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Financial skeptic

Notes on "neoliberalism enforced" cruise to Frugality Island for 401K Lemmings

News Neoliberalism as a New Form of Corporatism Recommended Links Peak cheap Energy and Oil Price Slump Secular Stagnation under Neoliberalism Rational Fools vs. Efficient Crooks: The efficient m hypothesis Casino Capitalism
Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime Neoliberal Attacks on Social Security Unemployment Inflation vs. Deflation Coming Bond Squeeze Notes on 401K plans Vanguard
401K Investing Webliography Retirement scams Stock Market as a Ponzy scheme Financial Sector Induced Systemic Instability Neoclassical Pseudo Theories The Great Stagnation Investing in Vanguard Mutual Funds and ETFs
OIL ETNs Peak Cheap Energy and Oil Price Slump Notes on 100-your age investment strategy behavior in rigged markets Chasing a trade The Possibility Of No Mean Reversion Junk Bonds For 401K Investors Tax policies
John Kenneth Galbraith The Roads We Take Economics Bookshelf Who Rules America Financial Quotes Financial Humor Etc

“When the capital development of a country becomes a by-product
of the activities of a casino, the job is likely to be ill-done.”

John Maynard Keynes

"Life is a school of probabilities."

Walter Bagehot

Neoliberal economics (aka casino capitalism) function from one crash to another. Risk is pervasively underpriced under neoliberal system, resulting in bubbles small and large which hit the economy periodically. The problem are not strictly economical or political. They are ideological. Like a country which adopted a certain religion follows a certain path, The USA behaviour after adoption of neoliberalism somewhat correlate with the behaviour of alcoholic who decided to booze himself to death. The difference is that debt is used instead of booze.

Hypertrophied role of financial sector under neoliberalism introduces strong positive feedback look into the economic system making the whole system unstable. Any attempts to put some sand into the wheels in the form of increasing transaction costs or jailing some overzealous bankers or hedge fund managers are blocked by political power of financial oligarchy, which is the actual ruling class under neoliberalism for ordinary investor (who are dragged into stock market by his/her 401K) this in for a very bumpy ride. I managed to observe just two two financial crashed under liberalism (in 2000 and 2008) out of probably four (Savings and loan crisis was probably the first neoliberal crisis). The next crash is given, taking into account that hypertrophied role of financial sector did not changes neither after dot-com crisis of 200-2002 not after 2008 crisis (it is unclear when and if it ended; in any case it was long getting the name of "Great Recession").

Timing of the next crisis is anybody's guess but it might well be closer then we assume. As Mark Twain aptly observed: "A thing long expected takes the form of the unexpected when at last it comes" ;-):

This morning that meant a stream of thoughts triggered by Paul Krugman’s most recent op-ed, particularly this:

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

As most 401K investors are brainwashing into being "over bullish", this page is strongly bearish in "perma-bear" fashion in order to serve as an antidote to "Barrons" style cheerleading. Funny, but this page is accessed mostly during periods of economic uncertainty. At least this was the case during the last two financial crisis(2000 and 2008). No so much during good times: the number of visits drops to below 1K a month.

Still I hope it plays a small but important role: to warn about excessive risk taking by 401K investors in neoliberal economic system. It designed to serve as a warning sign and inject a skeptical note into MSM coverage. There are not many such sites, so a warning about danger of taking excessive risk in 401K accounts under neoliberalism has definite value. The following cartoon from 2008 illustrated this point nicely

As far as I know lot of 401K investors are 100% or almost 100% invested at stocks. Including many of my friends. I came across a very relevant to this situation joke which nicely illustrated the ideas of this page:

Seven habits that help produce the anything-but-efficient markets that rule the world by Paul Krugman in Fortune.

1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
5. Overgeneralize
6. Be trendy
7. Play with other people's money

I would like to stress again that it is very difficult to "guess" when the next wave of crisis stikes us: "A thing long expected takes the form of the unexpected when at last it comes".

But mispricing of risk in 401K accounts is systemic for "overbullish" 401 investors, who expect that they will be able to jusp of the train in time, before the crash. Usually such expectations are false. And to sell in the market that can lose 10% in one day is not easy psychologically. I remember my feelings in 2001-2002 and again 2008-2009. That's why many people who planned to "jump" stay put and can temporarily lose 30 to 50% of value of their 401k account in a very short period of time (and if you think that S&P500 can't return to 1000, think again; its all depends on FED). At this point some freak out and sell their holdings making paper losses permanent.

Even for those who weathered the storm and held to their stock holdings, it is important to understand that paper losses were eliminated mostly by Fed money printing. As such risks remains as at one point FED might find itself out of ammunition. The fact that S&P500 recovered very nicely it does not diminish the risk of such behavior. There is no guarantee that the third crisis will behave like previous two.

Next crash will have a new key determinant: the attitude toward the US government (and here I mean the current government of Barack Obama) and Wall Street after 2008 is the lack of trust. That means that you need to hope for the best but prepare for the worst. Injection on so much money into financial system was a novel experiment which is not ended yet. So how it will end is anybody's guess. We are now in uncharted waters. I think when Putin called Bernanke a hooligan, he meant exactly this. Since Bernanke was printing money out of thin air to buy financial paper, his action were tantamount to shoplifting. In some way this probably is more similar to running meth labs inside Fed building. The system was injected with narcotics. Everybody felt better, but the mechanism behind it was not healthy.

The complexity of modern financial system is tremendous and how all those new financial instruments will behave under a new stress is unknown. At the same time in the Internet age we, the great unwashed masses, can't be keep in complete obscurity like in good old time. Many now know ( or at least suspect ) that the neoliberal "show must goes on" after 2008 is actually going strongly at their expense. And while open rebellion is impossible, that results in lack of trust which represents a problem for financial oligarchy which rules the country. The poor working slobs are told be grateful for Walmart's low (poverty-subsidized) prices. Middle class is told that their declining standard of living is a natural result of their lack of competitiveness in the market place. Classic "bread and circuses" policy still works but for how long it will continue to work it is unclear.

But nothing is really new under the sun. To more and more people it is now clear that today the US is trying to stave off the inevitable decline by resorting to all kinds of financial manipulations like previous empires; yesterday, it was the British Empire and if you go further back, you get the USSR, Hapsburg empire, Imperial Russia, Spanish empire, Venetian empire, Byzantium and Roman empire. The current "Secretary of Imperial Wars" (aka Secretary of Defense) Ashton Baldwin Carter is pretty open about this:

“We already see countries in the region trying to carve up these markets…forging many separate trade agreements in recent years, some based on pressure and special arrangements…. Agreements that…..leave us on the sidelines. That risks America’s access to these growing markets. We must all decide if we are going to let that happen. If we’re going to help boost our exports and our economy…and cement our influence and leadership in the fastest-growing region in the world; or if, instead, we’re going to take ourselves out of the game.”

For the US elite it might be a time to rethink its neocon stance due to which the US is exposing ourselves to the enmity of the rising economic powers, and blowing serious cash to maintain it hegemony via maintaining huge military budget, financing wars and color revolutions in distant countries. In a way the US foreign policy became a financial racket, and racket can't last forever because it incite strong opposition from other countries.

Neoliberalism (aka casino capitalism) as a social system entered the state of decline after 2008. Like communism before it stopped to be attractive to people. But unlike communism it proved to have greater staying power, surviving in zombie state as finanfial institutions preserved political power and in some cases even enhanced it. It is unclear how long it will say in this state. Much depends on the availability of "cheap oil" on which neoliberal globalization is based.

But the plausible hypothesis is that this social system like socialism in xUSSR space before entered down slope and might well be on its way to the cliff. Attempts to neo-colonize other states by the West became less successful and more costly (Compare Ukraine, Libya and Iraq with previous instances of color revolutions). Some became close to XIX century colonial conquests with a lot of bloodshed (from half million to over a million of Iraqis, by different estimates, died ). As always this is mainly the blood of locals, which is cheap.

Libya and Ukraine are two recent examples. Both countries are now destroyed (which might be the plan). In Ukraine population is thrown in object poverty with income of less that $5 a day for the majority of population. And there is no other way to expand markets but to try to "neo-colonize" new countries by putting them into ominous level of debt while exporting goods to the population on credit. That is not a long term strategy as Greece, Bulgaria, and now Spain and Portugal had shown. With shrinking markets stability of capitalism in general and neoliberalism in particular might decrease.

Several researchers points to increased importance Central banks now play in maintaining of the stability of the banking system. That's already a reversal of neoliberal dogma about free (read "unregulated") markets. Actually the tale about "free markets", as far as the USA is concerned, actually was from the very beginning mainly the product designed for export (read about Washington consensus).

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Old News ;-)

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[Apr 29, 2016] A Conversation With Joseph Stiglitz

Notable quotes:
"... Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand. ..."
"... ditto...everyone from Tyler Cohen to Mark Perry of the AEI does daily posts about the markets working for everything...a daily "Market Failure in Everything" would provide a useful alternative to that point of view... ..."
"... Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality and need to be redirected to better target getting money flowing into economies and helping small and medium-size businesses. ..."
"... policies such as quantitative easing were a "version of trickle-down economics" and the subsequent increase in asset prices only affected the wealthiest in society ..."
"... "The key problem is the access of credit to small and medium-size enterprises, is getting that flow of money into the real economy," Stiglitz said. It's "nice to have a stock market bubble if you have a lot of stock. But if you are in the bottom 80 percent of America, you have a little stock and you can feel a little good about the stock going up. But let's face it, the overwhelming bulk of our stock market is owned by the 1 percent." ..."
"... Oh my god. He lumps in Bernanke with Greenspan. What are the Fed worshippers going to do now? Their deity is under attack from Stiglitz. Of course it is nothing but fact that bernanke denied that bubbles in real estate were possible OR that a bubble could become s problem for the economy. Hats off to Stiglitz. ..."
"... How much more evidence do we need that the current trickle down monetary policy has failed? "The weak growth for the quarter puts this recovery even further behind any prior recovery at the same stage. After eight and a quarter years, the economy is only 10.1 percent larger than its pre-recession level of output. A more typical recovery would have seen at least twice as much growth." ..."
April 28, 2016 | economistsview.typepad.com
From an interview of Joe Stiglitz :
...White: ... To what extent do you feel economist and economic theory is culpable for the crisis? What is the role of an economist going forward?
Stiglitz: The prevalent ideology-when I say prevalent it's not all economists- held that markets were basically efficient, that they were stable. You had people like Greenspan and Bernanke saying things like "markets don't generate bubbles." They had precise models that were precisely wrong and gave them confidence in theories that led to the policies that were responsible for the crisis, and responsible for the growth in inequality. Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand.
What can we do about it? We've had this very strong strand that is focused on the limitations and market imperfections. A very large fraction of the younger people, this is what they want to work on. It's very hard to persuade a young person who has seen the Great Recession, who has seen all the problems with inequality, to tell them inequality is not important and that markets are always efficient. They'd think you're crazy. ...

When I first started blogging, I used to do posts with the title "Market Failure in Everything." as a counter to "the prevalent ideology." Maybe I should revive something similar.

teve Bannister : , Thursday, April 28, 2016 at 07:03 AM

Agreed.
rjs -> Steve Bannister... , Thursday, April 28, 2016 at 02:14 PM
ditto...everyone from Tyler Cohen to Mark Perry of the AEI does daily posts about the markets working for everything...a daily "Market Failure in Everything" would provide a useful alternative to that point of view...
Paul Mathis, Thursday, April 28, 2016 at 07:11 AM
Nothing about Ricardian Equivalence or RBC fallacies.

While inequality is certainly important for consumption demand, PCE has not been a significant problem in the recovery. OTOH, reduction of the federal budget deficit explains virtually all of the deficient demand we have experienced. Obama and the Dems bought into RE and are paying the price now.

JohnH, Thursday, April 28, 2016 at 07:31 AM
Another interview with Stiglitz:

"Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality and need to be redirected to better target getting money flowing into economies and helping small and medium-size businesses.

In a Bloomberg Television interview Tuesday with Francine Lacqua and Michael McKee in New York, he said policies such as quantitative easing were a "version of trickle-down economics" and the subsequent increase in asset prices only affected the wealthiest in society.

"The key problem is the access of credit to small and medium-size enterprises, is getting that flow of money into the real economy," Stiglitz said. It's "nice to have a stock market bubble if you have a lot of stock. But if you are in the bottom 80 percent of America, you have a little stock and you can feel a little good about the stock going up. But let's face it, the overwhelming bulk of our stock market is owned by the 1 percent."

Stiglitz's comments come as some central banks around the world are being forced to delve deeper into their policy tools to help support their economies. As policy makers struggle to find a way out of the economic malaise, some have even raised the idea of helicopter money, which aims to direct cash straight to consumers.

The Columbia University professor, who said the Federal Reserve can do more to "channel" money to small companies and the economy, was also critical of negative rates. This is partly because of their potential impact on lending.

"The dangers of negative interest rates -- if you don't manage it extraordinarily well; some countries are doing it reasonably well, some are not -- is that it actually weakens the banking system," he said. "If it weakens the banking system, the banks are going to provide even less credit. While it might have some effect on financial markets, in terms of what we really should be concerned about, which is the flow of credit to businesses, that's not working."
http://www.bloomberg.com/news/articles/2016-04-26/stiglitz-says-misdirected-monetary-policies-increased-inequality

What's the point of low interest rates, if they only serve the interests of Wall Street banks and their wealthy clientele? Oh, right! That IS the point. And most economists are just fine with that.

BenIsNotYoda, Thursday, April 28, 2016 at 07:59 AM
Oh my god. He lumps in Bernanke with Greenspan. What are the Fed worshippers going to do now? Their deity is under attack from Stiglitz. Of course it is nothing but fact that bernanke denied that bubbles in real estate were possible OR that a bubble could become s problem for the economy. Hats off to Stiglitz.
anne, Thursday, April 28, 2016 at 08:17 AM
http://cepr.net/data-bytes/gdp-bytes/gdp-2016-04

April 28, 2016

Falling Investment and Rising Trade Deficit Lead to Weak First Quarter
By Dean Baker

Health care costs remain well-contained, barely growing as a share of GDP.

GDP grew at just a 0.5 percent annual rate in the first quarter. This weak quarter, combined with the 1.4 percent growth rate in the 4th quarter, gave the weakest two quarter performance since the 3rd and 4th quarters of 2012 when the economy grew at just a 0.3 percent annual rate.

Growth was held down by both a sharp drop in non-residential investment and a further rise in the trade deficit. Equipment investment fell at an 8.6 percent annual rate, while construction investment dropped at a 10.7 percent annual rate. The latter is not a surprise, given the overbuilding in many areas of the country. The drop in equipment investment was undoubtedly in part driven by the worsening trade situation, as many factories curtailed investment plans as U.S.-made products lost out to foreign competition, weakening demand growth. There was also a drop in information processing equipment, indicating that those who are expecting that robots will replace us all will have to wait a bit longer.

The rise in the trade deficit was due to a 2.6 percent drop in exports, as imports were nearly flat for the quarter. Trade subtracted 0.34 percentage points from growth for the quarter.

Consumption continued to grow at a modest 1.9 percent annual rate, adding 1.27 percentage points to growth. Consumption growth was held down in part by weaker demand for new cars, which subtracted 0.33 percentage points from growth for the quarter. This was the second consecutive decline in the sector. It is likely that car purchases will be up somewhat in future quarters.

The savings rate for the quarter was 5.2 percent, which is up slightly from the 5.0 percent from the prior three quarters and the 4.8 percent rates from 2013 and 2014, before people started saving their oil dividends. But seriously, there may be some modest room for this rate to decline, but for the most part consumption growth will depend on income growth going forward.

Health care services added 0.26 percentage points to growth, its smallest contribution since a reported decline in the first quarter of 2014. Spending in the sector remains well contained, growing at just a 3.8 percent annual rate over the last quarter and by 4.4 percent over the last year in nominal spending.

Housing grew at a 14.8 percent annual rate, adding 0.49 percentage points to growth. Housing has being growing at a double digit rate since the fourth quarter of 2014. While the sector is likely to continue to grow in subsequent quarters, the pace is almost certain to slow.

The government sector was a modest positive in the quarter, growing at a 1.2 percent rate. State and local spending increased at a 2.9 percent annual rate, more than offsetting a 1.6 percent drop in federal spending, all of it on the military side. Future quarters are likely to show comparable growth, although the composition may be somewhat different.

A slower rate of inventory accumulation reduced growth by 0.33 percentage points, as final sales of domestic product grew at a 0.9 percent rate. This is the third consecutive quarter in which the pace of inventory accumulation slowed, although the current pace is not especially low. It is likely that inventories will grow somewhat more quickly in the rest of the year, being at least a small positive in the growth story.

The weak growth for the quarter puts this recovery even further behind any prior recovery at the same stage. After eight and a quarter years, the economy is only 10.1 percent larger than its pre-recession level of output. A more typical recovery would have seen at least twice as much growth.

[Graph]

On the whole this is a weak report. The headline 0.5 percent figure probably overstates the weakness somewhat, but it is not a good sign when two consecutive quarters have an average growth rate of less than 1.0 percent. Inflation remains well under control, although there was a modest uptick in the rate of inflation shown by the core personal consumption expenditure deflator to 1.7 percent over the last year. Nonetheless, with an economy barely growing and an inflation rate that remains below target, it is difficult to envision the Federal Reserve raising interest rates further any time soon.

JohnH, Thursday, April 28, 2016 at 08:48 AM
How much more evidence do we need that the current trickle down monetary policy has failed? "The weak growth for the quarter puts this recovery even further behind any prior recovery at the same stage. After eight and a quarter years, the economy is only 10.1 percent larger than its pre-recession level of output. A more typical recovery would have seen at least twice as much growth."
rayward, Thursday, April 28, 2016 at 09:11 AM
Market failures aren't really market failures but market responses to market conditions. They are failures only in the sense that something deemed bad (e.g., falling home prices) is the market response. An extreme example is what's being called secular stagnation, which is just the market response to the shift of an enormous volume of production and income from the U.S. and Europe to China and other like places with much higher levels of inequality and savings. It's a market failure only in the sense that something bad (wage stagnation, slow economic growth) happened in the U.S. and Europe. Those responsible for the shift in production and income to China et al. (i.e., U.S. and European business executives) were either ignorant of the likely market response or didn't care as long as it increased profits (via lower costs). But that's not a market failure, it's an executive failure.
Peter, -1
"I think almost surely both Hillary and Bernie Sanders are very very committed to a pro-equality agenda, and the differences are more in details, more in one's confidence in their ability to execute this in a political context."

Disappointing. I guess we'll find out if he's right. Also his suggestion that the economy would have done just as well with no QEs is very disappointing.

"Stiglitz: I think they were right. They originally said, "When we hit 6 percent that's full employment." Now they know that 4.9 isn't full employment, there's weak labor market. They should have focused more on improving the channel of credit to make sure that money was going to small and medium-sized enterprises They should have said to the bank-like some other countries have done-if you want access to the Fed window you have to be lending to SMEs. "

Which was Bernie's suggestion. Hillary has said nothing.

[Apr 17, 2016] Towards a Theory of Shadow Money

Notable quotes:
"... Minsky famously quipped that everyone can create new money; the problem is to get it accepted as such by others. ..."
"... But even money-proper is not the same for everyone. Central banks create the money in which banks pay each other, while private banks create money for households and firms. Money is hierarchical , and moneyness is a question of immediate convertibility without loss of value (at par exchange, on demand). ..."
"... To convert shadow money into settlement money in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central) bank money. ..."
"... What makes repos money – at par exchange between "cash" and collateral – is what makes finance more fragile in a Minskyan sense. ..."
"... Liquid markets become more fragile, he argued, by giving investors the "illusion" that they can exit before prices turn against them. This is a crucial insight for crises of shadow money. ..."
"... Criminality and corruption is embedded at the top of the financial food chain, by law. ..."
"... Motion seconded: Government sanctioned counterfeiting. ..."
"... …and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance? Monty Python understood something about political economies and how one might achieve more fairness in outcomes… https://vimeo.com/111458975 ..."
"... Shadow money sounds to me like fictional capital by another name. And contractual based deposits sounds like counterfeiting. With the distinction that the man with counterfeit printing press robs the train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad. ..."
"... Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If God does not exist, an all powerful, all knowing, all present infinitely great in all categories of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence is part and parcel of Omnipotence. But of course, because we can talk or write about something, does not make it real. ..."
"... It can become socially acceptable as in the case of shadow money, but it is fictional capital, a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from the light of the fires and walk eyes wide open in the bright light of sunshine! ..."
"... Money is actually the easiest thing to write about, because it's formless energy. It's not that the phenomenon is shadow money, it's shadow assets. ..."
"... You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's why economics is a mental disorder, because it doesn't separate quantity and form. If you can't or don't, then yes, it's diabolically hard to write about because you're writing about two different things simultaneously without realizing it. Money is a quantity that is infinite and continuous, but form is an idea that is discontinuous and finite. People do what the forms tell them to do. The money is just like electricity that powers the animation of the forms. Repo is a form it's not money. It's existence results in a certain ordering of social relations, that's also a form. But money is just the energy that makes the forms potent. ..."
"... I guess that's why they used to call it "political economy" before the mental disorder fully usurped the power of perception and reasoning. ..."
"... Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about living beyond your means and mortgaging the future. ..."
"... It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves and interest. A system based on a finite supply of money is going to grow not much faster, at best, than the money available allows. ..."
"... Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow banking activity is designed to get around reserve requirements; nothing else I can see calls all this complexity into existence. The banks always need more, because lending is how they make their money, so they want an infinite amount to lend in order to drive their profits towards the infinite. ..."
"... This article I think defines shadow money alright as starting where bank deposits leave off but as the above comments suggest seems to miss some key points. I think a major problem with the article is seeing central banks as separate from the state rather than seeing the central bank along with the Treasury as the state itself. ..."
"... The article gets Treasury debt wrong by seeing it as the central bank funding the state rather than as actually coming from the state. This leads to wrong policy choices such as this state money being used to bail out useless financial transactions and asset appreciation rather than the public purpose. I think crazyman has it right. We left behind the power of perception and reasoning by not realizing the importance of political economy . ..."
"... This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition. ..."
April 16, 2016 | www.nakedcapitalism.com

By Daniela Gabor, associate professor in economics at the University of the West of England, Bristol, and Jakob Vestergaard, senior researcher at the Danish Institute for International Studies. Originally published at the Institute for New Economic Thinking website

Struggles over shadow money today echo 19th century struggles over bank deposits.

Money, James Buchan once noted , "is diabolically hard to write about." It has been described as a promise to pay, a social relation, frozen desire , memory, and fiction. Less daunted, Hyman Minsky was interested by promises of unknown and changing properties . "Shadow" promises would have fascinated him. Indeed, Perry Mehrling, Zoltan Pozsar , and others argue that in shadow banking, money begins where bank deposits end. Their insights are the starting point for the first paper of our Institute for New Economic Thinking project on shadow money. The footprint of shadow money, we argue,* extends well beyond opaque shadow banking, reaching into government bond markets and regulated banks. It radically changes central banking and the state's relationship to money-issuing institutions.

Minsky famously quipped that everyone can create new money; the problem is to get it accepted as such by others. General acceptability relies on the strength of promises to exchange for proper money, money that settles debts. Banks' special role in money creation, Victoria Chick reminds us, was sealed by states' commitment that bank deposits would convert into state money (cash) at par. This social contract of convertibility materialized in bank regulation, lender of last resort, and deposit guarantees.

But even money-proper is not the same for everyone. Central banks create the money in which banks pay each other, while private banks create money for households and firms. Money is hierarchical , and moneyness is a question of immediate convertibility without loss of value (at par exchange, on demand).

Using a money hierarchy lens, we define shadow money as repurchase agreements (repos), promises to pay backed by tradable collateral. It is the presence of collateral that confers shadow money its distinctiveness. Our approach advances the debate in several ways.

First, it allows us to establish a clear picture of modern money hierarchies. Repos are nearest to money-proper, stronger in their moneyness claims than other short-term shadow liabilities . Repos rose in money hierarchies as finance sidestepped the state, developing its own convertibility rules over the past 20 years. To convert shadow money into settlement money in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central) bank money.

Second, we put banks at the center of shadow-money creation. The growing shadow-money literature, however original in its insights, downplays banks' activities in the shadows because its empirical terrain is U.S. shadow banking with its institutional peculiarities. There, hedge funds issue shadow money to institutional cash pools via the balance sheet of securities dealers. In Europe or China , it's also banks issuing shadow money to other banks to fund capital market activities. LCH Clearnet SA, a pure shadow bank, offers a glimpse into this world. Like a bank, it backs money issuance with central bank (Banque de France) money. Unlike a bank, LCH Clearnet only issues shadow money.

Third, we explore the critical role of the state beyond simple guarantor of convertibility. Like bank money, shadow money relies on sovereign structures of authority and credit worthiness. Shadow money is mostly issued against government bond collateral, because liquid securities make repo convertibility easier and cheaper. The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to issue shadow money against the same government bond, which becomes akin to a base asset with "velocity." Limits to velocity place demands on the state to issue debt, not because it needs cash but because shadow money issuers need collateral.

With finance ministries unresponsive to such demands, we note two points in the historical development of shadow money in the early 2000s. In the United States, persuasive lobbying exploited concerns that U.S. Treasury debt would fall to dangerously low levels to relax regulation on repos collateralized with asset and mortgage-backed securities . In Europe, the ECB used the mechanics of monetary policy implementation to the same end. When it lent reserves to banks via repos, the ECB used its collateral valuation practices to generate base-asset privileges for "periphery" government bonds, treating these as perfect substitutes for German government bonds, with the explicit intention of powering market liquidity.

Fourth, we introduce fundamental uncertainty in modern money creation. What makes repos money – at par exchange between "cash" and collateral – is what makes finance more fragile in a Minskyan sense. Knightian uncertainty bites harder and faster because convertibility depends on collateral-market liquidity.

The collateral valuation regime that makes repos increasingly acceptable ties securities-market liquidity into appetite for leverage. Here, Keynes' concerns with the social benefits of private liquidity become relevant. Keynes voiced strong doubts about the idea of "the more liquidity the better" in stock markets (concerns now routinely voiced by central banks for securities markets). Liquid markets become more fragile, he argued, by giving investors the "illusion" that they can exit before prices turn against them. This is a crucial insight for crises of shadow money.

A promise backed by tradable collateral remains acceptable as long as lenders trust that collateral can be converted into settlement money at the agreed exchange rate. The need for liquidity may become systemic once collateral falls in market value, as repo issuers must provide additional collateral or cash to maintain at par. If forced to sell assets, collateral prices sink lower, creating a liquidity spiral . Converting shadow money is akin to climbing a ladder that is gradually sinking: The faster one climbs, the more it sinks.

Note that sovereign collateral does not always stop the sinking, outside the liquid world of U.S. Treasuries. Rather, states can be dragged down with their shadow-money issuing institutions. As Bank of England showed , when LCH Clearnet tightened the terms on which it would hold shadow money backed with Irish and Portuguese sovereign collateral, it made the sovereign debt crisis worse. Europe had its crisis of shadow money, less visible than the Lehman Brothers demise, but no less painful. "Whatever it takes" was a promise to save the "shadow" euro with a credible commitment to support sovereign collateral values.

Shadow money also constrains the macroeconomic policy options available to the state. That's because what makes shadow liabilities money also greatly complicates its stabilization: it requires a radical re-think of many powerful ideas about money and central banking. The first point, persuasively made by Perry Mehrling , and more recently by Bank of England , is that central banks need a (well-designed) framework to backstop markets , not only institutions . Collateralized debt relationships can withstand a systemic need for liquidity if holders of shadow money are confident that collateral values will not drop sharply, forcing margin calls and fire sales. Yet such overt interventions raise serious moral hazard issues.

Less well understood is that central banks need to rethink lender of last resort. Their collateral framework can perversely destabilize shadow money. Central banks cannot mitigate convertibility risk for shadow money when they use the same fragile convertibility practices. Rather, central banks should lend unsecured or without seeking to preserve collateral parity.

We suggest that the state, as base-asset issuer, becomes a de facto shadow central bank. Its fiscal policy stance and debt management matter for the pace of (shadow) credit expansion and for financial stability. Yet, unlike the central bank, the state has no means to stabilize shadow money or protect itself from its fragility. It has to rely on its central bank, caught in turn between independence and shadow money (in)stability, which may require direct interventions in government bond markets.

The bigger task that follows from our analysis, is to define the social contract between the three key institutions involved in shadow money: the state as base collateral issuer, the central bank, and private finance. In the new FSB or Basel III provisions, we are witnessing a struggle over shadow money with many echoes from the long struggle over bank money. The more radical options, such as disentangling sovereign collateral from shadow money, were never contemplated in regulatory circles. Even a partial disentanglement has proven difficult because states depend on repo markets to support liquidity in government bond markets. Our next step, then, will be to map how the crisis has altered the contours of the state's relation to the shadow money supply, comparing the cases of the U.S., the Eurozone, and China.

cnchal , April 16, 2016 at 4:10 am

Financial anarchy is my interpretation of shadow banking.

. . . The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to issue shadow money against the same government bond , which becomes akin to a base asset with "velocity." Limits to velocity place demands on the state to issue debt, not because it needs cash but because shadow money issuers need collateral .
----
The bigger task that follows from our analysis, is to define the social contract between the three key institutions involved in shadow money: the state as base collateral issuer, the central bank, and private finance .

Who does shadow banking serve? It is so far from capitalism, it should be illegal.

Bernie Sanders: The business of Wall Street is fraud and greed.

Robert Coutinho , April 16, 2016 at 7:32 am

Well…yes and no. There is real "need" for some shadow banking services. However, the idea of having Central Banks (issuers of money, or whatever) loaning based on … nothing?

Less well understood is that central banks need to rethink lender of last resort. Their collateral framework can perversely destabilize shadow money. Central banks cannot mitigate convertibility risk for shadow money when they use the same fragile convertibility practices. Rather, central banks should lend unsecured or without seeking to preserve collateral parity.

"Europe had its crisis of shadow money, less visible than the Lehman Brothers demise, but no less painful. "Whatever it takes" was a promise to save the "shadow" euro with a credible commitment to support sovereign collateral values."

Yes, but Lehman was not a taxing authority (although to be fair, Ireland et.al. were not money-issuing sources).

I am having a hard time understanding all of this–but as far as I can tell, the authors are basically suggesting that sovereign governments should be backing up the shadow banking system. However, I have not seen them suggest any reason for it except that the entire house of cards could come falling down. Boo hoo for the banksters–tell them to do things out of the "shadows".

Jujeb , April 16, 2016 at 4:20 am

Why is there a need for 'shadow money' in the first place?
Afaik, banks create money when they loan and central banks(especially the Fed) issues the most secure assets, their securities, which are used as collateral.

abynormal , April 16, 2016 at 7:44 am

Thanks Yves for sharing Gabor…what a Mess! towards the end of 2012 the US shadow banking was said to be around 67 Trillion …did something get baked-in? 2014 the IMF has a much smaller 'account'…(Japan being the worst laughing stock). the gaps are no small detail:

The IMF's latest Global Financial Stability Report analyzes the growth in shadow banking in recent years in both advanced and emerging market economies and the risks involved.

According to the report, shadow banking amounts to between 15 and 25 trillion dollars in the United States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and 6 trillion in Japan-depending on the measure- and around 7 trillion in emerging markets. In emerging markets, its growth is outpacing that of the traditional banking system. https://www.imf.org/external/pubs/ft/survey/so/2014/pol100114a.htm

Stephen Verchinski , April 16, 2016 at 9:34 am

That sure seems a Rx for destabilizing the world currencies to precipitate a collapse. Track and publicize the visits of Congressmen and Senators to the BIS and COL to start. Why are they making these visits under cover? Who are they meeting with? Are they being prepared as to what to expect a deliberate world currency crash? . Our political elite are so beholden to the bankers to allow for the theft of the wealth of nations for unattainable expanding growth and skimming of millions. Is it possible in regard the corporate banks to have the strings attached on the use of shadow money at time of chartering or in the case of the do over at time of bankruptcy?. How is this done? I'd also like to know a good proposal for the private investment boutique banks. Have any bills at state and federal levels been proposed and if not, why not? What would the main sections of such a bill look like. Thanks.

ke, April 16, 2016 at 8:04 am

A derivative promise made by a Wall Street prostitute, ultimately contingent upon the ability to liquidate the very users of the instrument, with currency debasement, and war to restock.

Paying people to buy stuff from others being paid to buy stuff, with the full faith and credit of dependent seniors in a collapsing actuarial ponzi, with nothing more than made for TV mercenaries, isn't likely to end well.

Craps, the bank moves to the next suckers, with nothing more than the promise of an exotic vacation, billed to someone else.

Steve H. , April 16, 2016 at 9:27 am

– Limits to velocity place demands on the state to issue debt, not because it needs cash but because shadow money issuers need collateral.

There's a dirty linchpin. Even if the diabolical multiplier from cnchal's quote were removed, and the dollar was hard-pinned to a pound of silver to pay the sheriff with, infinite debt issuance can step in to the feed the hungry beast.

Promises to pay kept mercenaries in line during the city-states. If you didn't win you didn't get paid. Unless you turned around and took your employers gold instead. Which is a bit like capturing the central banks.

Still, debt can be put to good uses. Infrastructure, maybe. Basic necessities and health. 'When the people are strong, the nation is strong.' Instead, the gearing seem like the machine in Princess Bride, sucking time from peoples lives.

Watt4Bob , April 16, 2016 at 10:06 am

With regard to velocity;

Ask any highway patrolman, the faster the speed limit, the worse the accidents.

On the famed autobahns of Europe, the no speed limit means that when an accident occurs, the results are likely to be catastrophic.

And I really love the observation that central banks need a mechanism to backstop the market.

Reminds me of the main problem with the famous Vincent Black Shadow motorcycle, it could attain speeds close to 200 mph, but brake designs at the time didn't work at those speeds, so as Hunter S. Thompson remarked;

"If you rode the Black Shadow at top speed for any length of time, you would almost certainly die."

Wall $treet wants to go fast, the faster the better, but they haven't got any brakes, and worse than that, we're all along for the ride whether we like it or not.

Jim Haygood , April 16, 2016 at 2:04 pm

Richard Thompson got it too:

Oh, says Red Molly to James, "That's a fine motorbike
A girl could feel special on any such like"
Says James to Red Molly, "My hat's off to you
It's a Vincent Black Lightning, 1952"

[James gets shot in a robbery]

When she came to the hospital, there wasn't much left
He was running out of road, he was running out of breath
But he smiled to see her cry
And said I'll give you my Vincent to ride

Oh, he reached for her hand then he slipped her the keys
He said, "I've got no further use for these
I see angels on Ariels, in leather and chrome
Swooping down from heaven to carry me home"

And he gave her one last kiss and died
And he gave her his Vincent to ride

It was sorta like that when Bernanke handed J-Yel the keys to his QE penny farthing bike.

Watt4Bob , April 17, 2016 at 9:09 am

I'd flesh out that analogy a bit;

The Bernanke and J-Yel witnessed the header that Greenspan took on that bike, and decided to leave it standing against the wall. When you consider the fact that neither of them could reach the pedals, let alone mount the thing and ride, that was probably a good idea.

Chauncey Gardiner , April 16, 2016 at 10:53 am

When did the central banks' framework to backstop markets morph into an organized effort to push the value of repo collateral relentlessly upward forever?…

What about increasing the relentless decline in the Velocity of Money by gradually increasing interest rates? Yes, that might be a catalyst to trigger a "liquidity spiral". So what? We now have moral hazard in spades and at some point will have to cross the Rubicon, whether willingly or not.

washunate , April 16, 2016 at 11:38 am

Here's a simple theory: Shadow banking is government approved fraud.

cnchal, April 16, 2016 at 12:07 pm

i am reading one of the links from the post titled "Regulating money creation after the crisis", and it's even worse than government approved fraud. I am only part way through it, but here is a gem.

On page 10

. . . Instead, OLA was designed to preserve the value of the assets of failed financial firms until they are liquidated, a worthy aim, but a very different one. At the same time, the Dodd-Frank Act has imposed significant new limitations on the government's freestanding panic-fighting tools . These limitations, absent future congressional action, would render next to impossible the kind of aggressive government rescue operation that was staged during the recent crisis.

Criminality and corruption is embedded at the top of the financial food chain, by law.

Paul Tioxon , April 16, 2016 at 2:20 pm

Motion seconded: Government sanctioned counterfeiting.

Keith , April 16, 2016 at 11:54 am

Before we complicate the issue, it is fairly obvious no one understands conventional money and it is one of the best kept secrets on the planet.

Learn how normal money works and how its mismanagement has led to many of today's problems.

Banks create money out of nothing to allow you to buy things with loans and mortgages (fractional reserve banking).

After years of lobbying the reserve required is often as good as nothing. Mortgages can be obtained with the reserve contained in the fee.

After the financial crisis there were found to be £1.25 in reserves for every £100 issued on credit in the UK.

Having no reserve shouldn't be a problem with prudent lending.

Creating money out of nothing is the service they really provide to let you spend your own future income now.

They charge interest to cover their costs, for the risk involved and the service they provide.
Your repayments in the future, pay back the money they created out of nothing.

The asset bought covers them if you default, they will repossess it and sell it to recover the rest of the debt unpaid.

At the end all is back to square one.

The bank has received the interest for its service.

You have paid for the asset you have bought plus the interest to the bank for its service of letting you use your own money from the future.

Today's massive debt load is all money borrowed from the future for things already bought.

It can also go wrong another way, when banks lend into asset bubbles that collapse very quickly. The repossessed asset doesn't cover the outstanding debt and money gets destroyed on the banks balance sheets.

When banks lend in large amounts, on margin, into stock markets, the bust shreds their balance sheets (1929).

When banks lend in large amounts on mortgages into housing markets, the bust shreds their balance sheets (2008).

If banks don't lend prudently you are in trouble.

Then they developed securitisation …… oh dear (no need to lend prudently now).

Housing booms and busts around the world …… oh dear.

All that money borrowed from the future and already spent …… oh dear.

susan the other , April 16, 2016 at 12:16 pm

This is so interesting. It seems to be approaching the subject that Wray speculated about a while back – that we should give central banks fiscal responsibility. Because otherwise a sovereign state has no control over its sovereign money? It seems to me that money itself becomes a rehypothecated asset by virtue of being invested over and over again – if it is well allocated and under good fiscal control all is well. If not we get the Great Recession.

So let the state become the defacto shadow central bank so it had direct control of its own money. Instead of hanging on to the old gold standard mindset of top down management, why not think of people, not collateral, as the root of the system – the grass roots. How much money does a system – a sovereign country – need per person. And then establish a sovereign central bank to deal directly, bringing the shadows into the sunlight of fiscal control.

JTHcPhee , April 16, 2016 at 12:35 pm

…and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance? Monty Python understood something about political economies and how one might achieve more fairness in outcomes… https://vimeo.com/111458975

Paul Tioxon , April 16, 2016 at 12:38 pm

Moneyness, like doggitas, you just can't scratch behind its ears. If shadow money is distinguished by its relationship to collateral, as opposed to money issued by the state, with the entire human enterprise of civilization as its basis, it still seems to me that at the top of the money hierarchy is fiat money, the real money by the real social order empowered by the social forms of power that sustain human life in all of its aspects, not just the financial conveniences. Shadow money sounds to me like fictional capital by another name. And contractual based deposits sounds like counterfeiting. With the distinction that the man with counterfeit printing press robs the train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad. Am I right or Am I right. What a bunch of Losers!!!

And if there is any doubt about the fictional quality of $Trillions and $ Trillions of dollars, physicists can not find anything naturally occurring in the universe beyond billions and billions. Money, simply a numbered record, a counting or cardinal number, transforms into money in name only, MINO, when it refers to fictional amount that can only appear contractually as words, and do not count how much economic activity or output has been produced.

Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If God does not exist, an all powerful, all knowing, all present infinitely great in all categories of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence is part and parcel of Omnipotence. But of course, because we can talk or write about something, does not make it real.

It can become socially acceptable as in the case of shadow money, but it is fictional capital, a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from the light of the fires and walk eyes wide open in the bright light of sunshine!

craazyman , April 16, 2016 at 12:43 pm

I don't know about this one. It seems to me to be some pretty queasy thinking. It kind of wanders around in circles of confusion. "my existence led by confusion boats, mutiny from stern to bow".

That's pretty funny somebody would say that money is diabolically hard to write about. That's pretty funny.

Money is actually the easiest thing to write about, because it's formless energy. It's not that the phenomenon is shadow money, it's shadow assets.

You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's why economics is a mental disorder, because it doesn't separate quantity and form. If you can't or don't, then yes, it's diabolically hard to write about because you're writing about two different things simultaneously without realizing it. Money is a quantity that is infinite and continuous, but form is an idea that is discontinuous and finite. People do what the forms tell them to do. The money is just like electricity that powers the animation of the forms. Repo is a form it's not money. It's existence results in a certain ordering of social relations, that's also a form. But money is just the energy that makes the forms potent.

The primary challenge is to come up with an ordered way of thinking about the forms themselves. That's frankly not easy. The ideal would be to understand them in the manner in which Euclid understood geometrical ideas. If you can get the vision, then you can see all the possibilities for structure and ordered relationships. there's really no triangle in reality and there's no point and there's no line and there's no plane. They just made them up to approximate physical reality. Then they thought to themselves "Holy shit! These ideas interrelated in an astounding range of symmetries and causations." Then they became a lens or a framework through which physical reality was interpreted. But they didn't confuse the idea of "number" with the idea of "triangle" or "circle".

Certainly in math the algebraic interpretation doesn't rely completely on the geometrical interpretation. But if there is no geometrical interpretation and it's only algebra, then so much is missing, so much is lost. I guess that's why they used to call it "political economy" before the mental disorder fully usurped the power of perception and reasoning.

susan the other , April 16, 2016 at 2:18 pm

lovely to read you

Watt4Bob , April 17, 2016 at 8:58 am

Certainly in math the algebraic interpretation doesn't rely completely on the geometrical interpretation. But if there is no geometrical interpretation and it's only algebra, then so much is missing, so much is lost.

With that firmly in mind, I think it's necessary to mention the fact that the " study " of "economics" relies on calculus, wherein we are introduced to the notion of change over time, volume, motion, acceleration, rates of change, vectors, etc.

Algebra and geometry are, as you point out, obvious abstractions, but once you add volume motion, and rates of change, the models become very seductive, and it's easy to see how one can be convinced that they are approaching an understanding of 'reality'.

The trouble is of course, that the egg-heads busy trying to describe economic "reality" with calculus, are, for the most part in the employ of savages who will forever cling to a simple arithmetic where their only interest is in "having it all".

Genius employed to make excuses for demented indifference.

Jim Haygood , April 16, 2016 at 1:27 pm

'Central banks should lend unsecured … we suggest that the state, as base-asset issuer, becomes a de facto shadow central bank.' - Daniela "Zsa Zsa" Gabor

This statement desperately needs Walter Bagehot's qualifications: "to solvent institutions" and "at a penalty rate."

Otherwise, we're just talking about another squalid round of "TARP for Jamie," as we peasants reach for our pitchforks.

cnchal , April 16, 2016 at 2:07 pm

Bagehot, eh.

It should however be pointed out that the idea of shadow banking is not remotely new. The concept was presaged well over a century ago by Walter Bagehot, the legendary English banker, essayist, and theorist. In 1873, Bagehot wrote Lombard Street: A Description of the Money Market, his canonical work on the money market and central banking. In it, he observed that the great London banks were accompanied by a parallel set of financial firms, known as "bill brokers," which in many ways resembled modern-day securities dealers. Like today's dealers, these bill-brokers financed themselves with borrowings that, Bagehot informs us, were "repayable at demand, or at very short notice."

Formally speaking these firms were not banks but to Bagehot they might as well be. "The London bill brokers," he observes, "do much the same [as banks]. Indeed, they are only a special sort of bankers who allow daily interest on deposits, and who for most of their money give security [i.e., collateral]. But we have no concern now with these differences of detail." At times, Bagehot is careful to note that the short-term obligations of bill-brokers were not technically deposits; he observes that the maturing of these liabilities "is not indeed a direct withdrawal of money on deposit," although "its principal effect is identical."

Other times, however, Bagehot dispenses even with this distinction: "It was also most natural that the bill-brokers should become, more or less, bankers too, and should receive money on deposit without giving any security for it." Here we have an unambiguous identification of the shadow banking phenomenon about 140 years ago .

Bas , April 16, 2016 at 1:30 pm

it's all been reduced to gambling with no meaningful value in "The House" to back it up. Money will disappear, like in Star Trek.

fresno dan , April 16, 2016 at 1:36 pm

I would posit that there are two types of money
A – money of the 0.001% – if they walk into a casino, real estate transaction, or any asset for that matter they can NOMINALLY lose money – in fact the 0.001% NEVER lose any of THEIR money, they just lose your money. All winnings, of anybody doing anything anywhere, belong to them.
B – money of everybody else – this money nominally is yours to do with as you see fit, but it ALL belongs to the 0.001%. The collateral that backs it up is everything you earn and own and when necessary your, and your family's, internal organs…

Jamie , April 16, 2016 at 4:46 pm

"The nation [England] was not a penny poorer by the bursting of these soap bubbles of nominal money capital. All these securities actually represent nothing but accumulated claims, legal titles to future production. Their money or capital value either does not represent capital at all … or is determined independently of the real capital value they represent."

– Marx
Banking Capital's Component Parts
Capital: Volume Three

James Levy , April 17, 2016 at 6:07 am

Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about living beyond your means and mortgaging the future.

It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves and interest. A system based on a finite supply of money is going to grow not much faster, at best, than the money available allows.

Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow banking activity is designed to get around reserve requirements; nothing else I can see calls all this complexity into existence. The banks always need more, because lending is how they make their money, so they want an infinite amount to lend in order to drive their profits towards the infinite.

Sy Krass , April 16, 2016 at 10:41 pm

A sovereign can create its own currency, but theoretically couldn't it create any currency? Couldn't Greece for example click a few key boards put some ones and zeros in and say, "oh our account with $1,000,000 US is actually $10,000,000,000 US?

HAHAHAHAHA!!!!!!!

financial matters , April 17, 2016 at 5:49 am

This article I think defines shadow money alright as starting where bank deposits leave off but as the above comments suggest seems to miss some key points. I think a major problem with the article is seeing central banks as separate from the state rather than seeing the central bank along with the Treasury as the state itself.

The article gets Treasury debt wrong by seeing it as the central bank funding the state rather than as actually coming from the state. This leads to wrong policy choices such as this state money being used to bail out useless financial transactions and asset appreciation rather than the public purpose. I think crazyman has it right. We left behind the power of perception and reasoning by not realizing the importance of political economy.

Lambert Strether, April 17, 2016 at 7:22 am

This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition.

ewmayer, April 17, 2016 at 4:45 pm

Some issues with the piece and questions for the authors (and fellow NCers):

I really wish such analyses would use the more-precise term "credit-money" in reference to money creation by banks, to distinguish it from government money creation, which similarly may have repayment requirements attached (bonds), but need not be so. The "need not be so" may occur via outright fiat emission, but more commonly appears in form of a public debt stock which continually increases with time, at least in nominal terms.

The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to issue shadow money against the same government bond, which becomes akin to a base asset with "velocity."

Fine, but what about that other crucial element of modern bank credit-money creation, leverage? Are there any practical limits on shadow banks' issuance of multiple units of shadow money against the same government-bond money unit? If so, how are they enforced (if at all)? Note also the key concept of "implied leverage" inherent in such schemes, where the leverage ratio may fluctuate drastically with the mark-to-market valuation of the collateral. Banks play endless games with "fictional reserves"; it would be naive to imagine that non-bank shadow lenders don't do similarly with their alleged collateral.

The first point, persuasively made by Perry Mehrling, and more recently by Bank of England, is that central banks need a (well-designed) framework to backstop markets, not only institutions.

Erm, markets are the *only* thing the government should be committed to ensuring functioning of - we have overwhelming evidences from multiple boom-bust-crisis episodes over the last 3 decades of the toxic results of governments backstopping hyperleveraged fraud-riddled institutions and the crooks running same.

[Apr 13, 2016] The dead end of neoliberal transformation of the USA society

economistsview.typepad.com

Economist's View

New Deal democrat : , Monday, April 11, 2016 at 03:07 PM
"consensus in support of global economic integration as a force for peace and prosperity "

"The Great Illusion" ( https://en.m.wikipedia.org/wiki/The_Great_Illusion )
That increased trade is a bulwark against war rears its ugly head again.

The above book which so ironically delivered the message was published in 1910.

Alas, the Kaiser, the Tsar, and the Emperor did not act in accord with its tenets. Either increased global trade is irrelevant to war and peace, or World War I didn't happen. Your pick which to believe.

RC AKA Darryl, Ron -> New Deal democrat... , Tuesday, April 12, 2016 at 03:06 AM
Awesome, Dude!
George H. Blackford : , Monday, April 11, 2016 at 03:20 PM
Our problems began back in the 1970s when we abandoned the Bretton Woods international capital controls and then broke the unions, cut taxes on corporations and upper income groups, and deregulated the financial system. This eventually led a stagnation of wages in the US and an increase in the concentration of income at the top of the income distribution throughout the world: http://www.rwEconomics.com/Ch_1.htm

The export-led growth model that began in the 1990s seriously exacerbated this problem as it proved to be unsustainable: http://www.rwEconomics.com/htm/WDCh_2.htm

When combined with tax cuts and financial deregulation it led to increasing debt relative to income in the importing countries that caused the financial catastrophe we went through in 2008, the economic stagnation that followed, and the social unrest we see throughout the world today. This, in turn, created a situation in which the full utilization of our economic resources can only be maintained through an unsustainable increase in debt relative to income: http://www.rwEconomics.com/htm/WDCh3e.htm

This is what has to be overcome if we are to get out of the mess the world is in today, and it's not going to be overcome by pretending that it's just going to go away if people can just become educated about the benefits of trade. At least that's not the way it worked out in the 1930s: http://www.rwEconomics.com/LTLGAD.htm

RC AKA Darryl, Ron -> George H. Blackford ... , Tuesday, April 12, 2016 at 03:13 AM
Totally excellent, Dude!
Dan Kervick : , Monday, April 11, 2016 at 06:26 PM
Global integration and the liberalization of capital flows outside of national boundaries, and outside of the constraints of national solidarity, has pushed Americans further into a ruthless capitalist struggle for strictly individual measures of "success", and intensified economic insecurity and the gaps between winners and losers. Economists find the resistance to these trends mysterious; others not so much.
RC AKA Darryl, Ron -> Dan Kervick... , Tuesday, April 12, 2016 at 03:14 AM
Priceless!
Adamski : , Tuesday, April 12, 2016 at 07:10 AM
The prospect of an international recession has me feeling down but then I read this sniping timewasting comments section and it doesn't seem so bad
Ashok Hegde : , Tuesday, April 12, 2016 at 02:07 PM
Economic leaders after WW2 had a Colonialist attitude entrenched within. They made a plan for global economic integration, which only considered the economic needs and realities of developed western nations. China/India/Indonesia/etc...were never at the conceptual table.

Now, the tides have turned. The China-India nexus historically accounted for roughly 40% of the global economy. That 'normal' state was eclipsed for 1.5 centuries, and we may regress to that norm. If so, a ton of jobs, and economic activity, may shift from the West, to Asia. If so, the western middle classes are screwed.

BILL ELLIS -> Ashok Hegde ... , Tuesday, April 12, 2016 at 03:02 PM
It's not a zero sum problem
BILL ELLIS : , Tuesday, April 12, 2016 at 02:56 PM
Up till now globalism has mostly been conducted by laissez faire neo liberal elite...for the needs of the elite.
That's not entirely a bad thing. Wars are started over the needs and desires of our elites. Common folks left to their own, won't find reason to go off and kill their counterparts... it only after "the other" has been dehumanized and demonized by the elite that common people will allow themselves to be organized to kill one another.

By allowing and encouraging the world's elite to operate within a system of mutual dependence, we decrease the incentive for the elite to marshal and deploy their captive populations against one another.

But once that international system has been solidified...as it has now... The objective should be to tear it down...it should be to make it democratized, unionised, and transparent .

We need to move from laissez faire neo liberalism to social democratic neo liberalism.

BILL ELLIS -> BILL ELLIS... , -1
Should " not" be torn down...

[Apr 11, 2016] Paul Krugman: Snoopy the Destroyer

Notable quotes:
"... "Judge Collyer repeatedly complained that the regulators had failed to do a cost-benefit analysis." What Professor Krugman omits here is that so-called "cost-benefit analysis" has been corrupted by the fallacious Kaldor-Hicks compensation principle. The house cleaning has a lot further to go than "Republicans." ..."
economistsview.typepad.com
Systemically important presidential elections:
Snoopy the Destroyer, by Paul Krugman, NY Times : Has Snoopy just doomed us to another severe financial crisis? Unfortunately, that's a real possibility, thanks to a bad judicial ruling that threatens a key part of financial reform. ...
At the end of 2014 the regulators designated MetLife , whose business extends far beyond individual life insurance, a systemically important financial institution. Other firms faced with this designation have tried to get out by changing their business models. For example, General Electric ... sold off much of its finance business. But MetLife went to court. And it has won a favorable ruling from Rosemary Collyer , a Federal District Court judge.
It was a peculiar ruling. Judge Collyer repeatedly complained that the regulators had failed to do a cost-benefit analysis, which the law doesn't say they should do, and for good reason. Financial crises are, after all, rare but drastic events; it's unreasonable to expect regulators to game out in advance just how likely the next crisis is, or how it might play out, before imposing prudential standards. To demand that officials quantify the unquantifiable would, in effect, establish a strong presumption against any kind of protective measures.
Of course, that's what financial firms want. Conservatives like to pretend that the "systemically important" designation is actually a privilege, a guarantee that firms will be bailed out. Back in 2012 Mitt Romney described this part of reform as "a kiss that's been given to New York banks"..., an "enormous boon for them." Strange to say, however, firms are doing all they can to dodge this "boon" - and MetLife's stock rose sharply when the ruling came down.
The federal government will appeal..., but even if it wins the ruling may open the floodgates to a wave of challenges to financial reform. And that's the sense in which Snoopy may be setting us up for future disaster.
It doesn't have to happen. As with so much else, this year's election is crucial. A Democrat in the White House would enforce the spirit as well as the letter of reform - and would also appoint judges sympathetic to that endeavor. A Republican, any Republican, would make every effort to undermine reform, even if he didn't manage an explicit repeal.
Just to be clear, I'm not saying that the 2010 financial reform was enough. The next crisis might come even if it remains intact. But the odds of crisis will be a lot higher if it falls apart.

jonny bakho : Monday, April 11, 2016 at 06:54 AM

The free market needs government intervention to save the market from itself.
pgl said in reply to jonny bakho... , Monday, April 11, 2016 at 07:25 AM
Yes - and we need to get the corporate lawyers out of the way.
Sandwichman -> pgl... , Monday, April 11, 2016 at 07:47 AM
10,000 at the bottom of the ocean would be a good start.
DrDick -> jonny bakho... , Monday, April 11, 2016 at 07:36 AM
Markets cannot even exist without government regulation.
anne : , Monday, April 11, 2016 at 07:02 AM
http://krugman.blogs.nytimes.com/2015/04/11/a-victory-against-the-shadows/

April 11, 2015

A Victory Against the Shadows
By Paul Krugman

There are two big lessons from GE's announcement * that it is planning to get out of the finance business. First, the much maligned Dodd-Frank financial reform is doing some real good. Second, Republicans have been talking nonsense on the subject. OK, maybe point #2 isn't really news, but it's important to understand just what kind of nonsense they've been talking.

GE Capital was a quintessential example of the rise of shadow banking. In most important respects it acted like a bank; it created systemic risks very much like a bank; but it was effectively unregulated, and had to be bailed out through ad hoc arrangements that understandably had many people furious about putting taxpayers on the hook for private irresponsibility.

Most economists, I think, believe that the rise of shadow banking had less to do with real advantages of such nonbank banks than it did with regulatory arbitrage - that is, institutions like GE Capital were all about exploiting the lack of adequate oversight. And the general view is that the 2008 crisis came about largely because regulatory evasion had reached the point where an old-fashioned wave of bank runs, albeit wearing somewhat different clothes, was once again possible.

So Dodd-Frank tries to fix the bad incentives by subjecting systemically important financial institutions - SIFIs - to greater oversight, higher capital and liquidity requirements, etc. And sure enough, what GE is in effect saying is that if we have to compete on a level playing field, if we can't play the moral hazard game, it's not worth being in this business. That's a clear demonstration that reform is having a real effect.

Now, the more or less official GOP line is that the crisis had nothing to do with runaway banks - it was all about Barney Frank somehow forcing poor innocent bankers to make loans to Those People. And the line on the right also asserts that the SIFI designation is actually an invitation to behave badly, that institutions so designated know that they are too big to fail and can start living high on the moral hazard hog.

But as Mike Konczal notes, ** GE - following in the footsteps of others, notably MetLife *** - is clearly desperate to get out from under the SIFI designation. It sure looks as if being named a SIFI is indeed what it's supposed to be, a burden rather than a bonus.

A good day for the reformers.

* http://www.nytimes.com/2015/04/11/business/dealbook/the-lessons-for-finance-in-the-ge-capital-retreat.html

** http://www.nextnewdeal.net/rortybomb/how-end-ge-capital-also-kills-core-conservative-talking-point-about-dodd-frank

*** http://dealbook.nytimes.com/2015/01/13/metlife-to-fight-too-big-to-fail-status-in-court/

Sandwichman : , Monday, April 11, 2016 at 07:14 AM
"Judge Collyer repeatedly complained that the regulators had failed to do a cost-benefit analysis." What Professor Krugman omits here is that so-called "cost-benefit analysis" has been corrupted by the fallacious Kaldor-Hicks compensation principle. The house cleaning has a lot further to go than "Republicans."
anne said in reply to Sandwichman ... , Monday, April 11, 2016 at 07:23 AM
https://en.wikipedia.org/wiki/Kaldor%E2%80%93Hicks_efficiency

A Kaldor–Hicks improvement, named for Nicholas Kaldor and John Hicks, also known as the Kaldor–Hicks criterion, is a way of judging economic re-allocations of resources among people that captures some of the intuitive appeal of Pareto improvements, but has less stringent criteria and is hence applicable to more circumstances.

A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome. The compensation does not actually have to occur (there is no presumption in favor of status-quo) and thus, a Kaldor–Hicks improvement can in fact leave some people worse off.

Sandwichman -> anne... , Monday, April 11, 2016 at 07:31 AM
There are no stable "units" in which compensation could be paid.

http://econospeak.blogspot.ca/2014/11/numeraire-shmoo-meraire-nature-doesnt.html

David Ellerman:

"Consider a transfer of an apple from Mary to John and a transfer of $0.75 from John to Mary. Use Kaldor-Hicks to evaluate each part as a "project" with the other part as the "compensation". Using money as the numeraire and the apple transfer as the "project", we see under the assumptions that the transfer of the apple increases social wealth measured in dollars so that is the recommendation based on "efficiency", and the payment of the "compensation" of $0.75 is a matter of "equity" of concern to politician, theologians, and philosophers but not to the professional economist. Now reverse the numeraire taking apples as the numeraire and the transfer of the $0.75 as the "project". Then the transfer of the apple (= "compensation") does not change social wealth = size of the apple pie, but the transfer of the $0.75 increases the size of the social apple pie by 3/4 of an apple so it is the transfer of the $0.75 that is recommended on efficiency grounds by hard-nosed economists while the transfer of the apple is left to politicians, theologians, and the like as a matter of "equity." Thus the outcome of the KH analysis is reversed by a change in the numeraire used to describe the exact same pair of transfers."

anne said in reply to Sandwichman ... , Monday, April 11, 2016 at 07:50 AM
November 22, 2014

#NUM!éraire, Shmoo-méraire: Nature doesn't truck and barter

The commodity in terms of which the prices of all the others are expressed is the numéraire. -- Leon Walras, Elements of Pure Economics.

But the numéraire is a purely technical device, introduced simply for the purpose of making exchange values explicit. In no way does the introduction of a standard of value alter the fundamental nature of the economy in question. It remains a barter economy, since goods are exchanged solely for other goods. -- André Orléan, The Empire of Value.

-- Sandwichman

anne said in reply to Sandwichman ... , Monday, April 11, 2016 at 07:26 AM
http://en.wikiquote.org/wiki/Catch-22

1961

Yossarian looked at him soberly and tried another approach. 'Is Orr crazy?'

'He sure is,' Doc Daneeka said.

'Can you ground him?'

'I sure can. But first he has to ask me to. That's part of the rule.'

'Then why doesn't he ask you to?'

'Because he's crazy,' Doc Daneeka said. 'He has to be crazy to keep flying combat missions after all the close calls he's had. Sure, I can ground Orr. But first he has to ask me to.'

'That's all he has to do to be grounded?'

'That's all. Let him ask me.'

'And then you can ground him?' Yossarian asked.

'No. Then I can't ground him.'

'You mean there's a catch?'

'Sure there's a catch,' Doc Daneeka replied. 'Catch-22. Anyone who wants to get out of combat duty isn't really crazy.'

There was only one catch and that was Catch-22, which specified that a concern for one's own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he was sane, he had to fly them. If he flew them, he was crazy and didn't have to; but if he didn't want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.

'That's some catch, that Catch-22,' he observed.

'It's the best there is,' Doc Daneeka agreed.

-- Joseph Heller

Sandwichman -> anne... , Monday, April 11, 2016 at 07:42 AM
Also known as the double-bind in Gregory Bateson's analysis.

And why the big fuss about the Panama Papers? Doesn't the Laffer Curve tell us that if the 1% evade taxes by hiding their money in off-shore accounts, it will cause so much economic growth that government tax revenues will actually increase?

Laffer curves, Kaldor-Hicks cost-benefit swindles and lump-of-labor fantasies are not "incidentals" of an otherwise sound economic discipline. They are symptoms of an ideology that is rotten to the core.

William said in reply to Sandwichman ... , Monday, April 11, 2016 at 08:54 AM
Yes, those supply-siders must love it when companies hide their income offshores. Just think how many more jobs they must be creating with their lower tax rate!
ilsm said in reply to Sandwichman ... , Monday, April 11, 2016 at 09:59 AM
BCA's or CBA's start with assumptions and ground rules.

Neither do anything but give "foundation" to preferences.

pgl : , Monday, April 11, 2016 at 07:24 AM
"The federal government will appeal the MetLife ruling, but even if it wins the ruling may open the floodgates to a wave of challenges to financial reform. And that's the sense in which Snoopy may be setting us up for future disaster."

As soon as Dodd-Frank was passed the large financial institutions got their legal teams busy trying to undermine it. One would think all progressives would rally behind enforcing Dodd-Frank. Of course Rusty wants us to believe enforcing Dodd-Frank is just too complicated. It is complicated only because the lawyers for the financial sector get paid big bucks to obscure what is sensible regulation.

DrDick -> pgl... , Monday, April 11, 2016 at 07:39 AM
Rusty is well paid not to understand that it is people like him and his employers who are responsible for the complexity of federal regulations.
pgl said in reply to DrDick ... , Monday, April 11, 2016 at 09:02 AM
I bet Rusty will protest this by saying he is not being paid that much. Which would be cool but the notion that we should just trash Dodd-Frank strikes me as bad financial economics. Now if we can improve on Dodd-Frank, that would be awesome if it makes Jamie Dimon really mad.
Peter said in reply to pgl... , Monday, April 11, 2016 at 10:36 AM
"One would think all progressives would rally behind enforcing Dodd-Frank."

What is that supposed to mean?

JohnH : , Monday, April 11, 2016 at 08:05 AM
LOL!!! "A Democrat in the White House would enforce the spirit as well as the letter of reform"...just like the incumbent Democrat sent bankers to jail for rampant mortgage fraud.

Oh, right! Obama and Holder actually made the investigation of mortgage fraud JOD's lowest priority and brought no criminal indictments...undermining the rule of law, giving bankers a 'get out of jail free' card, and encouraging them to commit yet more fraud.

Krugman is becoming just ridiculous, a partisan hack on steroids.

Peter said in reply to JohnH... , Monday, April 11, 2016 at 08:51 AM
"The episode showed that traditional financial regulation, which focuses on deposit-taking banks, is inadequate in the modern world."

What Krugman fails to inform his reader - one can only say so much in a column is that Bill Clinton repeatedly reappointed Alan Greenspan as regulator in chief.

The shadow-banking system was created during Greenspan's tenure and he saw no need to regulate it b/c free markets are awesome! And so the shadow-banking system promptly had a bank run.

Eric Blair -> Peter... , Monday, April 11, 2016 at 09:02 AM
Not "promptly"--it took fifteen years. That was Clinton's biggest weakness--he was good at dealing with urgent obvious problems, but he would sometimes let longer-term issues fester. This is why Obama will be remembered as a better president than Clinton--he plays the long game.
Peter said in reply to Eric Blair ... , Monday, April 11, 2016 at 09:10 AM
15 years? No. Clinton ended in 2000 with a tech stock bubble. Less than a decade later we had the mother of all bank runs.

"he was good at dealing with urgent obvious problems, "

Like what? Balancing the budget?

Eric Blair -> Peter... , Monday, April 11, 2016 at 09:29 AM
Notable examples of urgent problems that Clinton addressed effectively included the Mexico crisis of 1994, the East Asian crisis of 1997, and the collapse of Long Term Capital Management in 1998. Any one of these crises could have turned into a broader meltdown and spawned a depression similar to the 2008 one, but Clinton and his appointees (including Greenspan) did a good job of containing the damage. Unfortunately they did nothing to address the underlying problems that had made it necessary for them to act in the first place.
ilsm said in reply to Eric Blair ... , Monday, April 11, 2016 at 10:11 AM
Clinton pandered to the Sunnis sending USAF to do their work sundering Serbia. Bombing the Chinese embassy was par for the military industry complex.

Permanently stationed US funded mechanized brigade to keep the Sunnis happy with NATO over Serbia.

Peter said in reply to Eric Blair ... , Monday, April 11, 2016 at 10:13 AM
Dean Baker has a good critique of their handling of the East Asian Crisis, if you aren't familiar with it.
Peter said in reply to JohnH... , Monday, April 11, 2016 at 08:52 AM
"Oh, and yes, the episode also showed that making the breakup of big banks the be-all and end-all of reform misses the point."

*sends more money to Sanders campaign*

Peter said in reply to Peter... , Monday, April 11, 2016 at 09:12 AM
http://readersupportednews.org/opinion2/277-75/36222-focus-why-the-banks-should-be-broken-up

Why the Banks Should Be Broken Up

By Matt Taibbi, Rolling Stone

09 April 16

Bernie or no Bernie, 'Times' columnist Paul Krugman is wrong about the banks

Paul Krugman wrote an op-ed in the New York Times today called "Sanders Over the Edge." He's been doing a lot of shovel work for the Hillary Clinton campaign lately, which is his right of course. The piece eventually devolves into a criticism of the character of Bernie Sanders, but it's his take on the causes of the '08 crash that really raises an eyebrow.

...

Peter said in reply to JohnH... , Monday, April 11, 2016 at 08:56 AM
"It doesn't have to happen. As with so much else, this year's election is crucial. A Democrat in the White House would enforce the spirit as well as the letter of reform - and would also appoint judges sympathetic to that endeavor. A Republican, any Republican, would make every effort to undermine reform, even if he didn't manage an explicit repeal.

Just to be clear, I'm not saying that the 2010 financial reform was enough."

The Republicans are going to lose so Krugman's lesser evil argument doesn't really work.

Does Krugman discuss Hillary's reforms? No of course not.

Eric Blair -> JohnH... , Monday, April 11, 2016 at 08:59 AM
Your comment only makes sense if you believe that either
(1) designating a financial institution "systemically important" is trivial or totally meaningless compared to criminal indictments for previous actions, or (2) a Republican would enforce this designation just as much as Obama has. Which is it?
pgl said in reply to Eric Blair ... , Monday, April 11, 2016 at 09:04 AM
Uh oh - a tough question for JohnH. Careful as he might say you are "not qualified" or something like that.

Republicans want a laissez faire financial system. After all - 2008 was such a great year (not).

Peter said in reply to pgl... , Monday, April 11, 2016 at 09:11 AM
Hey buddy! Getting feisty again?
JohnH said in reply to Eric Blair ... , Monday, April 11, 2016 at 09:20 AM
LOL!!! Eric Blair asserts that it is "totally meaningless" to sending bankers to prison for fraud that threatened systemically threatened the economy!

And he assumes that Obama would behave less deferentially to Wall Street banks when it comes to enforcing any regulation that bankers don't approve of.
Republicans have no monopoly on servility to the interests of Wall Street and their wealthy clientele, but Krugman obviously prefers Democratic corruption to its Republican cousin...

Eric Blair -> JohnH... , Monday, April 11, 2016 at 09:36 AM
No, I did not say what you claim that I said. And whether Obama is being deferential to someone is at most a side issue. The important questions are first, does the rule help make the financial system more stable, and second, would it be enforced less by Republicans. I believe the answer to both questions is yes.
pgl said in reply to Eric Blair ... , Monday, April 11, 2016 at 10:43 AM
JohnH does this a lot. Cross his serial nonsense and you become Jamie Dimon's enabler.
JohnH said in reply to Eric Blair ... , Monday, April 11, 2016 at 03:21 PM
"would it be enforced less by Republicans?"

LOL!!! How can it get less than zero...which is the number of bank fraud indictments Obama issued against prominent Wall Street bankers?

It's hilarious how Wall Street Democrats try to claim that the Democratic Party is less corrupt than Republicans, when both parties feed from the same trough.

MIB said in reply to JohnH... , Monday, April 11, 2016 at 10:43 AM
Sandwichman says:

"The house cleaning has a lot further to go than "Republicans."

How about the leader of the Democrats, President Obama?

Real Democrats can hardly wait for good ol authentic, honest Bernie Sanders to start attacking President Obama – he's certainly not qualified to be president, taking all that Wall Street cash and letting the big banks off scot-free, like he and Holder did back 2009 -- unqualified.

But good ol straight shootin Bernie aint gona do that, is he? Nope, because even Bernie understands that Democrats actually like, maybe even love President Obama.

Bernie probably even understands that most Democrats like their democratic representatives, senators, governors, mayors, city councilors, etc as well. So railing against the establishment is not nearly as effective for Bernie as it is for Trump, Cruz and the tea party railing against the Republican establishment. You see this in most Sanders surrogates carefully leaving "democratic" off when criticizing the establishment, heck they might be confused with Republicans or Independents. Even the more excitable online Berniacs rarely use the term democratic establishment, instead invoking the generically ominous and evil "establishment."

It would have been much better (and honest) if Bernie had not turned his back on 28 years as a proud Independent and run for president as a proud Independent instead of his gimmick to garner more media attention by running as a Democrat.

His ego trip would have been much shorter, and Bernie certainly wouldn't be able to raise as much cash running as an independent, he'd likely struggle to exceed Nader's 3% general election vote in 2000, but he could have honestly taken on the real leader of the (democratic) establishment, President Obama.

JohnH said in reply to MIB... , Monday, April 11, 2016 at 03:25 PM
Nonetheless, Bernie is bringing critical economic issues into public discourse, issues that Wall Street Democrats have long tried to suppress or occasionally pay lip service to...issue such as minimum wages, trade policy, etc.

Even better, Bernie is showing socialist Democrats how to campaign and win against corrupt, incumbent Wall Street Democrats.

Antoni Jaume : , Monday, April 11, 2016 at 10:36 AM
That looks suspiciously just what Charles Murray proposed in his book "By the People: Rebuilding Liberty Without Permission", to litigate against norms that regulate corporations.

http://americablog.com/2015/05/by-the-ruling-class-charles-murrays-anti-democratic-revolution.html

dd : , -1
Well not all SI's are equal. The drubbing AIG took even as it was used to launder cash to more favored institutions is no doubt seen as the template. There's that nowhere to be found independent insurance guy with no clout on FSOC that's another message. Woodall,a former insurance regulator from Kentucky is the definition of outsider.
Last there's Jack Lew lecturing everyone on financial stability,truly a nice irony given Citi's illegal Traveler's deal and the horrific consequences.
No doubt the lawsuit is about positioning and they'll be more by other players who worry about being sacrificed to save the clout-heavy.
This is totally predictable given the power structure of FSOC.

[Apr 11, 2016] #panamapapers Offshore Funds: On the Run With (Almost) Nowhere to Go?

Notable quotes:
"... NY banking rules ..."
"... Nicholas Shaxson's Treasure Islands: Tax Havens and the Men Who Stole the World ..."
www.nakedcapitalism.com
Posted on April 11, 2016 by Yves Smith As strange as it may seem, a confluence of developments in the banking industry means the Panama Papers revelations looks likely make it a lot more difficult for offshore money, as tax evasions and tax secrecy are often politely called, to stay hidden. This would serve as a marked contrast to the last international-headlines-gripping leaks, the Snowden revelations. Even though Snowden gave a big window into the reach of the surveillance state, not all that much has changed, save the Chinese making more active efforts to avoid cloud computing and US technology vendors, and the Europeans bashing US concerns over violations of their privacy laws.

By contrast, the massive Mossack Fonseca records haul feeds into trends in banking that mean that a lot of these funds are going to find it hard remain secret. We'll summarize them below.

Tax base expansion initiatives . The US and European Union have been working on a program to expand the base of income that is subject to tax. Budget-starved European member states have been moving the plan forward ahead of schedule. This is one of the few positive developments to come of of governments failing to understand the implications of having a fiat currency (you can and typically need to run deficits, since the private sector sets unduly high return targets and chronically underinvests; the constraint on deficit spending is creating too much inflation).

Increasingly tough "know your customer" rules . The US going aggressively after foreign banks that have falsified records as a part of money-laundering has led to increased compliance. Even Standard Chartered, which thought the US had no business telling it not to do business with Iran, was brought to heel and its CEO forced to resign for his continued intransigence.

Now the US can throw its weight around only as far as dollar-based transactions are concerned, since those ultimately clear through US facilities. But the UK has also adopted stringent "know your customer" rules. It now takes weeks to open a new account that is not a personal account, say for your rugby club.

As John Dizard in the Financial Times reports :

There is a new urgency in the tone of the lawyers and advisers for offshore asset holders. The essential message is that you are the Shah of Iran, this is 1979, and you and your money will find yourselves hopscotching from one unwelcoming landing place to another…

If you or your clients think this is about tax cheats or the merely middle rich, they should think again…

As this column and others have noted, by next year Switzerland, along with Luxembourg, the Channel Islands and other European offshore investment management centres, will start exchanging tax information with their counterparts.

There are a very large number of beneficiaries, ie globalised rich people, who have until the end of this year to get their money safely onshore. The one Western country that does not have a deadline for complying with the Common Reporting Standard is the US.

Almost everyone who has non-criminally sourced capital would like to have at least some of it accessible within the dollar-based clearing system. But the clerical and legal checklists to set up accounts for legitimate money have become so long that it will take months to accomplish this even for those willing to pay the transaction costs.

And before you think the US banks are therefore the answer…. US banks are shunning money from the rich these days. . Dizard again:

The largest US banks do not really want to take more deposits, or even do the cursory know-your-customer due diligence work to open new special purpose accounts for old customers. Americans I know with legitimately acquired nine- or ten-figure investment portfolios now have to scrounge around to open accounts in midsize US banks.

Those rich Americans do not have the logistical or legal problems that Panama Papers-related flight capital will have in "onshoring" their money.

Moreover, US legislators are calling for the US tax havens like Delaware corporations and Wyoming limited liability companies, to report on who their ultimate beneficiaries are. Given the tone of his Guardian op-ed, Carl Levin sound like he is warming up for hearings:

Global revulsion against shell company abuses, offshore tax havens, and the lawyers that promote them has generated new public pressure to tackle these problems. Here are three steps to consider.

Outlaw corporations with hidden owners

….G20 world leaders have made a start with a joint commitment to increase corporate transparency. The United Kingdom is leading the way, mandating public disclosure of the true owners – the "beneficial owners" – of UK companies. The European Union has followed…

The United States is far behind. We now require more information to get a library card than to form a US corporation. ….The biggest impediment is opposition from the secretaries of state of our 50 states, who financially benefit from forming new corporations and don't want to ask questions that might jeopardize their revenue. Our states need to wake up to the damage they are doing and stop forming corporations with hidden owners.

Get tough on offshore tax abuse

Tax authorities should use existing tax information exchange agreements, including the US-Panama agreement, to go after tax cheats and determine whether Mossack Fonseca facilitated illegal conduct.

Offshore tax abuse goes beyond individuals. Some multinational corporations use tax havens to arrange secret tax deals or declare earnings offshore. The international community is finally demanding that large multinationals file reports disclosing the profits they make and the taxes they pay on a country-by-country basis. The United States has proposed regulations requiring those reports; the next step is to finalize them. A bigger issue: making those reports public.

Get tough on lawyers promoting misconduct

….Lawyers should be subject to the "know your client" requirements of anti-money laundering laws. In addition, banks should scrutinize suspicious accounts of law firms and require them to certify that they will not use those accounts to help clients circumvent the bank's own anti-money laundering controls.

Note that Levin doesn't seem to have a good answer about what to do about states that find it attractive to act as secrecy jurisdictions, but in the past, the Feds have used cutting off various Federal funds as a stick to force cooperation, Moreover, if Congress were to pass laws with "know your client" requirements with criminal sanctions and tough fines, that in and of itself would choke off a lot of domestic activity.

Information technology risk . Mossack Fonseca exposed in a very dramatic way that secrecy isn't just a function of the design of legal arrangements and the choice of jurisdiction and bank, but also of the integrity of the registered agent's IT security. There's no way to do due diligence on that. Those with offshore accounts must already be nervous that they could be exposed by a similar hack. Dizard's fallback remedy for the rich who want to keep their money hidden, "…you and your money will find yourselves hopscotching from one unwelcoming landing place to another," might work for the relatively small and fleet of foot to stay ahead of the taxman and the bank transparency moves, but it won't reduce IT risk.

Dizard's article, despite being informative, weirdly rails against crackdown on large-scale international capital transactions" as populist and ill-informed, due to limiting the mobility of international capital. Someone needs to clue him on the research by Ken Rogoff and Carmen Reihart, who are hardly of the pinko persuasion, who found that high levels of international capital movements are powerfully correlated with more severe and frequent financial crises. Dizard also tries to depict reducing capital movements as being Smoot-Hawley revisited. First, the notion that Smoot-Hawley caused the Depression had been well debunked. Second and more important, international capital flows these days are at such high levels (over 60 times trade flows) that the Bank of International Settlement has said that large international transactions are not about facilitating trade, and that excessive financial "elasticity" was the cause of the crisis.

He also depicts banks as winding up being beneficiaries, which contradicts his message that they regard onshored money as more hassle (which means cost) that its worth:

This will, within the next two years or so, lead to a one-time transfer from the global rich to the staff and owners of US financial institutions. But that will be followed by a long drought for new business, as the global wealth that did not move quickly enough gets slotted into endless holding patterns in the mid-Atlantic or mid-Pacific.

It's hard to see what good it will do someone to have money moving around the few finessable locations and banks that remain. Pray tell, how does it spent? Money you can't readily touch, or get into a jurisdiction where you'd like to spend it, does not seem terribly useful.

And the big point that Dizard misses is that onshoring these funds will make the future investment income on them subject to tax. Hidden untaxed wealth has contributed to rising inequality; Gabriel Zucman of UC Berkeley has estimated that 6% to 8% of global wealth is offshore, and most of that not reported to tax authorities. So the more the rich are discomfited by their overly-clever machinations, the better.

Northeaster , April 11, 2016 at 7:34 am

Well, if you live in a state where you can name an LLC for your nominee trust, it doesn't get any better. File the off shore LLC in Nevada where they don't ask any questions, and use it for your real estate vehicle to launder your monies. Any question to why high end real estate is on fire? The opaqueness in some states is intentional, as it took me about 10 minutes of random searching of properties (over $2 million) to find the off shore LLC owner, with people and entities that did not exists in the SoS filings. The activity index for RE sales over $750K is almost equal to the index under $400K and below combined. If you add the $500K and above sales, it crushes the entire index below $500K.

https://research.stlouisfed.org/fred2/graph/?g=47×5

Alex morfesis , April 11, 2016 at 10:30 am

Owning an entity does not open a bank account…a party almost always has to be vetted for a new enterprise…wired in funds for the benefit of an entity helps break the corporate veil…govt officials rambling to the public that this corporate charade is just "impossible" to deal with or stop are just laughing at the public (or need to hand back their law license to the bar)…money can Always be traced…a real estate closing will have closing instructions and in those instructions will be to whom to send back the funds and to what name if the transaction is not concluded….since title companies are state regulated enterprises….and there are basically only four major title insurance umbrella companies….this myth that a state title insurance investigator could not walk in and obtain the beneficiary of the source of funds is one big second city improv skit

Northeaster , April 11, 2016 at 11:33 am

All they have to do is have real estate fall under FinCen Suspicious Activity Reporting (SAR) requirements, but the NAR is simply too powerful and well funded with a more than accepting sold out CONgress,

Alex morfesis , April 11, 2016 at 12:52 pm

Not defending nar but state title insurance investigators have the absolute right to walk in unannounced and spot audit files…a new corp will not have all these closing funds in hand and for a proper corp veil to stand and hold, the funds had to be in a bank account in the name of corp…might I suggest that the funds do not arrive from a source matching the corporate name…thus revealing the actual party in interest….

susan the other , April 11, 2016 at 2:25 pm

After this amazing seminar from Yves MERS is making much more sense… and as always Utah stands squarely behind the banks by ruling in appeals court that you can make a ham sandwich your agent.

JTMcPhee , April 11, 2016 at 8:36 am

Another piece of the problem is the difficulty of "piercing the corporate veil" in so many legal domains (almost said "states and nations," but those are mostly convenient fictions themselves). There's been a long tail of effort by the Few and the Corrupt and the Criminal to make it very difficult, ever increasingly difficult, to hang liability for what little remains of proscriptions and penalties for vicious and renter-driven personal (from "behind the veil") actions that offend what are supposed to be police-powers (health, safety, welfare, nuisance and environmental destruction, etc.), hang it where it belongs, with penalties that actually matter to the sociopath, if behaviors are going to change - around the necks of the individual rotten humans that plot and plan and operate all the stuff that is killing ordinary people and the planet.

Corporate "beneficial owners" get to hide behind the screen of opacity and deflection that comes from the perversion of the notion that "business" needs require immunity of individuals from the consequences of "corporate" behavior. "Piercing the veil" requires meeting an extreme burden of proof that the corporation is a fraudulent shell, or merely an alter ego of the individual officer/owner. And if course the Wealthy and their advisers and facilitators and wholly owned political actors are still in the game, with huge resources even if currently under some increasing and likely temporary constraints, and they will be doing their damndest to preserve existing moats and walls and veils and find new ways to pervert the legitimacy-granting functions of law-making to protect their pleasure palaces and "specialness."

Eat the Rich, reads the old bumper sticker from Hippier days… With a plate of fava beans, and a nice sauce of Retribution and a side of Restitution…

inode_buddha , April 11, 2016 at 12:00 pm

I have seen one case in particular, where the CEO made one set of sworn statements to the SEC in the 10k, and said the exact opposite in Federal court in the same month. Neither legal team picked up on this or mentioned it, and neither did the judge. It was incredibly aggravating to watch. In this case he rode the company into the ground while pumping and dumping like mad, and got away with it. The lawsuit was simply another vehicle to pump the stock, it didn't matter if it even had any merit - which it didn't. Years later, the company imploded ithe only a few employees left, the execs walked away with millions, etc. and they made a lot of enemies along the way.

divadab , April 11, 2016 at 8:36 am

Hopefully greater regulation and international cooperation will surface the tax evaders and capture their previously unpaid taxes. But it will also drive many of them deeper into organized crime-style hiding schemes. For example, using squeaky-clean nominees acting as beards: here's how it works in many communities – one guy "owns" many rental properties for which there are long-term tenants, and the rent equals exactly the carrying cost of the property. The tenants happen to be businessmen and their families who run pretty close to the wind and whose assets are thereby continually at risk – effectively, they protect their houses from creditors by holding them in a trustworthy nominee name – the "legal owner" is a hidden agent for the actual owners. Totally undetectable. But enforcement of this type of contract is extra-legal – organized crime-style – and communal.

This type of setup is also a classic money-laundering vehicle – involving property flips between ostensibly unrelated parties but in reality coordinated. Hence distorted real estate markets as noted by Northeaster above. First $500,000 of profit on a principle residence sale is non taxable. I'd suggest the IRS focus on auditing house sales for which the principle residence exemption has been claimed, especially when people make close to the limit several times over (say) a ten-year period.

Synoia , April 11, 2016 at 10:26 am

$250,000 exemption for each individual on title every 2 years.

weinerdog43 , April 11, 2016 at 9:01 am

Way back when dinosaurs roamed the Earth, and I was taking Income Tax in law school, I couldn't shake the feeling that the whole point of the class was to assist people (corporations are people, my friend) to scam the government. While no one likes to pay taxes, these taxes provide services that people do, in fact like. It's all I can do to resist slapping folks who complain about the condition of the roads, and then in the next breath, whine about their tax burden.

Anyway, cheating the government out of one's fair share of the tax burden means 2 things:
1.) The remaining burden falls more heavily on those who DO pay; and
2.) Unpunished cheating encourages more people (and corporations) to cheat. "If they're not paying, why should I pay?"

After that class, I couldn't run fast enough away from tax law as it seemed to attract classmates I rather loathed. I couldn't agree more that tax lawyers who encourage cheating should face disbarment and fines. Apologies to my tax law brethren who try to do the right thing. I know some fine CPAs and tax guys. It just wasn't my calling.

Whine Country , April 11, 2016 at 10:03 am

I began my career as a CPA in the early '70s in the SF Bay area and virtually all of the lawyers I came in contact with had the same thoughts about taxes as you did. One of my accounting professors used to go on about how it was incredible that an attorney could pass the bar and practice law without ever having taken one tax course.

Particularly when you consider that there is very little that a lawyer does that does not in some way involve taxes. So for us CPAs this was just an opening for us to specialize in an area where lawyers had little or no interest.

In those days I recall that when you actually needed a tax attorney he was usually – I won't say loathsome – but kind of an odd sort. Recently I spoke to my ex-partner who took over our practice and the subject of tax attorneys came up. He reported to me that in the Bay Area tax attorneys are now billing $900 to $1,000 per hour. I guess you can call this supply side economics at work. As the number of mega zillionaires grows in the SF/Silicon Valley area, demand has apparently been created for a new category of super lawyer. The Free Market really can do some wonderful things when manipulated properly.

Yves Smith Post author , April 11, 2016 at 5:40 pm

You have to have your brain turned inside out to understand tax well enough to be a tax lawyer. Most regular lawyers have some antipathy for tax lawyers (I've sensed this and confirmed it). The logic of tax is extremely arcane, non-intuitive, and pedantic. Plus it does not have commercial value added.

perpetualWAR , April 11, 2016 at 10:46 am

Too bad the bar associations protect the scheming, lying cheats. Most bar associations have been infiltrated and are run by the bank lawyer scum.

polecat , April 11, 2016 at 1:47 pm

this is thing…..nearly every establishment related profession seems, in my mind at least, to be corrupted by fraud and graft……be it Pharma, Financials, Medical, MIC, Education, Agriculture, Law & Judicature, Transportation & Energy, National social policy, Foreign & National & Security policy……..

….hence… all phony & all illegitimate !!!

Alex V , April 11, 2016 at 9:04 am

I'm an American citizen living overseas. For me an "offshore account" is not an option, it's a fact of life. Creating fair laws to control tax evasion are therefore of interest to me.

One example of the opposite of fair law is FATCA. This is quite a terrifying bit of poorly conceived legislation; intended to go after blatant tax evaders and sanction evaders, but instead creating penalties that can be life ruining for a middle class expat that makes an honest mistake in their reporting. The penalties on banks (and by extension foreign countries) that did not want to subject themselves to US law are also overly aggressive. So aggressive that many financial institutions refused to deal with any Americans, even for things as simple as a savings account. "Knowing your customer" became discrimination based on citizenship.

I'm just hoping that any changes to enforcement or regulation that come about from the PPs take this into account.

Regarding Standard Chartered, I'm not quite sure it's absolutely clear cut that they were in the wrong:

http://www.exportlawblog.com/archives/4584
http://www.exportlawblog.com/archives/4266

They may have settled just to make the problem go away, and to maintain access to the US financial system. The US has a habit of imposing it's laws on the rest of the world, or ignoring international law it doesn't like. In my opinion, the sanctions on Iran were in many ways outright bullying, very much like with those on Cuba.

Yves Smith Post author , April 11, 2016 at 5:45 pm

Buh? Standard Chartered defied the advice of its US outside counsel and falsified wire transfer documents in a systematic manner after having been previously sanctioned for handling the transfer of funds to Iran for its oil sales, and to Sudan and other prohibited jurisdictions. You clearly have not read Benjamin Lawsky's order against the bank. Standard Chartered had a branch in New York to do dollar operations, and all dollar transactions ultimately clear (have to clear) through that branch.

These were clear-cut violations of NY banking rules and Lawsky could have yanked Standard Chartered's NY banking license, which would have been a cataclysmic event for the bank. And after Federal regulators initially acting offended that Lawsky had end run and embarrassed them, they stepped up and issued big fines against Standard Chartered of their own.

You also omit that Standard Chartered got yet another round of fines for failing to comply with the changes required! That led to the ouster of CEO Peter Sands, who had been defiant all along. From the New York Times in 2014, Caught Backsliding, Standard Chartered Is Fined $300 Million :

It took $667 million in fines and a promise to behave for the British bank Standard Chartered to emerge from the regulatory spotlight. All it took to return there was its failure to fully keep that promise.

In a settlement announced on Tuesday by New York State's financial regulator, Standard Chartered will pay a $300 million fine and suspend an important business activity because of its failure to weed out transactions prone to money-laundering, a punishing reminder of settlements in 2012. Those settlements with state and federal authorities resolved accusations that Standard Chartered, in part through its New York branch, processed transactions for Iran and other countries blacklisted by the United States.

The New York regulator, Benjamin M. Lawsky, has now penalized Standard Chartered for running afoul of the 2012 settlement, which he said required the bank to "remediate anti-money-laundering compliance problems."

An independent monitor, hired as part of Mr. Lawsky's 2012 settlement, recently detected that the bank's computer systems failed to flag wire transfers flowing from areas of the world considered vulnerable to money-laundering, according to Mr. Lawsky's order. The order did not specify the number of transactions that the bank's filters failed to identify, but a person briefed on the matter said that it was "in the millions."

Please stop defending crooked bank behavior. Plus this is agnotology, which is against our house rules.

DJG , April 11, 2016 at 9:08 am

Thanks for this. The problem with the Panama Papers for those of us outside economics and finance is that we don't understand the mechanisms and regulations that ease all of this movement of money. Even though I have stocks in my IRA, it isn't as if the companies report their financial messes in the proxy statements. Au contraire, it's all the glory of Jeffrey Immelt all the time.

"Finessable": I kind-a like it. Your coinage?

readerOfTeaLeaves , April 11, 2016 at 4:22 pm

You may want to check McClatchy's website as they have some explanatory videos and terrific reporting.
I got started on all the tax haven skullduggery by reading Yves, so it's wonderful to see this getting a far wider, fully documented exposition.

http://www.mcclatchydc.com

Also, Nicholas Shaxson's Treasure Islands: Tax Havens and the Men Who Stole the World is one of the best books that I've ever read. His blog is here: http://treasureislands.org

Earlier this week, a friend said, "Is it a good day?" I said, "It's an AWESOME day! All the sleaze is finally coming out into the sunlight."

Yves Smith Post author , April 11, 2016 at 8:01 pm

Yes, Treasure Islands is a terrific book. Highly readable but still covers many of the important technical issues.

Jim Haygood , April 11, 2016 at 1:46 pm

'It now takes weeks to open a new account that is not a personal account, say for your rugby club.'

… which is why workarounds, both old school (gold) and new (anonymous digital currencies), will be found to sidestep the politicization of government currencies, which now come bundled with odious surveillance that makes their use increasingly unattractive.

Yves Smith Post author , April 11, 2016 at 8:04 pm

These are both property, not money, and not at all workable for anyone who needs them for transactions. Both are volatile and bitcoin with its blockchain makes its entire history of past holders accessible. That's not a desirable feature for someone hiding from the taxman.

Micky9finger , April 11, 2016 at 1:56 pm

the constraint on deficit spending is creating too much inflation).

Huh?

Yves Smith Post author , April 11, 2016 at 5:32 pm

That is correct for fiat currency issuers. This is not any secret if you've been reading about how monetary operations work.

RBHoughton , April 11, 2016 at 8:25 pm

Good grief. What's the world coming to? Are we now expected to visit our offshore paradise and suitcase money home? The gentlemen in Customs will be checking every flight from the Caymans.

"The one Western country that does not have a deadline for complying with the Common Reporting Standard is the US." – Ahh ha – is this part of the solution to falling inwards investment?

[Apr 10, 2016] Follow the money

Notable quotes:
"... Perhaps that's the problem with economics: the economists are so wrapped up in politics they can't tell where one starts and the other ends. Economics becomes nothing more than politics with math thrown in to lend authority to "very serious" agendas. ..."
"... Much like theology, it's a matter of culture and clique. Fitting they break up the field into Orthodox and Heterodox. Perhaps they should have economic cardinals that elect an economic pope. ..."
"... "When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny." John Adams ..."
"... Politics and economic matters cannot be separated. Most politics are an expression of economic interests; in fact almost all - things that appear to be about "power", social dominance, and social mores are also mostly motivated by arranging or sustaining an environment where certain groups get to decide matters of the economy at the expense of others. ..."
"... Have you heard the phrase "follow the money", and even older "cui bono"? It's the same principle. Most motivations are based in economic affairs and conflicts. ..."
economistsview.typepad.com

Ron Waller -> Alain Sherter...

...Krugman may be an economist, but this politicking op-ed has nothing to do with economics.

Perhaps that's the problem with economics: the economists are so wrapped up in politics they can't tell where one starts and the other ends. Economics becomes nothing more than politics with math thrown in to lend authority to "very serious" agendas.

BTW, how are economic ideas established, in any case? We know with science, falsifiable hypotheses are put forward and put to the test. Economists know enough about statistics to hide behind the ethics problem of running economic experiments. Even though they ARE running economic experiments with their Aristotelian notions that almost always get it wrong: from "efficient" taxation nonsense that gives the rich big tax breaks, to investor-protecting inflation targeting that ran the economy into the ground -- which they call the Great Moderation; etc.

Much like theology, it's a matter of culture and clique. Fitting they break up the field into Orthodox and Heterodox. Perhaps they should have economic cardinals that elect an economic pope.

likbez -> Ron Waller ...
Politics is deeply connected to economics. Especially under neoliberalism. It is actually difficult to distinguish two and many economic issues are highly political ("role of the market in the society").

Moreover:

"When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny." John Adams

cm -> Ron Waller ...
Politics and economic matters cannot be separated. Most politics are an expression of economic interests; in fact almost all - things that appear to be about "power", social dominance, and social mores are also mostly motivated by arranging or sustaining an environment where certain groups get to decide matters of the economy at the expense of others.

Have you heard the phrase "follow the money", and even older "cui bono"? It's the same principle. Most motivations are based in economic affairs and conflicts.

[Apr 10, 2016] The Repercussions of Financial Booms and Crises

March 29, 2016 | Angry Bear

Financial booms have become a chronic feature of the global financial system. When these booms end in crises, the impact on economic conditions can be severe. Carmen M. Reinhart and Kenneth S. Rogoff of Harvard pointed out that banking crises have been associated with deep downturns in output and employment, which is certainly consistent with the experience of the advanced economies in the aftermath of the global crisis. But the after effects of the booms may be even deeper and more long-lasting than thought.

Gary Gorton of Yale and Guillermo Ordoñez of the University of Pennsylvania have released a study of "good booms" and "bad booms," where the latter end in a crisis and the former do not. In their model, all credit booms start with an increase in productivity that allows firms to finance projects using collateralized debt. During this initial period, lenders can assess the quality of the collateral, but are not likely to do so as the projects are productive. Over time, however, as more and more projects are financed, productivity falls as does the quality of the investment projects. Once the incentive to acquire information about the projects rises, lenders begin to examine the collateral that has been posted. Firms with inadequate collateral can no longer obtain financing, and the result is a crisis. But if new technology continues to improve, then there need not be a cutoff of credit, and the boom will end without a crisis. Their empirical analysis shows that credit booms are not uncommon, last ten years on average, and are less likely to end in a crisis when there is larger productivity growth during the boom.

Claudio Borio, Enisse Kharroubi, Christian Upper and Fabrizio Zampolli of the Bank for International Settlements also look at the dynamics of credit booms and productivity, with data from advanced economies over the period of 1979-2009. They find that credit booms induce a reallocation of labor towards sectors with lower productivity growth, particularly the construction sector. A financial crisis amplifies the negative impact of the previous misallocation on productivity. They conclude that the slow recovery from the global crisis may be due to the misallocation of resources that occurred before the crisis.

How do international capital flows fit into these accounts? Gianluca Benigno of the London School of Economics, Nathan Converse of the Federal Reserve Board and Luca Forno of Universitat Pompeu Fabra write about capital inflows and economic performance. They identify 155 episodes of exceptionally large capital inflows in middle- and high-income countries over the last 35 years. They report that larger inflows are associated with economic booms. The expansions are accompanied by rises in total factor productivity (TFP) and an increase in employment, which end when the inflows cease.

Moreover, during the boom there is also a reallocation of resources. The sectoral share of tradable goods in advanced economies, particularly manufacturing, falls during the periods of capital inflows. A reallocation of investment out of manufacturing occurs, including a reallocation of employment if a government refrains from accumulating foreign assets during the episodes of large capital inflows, as well as during periods of abundant international liquidity. The capital inflows also raise the probability of a sudden stop. Economic performance after the crisis is adversely affected by the pre-crisis capital inflows, as well as the reallocation of employment away from manufacturing that took place in the earlier period.

Alessandra Bonfiglioli of Universitat Pompeu Fabra looked at the issue of financial integration and productivity (working paper here). In a sample of 70 countries between 1975 and 1999, she found that de jure measures of financial integration, such as that provided by the IMF, have a positive relationship with total factor productivity (TFP). This occurred despite the post-financial liberalization increase in the probability of banking crises in developed countries that adversely affects productivity. De facto liberalization, as measured by the sum of external assets and liabilities scaled by GDP, was productivity enhancing in developed countries but not in developing countries.

Ayhan Kose of the World Bank, Eswar S. Prasad of Cornell and Marco E. Terrones of the IMF also investigated this issue (working paper here) using data from the period of 1966-2005 for 67industrial and developing countries. Like Bonfiglioli, they reported that de jure capital openness has a positive effect on growth in total factor productivity (TFP). But when they looked at the composition of the actual flows and stocks, they found that while equity liabilities (foreign direct investment and portfolio equity) boost TFP growth, debt liabilities have the opposite impact.

The relationship of capital flows on economic activity, therefore, is complex. Capital inflows contribute to economic booms and may increase TFP, but can end in crises that include "sudden stops" and banking failures. They can also distort the allocation of resources, which affects performance after the crisis. These effects can depend on the types of external liabilities that countries incur. Debt, which exacerbates a crisis, may also adversely divert resources away from sectors with high productivity. Policymakers in emerging markets who think about the long-term consequences of current activities need to look carefully at the debt that private firms in their countries have been incurring.

cross posted with Capital Ebbs and Flows<

Warren March 31, 2016 11:14 am
And therein lies the half of Keynesian Economics that is ignored - running surpluses during the booms to tamp them down, and to have a reserve to pump into the economy during the busts.

[Apr 02, 2016] Unemployment Rate Edges Higher as Prime-Age Workers Reenter Labor Market

Notable quotes:
"... Self-employment has risen substantially since the ACA took effect. ..."
"... One of the desired outcomes from the ACA was that it would free people from dependence on their employer for health care insurance, allowing them to work part-time or start a business if they so choose and get insurance through the exchanges. ..."
"... Yes labor force participation has increased but it still is only 63%. Yes the employment to population ratio is now 59.9% but it should be 62%. Slow progress with a long way to go. ..."
"... But the negatives, especially among the series that lead, are beginning to outweigh the positives. Revisions were mixed. The manufacturing workweek declined, and manufacturing jobs are now down YoY. Although temporary jobs rose this month, they have failed to top their December peak for the last 3 months. Short term unemployment has continued to rise slightly. A coincident indicator, aggregate hours, also failed to exceed its January high. ..."
April 01, 2016 | Economist's View
Dean Baker:
Unemployment Rate Edges Higher as Prime-Age Workers Re-enter Labor Market : Self-employment has risen substantially since the ACA took effect.

The economy added 215,000 jobs in March, with the unemployment rate rounding up to 5.0 percent from February's 4.9 percent. However, the modest increase in unemployment was largely good news, since it was the result of another 396,000 people entering the labor force. There has been a large increase in the labor force over the last six months, especially among prime-age workers. Since September, the labor force participation rate for prime-age workers has increased by 0.8 percentage points. This seems to support the view that the people who left the labor market during the downturn will come back if they see jobs available. However, even with this recent rise, the employment-to-population ratio for prime-age workers is still down by more than two full percentage points from its pre-recession peak. Another positive item in the household survey was a large jump in the percentage of unemployment due to voluntary quits. This sign of confidence in the labor market rose to 10.5 percent, the highest level in the recovery to date, although it's still more than a percentage point below the pre-recession peaks and almost five percentage points below the peak reached in 2000.

Other items in the household survey were mixed. The number of people involuntarily working part-time rose by 135,000, reversing several months of declines. However, involuntary part-time work is still down by 550,000 from year-ago levels. The number of people voluntarily working part-time fell in March, but it is still 654,000 above its year-ago level.

One of the desired outcomes from the ACA was that it would free people from dependence on their employer for health care insurance, allowing them to work part-time or start a business if they so choose and get insurance through the exchanges. There has been a substantial rise in self-employment since the exchanges began operating in 2014. In the first quarter of 2016, incorporated self-employment was up by more than 400,000 (7.8 percent) from the same quarter of 2013. Unincorporated self-employment was also up by almost 360,000 (3.9 percent).

While the employment growth in the establishment survey was in line with expectations, average weekly hours remained at 34.4, down from 34.6 in January. This indicates that February's drop in hours was not just a result of bad weather. As a result, the index of aggregate hours worked is down by 0.2 percent from the January level. This could be a sign of slower job growth in future months. ...

The average hourly wage rose modestly in March after a reported decline in February. There is zero evidence of any acceleration in wage growth. The average for the last three months increased at an annualized rate of 2.3 percent compared with the average of the prior three months. This is virtually identical to the increase over the last year.

On the whole this is a positive report, both because the economy continues to create jobs at a healthy pace and even more importantly because it indicates that people are returning to the labor market. The continuing weakness in wage growth is discouraging, but also should signal to the Fed that there is little reason to raise interest rates.

PPaine :

The job markets are coming alive

But is the punch bowl headed for the kitchen sink ?


We need to set much higher target ratios for E to P

We need 15 million more jobs in short order
To get near vickrey zone conditions on job markets


Obviously we won't go there
But just how far will we go
Before the bastards turkey wire the system ?

PPaine -> PPaine ...
We need the quit rate to go up another 30% at least
PPaine -> PPaine ...
I mean on top of the 50% rise to match the high water mark of the Clinton miracle
anne -> PPaine ...
https://research.stlouisfed.org/fred2/graph/?g=3Ppz

January 30, 2016

Total nonfarm quits, 2000-2016

[ The quits rate only needs to climb 15% to get back to the Clinton level. ]

anne -> PPaine ...
Never ever explain what "Vickrey zone conditions" are, as long as there is no concern with being understood.
RC AKA Darryl, Ron -> anne...
[Google William Vickrey. Highlights of Wikipedia:]

...Vickrey's economic philosophy was influenced by John Maynard Keynes and Henry George. He was sharply critical of the Chicago school of economics and was vocal in opposing the political focus on achieving balanced budgets and fighting inflation, especially in times of high unemployment...
Selected works[edit]

"Counterspeculation, Auctions, and Competitive Sealed Tenders", Journal of Finance, 1961. The paper originated auction theory, a subfield of game theory.
"Fifteen Fatal Fallacies of Financial Fundamentalism: A Disquisition on Demand Side Economics". October 5, 1996.

Arrow, Kenneth Joseph; Arnott, Richard J.; Atkinson, Anthony A.; Drèze, Jacques (editors) (1997). Public Economics: Selected Papers by William Vickrey. Cambridge, UK: Cambridge University Press. ISBN 0-521-59763-3.

Warner, Aaron W.; Forstater, Mathew; Rosen, Sumner M. (editors) (2000). Commitment to Full Employment: The Economics and Social Policy of William S. Vickrey. Armonk, N.Y: M.E. Sharpe. ISBN 0-7656-0633-X.

Pavlina R. Tcherneva; Forstater, Mathew (2004). Full Employment and Price Stability: The Macroeconomic Vision of William S. Vickrey. Edward Elgar Publishing. ISBN 1-84376-409-1.

[Paine repeatedly references William Vickrey because of his substantial commitment to full employment policy as sound economics (as if human well being for the masses actually mattered).]

RC AKA Darryl, Ron -> RC AKA Darryl, Ron...
And Anne repeatedly asks "What does this reference to Vickrey mean?" Maybe Anne's battery is almost dead and working memory gets reset each time the solar generator powers down. The programming still functions because it is stored in non-volatile memory on the hard drive, but volatile RAM is wiped each time that the sunsets after the battery storage is exhausted.
anne -> PPaine ...
We need 15 million more jobs in short order. To get near Vickrey zone conditions on job markets

[ Where did the 15 million number come from, and I still have no idea what Vickrey zone conditions are? ]

pgl :
Yes labor force participation has increased but it still is only 63%. Yes the employment to population ratio is now 59.9% but it should be 62%. Slow progress with a long way to go.
pgl -> pgl...
I may be setting the bar too low with my call for a 62% employment to population ratio. Brad DeLong puts it north of 62.5%:

http://www.bradford-delong.com/2016/04/must-read-the-federal-reserve-is-looking-at-the-past-six-months-and-seeing-significant-improvement-in-the-labor-market.html

New Deal democrat :
But the negatives, especially among the series that lead, are beginning to outweigh the positives. Revisions were mixed. The manufacturing workweek declined, and manufacturing jobs are now down YoY. Although temporary jobs rose this month, they have failed to top their December peak for the last 3 months. Short term unemployment has continued to rise slightly. A coincident indicator, aggregate hours, also failed to exceed its January high.

So while we can cheer yet another month of jobs added to the economy, and the jump in participation, this report just adds to my concern about next year.

pgl -> New Deal democrat...
I won't cheer until the employment to population ratio reaches 62% and real wages actually rise on a consistent basis.
sanjait -> New Deal democrat...
Don't look at peaks in monthly data, look at rolling average trends.

Also, while manufacturing specific data can be meaningful ... these days the dynamics in those data are largely dominated by swings in O&G, which is in a historic funk.

sanjait :
In general, the trends look good. The working age E/P number is, to me, the most meaningful single indicator we have, and it appears to be continuing to rise and at an accelerating rate. That's a very good sign. It's very arguable that things could and should be improving at a faster rate, but when this stat is rising things are indeed improving.

Baker's note about ACA and self-employment is also an important one. One important aspect of ACA is that it is GREAT for entrepreneurship. People are more free to leave jobs and start companies when their ability to get health insurance isn't predicated on their working for a large company with a group plan.

The GOP makes a lot of noise about how ACA supposedly kills jobs and stifles industry, but the reality is that tomorrow's tech leaders, and major employers, are getting a boost today from ACA.

Ben Groves :
It is not sustainable and will reverse in April imo. Driving unemployment down.

[Apr 02, 2016] U.S. Light Vehicle Sales decline to 16.45 million annual rate in March

www.calculatedriskblog.com

Calculated Risk

Based on an estimate from WardsAuto, light vehicle sales were at a 16.45 million SAAR in March.

That is down about 4% from March 2015, and down about 6% from the 17.43 million annual sales rate last month.

gdd9000 4h cant spend what you dont have unless you borrow, and that noose is starting to tighten for the vehicle market. And leasing is the next victim, as the flood of off leases are now rolling in and killing residuals. uh, buhbye
resuscitate 4h

People want decent paying jobs instead of getting more debts/credits while deleverage from past profligate. Banks sitting on trillions of reserves because of lack of demand for fund as well as risk averse behavior in debt markets. Pushing string.

[Apr 02, 2016] How Much Has Global Economic Power Really Shifted?

Notable quotes:
"... By C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from Triple Crisis ..."
www.nakedcapitalism.com
Posted on April 1, 2016 by Yves Smith By C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from Triple Crisis

Much has been made of how there has been a substantial shift in the balance of economic power between the advanced capitalist economies (or the "North") and some economies of the global South. It is true that very recently the hype surrounding "emerging markets" has died down, as international capital flows have swung away from them and many of them have shown decelerating growth or even declines in income as global exports fall. Nevertheless, the feeling persists that – in spite of a supposedly resurgent US economy – the advanced economies are generally in a process of relative decline, while the developing world in general and certain economies in particular have much better chances of future economic dynamism. And this process is generally seen to be the result of the forces of globalisation, which have enabled developing countries, especially some in Asia, to take advantage of newer and larger export markets and improved access to internationally mobile capital to increase their rates of economic expansion.

Chart 1

Chandrasekhar-Ghosh-Advanced-economies-GDP-share-e1459434143778

But how significant has this process actually been?

In fact, there has definitely been some change over the past three and a half decades, but it has been more limited in time than is generally presumed. Chart 1 plots the share of the advanced economies in global GDP in current US dollar prices, calculated at market exchange rates. (Data for all the charts have been taken from the IMF World Economic Outlook October 2015 database.) This shows that the share of advanced economies declined from around 83 per cent in the late 1980s to around 60 per cent now, which is really quite a substantial decline. However, the bulk of this change occurred in a relatively short period: the decade 2002 to 2012, when the share dropped from 80 per cent to 62 per cent. The periods before and after have shown much less variation, and indeed, the share seems to have stabilised at around 61 per cent thereafter.

Chart 2 looks at the obverse of this process – the change in the shares in global GDP of the major developing regions, with China treated as a separate category on its own. This shows a somewhat more surprising pattern, because it indicates that the dominant part of this shift is due to the increase in China's share, which rose from around 3 per cent to more than 15 per cent. Once again, this happened essentially during the decade after 2005, when the share of China in global GDP at market exchange rates jumped by more than ten percentage points. Indeed, the change in China's share alone explains 87 per cent of the entire decline in the share of the advanced economies in the period 1980 to 2015. Considering only the last decade, that is after 2005, the relative increase in China's GDP accounts for a slightly lower proportion of the change, at 67 per cent – which is still hugely significant.

Chart 2

Chandrasekhar-Ghosh-Developing-regions-GDP-share-e1459434198585

The change in shares of other regions provides some interesting insights. The Latin American region experienced a medium term decline in relative income share over the 1980s (the "lost decade"), recovered somewhat in the 1990s before declining once again in the late 1990s and early 2000s. The global commodity boom of 2003 onwards was associated with a revival in the region's economic fortunes and the share of the region increased from 5 per cent in 2003 to more than 8 per cent in 2011, but thereafter it has stagnated and fallen with the unwinding of that boom.

The income share of the MENA region (Middle East and North Africa) appears to be very strongly driven by global oil prices, with sharp peaks in period of high oil prices and stagnation or decline otherwise, and over the entire period there has been a stagnation in income share rather than any increase. An even more depressing story emerges for Sub Saharan Africa, which showed decline in income share for a prolonged period between 1980 and 2002, and subsequently a slight recovery (from 1.1 per cent in 2002 to around 2 per cent in 2012 and thereafter) that was still well below the share of more than 3 per cent in 1980.

The only developing region that shows a clear increase is developing Asia, which in this chart excludes China to clarify the respective significance of both. But the increase in the income share of this region (minus China) has been much less marked than that for China, and most of it occurred after 2002, as the income share rose from 3.5 per cent in 2002 to 6.4 per cent in 2015.

Chart 3

Chandrasekhar-Ghosh-Non-China-Asian-economies-GDP-share-e1459434252272

Chart 3 indicates the changes in shares of the largest Asian developing countries other than China. It is evident that in terms of increasing share of global GDP, India has been the most impressive performer over the past decade in particular, with its share increasing from 1.8 per cent in 2005 to 3 per cent in 2015. Note, however, that this is still tiny in comparison to China, and indeed, just the increase in China's share over that decade has been more than three times of India's aggregate share. South Korea's share has also increased, mostly over the 1980s and early 1990s, while Indonesia's share increase occurred mostly during the commodity boom of the 2000s.

In terms of per capita GDP, however, the Indian performance looks much less impressive than those of the major Asian counterparts. Interestingly, even the Chinese experience appears not as sharply remarkable, although still hugely better than that of India. Chart 4 tracks the movements of per capita GDP, measured now in Purchasing Power Parity (PPP) exchange rates rather than market rates. There are numerous problems with the use of the PPP measure, but for current comparative purposes it does provide some kind of indicator. This shows that by far the most impressive performance in terms of increasing per capita GDP has been in South Korea, followed by Malaysia. India shows the least improvement among these five economies, despite its apparently more rapid increase in terms of share of world GDP in the last decade.

Chart 4

Chandrasekhar-Ghosh-Per-capita-GDP-PPP-e1459434299741

Overall, therefore, while the world economy has changed over the past three decades, this change should not be exaggerated for most developing regions, or even for most countries in what is apparently the most dynamic region of Asia.

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SKL , April 1, 2016 at 10:19 am

That China accounts for almost all of the shift isn't so much new news, as repeatedly memory-holed news. It's not surprising that it keeps going down the memory hole, as it completely destroys the case for the neoliberal policy consensus that China flouted over that period.

Every talking head who extolls the Washington Consensus for "lifting the poor of the world out of poverty" is a stone cold liar. The real goal of "globalization" isn't general prosperity, it's the continued domination of "us" over the "lesser breeds".

paul , April 1, 2016 at 11:58 am

It is the bringing the advantages of the third world to the others.
Why should we get paid more than them?
Look at all the billionaires that were lifted out of poverty in these countries.

cnchal , April 1, 2016 at 2:11 pm

Why should we get paid more than them?

Our useless eaters get much more than their useless eaters,

PPP is a scam. To someone displaced here, it matters zero that the worker in Mexico, for example, can get by on one tenth the wage that used to be payed to someone here.

Look at all the billionaires that were lifted out of poverty in these countries.

Look at the billions that did all the lifting. They still make as close to zero as you can get.

Imagine for a moment, Tim Cook does the underground boss thing and sneaks himself into the Foxconn factory for a spot on the assembly line for a month. If he could get by the first few days and not scrap too many phones, and become proficient and last the whole month at 60 hours a week, what do you think his pay for this work would be? Would you like your monthly pay to match it?

paul , April 1, 2016 at 3:04 pm

I wasn't being entirely serious, but my point was.

Other people work for sweet FA and so why shouldn't you?

This is the question technocrats have been tearing other peoples hair out for the last 40 years

Because…free markets have been the historical engine of common wealth…who cares if all the evidence points to the contrary.

I recognise the inversion of the pyramid of life in my little comment.

I do not believe the overclass are struggling manfully to support the rest of us through their own, thankless philanthropy.

Ranger Rick , April 1, 2016 at 10:20 am

Thanks to multinationals being effectively stateless due to tax arbitrage games, who actually has global economic power but the corporations themselves?

James Levy , April 1, 2016 at 3:45 pm

In the end, the States do, because the corporations need the military and other coercive power of States to enforce contracts and extract their pounds of flesh. The USA has the world largest GNP (or GDP, I can never keep the two straight although when I was a kid in the 1970s, it was GNP) and the world's most destructively powerful military (it may not be able to "defeat" you, but it can make you wish you had never screwed with Uncle Sam). GNP backstops military power and other nasty forms of coercion. Poor countries simply can't throw their weight around effectively in what is still an international jungle. Rich ones can.

Dr. Roberts , April 1, 2016 at 12:50 pm

It'd be interesting to see what Chart 2 looks like if measured in PPP rather than at market rates. It might demonstrate how much the structure of global markets effects the valuation of production, and how not-flat the globalized economy is. I'd like to see measures other than GDP as well, especially industrial commodities, capital goods, automobile, and shipping production. When it comes down to it where does the industrial capacity actually reside, and how has this shifted over the years?

Jim Haygood , April 1, 2016 at 1:47 pm

Since April 2011 - nearly five years ago - commodity prices have fallen a harrowing 48%, measured by the CCI-TR index. Over the same period, the US dollar index (DXY) rose almost 30%.

These two trends contributed to the recent flattening out of developing economy gains in GDP share, measured in USD.

Commodities are sufficiently depressed that on a valuation basis, a turnaround might be expected, and indeed may already have commenced in the CCI's 5.7% rise from its 15 Jan 2016 low.

In a more favorable global macro environment, developing economies likely will gain more relative GDP share over the next five years than they did in the headwinds of the past five.

susan the other , April 1, 2016 at 4:19 pm

That's a logical premise and it implies that developing countries, with a sparse and elitist infrastructure, will be the ones to do big new infra that promotes equality and stability, but do not waste their opportunity to balance their economies by using old ideas about investing in all the mistakes and boondoggles of neoliberalism… etc. This opportunity is part of a global power shift which demands environmental cooperation. Just personally hoping all the carpet baggers go directly to jail.

ke , April 2, 2016 at 12:09 am

The obamacare mandate will go down as the straw that broke the camel's back, and Chinas printing will reverse, with scant more to show for itself than Japan's push behind the internet.

Pushing government religion is one thing; mandating participation is another.

[Mar 30, 2016] Investors see shale production falling and demand continuing to rise

www.yahoo.com
Oil prices have hovered at $40 per barrel for much of the last week, as the markets try to avoid falling back after the strong rally since February. Investors see shale production falling and demand continuing to rise, which point to the ongoing oil market balancing. But it is unclear at this point if the rally from $27 per barrel in February to today's price just below $40 per barrel is here to stay. Fundamentals, while trending in the right direction, are still weak.

[Mar 29, 2016] Unfortunately we have to allow some people to become millionaires.

peakoilbarrel.com

Heinrich Leopold, 03/29/2016 at 3:09 am

Paulo,

As the witch hunt on the rich still goes on feverishly, people forget that an economical successful society needs trailblazers like McClendon. A society must be open to extreme characters for good and bad as these people stir up the pond and keep the wheels running. The current process in society of reverting to the mean, when only incompetent bureaucrats can earn big money combined with a top down centralized decision making process will make society much poorer over time.

Society must allow concepts and new ideas through a bottom up process managed by exceptional individuals like McClendon. The European Union -which becomes more and more a top down society similar to the Sowjet Union – and especially France are already good examples how fast a society can vanish through a centralized approach holding down individual activity.

This has been even recognized by China when Deng Xiao Ping famously said: 'Unfortunately we have to allow some people to become millionaires.' Should centrists get its grip to power, millionaires will be poorer and the poor will not be richer. It is not that Cuba becomes the new USA, it will turn the US into the new Cuba.

[Mar 29, 2016] Robert Shiller We're not in a housing bubble yet

Notable quotes:
"... Shiller said that he's concerned about recent volatility and "spectacular drops" in U.S. stocks and overseas markets, warning that further weakness could lead to a loss of confidence and cause investors to develop a "wait-and-see attitude." ..."
finance.yahoo.com

"It's not bubble territory yet, but bubbles are always a possibility," said Shiller. "Right now we're sitting where we were in 2003, and that developed over the next three years into quite a bubble." In 2006, there were more than 1.2 million foreclosure filings, a rate of one foreclosure filing for every 92 U.S. households nationwide.

Taking a look at the broader picture, Shiller said that he's concerned about recent volatility and "spectacular drops" in U.S. stocks and overseas markets, warning that further weakness could lead to a loss of confidence and cause investors to develop a "wait-and-see attitude." He's also keeping an eye on the recent plunge in oil prices, saying it would be "worrisome if these fears return."

[Mar 23, 2016] Cruz Seeks Economic Wisdom in the Wrong Place

Notable quotes:
"... Gramm seems pretty firmly in free market ideologue territory. Cruz deciding to bring him in as an economic advisor is certainly noteworthy. ..."
"... The short version: the Glass Steagall repeal allowed the banks to become "Too Big To Fail" and gave them enormous political leverage. It's the political leverage - the ability to count on Uncle Sam to come to the rescue, and provide easy terms for rent-seeking - that GLB provided. If they were separated, and only the investment banks could make risky investments, we would let the investment banks fail while protecting the boring old payments system. You won't get an argument on CFMA, however: it was worse. And that has Gramm's fingerprints all over it. And it might not have passed if the SIFIs were smaller. ..."
"... When I think of the villains of the Great Recession, Phil Gramm is always Public Enemy #1. ..."
"... The Glass Steagall repeal was not my biggest problem with Phil Gramm. My big problem is he wanted to have a completely deregulated financial sector. Sort of like when Newt Gingrich talked about "rational regulation" which was code for no regulation. But anyone who understands financial economics and our financial system knows that no regulations whatsoever is a recipe for a complete melt down. Which is what happened. ..."
economistsview.typepad.com
Barry Ritholtz:

Cruz Seeks Economic Wisdom in the Wrong Place :

Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. -- former U.S. Senator Phil Gramm, Nov. 16, 2008

...Gramm has been brought on as a senior economic adviser to Republican presidential candidate Ted Cruz. This isn't a promising development for Cruz... Not to put too fine a point on it, but I believe -- as do many others -- that Gramm was one of the major figures who helped set the stage for the crisis. ...

Gramm was a key sponsor of the ... Gramm-Leach-Bliley Act , which effectively repealed the piece of the Glass-Steagall Act... The damage caused by rolling back Glass-Steagall pales compared with ... the Commodity Futures Modernization Act of 2000 . Gramm was a co-sponsor of the legislation, which exempted many derivatives and swaps from regulation. Not only was the law problematic, but it veered into potential conflict-of-interest territory. ...

We got a chance to see those consequences a few years later when American International Group failed, thanks in part to swaps ... on $441 billion of securities that turned out to be junk. AIG wasn't required to put up much in the way of collateral, set aside capital or hedge its risk on the swaps. Why would it, when the law said it didn't have to? The taxpayers were then called upon to bailout AIG to the tune of more than $180 billion.

Maybe it isn't too surprising that Cruz would seek advice from Gramm. Cruz, after all, seems to want to hobble modern economic policy by returning to the gold standard. ... We have seen these movies before, and they end in tragedy and tears.

He also talks about Gramm's sad performance in his brief appearance as one of McCain's advisors in 2008.

pgl :

Phil Gramm says he got his economic degree from the University of Georgia. Well - it was from the Terry College of Business which is a business school. Not the graduate program of economics of the University of Georgia. I guess this makes Gramm one notch above Stephen Moore, Donald Luskin, and Lawrence Kudlow (aka the three stooges).

pgl :

The LA Times on Gramm's record on economics:

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-cruz-gramm-20160321-snap-htmlstory.html

"Gramm's most notable moment in that position came on July 10, 2008, when he dismissed the developing economic crisis as "a mental recession" in an interview -- and video -- released by the conservative Washington Times. "We've never been more dominant," he said. "We've never had more natural advantages than we have today. We've sort of become a nation of whiners." McCain immediately disavowed the remarks, and a few days later Gramm stepped down as his campaign co-chairman."

OK that was July. Menzie Chinn always notes that Luskin was saying the same thing as late as September 2008.

sanjait :
Gramm seems pretty firmly in free market ideologue territory. Cruz deciding to bring him in as an economic advisor is certainly noteworthy.

Though I'm still struck by how determined some people seem to lump Graham Leach Bliley in as a cause/major contributor to the crisis.

The CFMA very plausibly serves that purpose. If we want to mark Gramm as a villain, his sponsorship of that bill should be sufficient, as well as his abject refusal to acknowledge the crisis in real time.

But for whatever reason people have picked up Glass Steagall as a Very Important rule, and seem to be pushing to rationalize that by claiming it is a big part of the crisis story.

Ritholtz, to his credit, is qualified and nuanced about this. He notes that CFMA is the big story, and says GLB wasn't didn't "cause" the crisis.

But following through the links to his WaPo piece, he still looks like he is reaching for a reason to label it a major contributor to the crisis.

He claims that removing G-S restrictions caused the major banks to in turn cause the shadow banking entities like AIG, Bear, etc. to "bulk up" their holdings of subprime, based on ... nothing that I can see.

Sure, the major banks were customers and counterparties for those shadow banks, but Ritholtz seems to assume that if G-S weren't in place that demand would somehow have been less. Why?

Take a major bank with mixed commercial and investment banking activity and split the parts. Would that have changed their activities? Not much. The commercial banking side still would have held MBS (and purchase insurance on them) and the I-banks would still make speculative investments of various types.

No one, as far as I've seen, ever bothers to tell a complete story where the structural incentives in the financial sector changed as a result of Glass Steagall in a way that materially impacted the depth or serverity of the housing crisis. How would splitting megabanks into separate big C- and I-banks have changed anything? Bueller?

Instead I see a great many people, including well credentialed economists, just assume or hand waive the claim that it made a big impact without bothering to model or specify it. I'm not saying such an explanation couldn't exist that I'm not aware of ... but at this point I do see the absence of explanation as evidence of absence.

pgl -> sanjait...
Gramm dismissing the concern over a recession in the summer of 2008 is the kicker for me!
Charlie Baker -> sanjait...
sanjait:

"But for whatever reason people have picked up Glass Steagall..."

No need to speculate: Simon Johnson and James Kwak wrote a whole book about it. It's called 13 Bankers:

https://13bankers.com/

The short version: the Glass Steagall repeal allowed the banks to become "Too Big To Fail" and gave them enormous political leverage. It's the political leverage - the ability to count on Uncle Sam to come to the rescue, and provide easy terms for rent-seeking - that GLB provided. If they were separated, and only the investment banks could make risky investments, we would let the investment banks fail while protecting the boring old payments system. You won't get an argument on CFMA, however: it was worse. And that has Gramm's fingerprints all over it. And it might not have passed if the SIFIs were smaller.

When I think of the villains of the Great Recession, Phil Gramm is always Public Enemy #1.

pgl -> Charlie Baker ...
The Glass Steagall repeal was not my biggest problem with Phil Gramm. My big problem is he wanted to have a completely deregulated financial sector. Sort of like when Newt Gingrich talked about "rational regulation" which was code for no regulation. But anyone who understands financial economics and our financial system knows that no regulations whatsoever is a recipe for a complete melt down. Which is what happened.
The Rage :
Cruz just wants to make money for his buddies while waving the bible. JDR was there 100+ years before that "Ted".

[Mar 23, 2016] It's not a bull or a bear market, it's a bunny

finance.yahoo.com

"Unlike an enthusiastic bull or a scary bear, a bunny market hops about a bit but really doesn't go anywhere, and bunnies have often dominated the stock market during the latter stages of past economic recoveries," Paulsen said in a report this week for clients.

[Mar 22, 2016] Share Buybacks Turn Toxic

Notable quotes:
"... During the November-January period, 378 of the S&P 500 companies bought back their own shares, according to FactSet . Total buybacks in the quarter rose 5.2% from a year ago, to $136.6 billion. Over the trailing 12 months (TTM), buybacks totaled $568.9 billion. That's an enormous amount of corporate cash that was dumped on the market! ..."
"... Apple alone blew $6 billion in the quarter, even as its stock was tanking. Relative to its average share price over the period, it paid a 13% premium, the second highest premium paid by S&P 500 companies, after Symantec! Over the trailing 12 months, Apple blew nearly $40 billion on buybacks, and yet its stock dropped 15.5%. ..."
"... And yet, despite the current heroic efforts to prop up their shares, companies have seen their shares get hammered. ..."
"... Clearly, financial engineering is kaput! Buybacks no longer function reliably in inflating stock prices. The opposite seems to be happening. Perhaps investors are finally starting to see through these shenanigans, and perhaps they're now beginning to fret about all the debt these companies take on in order to fund buybacks! ..."
"... The bull market from early 2009 into May 2015 looks just like every bubble in history, and there's one sign after the next that we did indeed peak last May. The dominant pattern in the stock market is the "rounded top" pattern. ..."
"... what is missing here is stock options sales, stock being sold right about now. my guess is that stock option sales are rising and peaking soon. they know wtf is coming down and are basically cashing out. ..."
"... fucking corporations. and the majority get what 15/hr-30. they get millions. not saying some of these fucks aren't very intelligent people well deserving of their rewards, but really, millions while the serfs make squat... ..."
www.zerohedge.com
Submitted by testosteronepit on 03/21/2016 10:14 -0400 By Wolf Richter, WOLF STREET

Companies are still borrowing and spending billions on buying back their own shares – one of the big drivers behind the blistering stock market rally of the past few years. It worked wonderfully and without fail. But suddenly, it's doing the opposite, and now the shares of the biggest buyback queens are getting hammered. Something broke in the gears of this financially engineered market!

During the November-January period, 378 of the S&P 500 companies bought back their own shares, according to FactSet . Total buybacks in the quarter rose 5.2% from a year ago, to $136.6 billion. Over the trailing 12 months (TTM), buybacks totaled $568.9 billion. That's an enormous amount of corporate cash that was dumped on the market!

The sector that blew – "blew" because that's how it turned out – the most money on this type of financial engineering project was Information Technology, with $33.2 billion in buybacks last quarter. Four of the top 10 buyback queens were Information Technology: Apple, Microsoft, Oracle, and Visa.

Apple alone blew $6 billion in the quarter, even as its stock was tanking. Relative to its average share price over the period, it paid a 13% premium, the second highest premium paid by S&P 500 companies, after Symantec! Over the trailing 12 months, Apple blew nearly $40 billion on buybacks, and yet its stock dropped 15.5%.

This table shows the top 10 buyback queens in order of the amount spent on a TTM basis, and the mostly dismal performance of their shares over the same period.

GE didn't quite make this list (though it bought back $3.1 billion in Q4), but it was very active in different ways, following through on its $50-billion buyback program announced in April last year. FactSet:

In addition to the repurchase program, GE completed a stock swap with the former GE Capital retail finance division, Synchrony Financial, which had an effect on shares outstanding that was equivalent to a $20.4 billion buyback. As a result, the shares outstanding for GE were reduced by 6.7% in the last twelve months.

Total buybacks are ballooning in proportion to net income, which declined over the TTM period for the first time since 2009. So buybacks as a percent of income rose from 64.9% a year ago to 68.1% at the end of the quarter. In terms of free cash flow after dividends, share buybacks have now ballooned to 101.7%. This was, as FactSet put it, "a huge jump from the year ago quarter when the ratio was 81.6%."

The culprit? With income down over the TTM period, aggregate free cash flow has dropped 9.5% year-over-year.

FactSet's chart shows the declining net income (green bars), the nearly flat share-buybacks (blue bars), and the rising buyback-to-income ratio (red line, right scale). Note what happened last time income began to decline (2007) and share buybacks followed in 2008: the stock market crashed.

And yet, despite the current heroic efforts to prop up their shares, companies have seen their shares get hammered.

As FactSet's chart below shows, over the past 12 months, the S&P 500 total return index, which included dividends, rose 1.3% (green line). But the total return of SPDR S&P 500 Buyback ETF, which tracks the 100 companies in the S&P 500 with the highest buyback ratio, dropped 7.6% (blue line):

Clearly, financial engineering is kaput! Buybacks no longer function reliably in inflating stock prices. The opposite seems to be happening. Perhaps investors are finally starting to see through these shenanigans, and perhaps they're now beginning to fret about all the debt these companies take on in order to fund buybacks!

When companies borrow billions to then blow that moolah on buying their own shares that then promptly decline in value, it doesn't create a loss on the income statement. Instead, those billions quietly go up in smoke. What's left behind? Fewer shares outstanding, piles of additional debt, mauled cash balances, and much higher financial risk.

But once companies see that share buybacks are becoming toxic as their shares decline despite buybacks, they curtail them. And last time this happened – in 2008 – it pulled the rug out from under the already teetering markets.

The bull market from early 2009 into May 2015 looks just like every bubble in history, and there's one sign after the next that we did indeed peak last May. The dominant pattern in the stock market is the "rounded top" pattern.

Read… This Chart Shows the First Big Crash Is Likely Just Ahead

Pretty Vacant

Math is hard. Stock buybacks are supposedly driving the market higher. Yet, this article indicates corporations which engage in buyback activity instead underperform the market. Therefore, logically, buyback queens are impeding the market by slowing the advance of the subject firm's equity prices. HUH?

PlayMoney

Wondered why Jamie Dimon spent so much on personal stock purchases....until a month or so later JPM announces a big buyback. Thus inflating his recent purchase....should be a law against that. Criminals.

new game

what is missing here is stock options sales, stock being sold right about now. my guess is that stock option sales are rising and peaking soon. they know wtf is coming down and are basically cashing out. 10 million, 50 million, 2 million. yea, all legal, but that is the game, do the time, grind to the top, cash out the options and live the life.

fucking corporations. and the majority get what 15/hr-30. they get millions. not saying some of these fucks aren't very intelligent people well deserving of their rewards, but really, millions while the serfs make squat...

[Mar 16, 2016] The Fed caused 93% of the entire stock market's move since 2008 Analysis

finance.yahoo.com

The bull market just celebrated its seventh anniversary. But the gains in recent years – as well as its recent sputter – may be explained by just one thing: monetary policy.

The factors behind that and previous bubbles can be illuminated using simple visual analysis of a chart.

The S&P 500 (^GSPC) doubled in value from November 2008 to October 2014, coinciding with the Federal Reserve Bank's "quantitative easing" asset purchasing program. After three rounds of "QE," where the Fed poured billions of dollars into the bond market monthly, the Fed's balance sheet went from $2.1 trillion to $4.5 trillion.

This isn't just a spurious correlation, according to economist Brian Barnier, principal at ValueBridge Advisors and founder of FedDashboard.com. What's more, he says previous bull runs in the market lasting several years can also be explained by single factors each time.

Barnier first compiled data on the total value of publicly-traded U.S. stocks since 1950. He then divided it by another economic factor, graphing the ratio for each one. If the chart showed horizontal lines stretching over long periods of time, that meant both the numerator (stock values) and the denominator (the other factor) were moving at the same rate.

"That's the beauty of the visual analysis," he said. "All we have to do is find straight, stable lines and we know we've got something good."

... ... ...

As the financial crisis reached a fevered pitch in 2008, the Federal Reserve took to flooding the financial market with dollars by buying up bonds. Simultaneously, interest rates fell dramatically, as bond yields move in the opposite direction of bond prices. Barnier sees the Fed as responsible for over 93% of the market from the start of QE until today. During the first half of 2013, the Fed caused the entire market's growth, he said.

Since the Fed stopped buying bonds in late 2014, the S&P 500 has been batted around in a 16% range and is more or less where it was when the QE came to a close. Investors need to anticipate the next driver, said Barnier.

[Mar 14, 2016] Theres Only One Buyer Keeping S P 500s Bull Market Alive

Bloomberg Business
Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year.

Standard & Poor's 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

[Mar 10, 2016] This Is Jeff Gundlachs Favorite ( Scariest) Chart Zero Hedge

www.zerohedge.com
According to DoubleLine's Jeff Gundlach, this is his favorite chart - backing his perspective that equity markets have "2% upside and 20% downside) from here .

In his words: "These lines will converge..."

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/03/09/20160309_gundlach.jpg

Chart: Bloomberg

It should be pretty clear what drove the divergence...

[Mar 06, 2016] Galbraith Attack on Sanders Economic Plan By Former Chairs of the Council of Economic Advisors Irresponsible

Notable quotes:
"... Now the competition has gone, the US middle class is being wiped out. The US is going third world, with just rich and poor and no middle class. Raw Capitalism can only return Capitalism to its true state where there is little demand and those at the bottom live a life of bare subsistence. ..."
"... "The Marxian capitalist has infinite shrewdness and cunning on everything except matters pertaining to his own ultimate survival. On these, he is not subject to education. He continues wilfully and reliably down the path to his own destruction" ..."
"... "We came, we saw, he died" rinse and repeat for 5,000 years. ..."
"... By the 1920s, mass production techniques had improved to such an extent that relatively wealthy consumers were required to purchase all the output the system could produce and extensive advertising was required to manufacture demand for the chronic over-supply the Capitalist system could produce. ..."
"... They knew that if wealth concentrated too much there would not be enough demand. ..."
"... Fiscal conservatism, which champions a balanced budget and expenditure restraints, is often hailed as a politico-economic philosophy as well as a policy of financial responsibility. In practice, it has been used as an argument against free spending by governments which can lead to high levels of debt and inflation. It has not been a positive philosophy which advocates the pro-growth and stability benefits coming from balanced budgets. Rather, it is a negative one – reacting against excessive spending and its consequences. This is probably why modern examples of fiscal conservatism in the United States and the United Kingdom have not led to sustainable growth or a significant reduction in public debt. Instead, in the case of the Ronald Reagan era in the US in the 1980s, public debt soared as fiscal conservatism and other policies were abandoned. ..."
"... Galbraith is probably my favorite economist, and eminently reasonable here. It makes me think that Sanders should have used him, or someone like him as an adviser/in house economist, rather than relying on external analyses like Friedman. ..."
"... Is the American public, trained/indoctrinated to think of the USG budget in terms of a household budget analogy, ready for MMT? ..."
"... To me, too many of the supposed (and actual) intellectuals and high level advisers were experts in rationalizing and explaining the chosen party views, but still employed the Cato Institute suggestion to use "Leninist" propaganda techniques as put forth in the 1996 Newt Gingrich/Frank Luntz GoPac memo, "Language: A Key Mechanism of Control." ..."
"... Galbraith said casually about the thesis of his new book: This really is the new normal for capitalism – meaning low growth – because there is not much growth left. ..."
March 6, 2016 | naked capitalism

... ... ...

PERIES: James, the Council of Economic Advisors, they put out economic forecasts each year. And there has been some wildly optimistic ones. For example, if you look at the 2010 predictions for 2012 and 2013 they have not quite been attained. And one would say it was done in the interest of trying to make the administration that they were serving more impressive. But what accounts for this particular attack on Friedman's projection and other fellow economists?

GALBRAITH: This was a classic case of professional bad manners and rank-pulling. What we had here were four former chairs of the president's Council of Economic Advisors, and two from President Obama, two from President Clinton, who decided to use their big names and their titles in order to launch an attack on a professor of economics at the University of Massachusetts who had written a paper evaluating the Sanders economic program.

It's likely that the four bigwigs thought that Professor Friedman was a Bernie Sanders supporter. In fact, as of that time he was a Hillary Clinton supporter and a modest donor to her campaign. What he had done was simply to write his evaluation of the economic effects of the ambitious Sanders reform program. The four former council chairs announced that on the basis of their deep commitment to rigor and objectivity, they had discovered that this forecast was unrealistic. And what I pointed out was that that claim was based on no evidence and no analysis whatsoever. And when you pressed down on it you found that it was simply based on the obvious fact that we haven't seen the kinds of growth rates that Professor Friedman's analysis suggested the Sanders program would produce. And for a very simple reason: the Sanders program is bigger. It's more ambitious than anything we've seen in recent years, so it's not surprising that when you put it through a model it generates a higher growth rate.

So that was the basic underlying facts, and these guys, two men and two women, announced that they, that it was a disreputable study, but failed to present any analysis that suggested they'd actually even read the paper before they denounced it. And that's what I pointed out in my counter letter, in a number of articles that have appeared since.

PERIES: James, so in your letter, how do you counter them? What methods did you use to come to your conclusions?

GALBRAITH: Well, I, no need to say anything beyond the fact that I had looked in their letter for the rigor that they were so proud of, for the objectivity and the analysis that they were so proud of, and I'd found that they had not done any. They had not made any such claim, not done any such work.

So that began to provoke a discussion. It's fair to say ultimately, without apologizing for effectively launching an ad hominem attack on an independent academic researcher, one of the former chairs, Christina Romer of President Obama's council, and her husband David Romer, a fellow economist, did produce a paper in which they spelled out their differences with the, with the Friedman paper. But that, again, raised another set of interesting issues which we've continued to discuss at various, various outlets of the press.

PERIES: Now, James Friedman's claim that the growth rate from Sanders' plan to be around 5.3 percent. And some economists, including Dean Baker at the Center for Economic Policy and Research, have claimed that this is unrealistic. What do you make of that?

GALBRAITH: Well, the question is whether it is an effect, let's say, a reasonable projection, of putting the Sanders program into an economic model. And the answer to that question, yes, Professor Friedman did a reasonable job. He spelled out what the underlying assumptions that he was using were. He spelled out the basic rules of thumb that macroeconomists had used for decades to assess the effects of an economic program. In this case, an expansionary economic program. And he ran them through his model and reported the results, a perfectly reasonable thing to do.

Now, one can be skeptical. And I am, and Dean Baker is, lots of people are skeptical that the world would work out quite that way, because lots of things, in fact, happen which are not accounted for in a model. And we've talked, we've basically put together a list of things that you think might be problematic. But the exercise here was not to put everything into paper that might happen in the world. The exercise was to take the kind of bare bones that economists use to assess and to compare the consequences of alternative programs, and to ask what kind of results do you get out? And that's what, again, what Jerry Friedman did. It was a reasonable exercise, he came up with a reasonable answer, and he reported it.

PERIES: Now, Friedman seems to think that the rate of full employment in 1999 is attainable. However, many labor economists seem to think that the larger share of the elderly currently in society compared to 1999 explains some of the lack of labor participation, which creates a lower full employment ceiling that's contradicting Friedman's report. Your thoughts on that?

GALBRAITH: Well, I think it is a fact that the population is getting older. But as, I think, any economist would tell you, that when you offer jobs in the labor market, the first thing that happens is the people who are looking for work take those jobs. The second thing that happens is that people who might look for work when jobs were available start coming back into the labor market. And if that is not enough to fill the vacancies that you have, it's perfectly open to employers to raise their wages so as to bring more people in, or to increase the pace at which they innovate and substitute technology for labor so that they don't need the work.

So there's no real crisis involved in the situation if it turns out five years from now we're at 3.5 percent unemployment, and they were beginning to run short of labor. That's not a reason to, at this stage, say no, we're not going to engage in the exercise and run a more expansionary, vigorous reform program, a vigorous infrastructure project, a major reform of healthcare, a tuition-free public education program. All of those things, which were part of what Friedman put into his paper, should be done anyway. The fact that the labor market forecast might prove to have some different, the labor market might have different characteristics in five years' time is from our present point of view just a, it's an academic or a theoretical proposition, purely.

PERIES: And Friedman's paper, he looks at a ten-year forecast. Did you feel that when you looked at the specifics of that, including college, universal healthcare, infrastructure spending and of course, expanding Social Security and so on, that those categories and his predictions or projections, rather, made sense to you?

GALBRAITH: Well, again, what he was doing was running a program of a certain scale, of a large scale, through a set of standard macroeconomic assumptions. And that, again, is a reasonable exercise. If you ask me what my personal view is, I've written a whole book called The End of Normal in which I lay out reasons for my chronic pessimism about the capacity of the world economy to absorb a great deal more rapid economic growth.

But that's not in the standard models, and it would not be appropriate to layer that on to a forecast of this kind. What Friedman was criticized for was not for putting his thumb on the scale, but for failing to put his thumb on the scale. In fact, that was the reasonable thing to do.

On the contrary, and on the other side, when Christina and David Romer did put out their forecast, their own criticism of the Friedman paper, they concluded by asserting that if this program were tried, inflation would soar. So they there were making an allegation for which, again, they had no evidence and no plausible model, that in the world in which we presently live would produce that result.

So what we had here was a, what was essentially an academic exercise that produced a result that was highly favorable to the Sanders position, and showed that if you did an ambitious program you would get a strong growth response. It's reasonable, certainly, for the first three or four years that that would transpire in practice. And what happened was that people who didn't like that result politically jumped on it in a way which was, frankly speaking, professionally irresponsible, in my view. It was designed to convey the impression, which it succeeded in doing for a brief while through the broad media, that this was not a reputable exercise, and that there were responsible people on one side of the debate, and irresponsible people on the other.

And that was, again, something that–an impression that could be conveyed through the mass media, but would not withstand scrutiny, and didn't withstand scrutiny, once a few of us stood up and started saying, okay, where's your evidence, on what are you basing this argument? And revealed the point, which the Romers implicitly conceded, and I give them credit for that, that in order to criticize a fellow economist you need to do some work.

... ... ...

Keith , March 6, 2016 at 4:45 am

The true nature of Capitalism has obviously been forgotten over time.

Today we think it brings prosperity to all, but that was certainly never the intention.

Today's raw Capitalism is showing its true nature with ever rising inequality.

Capitalism is essentially the same as every other social system since the dawn of civilisation.

The lower and middle classes do all the work and the upper, leisure Class, live in the lap of luxury. The lower class does the manual work; the middle class does the administrative and managerial work and the upper, leisure, class live a life of luxury and leisure.

The nature of the Leisure Class, to which the benefits of every system accrue, was studied over 100 years ago.

"The Theory of the Leisure Class: An Economic Study of Institutions", by Thorstein Veblen.

(The Wikipedia entry gives a good insight. It was written a long time ago but much of it is as true today as it was then. This is the source of the term conspicuous consumption.)

We still have our leisure class in the UK, the Aristocracy, and they have been doing very little for centuries.

The UK's aristocracy has seen social systems come and go, but they all provide a life of luxury and leisure and with someone else doing all the work.

Feudalism – exploit the masses through land ownership
Capitalism – exploit the masses through wealth (Capital)

Today this is done through the parasitic, rentier trickle up of Capitalism:

a) Those with excess capital invest it and collect interest, dividends and rent.
b) Those with insufficient capital borrow money and pay interest and rent.

All this was much easier to see in Capitalism's earlier days.

Malthus and Ricardo never saw those at the bottom rising out of a bare subsistence living. This was the way it had always been and always would be, the benefits of the system only accrue to those at the top.

It was very obvious to Adam Smith:

"The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers."

Like most classical economists he differentiated between "earned" and "unearned" wealth and noted how the wealthy maintained themselves in idleness and luxury via "unearned", rentier income from their land and capital.

We can no longer see the difference between the productive side of the economy and the unproductive, parasitic, rentier side. This is probably why inequality is rising so fast, the mechanisms by which the system looks after those at the top are now hidden from us.

In the 19th Century things were still very obvious.

1) Those at the top were very wealthy
2) Those lower down lived in grinding poverty, paid just enough to keep them alive to work with as little time off as possible.
3) Slavery
4) Child Labour

Immense wealth at the top with nothing trickling down, just like today.

This is what Capitalism maximized for profit looks like. Labour costs are reduced to the absolute minimum to maximise profit. The beginnings of regulation to deal with the wealthy UK businessman seeking to maximise profit, the abolition of slavery and child labour. The function of the system is still laid bare. The lower class does the manual work; the middle class does the administrative and managerial work and the upper, leisure, class live a life of luxury and leisure. The majority only got a larger slice of the pie through organised Labour movements.

By the 1920s, mass production techniques had improved to such an extent that relatively wealthy consumers were required to purchase all the output the system could produce and extensive advertising was required to manufacture demand for the chronic over-supply the Capitalist system could produce. They knew that if wealth concentrated too much there would not be enough demand. In the 1950s, when Capitalism had healthy competition, it was essential that the Capitalist system could demonstrate that it was better than the competition. The US was able to demonstrate the superior lifestyle it offered to its average citizens.

Now the competition has gone, the US middle class is being wiped out. The US is going third world, with just rich and poor and no middle class. Raw Capitalism can only return Capitalism to its true state where there is little demand and those at the bottom live a life of bare subsistence.

When you realise the true nature of Capitalism, you know why some kind of redistribution is necessary and strong progressive taxation is the only way a consumer society can ever be kept functioning.

A good quote from John Kenneth Galbraith's book "The Affluent Society", which in turn comes from Marx.

"The Marxian capitalist has infinite shrewdness and cunning on everything except matters pertaining to his own ultimate survival. On these, he is not subject to education. He continues wilfully and reliably down the path to his own destruction"

Marx made some mistakes but he got quite a lot right.

Keith , March 6, 2016 at 6:29 am

Thanks to Michael Hudson, whose ideas anyone will recognise who has read his book.

"Killing the Host"

If you haven't read it, do so immediately.

Keith , March 6, 2016 at 1:11 pm

Perhaps, Western civilization had already cultivated and concentrated psychopathic personality traits in its elite before Capitalism ever begun. Early European history is an endless procession of wars at home and abroad as the elite took their wealth by force and the masses were kept in check by force whenever necessary.

No peaceful group could ever survive this relentless onslaught of millennia. This psychopathic elite then took their warlike ways to every corner of the earth. The wealthy elite from this era then became the wealthy elite of the next Capitalist era. Even today their bloodlust cannot be sated as they look to control a global empire.

Keith , March 6, 2016 at 1:17 pm

"We came, we saw, he died" rinse and repeat for 5,000 years.

Vatch , March 6, 2016 at 5:00 pm

Certainly countless hundreds of peaceful, responsible, inclusive, open, empathetic indigenous societies have been co-opted/overthrown by the western model.

Yes, but it's not just the western model that overthrows peaceful societies. The empires of China, the Japanese monarchies, the empires of India (together with a cringeworthy caste system), the human sacrificing Aztecs, Mayas, and Incas, all prove that tyranny is not a western invention.

When a local population becomes too large to be supported by simple egalitarian hunting and gathering, something else is required. That something is agriculture, and almost inevitably, the organization, specialization, and partial urbanization required by large scale agricultural society leads to exploitation and tyranny. This is seen in the earliest societies for which we have a written record, Sumer and Egypt.

Jim Young , March 6, 2016 at 12:27 pm

Thanks for the explanations of Veblen and Galbraith, which I find enduring basics over more than 100 years of speculation, real investment, and the best way to keep consumer society healthy.

My unschooled, simple, way to measure the health of an economy is in the Velocity of Money in the real economy of useful products and services. It appears to be very far below where it was when we did our best, and lower than when we first started measuring it near the beginning of the Great Depression.

Clive , March 6, 2016 at 12:37 pm

Or, pictorially illustrated .

I'm thinking of having my Christmas Cards printed with it on the front this year.

Keith , March 6, 2016 at 1:58 pm

In addition …..

By the 1920s, mass production techniques had improved to such an extent that relatively wealthy consumers were required to purchase all the output the system could produce and extensive advertising was required to manufacture demand for the chronic over-supply the Capitalist system could produce.

They knew that if wealth concentrated too much there would not be enough demand.

Of course the Capitalists could never find it in themselves to raise wages and it took the New Deal and Keynesian thinking to usher in the consumer society.

For The Win , March 6, 2016 at 5:46 am

Colonialism and fiscal conservatism

Fiscal conservatism, which champions a balanced budget and expenditure restraints, is often hailed as a politico-economic philosophy as well as a policy of financial responsibility. In practice, it has been used as an argument against free spending by governments which can lead to high levels of debt and inflation. It has not been a positive philosophy which advocates the pro-growth and stability benefits coming from balanced budgets. Rather, it is a negative one – reacting against excessive spending and its consequences. This is probably why modern examples of fiscal conservatism in the United States and the United Kingdom have not led to sustainable growth or a significant reduction in public debt. Instead, in the case of the Ronald Reagan era in the US in the 1980s, public debt soared as fiscal conservatism and other policies were abandoned.

Rodger Malcolm Mitchell , March 6, 2016 at 2:08 pm

A Monetarily Sovereign government does not need to reduce debt. In the U.S. (which is Monetarily Sovereign) federal so-called "debt" is actually the total of deposits in T-security accounts at the Federal Reserve Bank. In short, "debt" is bank deposits.

Why anyone would want to reduce the size of deposits at the world's safest bank is a mystery to me - other than the misleading use of the word "debt."

While all bank accounts are, in fact, debt of banks, most banks boast about the size of their depositors' accounts.

Contrary to popular myth, federal debt (i.e. deposits at the FRB) does not lead to inflation. America's "debt" has grown more than 9,000% in the past 75 years, and the Fed is struggling to create inflation.

mpr , March 6, 2016 at 9:12 am

Galbraith is probably my favorite economist, and eminently reasonable here. It makes me think that Sanders should have used him, or someone like him as an adviser/in house economist, rather than relying on external analyses like Friedman. It would possibly have given his program more gravitas – first amongst elites, and then more generally. At least it would have had a chance of changing the broader discussion. Whether you agree with it or not, right now the general MSM reporting on the Sanders plan is that it doesn't add up.

diptherio , March 6, 2016 at 9:57 am

I want to know why he hasn't been prominently featuring Prof. Kelton and her economic policy prescriptions. What's up with that?

John Zelnicker , March 6, 2016 at 10:25 am

This is speculative, but since Prof. Kelton is actually the economist for the Minority (the Democrats) of the Senate Banking committee, there may be reasons of protocol that Sanders isn't using her policy ideas at the moment.

Another possibility is that trying to introduce a new economic paradigm while running for the nomination may be a bridge too far. If Sanders tried to explain to people that taxes don't fund federal spending, etc., heads would explode.

I'm also not sure how one would use Prof. Kelton's ideas without bringing in a whole bunch of MMT concepts. Maybe if Sanders wins the nomination he can begin to bring some of these ideas into the conversation.

Rodger Malcolm Mitchell , March 6, 2016 at 2:19 pm

He won't use her ideas simple because the American voter in not yet amenable to the facts of Monetary Sovereignty .

Try explaining even to your best friend that:

1. Unlike state and local taxes, Federal taxes do not fund federal spending.
2. Even if FICA were eliminated, Social Security and Medicare benefits dramatically could (and should) be increased. There are no federal "trust funds."
3. Federal deficits are necessary for economic growth
4. Federal "debt" is nothing more than deposits in T-security accounts at the Federal Reserve Bank.
5. America never has had, and is absolutely in no danger of, hyper-inflation.

Perhaps, if Bernie wins the election, he will be freer to educate the masses, as well as the economics community, but meanwhile he has to claim the popular myth that federal spending has to be "paid for" by taxes.

Kurt Sperry , March 6, 2016 at 11:48 am

Is the American public, trained/indoctrinated to think of the USG budget in terms of a household budget analogy, ready for MMT? I think it's politically OK to use MMT informed policies–"deficits don't matter"–as the Republicans have, but not OK to openly acknowledge doing so. MMT runs head on into bedrock beliefs like the protestant moral virtues of thrift and fiscal responsibility. People cling to this stuff as tightly as they cling to their religion and guns.

MaroonBulldog , March 6, 2016 at 1:00 pm

MMT is a volatile, explosive doctrine. Tell an ordinary off-the-street taxpayer that Federal taxes don't fund Federal expenditures, that Federal taxes destroy the money they collect and so keep inflation at desired levels, and ready yourself to answer this:

"If I'm just paying taxes so the money can be burned, why should I pay taxes? What good does paying taxes for that do me, or people like me?"

And be prepared not to have your answer heard, comprehended, or accepted, after it is given.

It could lead directly and quickly to the end of a system of tax collection based on voluntary compliance. It could ignite a revolution.

MMT is an unpopular doctrine. Whether it is the true theory, or a truer theory than others, of the state of the world–is not the point.

Yves Smith Post author , March 6, 2016 at 3:01 pm

She can't. She's his staffer (on the Senate Budget Committee) so she is now allowed to work on the campaign. It would be a big ethics violation and would produce a scandal. Staffers cannot work on any of their bosses campaigns, including re-elections. Remember, they are government employees, not on Sanders' personal payroll.

Jim Young , March 6, 2016 at 11:56 am

My old party has worked hard to try discredit James Galbraith. I was faced with some ridicule from a Bush era international negotiator for trying to read "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too" in an airport waiting area.

To me, too many of the supposed (and actual) intellectuals and high level advisers were experts in rationalizing and explaining the chosen party views, but still employed the Cato Institute suggestion to use "Leninist" propaganda techniques as put forth in the 1996 Newt Gingrich/Frank Luntz GoPac memo, "Language: A Key Mechanism of Control."

I don't oppose them (at that level) expressing their well thought out views, even using the "persuasive" techniques described in the document at http://www.informationclearinghouse.info/article4443.htm but I do fault them for trying to prevent people from freely exploring far more comprehensive information and views.

We left the party ancestors had founded and stayed loyal to for 5 generations, though, because of the lower level dirty tricksters ("opposition researchers") that wanted us to corrupt the processes as one fund raiser told me, "We have to fight dirtier than Democrats."

Galbraith is a voice that must be listened to, just as there may be many others that we should be able to listen to (as I assume we could have under the old "Fairness Doctrine" before the corporate take over of almost all fully accessible media).

susan the other , March 6, 2016 at 11:49 am

stg Galbraith said casually about the thesis of his new book: This really is the new normal for capitalism – meaning low growth – because there is not much growth left. So maybe we are headed for a no growth world in which stability and sustainability dictate enterprise which is used to maintain a steady state – so that sounds more socialist than capitalist out of necessity. I believe this is our future too. And I think I understand Varoufakis' and Galbraith's "modest proposal" in a clearer light because growth must be used going forward not willy-nilly, but to achieve our ends. And also too – a while back the link that effectively said we had it backwards when we assume that capitalism supports socialism – because capitalism in reality lives off and is only possible under sufficient socialism. And it seems the 4 presidential advisors are more out to lunch than their letter showed.

jack , March 6, 2016 at 1:09 pm

As somebody asked above, I am still left wondering where Justin Wolfer's NYTimes piece fits into all this?

Detroit Dan , March 6, 2016 at 4:49 pm

Can't respond to all the nonsense. I just read Wolfer's piece and it seems to miss the point (as with the Romers), as noted in the following 2 articles. I especially recommend the 2nd one from John Cassidy in the New Yorker.

Friedman-Response-to-the-Romers
Bernie Sanders and the Case for a New Economic-Stimulus Package

Bernard , March 6, 2016 at 1:22 pm

as usual, i hear a lot "they" failed conservatism, never, Conservatism is just the age old avenue to "scam" the other. Bush "failed" at conservatism, i.e., it was Bush's fault not the ideology of Conservatism. on and on, this self repeated/reinforced "idea" that we have just not "found" the correct "application" of the ideal/reality that is Conservatism.

it does get old, too. all the people killed due to Conservatism and its' perpetrators. Greed, in other words, and the age old scam with "new and improved" tactics. These people have no concept of what "society" is, why we are all interrelated. to scam one is to scam us all. and these people are definitely not Christian in the "Jesus Christ" i've always heard about. Whatsoever you do unto the poor, you do unto me!

i just suppose psychopaths use any avenue for their "crimes." as i've heard, too, any great fortune is usually the result of a great crime.

somethings never change.

[Mar 04, 2016] Legendary billionaire investor Jim Rogers is certain that the U.S. economy will be in recession in the next 12 months

www.zerohedge.com

Legendary billionaire investor Jim Rogers is certain that the U.S. economy will be in recession in the next 12 months. During an interview on BloombergTV, he explained why he had covered his position in the Japanese yen, saying that the nation is "printing a lot" of the currency .

Rogers also warned that there is a "100 percent" probability of a recession in the U.S. within a year, and with debt levels very high across the nation, this is a grave concern.

Jim Rogers sums up the carnage that is coming...

http://www.bloomberg.com/api/embed/iframe?id=xjQqFCwDThO7KMsEXp9NZw

Even The Fed tends to agree with him...

The latest reading of St.Louis Fed's recession probability is higher than all but 3 months (in the last 50 years) when a recession did not immediately proceed.

[Mar 04, 2016] Naïve Siegelism

www.nakedcapitalism.com

Jim Haygood , March 3, 2016 at 9:55 am

'a retirement plan ultimately depends on the future earning power of the economy'

That's why all modern pension plans hold some equities.

An individual's cost to own one diversified equity fund and one diversified bond fund is about 0.1% per year. Whereas the expected benefit (compared to SocSec's all Treasury portfolio) is about 3.0% annually.

The seminal research pointing to an equity premium was done in the U.S. in the early 1960s, resulting in Nobel prizes for several participants. A half century on, their work has had zero effect on the politically petrified SocSec system - 20% funded, headed for zero in 2033.

Jim Haygood , March 3, 2016 at 11:55 am

Total bond market fund, 0.07% annual expense ratio (not a reco; just one example):

https://personal.vanguard.com/us/funds/snapshot?FundId=0928&FundIntExt=INT

Large cap index fund, 0.05% expense ratio (again not a reco, just an example):

https://personal.vanguard.com/us/funds/snapshot?FundId=0968&FundIntExt=INT

Equity premium of 6% gives 3% net benefit (vs. 100% Treasuries) in a 50/50 mix with bonds:

"The equity premium, which is defined as equity returns less bond returns, has been about 6% on average for the past century."

http://www.investopedia.com/terms/e/epp.asp#ixzz41rIVV14V

Seminal research - Fisher/Lorie paper of 1964, establishing the equity premium and founding CRSP which serves as the database for nearly all U.S. equities research:

http://www.crsp.com/50/images/rates%20of%20return%20paper.pdf

Nobel Prizes 1990 - Harry Markowitz, Merton Miller, William Sharpe - for Modern Portfolio Theory, which implies in conjunction with the equity premium that the optimal risk-reward portfolio should include equities:

http://www.britannica.com/topic/Winners-of-the-Nobel-Prize-for-Economics-1856936

Zero effect: "Since the beginning of the Social Security program [in 1935], all securities held by the trust funds have been issued by the Federal Government."

https://www.ssa.gov/oact/progdata/investheld.html

Headed for zero: "The dollar level of the theoretical combined trust fund reserves declines beginning in 2020 until reserves become depleted in 2034." - SocSec Trustees Report 2015, page 3.

https://www.ssa.gov/oact/tr/2015/tr2015.pdf

(The 2033 depletion date was from last year's trustees report; sorry.)

likbez , March 3, 2016 at 6:39 pm
This all is "water under the bridge." Called Naïve Siegelism

http://softpanorama.biz/Skeptics/Financial_skeptic/Protecting_your_401K/Protecting_401K_from_yourself/naive_siegelism.shtml

Can you spell "secular stagnation" ? And can you explain to us what returns are expected for stocks in the "secular stagnation" regime in comparison with bonds?

And what will you do if S&P500 drops to 660 like it did in 2008. And stays at this level for a couple of years like oil prices recently did.

BTW LTM was also founded by Nobel price winners: (https://en.wikipedia.org/wiki/Long-Term_Capital_Management ):

LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives".[3]

[Feb 28, 2016] Trump defends Trump University from Rubio, Cruz attacks

That's a pretty typical education sharks tactics. This was (and still is) an epidemic that started in late 90th with the peak around 2007 (coincided with the subprime mortgages peak). May be slightly longer. Not all students were innocent in this case. Most knew what they are buying. That includes some Obama staffers and several Department of homeland security employees.
http://www.geteducated.com/life-experience-college-degree/290-online-college-diploma-mill-cases
Diploma mills under Bush II were really like yet another sub-prime mortgage boom. Trump was a very small fish in this business but probably the desire to milk his name prevailed over caution. the most notorious hunted for people who can get government grant and then loaded them with additional debt up to the neck. Now Trump is in the spotlight and will pay the damages althouth it is unlcear to me if the students were engaged in "career enhancing" move or were defrauded. One strong point in defense of Trump is that his university offered no degree. That can get him off the hook.
https://jhupbooks.press.jhu.edu/content/diploma-mills?platform=hootsuite
The most significant shift in higher education over the past two decades has been the emergence of for-profit colleges and universities. These online and storefront institutions lure students with promises of fast degrees and "guaranteed" job placement, but what they deliver is often something quite different. In this provocative history of for-profit higher education, historian and educational researcher A. J. Angulo tells the remarkable and often sordid story of these "diploma mills," which target low-income and nontraditional students while scooping up a disproportionate amount of federal student aid.
Tapping into a little-known history with big implications, Angulo takes readers on a lively journey that begins with the apprenticeship system of colonial America and ends with today's politically savvy $35 billion multinational for-profit industry. He traces the transformation of nineteenth-century reading and writing schools into "commercial" and "business" colleges, explores the early twentieth century's move toward professionalization and progressivism, and explains why the GI Bill prompted a surge of new for-profit institutions. He also shows how well-founded concerns about profit-seeking in higher education have evolved over the centuries and argues that financial gaming and maneuvering by these institutions threatens to destabilize the entire federal student aid program.
This is the first sweeping narrative history to explain why for-profits have mattered to students, taxpayers, lawmakers, and the many others who have viewed higher education as part of the American dream. Diploma Mills speaks to today's concerns by shedding light on unmistakable conflicts of interest long associated with this scandal-plagued class of colleges and universities.
Notable quotes:
"... I would think that Trump gave all of those students a lesson that they should never forget, a fool and his money are soon parted. Who pays 36 grand to go to an unacredited school, to learn what they could get for free at the local library? ..."
"... The receptivity of the masses is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must harp on these in slogans until the last member of the public understands what you want him to understand by your slogan. ..."
"... There is a cult of ignorance in the United States. and there always has been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured through the false notion that democracy means that 'my ignorance is just as good as your knowledge. ..."
finance.yahoo.com

Republican presidential front-runner Donald Trump is playing defense on at least one issue these days: his role in a now-defunct real estate seminar business called Trump University.

At a rally in Arkansas on Saturday, Trump took a break from his stump speech to downplay a class-action civil lawsuit pending against the business, which was founded by Trump and offered students instruction on real estate investments.

"It's a small deal, very small," Trump said of the suit, which could force him to take the stand this summer.

Trump specifically railed against the judge in the case, and at one point noted the judge's Hispanic ethnicity.

Trump claimed the case should have been thrown out years ago, "but because it was me and because there's a hostility toward me by the judge - tremendous hostility - beyond belief." He then noted, as an aside: "I believe he happens to be Spanish, which is fine. He's Hispanic - which is fine."

A message left for the judge, U.S. District Judge Gonzalo Curiel, was not immediately returned. Curiel is a judge in the Southern District of California and based in San Diego.

New York Attorney General Eric Schneiderman, whose office has filed a separate civil $40 million complaint against Trump University in state court, accused Trump of "racial demagoguery." Schneiderman sued Trump University in 2013 alleging it committed fraud and fleeced 5,000 people out of millions of dollars.

"I will not engage in a debate about ongoing litigation," Schneiderman said in a statement issued after Trump made his comments. "But there is no place in this process for racial demagoguery directed at respected members of the judiciary."

Schneiderman noted that New York's state Supreme Court ruled that Trump University operated illegally in New York as an unlicensed educational institution.

Trump University emerged as a campaign issue at Thursday's GOP debate, raised by Florida Sen. Marco Rubio.

"There are people who borrowed $36,000 to go to Trump University, and they're suing now - $36,000 to go to a university that's a fake school," Rubio said. "And you know what they got? They got to take a picture with a cardboard cutout of Donald Trump."

Texas Sen. Ted Cruz jumped in, adding: "It's a fraud case. ... I want you to think about, if this man is the nominee, having the Republican nominee on the stand in court, being cross-examined about whether he committed fraud."

Schneiderman's suit alleges that Trump University falsely promoted itself as an educational institution even after the state education department warned it to stop. The complaint accuses Trump of falsely promising that Trump University students would receive intense training from experts hand-picked by Trump himself.

During breaks in the seminars, Schneiderman's complaint alleges, participants were urged to call their credit card companies and ask to increase their credit limits. Once the credit lines were secured, