Wednesday, February 23, 2011

The Buffalo Beast Pulls an Amazing Stunt on Wisconsin Governor Scott Walker

A jouranlist from calls Gov. Walker pretending to be David Koch, and Walker talks to him at length and is more than forthcoming with his plans and thinking.  It looks like the website is undergoing a denial of service attack, but the audio of the call is available on YouTube and has been partially transcribed at HuffPo.

Part 1: 

Part 2:

Saturday, February 19, 2011

Of Two Minds: Interesting Guest Essay

Charles Hugh Smith has opened up his place for another guest essay, this one from Eric A. called "Meme Theory and Markets."  The essay is fairly lengthy and chock full of charts, so I've only been able to skim it.  I will return to give it more attention, though, as it hits on a lot of themes and ideas that I've been pursuing for the last year or so (fractals, memes, etc.).  I do have some initial thoughts, though.

Eric A. is clearly another Austrian-inspired person, which means that he accepts that the boom-bust business cycle is "natural."  I don't.  While I accept that the boom-bust business cycle is a natural consequence of human behavior, I do not accept that the boom-bust cycle itself is natural.  Without the leveraged financial speculator, the deep boom-bust cycles of the industrail era simply would not happen.  The human fractal function operates in response to an input, and if that input is gamed by leveraged financials speculators who also control access to credit, you will see wild swings in market behavior (i.e., booms and busts) as a result.  Credit simply should not be extended to financial speculators, and financial speculation should be criminalized.   Make those changes, and the "natural" boom-bust cycle will disappear from the face of the earth, as capital will flow into real investments instead of speculative financial instruments such as the secondary equity market.

There is a throwaway line about Keynesianism that refers to it as "printing your way to prosperity," which is not what Keynes actually proposed.   Keynes sought to "euthanize the rentier class" by providing counter-cyclical pressures that would reduce the incentives to engage in the financial speculation that is always the cause of boom-bust cycles.  Because speculators profit both when the bubble is being deflated and while it is deflating, they have every incentive to drive boom-bust cycles.  Keynes sought to change that dynamic (albeit in a cowardly way; he should have called for criminalizing financial speculation).

Stoneleigh v. Gonzalo Lira: No Contest

Here's a link to Stoneleigh's summary of her deflation/hyperinflation debate with Gonzalo Lira, which she titled "Inflation for the Innocent, Hyperinflation for the Clueless."  The post includes a link to purchase rights to listen to the debate at the low low price of $30.  (Too rich for my blood; if it were just Stoneleigh talking, maybe I'd pay the money.)

One of the things she points out in her summary is the fact that it is hard to even have the debate when you don't have a common definition of "inflation":

The major hurdle in the debate hinged on the definition of inflation, as such debates often do. Financial analysts who expect deflation typically do so because they recognize the critical role of credit in the effective money supply and the effects of credit implosion. With a natural focus on the money supply, they typically (but not universally) define inflation and deflation as monetary phenomena - as an increase or decrease in the effective money (and credit) supply relative to available goods and services.

Analysts who anticipate inflation or hyperinflation typically focus on nominal prices, which they expect to increase, likely concurrent with a loss of confidence in the currency. As I am in the deflationist camp and Gonzalo is a hyperinflationist we naturally defined inflation/deflation differently, which lead to some awkwardness at the beginning of the debate.
The funny thing is that what Lira typically describes as hyperinflation (falling real estate prices, rising prices for staple commodities, and very high interest rates) is actually deflation.  First, tight credit is inherently deflationary, something that Lira admits with respect to real estate prices.  Second, tight credit can and will translate directly into higher consumer staple commodity prices IF (1) commercial credit is subject to the same high interest rates and (2) businesses pass the increased cost of doing business on to the consumer by raising prices in order to maintain profit margins.  I think  it is a safe bet that both conditions existed in Chile when it experienced "hyperinflation." 

