrium, such widely varying outcomes would not be expected to occur. The existence of chaotic outcomes appears to have begun with Henri Poincare in 1870 and references to the chaotic outcome phenomenon cropped up over the next 90 years. In 1961 a meteorologist by the name of Edward Lorenz working on an early digital computer was trying to develop a weather simulation. He inputted his data , ran his simulation over 7 days and printed out his results. He ran the simulation again and decided to run his simulation in the middle of his time period. To save time running the simulation again he used his printout data. To his surprise his results were totally different. This puzzling result made him look at his methodology. He noticed that his inputs were to 6 digits after the decimal but his printer would round off the inputs to only 3 decimal places . Why would that make any difference? In a linear system capable of reaching equilibrium, it wouldn’t have but it became apparent to Lorenz that weather was not operating under those rules..He3 dubbed it the Lorenz attractor operating under rules termed the Lorenz Oscillator which was a description of system which evolved over time spitting out data in a chaotic non repeating pattern. This was later referred to as the “Butterfly effect,”. This was a metaphor for chaos theory and referred to the title of a paper given by Lorenz at the American Association for the Advancement of Science in 1972 entitled” Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?”. It referred to the notion at the flap of a butterfly’s wings might be enough of a disturbance in the atmosphere to change distant atmospheric outcomes. Chaos Theory was initially confined to the fields of physics and mathematics but has been expanded not without controversy into widely varying fields including medicine, meteorology, evolution and even politics, economics and finance.
I have stated in previous blogs, the abject failure of most economists to predict accurately the behavior of markets despite dazzling mathematical models. In my mind, the reasons for this failure must lie with a failure of their assumptions, methodology and their models. This failure may be occurring because the system they are trying to model is not the system they think they have been dealing with. If the system is a non linear complex system, their results and predictions are doomed to failure. It is my contention after reviewing the opinions of economists writing outside the mainstream that neoclassical models and methodology need to be modified or abandoned. These new ways at looking at economics include names such as ecological economics, biophysical economics and complexity economics. I am just a humble beginning student struggling to wrap my mind around this problem but here is my current notion: The economy is an example of a complex, adapting, dynamic, non-linear system subject to both positive and negative feedback. Seemingly random changes in variables, however small can lead to widely different outcomes. The bad news from a policy making standpoint obviously is that if economics is a chaotic system, predicting its future behavior may be a fool’s errand. The good news is that if this notion becomes accepted, a lot of the high priests, fools and dimwits spouting nonsense and misinformation might eventually be discredited and disappear.
Saturday, August 14, 2010
Niall all but accused them of faulty assumptions and models. So his remarks put me on the trail of the history of modern economics and a study of their traditional assumptions and their cherished laws and models. Adam Smith in his 18th century Wealth of Nations was of course the seminal work on economics but it was the economic thought of the mid 19th century authors who laid down the basis for what we call classical economics which has been modified and expanded by a host of economists. But one striking fact virtually leaped off the page in my research. To understand how their economic theories came about, you have to know something about Mid 19th century physics. The physicists of the time were struggling to explain using Newtonian precepts the new discoveries made in heat, and light and electricity , matter and energy and the mysterious forces governing the behavior of these magical discoveries. Physicists like Faraday and Helmnholtz were struggling to form a unified explanation of the relationships between matter and energy, a struggle that continued into the twentieth century with Planck, Bohr, Einstein and a host of others but in the mid 19th century, the field was new and the concepts raw and only partially formed. Into this maelstrom of fascinating ideas stumbled our classical economic forefathers who wondered if the same mysterious forces of energy holding matter together in equilibrium might also be a unifying energy force governing the equally mysterious forces governing wealth relationships among peoples. The absurdity of such a quaint notion given what we know about physics today seems comical, but at the time prominent economic thinkers such as William Stanley Jevons in England(pictured above), Vilfredo Pareto in Italy, and Leon Walras in France and others felt that such a unifying link united two different fields might exist, might even certainly exist. These budding economists developed the notion that something they called Utility, which they defined roughly as economic satisfaction and well being, pervaded economic intercourse in much the same way that the nebulous physical force of energy pervaded all space. Perhaps energy and utility were not just analogues. Perhaps they were virtually one and the same, just existing in different fields?!! Religion and philosophy was added to the mix as these thinkers started looking for more analogous relations in Physics with economic concepts of labor, capital,money, resources and so forth. These nascent economists recognized that mathematics was a powerful underpinning to Physics and it was just a short step to then realize that for economics to become a science, that mathematics would have to be added to the mix. Physicists at the time debated the concept of equilibrium of forces that hold matter and energy in balance and so this concept of equilibrium had to be part of economic "science." They developed the notion that markets were closed systems and non market resources outside of a market system were "externalities"to such a market system. Inputs like money and resources, outputs such as goods and services flowed in a closed circular system along with consumption and distribution. If there were general laws governing physics, would there not be general laws governing economics? Eric Beinhocker in a book published in 2006 entitled:
Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics
Wednesday, August 11, 2010
Bloomberg carried an editorial by Lawrence Kotlikof, one of the few prescient economists is the business. an excerpt:
"Let’s get real. The
What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.
