Excellent Post from CHS Today

His opening paragraph states his thesis well:

The government's refusal to investigate financial crimes committed by the banking cartel and its Elites is nothing less than the willful destruction ofthe rule of law.

Barry Ritholtz is possessed by the same zeitgeist:

The fraud is rampant, self-evident, easy to prosecute. The only reason it hasn’t been done so far is that this nation is led by corrupt cowards and suffers from a ruinous two-party system.

We were once a great nation that set a shining example for the rest of the world as to what the Rule of Law meant. That is no more, as we have become a corrupt plutocracy. Why our prosecutors cower in front of the almighty banking industry is beyond my limited ability to comprehend.

The meme is spreading.  The trust in the current system is in tatters but holds on because there is still a large enough mass of people in "the center"-- between the unemployed and the 1%-- who are too frightened about losing their own livelihood to recognize the game is over.  Playing by the rules nets nothing for the regular guy. The game is rigged so that the house wins every time.

CHS Needs a Third Mind

Charles Hugh Smith shows his Austrian influence by declaring that the Fed and Bernanke are "Keynesian":

The Fed's knees are chafed from kow-towing to their banker masters, and worshipping the "magic" of their Keynesian Cargo Cult . .

But the Fed and Bernanke are NOT Keynesian in the least.  They are Chicago School monetarists.

Some people get this:

One year ago, I argued in Reason that Milton Friedman’s writings on the Great Depression inspired the Federal Reserve’s response to the current economic crisis. Friedman held that artificially induced inflation would have prevented the ordeal of the 1930s, so I inferred that Fed Chairman Ben Bernanke’s implicit goal is likewise to ramp up inflation as a cure to our present ills.

A year later, the Fed is beginning to make that goal explicit. Over the past few weeks, Bernanke and other Fed bigwigs have been dropping conspicuous hints that they plan to boost inflation and pump another round of conjured-up cash into the economy. One proposal is to inject $100 billion per month. It’s being called Quantitative Easing 2 (QE2).

And Robert Barro himself declared in 2007 that "we are all Friedmanians now."

So, what CHS is really decrying-- at least with respect to the Fed and Bernanke-- is the Friedman Cargo Cult, not the Keynesian Cargo Cult.  Krugman is clearly of the latter cult, but I'm not defending him or that cult here, only making the point that CHS has oversimplified his worldview: as much as he sometimes congratulates himself on being a free-thinker, his thinking is not all that free.  It is distinctly Austrian neoliberal.  Try as he might to distance himself from Chicago neoliberal economic thought, the core ideology is the same.

As I've said before,

How is it that the founders of two seemingly diametrically opposed schools of economic thought co-founded the neoliberal movement? Economics, more properly political economy, is really a political science, after all, so if their economics reflect their politics, doesn't that mean that their politics are diametrically opposed?

Only if you believe that each school's economics reflect its true politics. In the case of the founders of the Chicago School, that isn't the case.

Neoliberalism was founded by Hayek, Mises, Friedman and others as a multi-generational strategy to effectively eliminate public control of democratic governments in order to ensure governments would not interfere with the banks' creation and manipulation of boom bust cycles to their advantage. The end game is and always was to have a return of laissez-faire boom-bust cycle without governments stepping in to help their citizens during busts. As discussed previously, the neoliberals believed that classical liberalism had failed because it framed the goal of good governments and good economics as to promote the common good. Neoliberals removed the concept of the common good from their reforumulation of liberalism, recasting the concept of the market itself as an all-knowing, all-seeing god that could not be interfered without dire consequences.

Given that socialism and Keynesianism were responses to the great damage produced by laissez-faire economics had produced, there was no way to return directly to it in the form of the Austrian School of ecnomics. The Chicago School of economics was therefore created to provide an incremental move away from Keynesianism economically and an incremental move towards neoliberalism politically. The Chicago School exists to prove once and for all that government intervention into the money supply and the economy can never work and will always lead to disaster (but not until after eliminating the gains the common people reaped due to government intervention). Once the Chicago School's economics do their work and flame out spectaculary into a truly Great Depression, the answer will be and must be the Austrian School's economics. After all, we know from Milton Friedman's revisionist history that the Great Depression was caused by the "government" interference of the Federal Reserve, so what's left but to bend over for the all-knowing god of the market and hold your ankles (and never mind that man behind the curtain).

And the neoliberals will label Chicago School economics as "Keynesian." In fact, they already are.

The underlying assumption in CHS's post is that his idealistic view of capitalism is reality.  Unfortunately, what we are seeing IS capitalism as it always has been and always will be.  His idealized view of capitalism is what is sold to the masses, the bleating sheep (who think they are free thinkers), to explain why they always wind up losing in the "free market."  The folks who peddle capitalism are not and never have been subject to capitalism, which is a rigged game that they run for their own benefit and to the detriment of others.

While I agree with CHS that Bernanke's policies have been "disastrously wrong" by my own standards, I equally believe that Bernanke's policies have demonstrably achieved everything he was assigned to accomplish.  The man is in place to assist in the banks' looting of the real economy and to hasten the enslavement of the masses.  By that yardstick, Bernanke is a genius and a winner that will be canonized by those he serves.

And then people like CHS will applaud when we go full Austrian, which will preserve the gains the banks achieved through looting.

The Return of "The Project"

Over the Thanksgiving weekend I had something of an epiphany, which is that "The Project," the initial impetus for embarking on what is now a three year journey into understanding the depth and breadth of human nature, remains a valid idea and something upon which I must focus my non-working hours.

The basic idea of the Project was inspired by one of the worst books ever written: The Da Vinci Code.  Actually, the Project was inspired by the fact that such a horrible book could cause people to question their religion (and the leaders of their religion to undertake massive efforts to debunk a bad work of fiction).  My takeaway is that the willing suspension of disbelief that takes place whenever we sit down to read a work of fiction allows even unshakeable beliefs to be questioned when otherwise doing so would create a defensive reaction.

For the Project, I planned to create a rich fictional universe within which it was safe to question all sorts of widely held and "unshakeable" beliefs.  So I set out to develop a multi-cultural understanding of human nature and the themes that run through every culture and civilization throughout time.

My only problem was that this journey crumbled my own unshakeable beliefs down to their very foundations, and I was left feeling that I had nothing left to say within the scope I envisioned for the Project.

So I abandoned the Project and focused on engaging in the political directly.  And that was disillusioning in its own regard.  I found many fellow travelers, or thought I did, but most of them stopped their journey when they found a new comfort level, which I view as unwarranted as the last comfort level.  Yves Smith is a perfect example of this phenomenon, as is (to a much smaller extent) Barry Ritholtz before her.    Both seek to work completely within the system to effect change, to reform the system to make it fair.  This is impossible, and as Russ said today, nothing short of abolition is required.  Incrementalism has been and always will be doomed to failure.  Unfortunately, people like Yves and Barry fail to see how the "now-opia" of "progressive" rationalism bogs them down, forcing them to make the same arguments over and over again, all the while legitimizing the counter-arguments against them.  After all, you wouldn't be arguing if there wasn't a legitimate difference in opinion, right?

But I'm restarting the Project now, and I think it will actually be better and more successful than I had previously imagined.  The turning point for me was realizing that what I have discovered about the truth of humanity and human systems offers the makings of a far richer, much more far-reaching tapestry than I realized.  While I still owe people like paper mac responses on my "fractal theory of human cognition," the bottom line for me is that human beings do not experience reality.  Instead, they constantly interpret it, comparing what they observe to what they accept and reacting accordingly.  This comparison is subject to positive feedback-- i.e., reinforcement or cognitive biases-- that creates hysteresis and make it harder for people to leave a state of belief once they have reached it.  The study of propaganda, aka marketing or public relations, relies on this simplistic view of human cognition to great effect, successfully manipulating public opinion and "consumer" sentiment.  And the power structure has long known that the values espoused by social institutions are critical in shaping opinion and sentiment, although they did not have empirical evidence of this fact until cognitive science and behavioral economists came along.

The thesis of the myth that will drive the Project is that all major changes to society have been driven by the relative pathological few who seek to employ usury to control the masses.  From monotheism, to feudalism, to  classical liberalism (and the corporatism it spawned), to the current neoliberalism that dominates, all can be traced back to the drive to establish and maintain usury as the primary social control mechanism.  Indeed, given Islam's outright ban on usury, the "Clash of Civilizations" that has resulted in the West targeting Islamic nations takes on a whole different light.

Of course, the Project is set within a fictional universe, and I will have to take certain liberties to fill in gaps that will make the myth complete and flow.  Nothing will be sacred but the human spirit itself.