Bottom line: inflation, as Lira understands the term, is easy for banks to create or disappear at whim solely through the severe tightening of credit and without any "money printing" by a central bank. 

Thursday, February 17, 2011

Complexity . . . Meh . . . Whatever

Just to maintain continuity, I figured I'd discuss a Charles Hugh Smith essay for three days in a row.  This one is called "Complexity: Bureaucratic (Death Spiral) and Self-Organizing (Sustainable) ."

I don't have any comments on what he has to say about complexity expect that it is completely irrelevant.


Because, as far as human beings are concerned, the world is no more and no less complex that it has ever been.

Human beings are not wired to comprehend complexity, they're wired to ignore it.  The world has always been far too complex for humans to comprehend, which is why we've created religions like Christianity, Islam, and economics (a secular religion).  It's all about "satisficing."

All human systems (e.g., societies, states, corporations, bureaucracies, etc.) merely serve three basic functions: expectation setting; perception shaping; and applying force.  Remember, human beings define happiness by comparing what they see to what they expect and confirming that expectations are met.  Expectation setting is the single most important function, which is achieved in human systems by transmitting value systems through societal institutions.  Perception shaping is next most important, but cognitive biases always kick in to help, so propaganda is a lot easier than initial conditioning.  Applying force is what you do when people get too upset when they realize that reality is not what they were taught to expect in spite of all efforts to control perceptions.

Human systems do not fail because they become too complex.  They're always the same in terms of the functions they perform.  No, they fail because the people performing those functions become too simple to comprehend the entirety of the function they're performing, i.e., they lose their way and, ultimately, make a misstep that causes the masses to choose "fight" when presented with the "fight or flight" reflex. 

Ultimately, I tend to view "complexity" arguments as a symptom of a weak will.  Human beings are no more or less complex than they ever have been in history, and the complexity of human systems is identical to that of a single human being.  Yes, more people are involved, but the functions that must be served remain the same.  The manner in which the human mind interacts with what is outside of it is the chokepoint.  Whether you have an 16-bit brain, or a 64-bit brain, you're stuck with an 8-bit bus that limits how you perceive and interact with the outside world.  The good news is that you can engineer the bus to sample multiple times a clock cycle to effectively increase your bandwidth, but you have to realize the limitations that are hardwired into your system.  Most people just accept the 8-bit, single sample per clock cycle limitation, though. 

Complexity is a bitch, you know.  We simply can't comprehend it all.

But you don't have to understand complexity in its entirety.  You just have to understand the building block that gets replicated to create the appearance of that complexity; i.e. the basic function of the human mind.  Tinfoil hat conspiracy theorists inherently internalize this understanding because the only way elaborate conspiracy theories could be so successful is if human beings were exceedingly simple.  Well, human beings are exceedingly simple, and they're all fundamentally the same regardless of how different they appear to be.

Financial Speculation IS Driving Commodity Prices

Here's an interesting interview segment where two economists agree that Krugman is wrong, that speculation is driving the price of staple commodities, not any shift in supply and demand.  The two economists in question share actual data that one should be able to track down to confirm/deny their conclusions, but the fact that they claim to have data and are not just spouting fact-free economic dogma makes them more credible, in my opinion.

The basic conclusion is that there has been a shift in market dynamics over the last decade that allows the futures market to drive prices on the spot market, and that if a player is big enough, it can drive prices on the futures market (and, therefore, on the spot market) to whatever it wants.  Between the massive concentration of wealth and financialization of the real economy, there is no such thing as a free market; markets are merely at the command of the big capital pools who move prices at their whim.

More at The Real News

From the transcript, which may be found here:

JAY: Jayati, some people argue, including people like Paul Krugman, who actually--who usually isn't someone to critique--to be shy about critiquing speculation, he's saying that if there isn't physical hoarding of food, you can't have this kind of gambling affect the price of food, that if you buy a future on, you know, corn or whatever and you think a year from now the price will be higher, that the spot markets, the actual day-to-day market, catches up to that, and that there's no point--you can't actually manipulate the price unless somehow you're physically putting corn somewhere. What do you make of that argument?