Last month, the International Monetary Fund released its annual review of
But delve deeper, and you will find that the IMF has effectively pronounced the
The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.
Double Our Taxes
To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the
Did you catch the IMF phrase that the US will need a permanent fiscal adjustment of 14% of GDP? If you're not on the floor by now, you should be. Here is the math: We have a $14 Trillion GDP. 14% of that is about $2 Trillion. Federal revenue is just a bit more so the IMF says we will in effect have to double the taxes of everyone who pays taxes!!! Is there anyone, any politician
out there talking about this impossible hole that the US finds itself in? (Deafening silence).
How are you going to double the taxes of the middle class? They don't have any freaking jobs and given the fact that the corporations have off shored all the decent jobs, their children wont have any freaking jobs. And in case you missed it, we are in a depression. So that leaves the corporations, but most of them don't pay much in taxes. Oh I know, Mitch McConnell whines that US Corporate tax rates are the highest in the world(not true) so the GOP wants to cut taxes for the fat cats. You remember, trickle down, create jobs..blah...blah...The real truth is that the US has a nominal tax rate of 35% for the biggest corporations but because those corporations wrote the corporate tax laws, US corporations enjoy an effective real tax rate of only between 14 and 18% depending upon which source you cite. Any many of the very biggest like Goldman Sachs and GE pay less than 5% in most years and it is those tax breaks that have destroyed middle class jobs for the last 30 years. Middle class income adjusted for inflation has barely budged since 1973, up only 10% in 35 years. But the richest 10% has seen their income up 90%. A CEO in 1973 earned 23 times mean income. Today he earns over 300 times mean income. So if you double what Goldman Sachs paid in corporate taxes in 2008, that only takes you to 2%! And if you double what GE paid, it doesn't even take you to 1%! To get an idea how GE managed to pay virtually no taxes, you would have to go through the estimated 24000 pages of their tax return. The is no chance under the current tax code that you will be able to double taxes on companies that hardly pay anything anyway. It would be far better to lower the nominal corporate tax rate to say 15 or 20% under a flat tax scheme with zero deductions but GE and GS would squeal like piggies and mobilize their hundreds of lobbyists to kill that idea in a NY minute. So maybe it's time to summarize this difficult spot we find ourselves in the summer of 2010: 1. The US is functionally bankrupt as are many of the states. There will be no way to pay the retirements promised or expected for state and federal workers let alone current levels of Social Security, medicare, and Medicaid entitlements. 2. The banks are bankrupt or would be if accepted accounting rules were again used. Obama and his Keynesian economic gang took 2000 pages to pass reform legislation which the banks were thrilled with. All they needed to do was reenact the Glass-Stiegal act which ran to 40 pages. We are virtually guaranteed another banking collapse. The financial markets are a rigged suckers game with traders in control. The May HFT(high frequency trading) meltdown in which it was revealed that HFT is over 70% of all trades on the NY Exchange was enough to make this sucker sell most of his stocks and mutual funds. 3. The corporations control the three branches of government but their very attempt at control has destroyed confidence in the
political system by the American public. We now have a co opted dysfunctional political system engaged in internecine polarizing debates, full of sound and fury and signifying...NOTHING.
I think we are looking at a very complex economic and political system teetering on the brink needing only a traumatic event to tip it over into collapse. What form it will take is any body's guess but it could be another misguided military misadventure such as an attack upon Iran by our over extended military or by Israel. The trigger could be another attack upon US infrastructure by middle east extremists who feel they have nothing left to lose. A coup against the House of Saud could do the trick as well as any number of natural catastrophes. The financial default of a major state such as California might provide an inflection point.