As an aside, DownSouth is somebody I have not heard from since he was cast out from the Garden of Yves, but one thing he was harping on prior to his expulsion was "ponerology."  I have the book that he was citing, and it is quite dense and ponderous to wade through, but this related site is more accessible and, I think, consistent with the "mythesis" at the heart of the Project.

The Single Most Cogent Statement of What We Face

The folks at the Automatic Earth say all that needs to be said.  And I'm just talking about the lead-in to the main article . . .

Personally, I believe we will see something akin to a 10x Lehman moment in the next week or so, and I'm moving to protect my assets by taking my money out of a TBTF bank and put it into a local bank (something I've been contemplating for quite some time but now feel is imperative).  The actions of the central banks (the alleged bailout of the Euro zone) and the Obama administration (goosing the unemployment number by disappearing 1.5 million unemployed) smacks of desperation intended to get the sheep into the markets for one last fleecing.

Robert Viennaeu's Thoughts on Economics

I've been a big fan of Robert's since stumbling upon him a couple of years ago.  He has taken up economics as a hobby and with gusto.  He has reached many of the same conclusions about economics as I have, but he still believes in it as a science that has something meaningful to say.

Today's post is a good one, and it has its own link to a piece by Gavin Kennedy, somebody who has studied Adam Smith extensively and reached a very different conclusion about what Smith actually meant by his Invisible Hand.  This quote from a paper by Getty Lustila comes from Kennedy's latest post:

For Smith, all human beings are naturally ‘in-tune’ with one another through the faculty of sympathy; which, acting as a mirror for others, allows us to take part in their suffering and joy. The ability to sympathize with our fellows is not a virtue (in the traditional sense). Instead, the faculty of sympathy is a constitutive part of human agency: devoid of sympathy, we are not human.

And that's neoliberalism's aim: dehumanization.

Karl Denninger Sees the Real Enemy, Inadvertently Previews A Paradigm Shift In The Political Spectrum

In a post entitled "Nail, Meet Hammer," Karl posts up this interesting video:



I do not agree with everything that Christopher Greene says in this video, and I doubt that Karl does, either.  But  there is a great deal that I do agree with, and I'm sure that Karl wouldn't post it if he didn't agree with a lot of it, as well.  While I doubt that Karl and I would agree about what where we agree with Mr. Greene's video, I am sure that we would agree more than we disagree.

The point here is that a new political center is being created before our eyes.  Denninger proclaims himself as an original member of the Tea Party.  But he has pretty much washed his hands of it and now supports the Occupy movement.  He even makes a pretty good observation about it here.

NOTE: Where Karl and I probably disagree with Greene is the conspiracy theory that drives Greene's narrative.  Karl probably doesn't believe in it, as he prefers to think of people as stupid instead of evil.  I don't agree with the details of the conspiracy implied by Greene's narrative, but the documented history of neoliberalism demonstrates a concerted, multi-generational effort to shape and control public perception in order to rip off the public.  If you're willing to have a looser conception of a conspiracy theory, one that does not require secretive back room meetings between villains, then it is hard to not view neoliberalism as one giant conspiracy.

Karl ALMOST Gets It

Mr. Denninger uses NetFlix to make a point that he ultimately misses, stating:

There are three lessons embedded in this chart.

The first is that exponential (compound) growth does not last forever.

The second is that when (not if) the party ends, the usual path is straight down, while the climb up was (by comparison) rather sedate.

And the third is that you can make it much worse by doing stupid things.

Netflix was a prime example of all three in action . The firm sold the market on the premise of "everlasting growth." That premise forgot the fact that they had created the "brand" on the back of a skeptical industry that underpriced their services - and that these "teaser rates" for content access would end. There was no way for Netflix to win on this, as they'd either fail outright or the content cost ramp would nail them if they were "successful." These risks were disclosed and nobody paid attention to them.

The emphasized sentence illustrates my point.  ALL share prices on the secondary equity markets inherently assume "everlasting growth."  That is because free cash flow models using net present valuation techniques start with today's free cash flow, assume annual growth over 3-5 years at a one rate, and then assume a terminal value which is based on lower, but now perpetual, annual growth rate into the future.  

What Karl is really complaining about with NFLX is the slope of the increase stock price, which is based as much or more on the P/E multiple applied to the assumed level of perpetual growth as on the premise of "everlasting growth," which is common to all companies sold on the secondary equity markets.

Again, I wish Karl luck with his book.  As often as I disagree with the man, he is a genuinely good guy who, like Jesse and Charles Hugh Smith among the A-list financial bloggers, should always be taken seriously ESPECIALLY when you disagree with them.  People with their size audiences who continue to speak unvarnished truth are to be respected.

Placeholder: "-Isms" and Power

I've been taking a haphazard journey through time in an effort to understand better the human condition.  As a result of this journey, I have become convinced that we are on the verge of an event like the so-called "Glorious Revolution" of 1688. 

My journey thus far has only taken me to the formation of the modern Roman Catholic Church and the feudalism that arose in its wake.  The way I see it, the Glorious Revolution marked the end of feudalism and the beginning of capitalism.  The primary difference between the two power structures is that feudalism relied upon the social institution of the Roman Catholic Church to dictate the economy, while capitalism set up secular social institutions to dictate the economy.  Capitalism was on the verge of failure beginning in the mid 18th century, and Marx offered an alternative power structure in communism.  The problem with all the "-isms" is that they always benefit the same people, i.e., the oligarchy that is already in control.  The value of capitalism, and its cousin communism, is that they both make it harder to hold the true rulers accountable.

In any event, the people of the world are awakening to two facts: (1) the promise of the neoliberal form capitalism is false, and (2) we have passed the point of no return for capitalism, as we are at Peak Everything.

My great hope is that, this time, the break from the past will not wind up with the current rulers on top, as has always been the case in the past. 

When You Question Your Understanding of the Present, You Need to Double-Check Your Understanding of the Past

Karl Denninger.  The man is a dynamo. 

I just wish he were as right about the world as he thinks he is.  Unfortunately, he's not.  Why?  Because he refuses to question what he thinks he already knows.

Two examples.

First, there's this post of his, which is dogmatically modern "libertarian" chic.  Watch the video he links to, and ask whether there can be any distinction between the "oligarchy" which the video claims to abhor and the "republic" which the video claims to exalt over all other forms of government.  It seems to me that a republic in which only men (not women) who own property (not all citizens) and who are not themselves property (i.e., slaves) serves only the oligarchy.  Seriously, how obvious is that?  Just take the time to past the rhetoric and at the actual facts.  (And the claim in the video that everybody else "lies" about how to describe the left-right continuum is utter nonsense; you can't legitimately argue that your new definition of accepted terms makes somebody else a liar.)

Second, look at this post, which complains about the frauds he recognizes while demonstrating the fraud he fails to see.  What Karl doesn't get is that, according to his definition, all stock market transactions are also Ponzi schemes, and by trading, he aids and abets those schemes.  As I've said before, analysts set stock price targets based on free cash flow models that assume perpetual growth, which, as Karl rightly points out, is not possible in the real world.  Nevertheless, like a good modern "libertarian," Karl has blinders on when it comes to "private" behavior (as opposed to the behavior of the government).

Karl is too old to change, so I'll just focus on enjoying him for the person he is, which is a genuine, well-meaning dude.  I wish him much luck on the upcoming release of his book.

Tea Party Communists

Recently, I was reading David Graeber's Debt: the First 5,000 Years, and it struck me that a large part of the Tea Party belief system is communist in nature.

This is most apparent in their nativist attitudes and anti-illegal immigrant fervor.  Basically, they argue that illegal immigrants are "stealing" American jobs.  But how is that possible when the businesses that are giving illegal immigrants jobs are privately owned?  How can Tea Partiers believe that the jobs located in America and provided by private business owners belong to America at large?  The fact is those jobs don't belong to Americans but to anybody the business owner chooses.  (Note: there are no similar complaints about "American" jobs that get sent to China.)

Tea Partiers have also been known to whine about "wanting their country back," but their claims to the country as a whole don't extend beyond what they themselves own, at least under their view of capitalism and free markets.  What the Tea Party is really arguing is that society OWES them something, which means they're really closet communists.

Paul Craig Roberts on the Death of America

Paul Craig Roberts says what needs to be said about the unlawful execution of a U.S. citizen by his government: The Day America Died.

To be clear, the execution of American citizens without Due Process is something that the U.S. government had engaged in numerous times in its checkered past.  What makes this murder different is, as PCR says, "never prior to President Obama has a President asserted the power to murder citizens." 

Think about it: even Dubya didn't go that far, and he was despised by Obama supporters. 

What shocked me-- and it shouldn't have-- is "liberals" like Bill Maher and Salman Rushdie were all for murdering Awlaki when people like them had problems with something far less serious-- indefinite detention of foreign citizens-- when Dubya was doing it.