GHOSH: Well, you know, that used to be true, that used to be the case, that in fact to speculate in grain, you had to hold grain. And that was why, essentially, the speculators in grain were those who were commodity dealers. That was the old story. What happened in the last decade is that you have this kind of transition whereby you have a futures commodity in which financial agents who have no interest in holding the actual physical commodity are able to play this market. And that's because they are essentially rolling over contracts and constantly purchasing newer contracts, that is a crucial change in the market in the last decade.

JAY: I mean, one would think, Bob, that if you know there's a future market, and the futures six months from now are higher than what the market is right now, you would--I mean, it goes to--the logic would say you'd try to hold on to what you've got for six months and sell it when it's higher. Is that the logic of this?

POLLIN: Well, except that, as Jayati said, the people that have come to dominate the market are people who are not really calculating on the basis of when any physical commodity is coming due. They are basically moving the market in order to move the market. And if they're big enough, if they're so much bigger than all the other traders, they have the capacity to move the market to the degrees that we have seen that are just unprecedented. And so when they move the futures market, that pushes the spot market up--the futures market is driving the spot market prices. And that's why you have, you know, the new form, much greater form of speculation becoming the predominant force in the futures market, which is then pulling the spot market along with it.

JAY: Well, what do you make of Krugman's argument that says you can't do that with food, that you actually have to hoard it or you can't move the price?

POLLIN: I think it's wrong.

GHOSH: Well, that's simply not true, and we have evidence of that in 2008. In fact, what happened in 2008 is a classic example, where the food price went up by--almost doubled in the period between January and June, and then fell back to almost the previous level in the next six months, and yet there was hardly any major movement in terms of actual turnover of the physical commodity.

Wednesday, February 16, 2011

Putting "Austerity" In Perspective

Via Max Keiser, we find this link to a piece by an Irish journalist named David McWilliams who distills the truth masked by the term "austerity":

So let’s get things straight: the Irish citizen is being asked to take on the debts of the European banks and pay for this by selling our assets for half nothing to the same banks so that we can bail them out. We take on debts without a discount and sell assets without a premium. At the moment these loans that we are being asked to pay are trading at a deep, deep discount because the “assets” they were supposed to back have collapsed in value. Yet we are being asked to pay for these loans at par.
The only reason the American people are facing calls for "austerity" is the fact that we "borrowed" money from insolvent financial institutions who had no money to lend us in order to save them from extinction.  Our punishment for this good deed (performed in our name but not by us) is not only to pay interest on the fictional money we created by borrowing it, but to dismantle the social safety net that was established the last time these financial institutions screwed the world.

Seriously, from a moral perspective, do we owe anything to bankrupt institutions that lent us money they didn't have (with interest) in order to bail them out?  But for the accounting fiction created by the bailouts, those institutions would still be dead.  And we're beholden to them why, exactly?

The powers that be clearly view this as some kind of Milton Bradley board game, but their insistence on keeping their monopoly money is killing people around the globe, including people in the United States.

Matt Tiabbi Does What Matt Taibbi Does

From "Why Isn't Wall Street in Jail?":
"You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."
Read the whole thing here.

Charles Hugh Smith Is On a Roll!

CHS says "You Want Inflation?  Here's How to Get It."

In the very first line, he gets it:

Rising prices driven by speculation is not the same as organic inflation, and diverting national income to the banks will not create organic inflation.
He goes slightly off-course when he accepts the Federal Reserve's stated goal of creating "modest inflation" as its actual goal (which I think is to induce a political crisis in the U.S. in response to the 1970s-style stagflation that the Fed is purposefully fostering), but I can forgive him for that.  Skipping to the end:

The Fed's policies cannot create organic inflation, because all the Fed is doing is transferring wealth to the nation's Elites. Their spending on luxuries and fine dining are not broadbased enough to generate organic inflation in the entire economy.