It behooves all of us to be preparing for the possibility of a collapse. In a future blog I will try to offer up some ways in which we as individuals can protect ourselves from the consequences of a political and financial delamination.
Monday, August 9, 2010
Now that I am back to blogging, I have had to play catchup on what new ideas and events I have missed these past 6 months by swearing off the sheer effort involved in trying to glean clues about the political and economic and social direction of a society that had not done what Tootle the Train was compelled to do: Stay on the track no matter what. Our society was off the track and since there was little I could do to change the situation, to hell with it. My goal in my blog had not really been to change society because the likelihood of that was minimal. My chief goal was to try to tease out the factors in what appeared to me to be a collapse of our society and for me, writing has always been the way I have used to arrive at understanding. The other task has been a self education involving the study of history,anthropology, sociology and economics, all subjects I had minimal exposure to when I was in college and medical school. In a real sense I am a prisoner of my biases and the books and authors that I have studied the past several years as I have been constructing my weltanschauung. In many blogs I have laid my lash across pusillanimous politicians, incompetent and delusional economists and the greedy corporate empires who have driven our train off the track to the brink of collapse. As any reader of this blog has perhaps noted, I have said that we are in a depression, not a recession. The distinction of whether it is a "D" or an "R" is of course a matter of how deep and how long it lasts. Some authors have said a depression is a 10% drop in GDP coupled with high unemployment lasting for more than a few years. Officially, which is to say looking at official government statistics, our GDP which is said to be in the $14 Trillion range has not dropped 10% or $1.4 Trillion. But government statistics on for example, unemployment are bogus and are deliberately bogus because if true statistics were given, the true magnitude of this downturn would be obvious to all. Unemployment is normally reported as U-3 unemployment, which is anyone who is unemployed who has sought employment within the last 30 days. If you gave up looking for a job, if you are underemployed or part time worker, you are not counted as unemployed. Government statistics say 9.5% is our unemployment rate when the real number is likely nearly double that. The U-6 unemployment figure attempts to estimate these other uncounted workers and is estimated at nearly 18%. GDP figures are suspect as well. GDP includes government spending as well as private spending, services and consumption. Our current deficit is about $1.4 Trillion which is 10% of our GDP. That money was borrowed and injected into the economy. Had it not been injected, our GDP would have been smaller, perhaps 10% smaller. That would meet the criteria for a depression. Whether we are in a recession or a depression or a double dip recession is of only incidental interest to me. My concern is whether this depression leads to a societal collapse. Depressions can lead to economic hardships and collapse of economic activity but most economic depressions eventually end. The downturn becomes an upturn. The depressions of 1857, 1873 and 1929 all eventually turned. But the depression preceding the the Harappan Civilization in India in 1700 BC, the Roman collapse in 470 AD, or the Mayan collapse around 900 AD were economic depressions that became societal collapses. The details of these collapses with the exception of the Roman collapse are sketchy and records are scant. Great civilizations do have a life span. They rise and fall. Once a civilization reaches a critical inflection point, it falls. Are we in the West nearing such a point? If we are, how long would it take before it became obvious? Could it happen within a matter of months or years or would it likely take the form of a stair step decline over many years? There is of course no way to know whether this depression will or even should proceed to a full scale collapse but I was taken by the words of Harvard economic historian Niall Ferguson who appeared on a panel with David Gergen and Mort Zuckerman at the Aspen Ideas Festival this summer. I will provide a link to the hour long video. Ferguson contends that collapse can happen suddenly. He cites historical data, complexity or systems theory, chaos theory, and a newer rogue brand of economics:complexity economics to show how an economic and political system in apparent equilibrium can can change to disequilibrium in a New York minute. I will attempt to explain key features of complexity economics in a future blog when I have studied it in more detail. Here is the link to the Aspen Conference:
Tuesday, August 3, 2010
I have been absent from the blogosphere for 6 months. After the 4 horsemen galloped up to my log cabin last winter and announced that Armageddon had finally arrived, I felt there was really no reason to continue with a life of trivial self delusion. It was game. Set. Match. What am I referring to? Well the US Supreme Court deciding that corporations had the same rights as individuals. Of course that has been the de facto law of the land for decades but when Shrub's court made it the echte law of the kingdom, I knew the war was lost. So I gave up and put my dog and pony show in the barn. Since then the economy has continued its ride down the ABS drain pipes heading for the septic tank, BP has despoiled an already despoiled Gulf Coast, and Wyoming finally got some snowpack well into spring. Why bother blogging? I only blog when something knocks me up the side of my face. Well it finally happened. I snapped out of my reverie. Kartik Athreya came into my life. I owe old Kartik a debt of gratitude. You may politely have asked "Who the he__ is Kartik Atheyra?" That guy up left is Kartik, He works as a senior economist for the Richmond Federal Reserve Bank.And lest you think Kartik is not a heavy hitter, he graduated from the University of Iowa. That should shut you up. He wrote a paper entitled "economics is hard" on June 17th in which he basically said that non economists(ie bloggers and other low unqualified yammering nabobs) have no business criticizing economic high priests in the temple. Here is a sample of his thesis:"writers who have not taken a year of PhD coursework in a decent economics department cannot meaningfully advance the discussion on economic policy." Here is a link to his paper:http://www.scribd.com/doc/33654737/Economics-is-Hard#fullscreen:on
Kartik also trashed one of my demigods, Elizabeth Warren, which really got my ruff up. And so I am trashing Kartik and all the other anosognosiacs working at the Richmond Fed, The New York Fed, the Pocatello Fed, and for that matter all the feds everywhere. Anosognosia as you may know if you went to a decent medical school is when a disabled person is unaware of his disability. It is common after strokes and with certain other psychiatric disorders such as Alzheimers Dementia.... "I'm not crazy! Whatza matter with youse guys?!" The Feral Reserve both in the US and in Central Banks everywhere is full of economists suffering from anasognosia. Greenspan had it. Summers has it. Geithner has it and Bernanke has it in spades. They simply are unaware that they are disabled, prisoners of economic dementia, practitioners of cognitive dissonance. The problem is we are the puppets and they hold the strings. They are economists of a particularly virulent variety, neo classical, Keynesian economics. These clowns are the most dangerous sort of clowns, clowns who don't know that they don't know. They are so stupid that they actually think that economics is a science! They pretend it is a science. The fact is that economics is no more a science than psychology or sociology or religion is a science. The simple fact is that unlike a true science, economics has no verifiable, replicable way to prove anything. Economists can look at money and credit flows, capital flows, labor management interactions, interest rates, trade and tariff interactions going back centuries and then show no diffidence drawing conclusions about causality. In the late 20th century the neoclassical school started to draw upon mathematical tools, a shrewd decision, because unlike economics, mathematics relies upon demonstrable, replicable theorems and models and explaining economics with mathematical concepts would validify economics. But shit is still shit even if you put it into an obfuscating equation. Since there is no way to prove conclusively a particular economic law or theorem, the field has been balkanized into many schools, each with their own particular bias. I feel confident that there are indeed economic laws which govern economic and financial interactions among us but the sad fact is with few exceptions, there is no reliable way to prove that the Austrian school is superior to the Chicago school any more than you can prove that a Presbyterians view of creation superior to an Anabaptist.
The tragedy, and make no mistake, it is a colossal tragedy that the Feral Reserve and the giant bank holding companies have colluded and conspired to trade garbage with the financial dimwits of the world with no oversight using access to Trillions of dollars issued from the public treasury at 0 % interest. And suprise surprise! The 6 biggest banks have actually made money this year even though the other 900 or so other sizable banks have not. The sad fact as anyone who attended a decent community college know that the FASFA accounting rules were secretly and suddenly changed a few years back to conceal the fact that many of these banks were insolvent. And so we lurch along, extending terms and pretending that the turbine engine driving this chimerical economy which flamed out a few years back can be reignited and we can start borrowing and consuming our way back to prosperity. The chance of that happening is zero. The large corporations have rigged the tax system to defer taxes on their overseas profits, allowed deductions on all costs to move a business overseas and continue to practice domestic job killing wage arbitrage. The US now makes almost nothing of value beyond some good heavy equipment, armaments and airplanes. Of course we have a booming service industry where we all take in each other's laundry and an utterly corrupt medical industry which contributes 2.5 Trillion to our GDP. Banks trade paper aided by accountants and lawyers. Some insurance companies even insure this paper even if they do not understand it or have the reserves to back losses . But who actually makes anything of real value in a financial and service based economy? The game is over Fido. Our economists who do not understand the pernicious danger of debt and cheap credit, confuse money with value and are blissfully unaware of the dominant role that fossil energy has played in our industrial expansion and remain unaware of the consequences to that industrial economy when that fossil energy is withdrawn in the near future.