Let's face it, Americans of all political stripes have entered an era that history will judge as one when Americans only "Thought They Were Free."

This is what the American flavor of fascism looks like.

A Couple of Things Worth Reading When You Get a Chance

David Brin on "Class War" and the Lessons of History.

The Automatic Earth's Response to Chris Martenson re: Deflation.

Both articles are great for different reasons.  Brin's is more accessible, however.

Cognitive Dissonance, Karl Denninger Edition

One side of Karl's brain relies on Fed data regarding the amount of outstanding debt to argue that the American consumer has not delevered.

The other side of Karl's brain argues, I think correctly, that the value of outstanding debt has been vastly overstated by banks who refuse to mark bad debts to their market value.

If the latter argument is correct, than the former cannot be.  Anybody who believes the banks are lying about the value of the debt they're carrying on their books should not be relying on the banks lies for anything.

Qualitatively Defining Deflation and Inflation

Simply put, deflation is persistent economic contraction caused by the withdrawal of credit generally.  An economy in persistent contraction cannot continue to service existing debt that in all cases assumes economic expansion.  Institutions charge interest at a rate greater than the expected rate of inflation.  That is how they make money.

On the other hand, inflation is persistent economic expansion caused by leveraged financial speculation.

Others who I respect continue to insist on describing inflation/deflation as monetary phenomenon (aka Milton Friedman's Big Lie), but I think they've modified the description enough to make it workable and consistent with my view.  See Stoneleigh here:

As we have consistently explained here at The Automatic Earth, inflation is an increase in the supply of money and credit relative to available goods and services, while deflation is the opposite. Deflation, moreover, is aggravated by a collapse in the velocity of money. Price movements are lagging indicators of monetary changes, but are also subject to a number of other drivers, such as scarcity and substitutability (or lack thereof).

I was poking around over at the Automatic Earth this morning, and I strongly recommend reading this "primer" and following the links contained therein.  I particularly liked Stoneleigh's take "On the Nature of Political Crisis," which includes the following choice paragraphs:

As expansion morphs into contraction, in accordance with the very exact same Ponzi logic that underlies our present financial crisis, institutions may collapse along with other higher order structures. While they are eventually to be replaced by something much simpler from the grass roots, to serve their essential functions, this does not happen overnight.

The psychology of contraction may well inhibit the formation of effective new institutions, even much simpler ones, for a long period of time. The psychology of contraction is not constructive, and leads in the direction of division and exclusion as trust evaporates. Unfortunately, trust – the glue of a functional society - takes a long time to build, but relatively little time to destroy.

Elites (top predators) will have a smaller peripheral pool from which to extract the tithes they have come to expect. No longer able to pick the pockets of the whole world, they will very likely squeeze domestic populations much harder in a vain attempt to maintain the resources of the centre at their previous level. This will be very painful for those at the bottom of the pyramid, who will be asked, told and eventually forced to increase their contributions, at the very moment their ability to do so declines sharply.

Whether the left or the right presides over contraction, we are most likely to see a much more pathological face emerge, and this will aggravate political crisis considerably. On the right this could be xenophobia, strict enforcement of tight and arbitrary norms dictated by the few, loss of civil rights, extreme poverty for most while a few live like kings, and fascism, perhaps grounded in theocracy.

On the left it could be forced collectivization, the elimination of property rights, confiscations, and a desire to punish anyone who appears to be doing relatively well, whether or not they achieved this legitimately through foresight, hard work and fiscal responsibility. In either case, liberty is likely to be an early casualty, and intolerance of differences is virtually guaranteed to increase.

As long as we insist on the false left/right dichotomy, Stoneleigh's prediction will come true.
I also found this post quite insightful:

As collective human endeavours, markets follow rules of collective, or herding, behaviour that are hardwired in us as they are in other mammals. As humans, we respond subconsciously to the emotional signals of others, validating our own opinions by their conformity to received wisdom. We are genetically programmed to feel reassured by conformity to consensus, whether accurate or not, and to feel acute discomfort if everyone else around us thinks we are crazy. As trend-following is a recipe for social inclusion, consensus is a powerful force. Most market participants have no real information upon which to act. All they have to go on is what they see others doing, and the perceived comfort level of others in taking those actions. Unfortunately, the received wisdom they rely on is a lagging indicator of relatively persistent trends. By the time the advantages of a particular course of action have become common knowledge, it is almost always too late to act on them advantageously, as the gains will have gone to the early movers.

* * *

Markets are at heart a predatory wealth concentration mechanism for separating the herd from its money. They allow insiders to feed off the greed and fear of a momentum-chasing majority that is always fully invested at tops and fully liquid at bottoms. While the majority always hangs on for too long, giving back their erstwhile gains and more, insiders take a contrarian stance and reap the rewards. While some call this immoral, it is better described a amoral, and is no more unnatural than any of the many predator/prey relationships that exist within and between other species. While we generally prefer not to think of human societies in such terms, we delude ourselves to think that survival of the fittest does not apply to us. As individuals, we must be proactive rather than reactive, and we must not be complacent as the complacent become prey.

* * *

However, society's collective mood swings from optimism to pessimism are about far more than making, or more often losing, money in the market. Social mood tells you a lot about what people will collectively do, and as such acts as a leading indicator for a large constellation of effects. Prechter refers to this as socionomics and has written many books on the topic (some of which we recommend below). When the majority is in an optimistic mood, trust and confidence increase. People are prepared to take risks because they see a good chance of success, and their confidence becomes a self-fulfilling prophecy. They start companies, and invest for the long term because their 'discount rates' fall as their tolerance for risk increases. In other words, they value the future more than usual (although humans are collectively so biased towards short-termism that this increased valuation of the future is sadly never enough to actually preserve a future for the next generation). Mainstream environmental movements are always formed near highs in social mood for instance (but they disappear very rapidly when hard time short people's horizons drastically). Optimistic populations also increase the social inclusiveness of their political culture over time, weakening the 'us versus them' dichotomy to everyone's benefit.

* * *

If you read the mood of the crowd and watch consensus develop, it is possible to predict where events are headed, since mood is a leading indicator. Mood drives liquidity and financial decisions, which are followed in turn by economic effects and then by political fallout from those economic effects. We are currently witnessing the development of a large scale shift towards a pessimistic mood in the wake of the greatest optimistic bubble in history. As trust and confidence are progressively lost, I am expecting (in roughly this order due to differing time lags) ever-increasing increasing risk aversion, progressively less liquidity, enormous financial losses, angry recrimination leading to witch hunts of those who have been particularly successful at the expense of others, xenophobic persecution and demonization of other cultures, the election of populists prepared to play the blame-game at great cost to everyone, and finally war.

By understanding the nature and direction of social mood, it is possible to resist becoming part of a highly unconstructive consensus, although there may be a social price to pay for doing so. Retaining trust in one's fellow man will become harder and harder, especially at a societal level. This is why we recommend establishing and cementing relationships of trust at the local level as soon as possible, as such relationships are the most valuable thing you can have in times of great upheaval.

For the last couple of years, I've been standing on the sidelines observing the social mood and how it changes over time.  The latest trend, and I've seen it with people like Jesse, CHS and Yves, is to stop questioning and start concluding.  A sense of urgency is developing, and it is forcing certainty because uncertainty paralyzes the human animal.  Many rationalists were able to embrace uncertainty for quite awhile, but doing so can be quite depressing.  Yves, for example, has embraced MMT and is busy trying to drive what will prove to be "a highly unconstructive consensus."

People Must Die So Our Fictions May Live

That's my nutshell desription of the current global crisis of capitalism:  people must die so our fictions may live.

Screwflation, "austerity," bailouts -- they are all about protecting the integrity of balance sheets that reflect accumulated "wealth" that does not exist in the real world and which depends entirely on perpetual exponential economic growth in a finite world.  Unfortunately, this fictitious wealth is real to those who claim to own it, and they refuse to lose any of it.  So, people in the real world must die so the wealthiest 0.5% of the world's population don't lose any points off their score.

Because that is what "wealth" becomes when you have so much of it that you can't possibly spend it all: nothing more than a score in a video game.  

At an Impasse

It grows increasingly more difficult for me to even attempt to add to an internet "discussion."  Regardless of the forum and its contributors, we are all, each of us, slave to our own worldview.

My worldview is both cynical and optimistic at the same time.  On the one hand, I have no faith in human institutions, which have proven over the millenia to be mechanisms for command and control.  On the other hand, I have great faith in humanity itself.

The trouble is that the architects of human institutions understand humanity better than most humans do, and so they are able to "evolve" human institutions faster than most humans are able to recognize and respond to those changes.

This trouble is exacerbated by the fact that most humans stop questioning our worldviews once we have become comfortable with them, and so we seek to confirm what we think we already know.  This is what the architects understand better than most humans, and they understood it long before Kahneman et al. and the formation of "behavioral" economics.

Today, the folks over at The Automatic Earth had a post up analogizing economics to religion.  But there is no analogy as the two are one and the same, at least in modern times.  Economic schools of thought, just like the religions that sprang from Judaism (Judaism, Christianity and Islam), are nothing more and nothing less than a means by which to command and control the masses of humanity who just want to live, to make them serfs through which to wield power.

Also today, over at Naked Capitalism, we had a discussion about debt inequality that was a year later and nowhere near as empirical as my own analysis here and here.  I was quite tempted to join the conversation but determined that doing so would be a waste of my time.  The memes are too ingrained to overcome, even among those who think they are "fighting the system."  The architects of the system framed the memes, and most who are convinced they are fighting the system have actually adopted choices that are the Plan B of the architects.  MMT is an example of this phenomenon.

The system cannot be reformed.  It can only be scrapped.  The moment where we can scrap the current system is moving towards us rapidly, although it may still be a decade or two away.  Unfortunately, some have been convinced that reform that is apparently more radical is the same as scrapping the current system.  It categorically is not.   No "One God to Rule Them All" religion is reformable.  Neither is any "One Rationale to Rule Them All" economic theory reformable.  Both exist to command, control and enslave the vast majority of humanity who just want to live and let live. 

My personal interpretation of "blessed are the meek; for they shall inherit the Earth" is that plain folk will be left behind by the elite, which is happening right now in the U.S. and has been for over 30 years now.  "Here you go, meek, see what you can squeeze out of the heap of refuse that we left you called the Earth.  We're outta here. Losers."

This Grows Tiresome

Update:  Both my comments are now up at NC.  Apparently, something I said got caught in a filter.  I don't know what word caused the hiccup (liberal, maybe?).  In any event, the explanation Yves gave Russ for how comments are moderated/filtered does not match my experience.

Earlier this evening, I posted a comment on Naked Capitalism.  I did not attempt to post, I confirmed that I had posted.  I saw it with my own two eyes.

I looked a bit later, and my comment had been disappeared.

What kills me is that my comment was not the least bit disrespectful or even critical.  Indeed, it was much along the lines of what I set forth immediately below:

So . . . let me try this again.

Nice effort, Richard.

The problem, as I see it, is that you've identified as "radical" things that were part and parcel of classical liberalism.

If you are correct, and I'm not saying that you aren't, then today's liberal is a neoliberal, not a clssical liberal.

Adams Smith, a classical liberal, was anti-corporate.

Teddy Roosevelt, a classical liberal, although labeled a "conservative" was anti-monopoly (what you call "anti-trust").  The fact is that many businessmen were anti-monopoly in the late 19th century, before the "Progressive Era" (i.e., during the Gilded Age).  Check out the online archives of the NY Times.

If it truly is "radical" to embrace classical liberal ideology, we're all screwed. 

IF you are correct, that means that the modern "progressive" embraces the neoliberal frame of negative liberty, which is in opposition to the classical liberal frame of positive liberty.  No wonder modern progressives cannot win: they give up before the fight.

But when I tried to post up THIS comment, it got disappeared immediately. 

Yves is part of the neoliberal establishment.  Period.

Confirmation:  I now have a screenshot showing the above-quoted comment identified in the "Recent Comments," but when you click on the link, you are delivered to a page that does not include that comment (i.e., the place where the comment was actually made).  This truly grows tiresome.  There is nothing in the above comment that is worthy of moderation, even if you think I personally need to be moderated.

Because Naked Capitalism Won't Publish My Comment

I attempted to respond to this post by PeePee.  I submitted my comment once, but it didn't show up.  Tried to resubmit, but I was told that the comment was already made.  The clear implication is that my comments go to moderation these days (I had numerous similar issues last week, but I chalked them upt to being out of town with crappy internet service.)

The comment:

It goes back to how financial institutions make money – primarily, by lending other people money (that has always been and still remains the core of banking profits).

I'm surprised you didn't correct the man, Philip. We all know that money is created by lending it. A decades-old Fed working paper establishes this fact, as Steve Keen has noted on this very site.

Once they figured out the game borrowers just lied about their finances – this is why terms like ‘liar loans’ and ‘NINJAs’ (no assets no jobs or assets) sprung up in the mortgage industry.

If you believe the other Michael Hudson, this narrative is a complete whitewashing of what liar loans were all about. In many documented cases, it was the lender who was lying about the borrower's finances, and without the borrower's knowledge.

It’s silly to think that everybody in finance is ‘evil’ or engaged in fraud (though there are people who assert that). Most people involved are very smart, diligent, hard working and passionate about what they do.

Wow. Nice strawman. Financial fraud that dwarfed the S&L debacle and there has been no criminal convictions outside of the lone wolf, small fry scamsters like Bernie Madoff? Really? The government's view appears to be that there was no crime, apparently because fraud is the new official business model of the FIRE sector. (h/t Janet Tavakoli)

And again you didn't call him on it.

Elites who allow their empathy for their fellow elites to overwhelm their conception of the rule of law cannot be trusted to enforce the law. Satyajit Das is no Bill Black.

History of Socialism

A few months ago I picked up an early twentieth century edition of a late nineteenth century tome by Thomas Kirkup entitled History of Socialism.  I opened it up to the chapter on Marx and noted a couple of things.

First, the introductory paragraph about Marx himself focused on his Jewish ancestry.  No surprise, I suppose.

Second, much of the chapter was spent on arguing that Marx was not the father of Socialist thought but merely its most outspoken prophet.  Indeed, Marx's labor theory of value was traced all the way back to John Locke's conception of property and Ricardo's iron law of wages.

Which leads me back to the poster child of rationalist arrogance: MMT shill Philip Pilkington, who for some unknown reason gets a lot of air time over at Yves' site.  I've complained before about the rationalist arrogance of CHS (or even Jesse, actually), but that's because they're not typically arrogant people.  My complaints are about their behavior on a given occasion, not on who they are on a daily basis.  My complaints about PeePee are about his arrogance, which is a feature of who he is and not a behavior.

I guess it all boils down to this: if Locke's revolutionary theory of natural law (including property) can be perverted to enslave the masses in the name of liberty, what hope does MMT have?  Yes, I've skipped quite a number of steps in asking that question, including explaining what I mean about Locke, but rationalists are smart enough to figure out what I mean, right?

Jesse's Monetarist View of Deflation

In his latest post, Jesse backtracks somewhat on deflation, limiting the concept to "monetary deflation."

When you redfine deflation to limit it solely to its monetary component, it is hard to argue with Jesse's conclusions.  But I will.

In the short term, Jesse is absolutely correct.  We have no "monetary deflation."  Now.  But we will. 

Where I disagree with Jesse is in the long term outlook.  As I've said before, we are in a period of managed deflation.  What I mean (and have always meant) by "deflation" is an economy in contraction (as opposed to expansion).  What I mean by "managed" is that financial speculation is being used to mask that contraction by creating higher prices for consumer staples.  In short, I've argued that stagflation, what I call "screwflation" is not inflationary at all but is, in reality, deflation.

The problem, I think, is that Jesse's understanding of inflation/deflation is fully informed by Milton Friedman's Chicago School brand of monetarism.  It was Friedman, after all, who famously stated that "inflation is always and everywhere a monetary phenomenon."  (I've argued, as Henry George did long before me, that inflation is, in fact, always and everywhere the result of leveraged financial speculation.)  Indeed, Jesse believes that the Federal Reserve, through its monetarist policies, has a profound influence over the economy.  (As I've said before, with John Kenneth Galbraith's support, I believe the Federal Reserve is largely irrelevant.)

As a result in his belief in monetarism, i.e., the demonstrably false quantity theory of money, Jesse mistakenly believes that things like "monetary deflation" and hyperinflation are purely "policy decisions."  Well, they weren't during the Great Depression, and the only reason they are at this point of the Greater Depression is because of the automatic stabilizers that world governments put in place as a result of the Great Depression.  The problem is, as Jesse notes, that without substantial reform of the current system, things are going to get worse, to the point where no central bank and no government will be able to influence, let alone control, the final outcome.  Why?  Because the same cannibalistic system that ate the real economy is eating the automatic economic stabilizers. 

One final note: Jesse says that "credit is NOT money."  While I agree that credit is not M0, I'd argue that M2, which he relies upon, is credit.  Riddle me this: what would happen if all of the owners of M2 would simultaneously demand that their "wealth" be turned into cash, i.e., M0?

Charles Hugh Smith's Challenge

CHS is back from vacation, clearly recharged and invigorated by his time off.  As well as more sober.

In a particularly poignant post, CHS describes the plight of "Russ in Redding," a young homeless man who had graduated from culinary school but couldn't find a job.  CHS ended his post with the following challenge:

If you didn't like Getting 20 Million Unemployed Back to Productive Work: Here's How (August 16, 2011), then outline your own Plan B. Doing nothing--waving dead chickens and painting dials on rocks to please the cargo cult priests--is going to accomplish just that: nothing.

What is Plan A?  This:

As I have made clear here many times, Plan A--millions of jobs appearing out of thin air, magically called into existence by the incantations of cargo-cult Keynesians and their Wall Street banker brethren who think all our structural unemployment will go away if only the Federal Reserve shoves another couple trillion dollars into the banks and speculators' hands every year--has failed. We need a Plan B, and we have no models for Plan B.

I agree with CHS that Plan A can't create millions of jobs, but it wasn't designed to do so.  Plan A exists to finalize the neofedualization of the Western world.

But his Plan B is no Plan B at all.  It provides no alternative to Plan A.  Rather, it proposes that involuntary servitude-- i.e., slavery-- is the price for the welfare provided by his Savior State.  His idea is so bad, so impractical, that I don't know that he is credible enough to issue any kind of challenge.

That being said, his heart is in the right place, even if his two minds are not thinking clearly.  For this reason, I'll take up his challenge.

Plan B is to do nothing.  For now.  Remember that Plan A, according to CHS, is to continue bailing out the speculators (something that he calls "Keynesian" but which is categorically NOT Keynesian but Chicago School monetarism).  (It continues to irk me that so many libertarian-inspired types want to label Milton Friedman's policies as "Keynesian" when he was the anti-Keynesian.)  So, my Plan B is not Plan A.

I get CHS's sense of urgency.  I really do.  But it will take a bit longer for things to unfold to the point where people are desparate for change.  It is then that most of us will realize that community matters, that our neighbors matter.  These things simply take time.

On Managed Deflation (aka "Screwflation")

In the past week, both Steve Keen and Stoneleigh have independently posted up some interesting observations that support and reinforce each other.

First up is Stoneleigh's Et tu, Commodities? 

Our most consistent theme here at The Automatic Earth has been the developing deflationary environment and the knock-on effects that will follow as a result. Now that the rally from March 2009 appears to be well and truly over, it is time to revisit aspects of the bigger picture, in order for people to prepare for a full-blown liquidity crunch. October 2007-March 2009 was merely a taster.

As we have explained before, inflation and deflation are monetary phenomena - respectively an increase and decrease in the supply of money plus credit relative to available goods and services - and are major drivers of price movements. They are not the only price drivers, to be sure, but they are usually the most significant. People generally focus on nominal prices, when understanding price drivers is far more important. A focus merely on nominal price also obscures what is happening to affordability - the comparison between price and purchasing power.

* * *

While credit expansion (inflation) is a powerful driver of increasing prices, credit contraction (deflation) is a far more powerful driver of decreasing prices. Credit, having no substance, is subject to abrupt fear-driven disappearance. Confidence and liquidity are synonymous, and confidence is once again evaporating quickly, as it did in phase one of the credit crunch (October 2007-March 2009). As contraction picks up momentum, the loss of credit will rapidly lead to liquidity crunch, drastically undermining price support for almost everything. With purchasing power in sharp retreat, however, lower prices will not lead to greater affordability. Purchasing power typically falls faster than price under such circumstances, so that almost everything becomes less affordable even as prices fall.

Credit expansion reversed in 2008, and this is deflation by definition. Despite the talked-up attempts to monetize debt through quantitative easing - a deliberate attempt to stoke inflation fears in order to counteract the psychology of deflation - money plus credit has been in net contraction. Talk of monetary growth based on only the money fraction misses the elephant in the room, since the vast majority of the effective money supply is credit, and the tightening of credit is by far the dominant factor.

* * *

We stand on the verge of a precipice. The effects of the first real liquidity crunch for decades will be profound. We are going to see prices fall across the board, but far fewer will be able to afford goods or assets at those lower prices than can currently afford them at today's lofty levels. The social effects of this will be enormous, and will spread to many more countries. The collapse of our credit pyramid will be the driving factor and it will sweep all before it like a hurricane for at least the next several years. Beware.

Next up is Steve Keen's developing "Credit Accelerators," which seek empirically to measure the phenomenon Stoneleigh mentions above, i.e., that credit expansion (contraction) drives price increases (decreases).

If we go back to the week before last, Stoneleigh's colleague, Illargi, had his own interesting post, in which he quoted from a piece by Larry Kudlow that argued that the recent explosive growth in the U.S.'s M2 monetary aggregate.  Kudlow's piece is entitled The Deflationary M2 Explosion:

This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.

“The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets,” writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.

So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, “The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt.”

Grannis concludes, “In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice.”

When Jesse looked at that same M2 growth, he mockingly asked "Dude, where's my deflation?"  The answer, of course, is "right in front of you, but you are too blind to see it."  Indeed, it's almost as if he had himself in mind when he said the following:

There is certainly no lack of people who remain obstinate in their errors and illusions. I have a little more respect for those who try to maintain their theories while at least accepting the obvious. But unless they can create a whole of it, their theory is found to be lacking.

Jesse's error/illusion is twofold.  First, like most everyone else, he is ignoring credit's role in the inflation/deflation equation.  Second, he mistakenly believes that M2 is driven entirely by Fed policy and fails to understand that it is the banking customer who determines the vast majority of how much wealth is held in banking deposits instead of in equities and bonds.  He cannot be blamed for this, however, as Milton Friedman was the first to employ this kind of sleight of hand with monetary aggregates, when he argued that a contractionary M1 during the Great Depression implied a contractionary Fed policy when, in fact, M0 showed an expansionary Fed policy.  It was simply overwhelmed by depositors' lack of trust in banks to hold their uninsured deposits (there was no FDIC, back in the day).

Charles Hugh Smith: An Ideologue Who Fails To Acknowledge His Own Ideology

I will always remain a big fan of CHS, but I can no longer take him seriously.  Today's post was yet another foray into righteous, self-delusional rationalist arrogance, which he labeled as "too practical" but which I label as shortsighted, foolish, and just as ideological and "cargo cult" as the right/left strawmen he sets up as his opponents.

All I can conclude is that CHS is a true believer in capitalism.  And it is this belief in captialism that blinds him to the fact that it is captialism itself that he decries. 

For example, what he describes as the "Savior State" is the exact same thing that Jamie Galbraith describes as the "Predator State."  Where both men recognize that the [insert perjorative adjective here] State is detrimental to the individual, at least Galbraith rejects the lie that all our workers need is better training and education.  Any fool can see that if the jobs aren't there, being better trained and educated can't earn you a job.  CHS isn't burdened by that kind of insight.

The worst part is that CHS seems to be angling his attack on the state as if he were an anarchist, but his recommendation (indentured servitude to the state) seems certain to entrench the power of the state over the individual.  Moreover, if his twisted concept of "workfare" was workable, it could not be allowed to "crowd out" the highly skilled labor of the private sector contractors to whom the state currently ourtsources.   In other words, there is no way the powers that be would allow the indentured servants to gain skills that empower them to compete against the private cartels.

But let's overlook that naivete and focus on the inanity of his recommendation.  His complaint about welfare, which is spot-on-- i.e., that it atomizes the individual and detaches him from society-- is not adressed by involuntary servitude, which should be anathema to the free-thinking, Austrian-leaning libertarian that CHS portrays himself to be.  The kind of workfare that CHS advocates would do little more than create an American caste of untouchables who would never be able to attain the kind of job that they might be capable of simply because they fell below the line one time. 

You might as well make welfare recipients sew a star of David on their work clothes, Chuck.  But, of course, to you the vast majority of Americans are worthless whining fools deserving of all that's coming to them.

The right to earn you own way through life is a human right.  The welfare state was constructed to perpetuate the canibalism of capitalism while denying that basic human right.  The recipients of welfare are not saved by the state but the prey of the state.  They're the coppertops of this particular instantiation of the matrix.

I'm glad the man is taking some time off.  I'd suggest he go away for a year or more and get in touch with his inner humanity.  It is apparent to me that he's just another rationalist Jedi who has become enamored by the Dark Side.

People matter, Chuck.  Stop pretending that everybody but you is a dick.

Oh, by the way, here is the link to his latest drivel.

To be fair, and to defend my continuing respect for the man as a rational thing, here is his post from yesterday.  He thinks much more clearly when he focuses on process instead of outcomes.

Charles Hugh Smith: Of Two Minds, Neither Thinking Very Clearly

Today's offering from CHS asks the question: If the Market Crashes, Who Owns Enough Stock to Even Care?  

He answers the question "basically nobody."  Why?

Since 81% of all stocks are owned by the top 10%, a stock market crash has little effect on the bottom 90% of Americans.

But this was just as true when the stock market crashed in 1929, and yet it led to the Great Depression, which affected the bottom 90% of Americans more than anybody else.

Wait.  There's more:

If the market crashes, high-end retailers and restaurants would likely see sales fall significantly. While there would be consequences, we should be careful not to overstate the stock market's role in the nation's Main Street economy.

Again, this was true in 1929. 

A final insight from Mr. Smith:

One last point: those who exited the stock market won't care if it crashes because they opted out of playing the risky game altogether.

On the one hand, CHS is literally correct in that there is no direct or immediate effect of a stock market crash on the vast majority of the populace.  On the much larger and far more practical hand, a stock market crash will cause the owners of wealth who were "invested" in the stock market to undertake actions that will be shockingly deleterious to everybody else.  When, as a society, we allow debt-leveraged financial speculation, there is no way to "opt out of playing the risky game altogether."  To believe otherwise is depressingly naive.

Paul Craig Roberts' Take on S&P's Downgrade of the US

He views it as all part of a war between the FIRE sector and the military/security complex.

Interesting stuff.

The Fallacy of Fractal Geometry

One thing that I've struggled with for well over a year now is that "fractals" are typically described in terms of geometry and/or probability, while my fractal theory of cognition does not fit easily within that paradigm.

Within the last 24 hours, I realized that even the concepts of the fractal geometry of nature and fractal finance do not truly describe geometry or probability.  Rather, they describe the result of applying a force to an object.  In the case of a coastline's fractal geometry, the force is erosion, and the object is rock, soil, etc.  In the case of a stock price's fractal charts, the force is human decision-making, and the object is the stock price.

Viewed through this prism, my fractal theory of cognition is entirely consistent with the broader theory of fractals, which suggests that we can better understand the fractal geometry of nature by focusing on the physical constants at play, many of which are defined in terms of stress (force) per unit area.  In this sense, fractals are not a "geometry" at all but a very complex derivative of stress (force) and strain (reaction to force).

How to Simulate QE3 When You're Not a Central Bank: Downgrade Long-Term U.S. Sovereign Debt

Jesse tells us that S&P has downgraded long-term U.S. sovereign debt while leaving the current rating for shorter term treasuries (2 years or less) intact.  Full report here.

Jesse thinks that this is all a set up for QE3, but I think he's wrong.  There's no need for QE3 with this downgrade, and QE3 wouldn't work anyway.

I predict that the long term effect of the downgrade will be that people will pile into 2 year treasuries, driving yields down, just as they did during QE2.  At the same time, the yields of 10-year and 30-year bonds will rise, just as they did during QE2.  This time, however, those yields will rise a bit (if not much) higher because they are no longer tied solely to the prospects of inflation (which are truly non-existent) but to the risk of default (which is also non-existent).  This downgrade is all about creating yield premiums that are not warranted in view of the state of the real economy, making long-term treasuries an attractive investment.

I wouldn't be surprised to see equities continue to sell-off because all the yield you need will be found in long-term treasuries that are priced at a premium when compared to inflation expectations (or should I say deflation expectations).

Screwflation is in full effect.

Rationalist Arrogance

On display here.

Don't get me wrong.  Charles Hugh Smith is still one of my favorite bloggers and thinkers out there.  I will not change my opinion of him because he is as human and "irrational" as everybody else.

But the man is just as trapped in a box as all the ideologues he bemoans, he just can't see it.  And the reason he attracts so many readers is that his custom-made box (as opposed to pre-fabricated box) is the same as 99% of the pre-fab box that attracts most of his readers, i.e., the Austrian-inspired libertarian creed.  To one or both of his two minds, that makes everybody else a chimpanzee to his true human, but the fact is that he needs to evolve a little bit to reach the lofty heights which he claims to have attained.  When he starts questioning whether fiction (what he calls "mental constructs") should rationally lead to global instability, perhaps a bit of his conviction will crumble, even though it is based on logic, i.e. what he considers being rational.

If your logical chain of reasoning starts with a fiction, your conclusion will be a fiction.  Under such circumstances, being logical does not make your conviction any less false or irrational than those who do not try to rationalize their belief system.

Heirloom Humanity

Think of heirloom varieties of fruit, vegetables and livestock as compared to those bred for commercializtion.  Then think of modern society, which has been bred to be a consumer.

There's an analogy there somewhere.

The Fruit of the Digital Age: No Fruit

I am watching a PBS special on Mayan civilization, and I am struck by the fact that a the lack of permanent physical records of today's civilization means that it cannot be studied and understood by anthropologists even half as well as the Maya.

Then I realize that future anthropologists won't have any of a harder of time than we do. Truth in the Digital Age is a nose of wax that can and will be manipulated to serve the interests of the power structure.

The Reason "War is Good for the Economy" = Debt

Here's a half-formed thought that just struck me.

So often we hear that war can be good for the economy.  I recall that George W. Bush prescribed war as a way out of recession, for example.

From the other side of the alleged political spectrum, we often hear that war is all about empire and plunder, i.e., the reason war is good for an economy is that the victor subjugates the resources (and income) of the vanquished.

But the bottom line is that the financiers of war win regardless of the outcome, and in this sense finance (and the debt it creates) drives war.

Combine that thought with economist Steve Keen's credit-based model of economics, and it is easy to see that George W. Bush was right, albeit for the wrong reasons.

The Real Aim of Debt-Ceiling Kabuki: Corporate Tax Holiday?

I just ran across this over at Taibbi's blog:

I’ve been in and out of DC a few times in recent weeks and one thing I keep hearing is that there is a growing, and real, possibility that a second “one-time tax holiday” will be approved for corporations as part of whatever sordid deal emerges from the debt-ceiling negotiations.

Personally, I'm okay with a tax holiday, so long as strings are attached (i.e., you can bring the money back in tax free, but ONLY if you invest in creating real jobs in the U.S.), but that is not what we're talking about here:

Here’s how it works: the tax laws say that companies can avoid paying taxes as long as they keep their profits overseas. Whenever that money comes back to the U.S., the companies have to pay taxes on it.

Think of it as a gigantic global IRA. Companies that put their profits in the offshore IRA can leave them there indefinitely with no tax consequence. Then, when they cash out, they pay the tax.

Only there’s a catch. In 2004, the corporate lobby got together and major employers like Cisco and Apple and GE begged congress to give them a “one-time” tax holiday, arguing that they would use the savings to create jobs. Congress, shamefully, relented, and a tax holiday was declared. Now companies paid about 5 percent in taxes, instead of 35-40 percent.

Money streamed back into America. But the companies did not use the savings to create jobs. Instead, they mostly just turned it into executive bonuses and ate the extra cash. Some of those companies promising waves of new hires have already committed to massive layoffs.

The difference between now and 2004 is that, reminiscent of the events leading to the bank bailout and TARP, an existential economic crisis is being manufactured to justify something that is manifestly not in the American people's interest, but this time it is being peddled directly to the American people. 

All this smacks of desparation.  There are only so many times you can play the "financial fiction will doom economic reality" card.  The next phase of this game of managed deflation (as I call it) is war.  Nothing less than patriotic fervor induced by a perceived physical threat will be able to distract the populace from the fact that it is being mugged.

Seriously, does anybody think that this kind of story gets published without the complicity of the Fed, the entity managing deflation?

(Reuters) - The Federal Reserve is actively preparing for the possibility that the United States could default as a deadline for raising the government's $14.3 trillion borrowing limit looms, a top Fed policymaker said on Wednesday.

Charles Plosser, president of the Philadelphia Federal Reserve Bank, said the U.S. central bank has for the past few months been working closely with Treasury, ironing out what to do if the world's biggest economy runs out of cash on August 2.

"We are in contingency planning mode," Plosser told Reuters in an interview at the regional central bank's headquarters in Philadelphia. "We are all engaged. ... It's a very active process."

Plosser said his "gut feeling" was that President Barack Obama and Congress will come to an agreement to increase the Treasury's borrowing authority in time to avert a default on government obligations.

And sites like zerohedge eat the news up as confirmation of their theories, rebroadcasting it to confirm their readership's religious (i.e., economics), never realizing that they're aiding and abetting the system they claim to oppose.

Fractal Dysfunction

I've recently taken to describing the two most important factions of "the Elites" (note: I did not say "major" factions) as "rationalists" and "realists."  I did not coin these two terms, but I've come to use them in a peculiar way.  In particular, I view "realists," as exemplified by modern realists in the tradition of Carl Schmitt (Hitler's lawyer) and F.A. Hayek (neoliberalism's primary architect) as power addicts, and I view "rationalists," as exemplified by pretty much every other intellectual as enablers of the power-addected realists ("he beats me because he loves me").  Applying the Pareto Principle, I'd argue that 10% of "the Elites" are realists, and almost all of the rest are rationalists.

Interestingly, if you look at the broader adult population, "the Elites" are probably only 10%, leaving almost everybody else-- who I've come to think of as the SSDD (Same Shit, Different Day) crowd.  By the way, I celebrate the SSDD crowd precisely because they are just normal folk trying to get along and enjoy life.  I'd love to be half as happy as the SSDD folks I know, who include the majority of my family.

If my ballpark estimates are correct, that means that no more than 1% of our population dictates how all of us live, which is consistent with economic data.  And I'm sure that we can drill down further and discover that the core power-a-holics that drive society represent only between 0.0001-0.1% of the entire population.

Does that make any sense?  Should the societal equivalent of a desparate heroin addict dictate society's mores and actions?  I don't think so.  The fact that people like me are instictively compelled to fill any perceived power vacuum does not mean that people like me should dictate how everybody else lives.  I am not superior to the SSDD crowd.  Indeed, I'm so far away from the mean that I should be classified as deviant, but people like me are elevated to leadership roles every day.  Unfortunately, the vast majority of people like me view "leadership" as an opportunity to prey upon the rest of society as opposed to an obligation to serve.

Comments Fixed?

I switched back to the pop-up method to see if that helps.  Seems better.

Odd Blogger Behavior

If you want to comment, select "Anonymous."  The OpenID and Gmail methods don't seem to work (I can't post comments using either method, only by using Anonymous).

Hoisted Placeholder: Taking Issue WithPhilosophy and Theology

Hoisting my comment from over at Russ's place:

"But if we could overcome our childishness, profligacy, idiotic dogmas, petty and self-hobbling resentments, if we could assume adult responsibilities and become more rational and scientific (but also recognize the limits of reason and science), we’d transcend ourselves. If we, passionate beings, could live a fuller life of passion controlled and mediated by reason, passion sublimated as spirit and creativity, we’d transcend ourselves. This fuller, richer, more intelligent, more creative human being would be an “Overman” compared to the flawed, childish, dogmatic person of today, vacillating between hating his passions and being their slave; between the nihilistic worship of science and reason and the nihilistic rejection of them."

My fundamental (and growing) problem with Western philosophy generally is its insistence on describing how things are, which, once it is accepted as correct, becomes the description of how things ought to be. Because of the way the human brain works, merely substituting one description of how the world is with another will not, cannot, achieve the transcendence you seek. This is because the world is not a static thing. It is dynamic, never stuck in any one state.

The only way to break free of false dichotomies that our brains spawn whenever they accept an orthodoxy (i.e., anything that is not orthodox fails to meet expectations and, as a result, gives rise to a negative emotion that compels us to attack and change what disappointed us) is to stop trying to describe how things are and focus on describing how things work. We need to accept that human beings are NOT rational in the manner described (falsely) by Western philosophy, that human beings merely compare what they experience to what they expect and act emotionally on the basis of that comparison. Most philosophy/theology seeks to control human action by defining how the world is and, therefore, setting and controlling expectations of how the world ought to be.

The one exception I've found is the Tao Te Ching (I purposefully am not saying Taoism because I think the religion that has spun up around the Tao Te Ching is contrary to the Tao, which describes how the world works, not how it is or ought to be). I actually view the Tao Te Ching as just an ancient recognition of what I've discovered recently on my own.

The way for humanity to transcend itself is to embrace its humanity, and what defines humanity is the process of how we make decisions. We need to be realistic in what it means to be rational. We also need to be rational in what it means to be realistic. When we strike the proper balance between realism and rationalism, we will find a third way that transcends both.

Placeholder: The Illusion (and Lie) of "Complexity"

I've said before that the world is no more complex today than it ever was, that human beings, through the division of labor, have become simpler and, therefore, less capable of understanding the world as it is (i.e., as it always has been and as it always will be).  In this sense, complexity is an illusion.

I've recently come to the conclusion that complexity is not just an illusion, but a lie.  Throughout the ages, the "complexity" of the current era has been pointed to as an excuse for maintaining the current power structure.  Founders like Hamilton and Monroe relied on complexity, as did proto-neoliberal Walter Lippmann. Nieburh points to additional examples.  The argument always goes something like this (although it is sometimes turned on its head): "the modern world is far too complex for any one man to fully understand, therefore, democracy is impossible and undesirable."  Unspoken is the fact that all societies form so that both physical and intellectual labor can be divided among several people, which implicitly requires that no one person in society will ever know everything that is needed to run the society.  "Efficiency" demands this.

The lie of complexity is often unwittingly employed by smart people like Charles Hugh Smith.  Why?  I believe it is because people like CHS are rationalists, that they honestly believe that human beings are "rational" in the manner economists and other social scientists (witch doctors) describe, and that the only way to describe "irrational" choices embraced by most people is by identifying a limit to rationality.  But the commonly peddled definition of "rationality" is itself a lie, one that those in power ignore constantly.  (And, not to mention, it is the alleged limits of human rationality the elite use to maintain their power.)  At the end of the day, rationalists are the enablers of the power addicts (the hallmark of a co-dependent relationship).

The best way for me to demonstrate the lie of complexity is to use fractals.  Fractals are often described as defining complexity or even chaos, but they are, in fact, the purest form of order: a pattern that iteratively repeats itself.  As I've said before, I believe that humans behave fractally, that they apply the same basic decision-making function iteratively and at different levels of abstraction, thus explaining why markets appear fractal in nature.  To understand (and even control) a society, all you need to do is understand the seed function employed by the mean of that society.  Basically, all human action is determined by comparing what is experienced to what was expected and reacting to the emotion created by the mismatch, if any, between the two.  The easiest way to control human action is to define expectations, as humans will work tirelessly (and violently, if necessary) to ensure that expectations are met.  But propaganda is a useful tool for playing upon the cognitive biases of people to help them see perfect alignment (when expectations and experience are actually in conflict) and conflict (when expectations and experience are fully aligned).

The specific fractal I'm thinking of is called the Koch Star.  As explained quite well by Wikipedia:

The Koch snowflake can be constructed by starting with an equilateral triangle, then recursively altering each line segment as follows:

1.divide the line segment into three segments of equal length.
2.draw an equilateral triangle that has the middle segment from step 1 as its base and points outward.
3.remove the line segment that is the base of the triangle from step 2.
After one iteration of this process, the result is a shape similar to the Star of David.

The Koch snowflake is the limit approached as the above steps are followed over and over again. The Koch curve originally described by Koch is constructed with only one of the three sides of the original triangle. In other words, three Koch curves make a Koch snowflake.

Let's visualize the explanation:

So, here's the lie of complexity.  Mathematically,

The Koch curve has an infinite length because each time the steps above are performed on each line segment of the figure there are four times as many line segments, the length of each being one-third the length of the segments in the previous stage. Hence the total length increases by one third and thus the length at step n will be (4/3)n of the original triangle perimeter: the fractal dimension is log 4/log 3 ≈ 1.26, greater than the dimension of a line (1) but less than Peano's space-filling curve (2).

But we can see intuitively from the animated .gif above that after the fourth iteration of the fractal, the area enclosed by the "infinite length" curve does not change, i.e., an infinite length bounds a finite space:

So the area of a Koch snowflake is 8/5 of the area of the original triangle, or .^[2] Therefore the infinite perimeter of the Koch triangle encloses a finite area.

Thus, in spite of the beauty and certainty of mathematics, increasing the complexity of the fractal Koch curve to infinity does not change the fundamental, finite nature of what that curve actually describes. 

The Koch Star is no different than our current reality.  You can divide labor as much as you want, to infinity even, but that will not change the fact that we live in a finite world.  The complexity of the modern world is just as illusory as the infinite length of the Koch curve.  Yes, in theory, if you keep on dividing things in two forever, you theoretically create perpetual exponential growth, but reality quickly intrudes by placing real limits on what can be achieved.  Anybody who attempts to sell complexity beyond the limits of reality is, by definition, a liar and a fraud.  Even if they don't realize it.

A separate but related thought I will develop is that Taoism (as set forth in the original Tao Te Ching) is not a spiritual or religious tract at all, but a timeless description of the seed function of the human societal fractal.

Hoisted From My Own Comment Elsewhere: The Tyranny of the Middle-Man

I posted this comment over at Russ's place:

Fundamentally, I think you're arguing that liberty begins and ends with autonomy, which is inherently a local thing.  No market can be a "free market" if it depends on the coordination of far-flung resources by a middle-man, as the middle-man will of necessity become the top-dog.  All financialization ultimately boils down to creating a middle-man, an intermediary between market participants and what they seek to acquire.  Whether the commodity in question is money or food, the middle-man can create gluts and shortages at will, and does so to further his own self-interest.

An important point that economist Steve Keen has made about mainstream economics is that it models our economy as if there was no money, as if we were merely bartering.  He makes this point most forcefully here, but you should consider a more undertaking a more complete treatment of the topic in his book, Debunking Economics, most of which you can find in a much more complete but less cogent form here. 

In the movie (but not the book) The Wizard of Oz, Dorothy was admonished to ignore the man behind the curtain.  In modern economics, we're all implored to ignore the man between us and what we want.

And, sadly, we comply.

FYI -- I likely will have a burst of activity over the next week as I will be on vacation with my family.  Be warned, though, I'm trying to find a way to work blogging into my daily life while not distracting from the many other things I want to accomplish.  This inherently means that I'm going to be throwing a lot of seemingly half-formed things out there for consumption.  Trust me, though, I don't throw out half-formed ideas, only half-formed expressions of them.  Challenge me.  Question me.  I'll respond. 

Comments have been acting up lately (Russ, Mr. Falberg and I have all had problems), so feel free to contact me directly at taojonesing@gmail.com

"Efficiency" Is Tyranny; Scale Is Violence

These are a couple of thoughts that occurred to me as a result of my discussion with an economist friend on Tuesday. 

My friend's premise, with which I disagreed, was that society prefers a small number of producers that make a particular good because that is the most efficient outcome.  I argued that his conclusion assumed a definition of "efficiency" that simply did not have to be.  If we were to define efficiency differently and construct a different set of rules to enforce that new definition (i.e., reconfigure the accounting rules, tax laws, etc. that enforce the current definition of efficiency), then the outcome could be different; i.e., society would prefer several small producers over one or two.

That didn't set well with him.  He insisted that "this was physics," that economies of scale command industry consolidation into one or two firms.

I had to disagree again, and that's when the fun really began.  Having worked at both monopolists (Intel) and startups, I know that most of the vaunted economies of scale arise from the fact that large firms demand-- and get-- much lower prices from their vendors.  They likewise get much more favorable financing terms from banks and other financial institutions.  Because large firms tend to have much lower input costs, they have a better cost structure than their competition, who falls farther and farther behind.

Desparate to make a point that could not be countered, he trotted out the division of labor and Adam Smith's pin factory, arguing that in many industries there is a minimum capital expense required just to get started, and that the widget maker who made a million widgets a year has a cost per widget that is a lot lower than a widget maker who uses the same size factory to make just one widget.  Again, I disagreed, noting that it is accounting rules and tax laws regarding depreciation and amortization that drive his conclusion, not any law of nature. 

So he called me irrational, at which point I took him a bit deeper into Adam Smith's body of work to identify a major weakness of modern economics, which is that it assumes that humans make economic decisions purely in monetary terms.  Even Adam Smith recognized that was not the case, as his Invisible Hand was the manifestation of society's "moral sentiments," the set of rules that makes every citizen consider how his actions will be perceived by the rest of society.  And behavioral economists, leveraging off of recent advances in cognitive science, have confirmed Smith's fundamental insights.    As a result, I argued that modern economics is complete hogwash.  The saying in corporate America is "if it can't be measured, it doesn't exist." and economists refuse to measure anything other than money.

I then turned his economies of scale argument on its head, noting that the returns to scale a large firm receives can be viewed as a tax on the rest of the industry.  The vendor has its own success metrics, including profit margins that it will have to support by charging the large firm's competitors substantially more.

We quickly agreed to disagree and moved onto friendlier topics, but I have not been able to stop thinking about our conversation. 

One thought is that efficiency, as currently understood, is tyranny.  Economic efficiency is a prerequisite to maintaining the illusion of perpetual exponential growth.  It is always and everywhere the enemy of competition and self-determination.

Another thought is that scale is violence, at least in economic terms.  Too Big To Fail is a clear manifestation of this violence.

I'm Done With Mainstream Econo-Blogs

Naked Capitalism is the last mainstrream econoblog that I still frequent, and I've decided that continuing to visit the site is of little value to me.

It's bad enough that Yves has elected to give "air time" to the smug, self-celebrating Philip "I'm so fucking smart" Pilkington, a guy who pimps MMT in a way to make it sound hopelessly naive.

But the real problem is tha lack of any effort to define solutions to the problems that are now so very clear.  The aim of the blog appears merely to be to confirm, yet again, that people like "us" were right to say there's a problem because, well, there's a problem!  Mirable dictu!

Quelle surpise?  Not really.  You make money by exercising people's concerns, not by resolving them.

Why quit frequenting NC now?  I have found that all I care about are comments from attempter and DownSouth.  Everybody else is too stuck within the current paradigm to say anything of interest.  Like me, however, attempter and DownSouth don't comment nearly as much as they once did.

Harriet Beecher Stowe

I just took a quick glance at this story over at Salon.com regarding a review of a recent book about Harriet Beecher Stowe.  I think the history described by the author is, well, a bit wrong.

Generally, and let's be clear about this, slavery was indeed one of the twin pillars that formed the foundation (you like mixed metaphors, well there you go) of the U.S. Constitution.  That does not mean that there was any sort of agreement about slavery other than the fact that the mercantilist Northern elite agreed to allowing slavery to persist in exchange for the physiocratic Southern elite's agreement to accept tariffs.  Go back and read the Constitution (without the Bill of Rights, which was added later) and the compromise between tariffs and slavery is starkly obvious.  Indeed, in the run up to the Civil War, there was a book that made precisely this point.

What I find disturbing about the laudatory praise of Ms. Stowe is the notion that she was somehow "liberal" for her age.  The fact is that many Northern states had abolished slavery within their borders before ever entering into the Constitution, an argument that was made by Dred Scott's lawyers to the Supreme Court.

When you look at the historical pressures that led up to the Civil War, what you see is the fact that the Southern states were using the Constitution as a club to force Northern states to support and perpetuate the institution of slavery.  Abolitionism wasn't really an attempt to do away with slavery as much as it was an attempt to hold the line on slavery in the Northern states.  The abolitionist movement would never have arisen but for the fact that Southern states were constantly seeking to force Northern states to support slavery through fugitive slave laws, etc.  Indeed, the first proposed "papers please law" required freed slaves to carry papers with them to prove they were not fugitive slaves.  The failure to have such papers would have allowed fugitive slave hunters to kidnap free black men and women and "extradite" them to the Southern states, which they apparently did quite often.

Bottom line: the smaller Southern states had succeeded for decades in browbeating the larger Northern states into accepting and expanding the institution of slavery much more broadly than contemplated by the Constitution.  In this sense, the Civil War was really a war of aggression by the slaveholding Southern states: the abolitionist movement arose as a bulwark against extra-constitutional encroachment of slavery into the Northern states, something that the Dred Scott decision all but assured.  The Southern states could not abide a reversal of their fortune.

Against this backdrop, I have a real problem with the concept of portraying Ms. Stowe as some kind of "liberal" hero that the current "progressive" movement can take lessons from.  She was merely a representative of one of the dominant forces in the United States.  Yes, she was a particularly effective propagandist-- and I say this as somebody who enjoyed her book and agreed with her message-- but to lionize her as some kind of hero is to confuse the effectiveness of her presentation with her real aims.  Like the "pro-life" advocates of the present era, she did not care about or take responsibility for ensuring the quality of life of those she claimed to represent and protect.  She was far more interested in limiting the options available to her opponents than she was to helping the pawn she used to achieve that end.

And I say all this as somebody who believes that Harriet Beecher Stowe actually performed a real service to our country. 

Responding to the most recent comment

Blogger is puking on my attempt to provide a comment, so I'm responding to Mr. Falberg here.

I prefer to not resort to ideas like the "New World Order."

First, to the extent that a New World Order is actually contemplated, it is merely a new new New World Order (at least) meant to secure power in light of society evolving to a point where it wants to take that power away.

Second, the current NWO theory infuses far too much lifelike detail into what is at best a thumbnail sketch. Indeed, the ruling elite would be stupid to insist on a "one world government" because a key aspect of maintaining control without responsibility is to be behind the scenes and out of sight. The more people there between you and the audience, the less likely they'll be able to see you. The current system is already far more effective than a one world government would ever be.

And the worst part about it is that a lot of the people who believe in and push the NWO thesis love them thelr natural law, their John Locke, and their Thomas Jefferson, i.e., they just prefer the old NWO over the one they see coming.

I care less about the conspiracies and more about the mechanisms that allow us to be duped by them.  The only thing we can control is our own actions.  I can't stop somebody from trying to dupe me, but I don't have to allow myself to be duped.  The problem with the NWO theory is that it assumes its starting worldview is itself valid and true when, in fact, it appears to be just a prior version of the NWO, at least to me.