Borrowing money does not drive organic inflation: higher incomes and free cash drive organic inflation. If you want inflation, then you have to increase the incomes and assets of 60% of the households, not just the top sliver who own most of the financial assets.
Unlike most other Austrian-inspired people, Smith is taking care to use the term "inflation" as it is actually defined by the Austrian school, which is in terms of the quantity theory of money, which conveniently lays the blame for inflation at the feet of labor for demanding and getting higher wages.  "Silly wage slave, if you demand higher wages, I'll just have to raise the prices you pay for stuff."

One thing that Smith has done that I think works well is to embrace the misuse of the term inflation and relable it as "speculative inflation" so it can be compared and contrasted to correct usage of the term in economics according to the quantity theory of money, now relabeled "organic inflation."  As much as I demand and appreciate this kind of rigorous thinking, I do so in part because it calls the quantity theory of money into question.

Remember that Chicago neoliberals blamed rising labor wages for the stagflation of the 1970s.  If what we have today is the same as the stagflation of the 1970s (I think it is), and what we have is being caused by financial speculators, shouldn't we revisit the 1970s and reassess what caused the stagflation in the 1970s?  When you do, you'll see that financial speculation caused that, too, and when you dig a little deeper, you'll see that the quantity theory of money entirely fails to explain inflation.  Inflation is, always and everywhere, caused by financial speculators.

Tuesday, February 15, 2011

Charles Hugh Smith With a Good Explanation of Why Hyperinflation Is Not In Our Near Term Future

Charles Hugh Smith has an excellent post up today, which you can find here.  Smith's piece stands as a nice counter to Gonzalo Lira's recent missive on hyperinflation.

Here's what I view as the key passage in Smith's lengthy piece:

Credit is not cash, and creating credit is not the same as printing cash. Shoveling $1 trillion in zero-interest credit into the banking system does not necessarily mean that $1 trillion flows into the real economy--that can only happen if someone or some entity borrows the credit.

This is why some claim that hyperinflation has never occurred in a credit-based system; it can only arise in a monetary system in which cash itself is printed (i.e. Zimbabwe et al.)

I am not making any such broad claim, but to identify the two as identical seems to me to be a profound confusion.

This distinction plays out in a number of ways. If the Fed had actually printed $1 trillion in cash and dropped it from helicopters, then those collecting the cash on the ground might have spent it, creating more organic demand for goods and services.

If the Fed creates credit and loans it to banks at zero-interest rate, the credit only flows into the real economy if somebody borrows it.

Without borrowers, the "money" just sits in reserves, where it does not spark inflationary organic demand for resources, goods or services.

If someone borrows the "money" to refinance existing debt, the only money that flows into the real economy is the difference between their original debt servicing costs and their new debt servicing costs, presuming the new costs are lower than the original. (Not always the case if said borrower had an interest-only "teaser rate" mortgage that he/she is now rolling into a mortgage with principal payments and a market rate interest payment.)

Or a large speculator (trading desk, hedge fund, etc.) could borrow the credit-money to speculate in commodities, driving prices up on the widespread expectation of higher costs in the future. In this case, the credit-money does influence the real world economy by driving commodity prices above levels set by organic demand.

But speculative "hot money" is not organic demand; it flees or is lost if trends suddenly reverse.

Since commodities such as oil are priced on the margins, this matters. A sudden decline in oil from $86/barrel to $76/barrel would trigger an exodus from speculative long positions, reinforcing that decline in a positive feedback loop.
The distinction between credit and cash is an important one to make.  While a lot of people have recently been pointing to an increase in M2 as evidence of inflation, i.e., the expansion of the money supply, the fact is that M2 is just another way of measuring credit as it reflects obligations held by financial institutions to repay depositors.  The base money supply M0, which includes both circulating currency and currency held in bank vaults as reserves, has essentially stayed flat while M2 has been growing.  In other words, the number of demands for the same base money have grown while base money has not, which implies a deflationary spiral if and when the next financial crisis hits. 

Think of it this way, if everybody tried to to pull their money out of the banks at the same time, there'd only be enough cash to pay out what I think of as "RealM1,"  which is M1 minus the amount of money in circulation (official M1 already excludes the amount of money held as bank reserves). What I think of as "RealM2," which is M2 minus RealM, is nine times the size of RealM1.

Friday, February 11, 2011

Mubarak Does the Right Thing, But Why Now?

Mubarak's abrupt resignation just a day after his defiant "I ain't goin' nowhere" speech is welcome news, but now we have to ask ourselves "what the hell?"

The only thing that makes sense to me is that yesterday's speech yesterday was a very public demonstration for a very private negotiation between Mubarak and the United States.  There's no doubt that he wants to keep his ill-gotten gains, and that he wants his friends and family protected from criminal prosecutions in Egypt and elsewhere (e.g., for torture in Europe).  I have to imagine that he wasn't getting the guarantees he wanted, so he engaged in a little brinksmanship to secure those guarantees.  "You won't give me what I want?  Okay, let's set the Arab world on fire and see how that goes for you . . ."

Unfortunately for the people of Egypt, the interim solution of a military-run government may not prove to be much of a difference.  After all, it appears that the Egyptian military is a lackey of the American military.  While the Egyptian people seem to genuinely love their military, and the military's forebearance in cracking down on the protesters was assumed to be a reciprocation of those feelings, the Egyptian military may just have been following orders handed down by the American military.

I hope everything works out, but Washington D.C. does not believe in democracy of any sort (actually, it even views America's degraded form of democracy as a failed experiment), so the people of Egypt need to be on their guard.  They're acting like they've won a championship game, but they really just made it into the tournament. 

Thursday, February 10, 2011

Mubarak Could Have Saved the Speech and Just Tweeted "FU"

Jesse has a pithy post up.  Here's the money quote (for me):

Mubarak has said he will not step down. But he has appointed several commissions to study the problem.
You gotta love Mubarak.  He IS the problem.  

Here's a link to Al Jazeera's live feed.

Monday, February 7, 2011

Two Views of The Role of Speculation In Creating Food Price Inflation

Predictably, Krugman says "nothing to see here; move along."

Dylan Ratigan begs to differ:

You can see the same video at zerohedge along with Tyler Durden's commentary.

At the beginning of the video, Ratigan features Ben Bernanke's response to the accusation that the Fed's QE2 policy is driving food price inflation, which Bernanke scoffs at in response. 

I think Krugman's piece was, in fact, a defense of Bernanke's position.  While I actually agree that QE2 is not the direct cause of the clear and rampant speculation in staple commodities, I cannot agree with Krugman that such speculation is not, in fact, happening, that the increase in food prices is actually due to organic supply and demand. 

QE2 is not the proximate cause of what is currently happening to in the commodity markets.  First, QE2 is really just another way of shoring up the banks' balance sheets (something else Krugman denies).  It just doesn't require the American people to borrow the bailout money from the banks and pay them back interest on the money we give them.  Second, QE2 just isn't large enough to explain what is happening in the commodity markets.

That being said, leveraged speculation IS the proximate cause of what is currently happening in the commodity markets.  The problem with the analyses of both Krugman and Ratigan is that they do not consider the amount of existing money that is pouring into the commodity markets seeking yield.  The equity markets are a total joke.  They're completely simulated by robot traders, who currently account for 50-70% of all trades on a daily basis, and they're exhibiting very low trading volume and no trend whatsoever (a big reason why a lot of hedge funds are getting out of the game).  QE2 intentionally took the bond markets off the table.  The real estate market continues to slide, and we're only at the beginning of what will be an ugly commerical real estate market.

All this leaves the commodity markets as the only game in town, and it is a game easily rigged because it influences the availability of real-world supplies of materials.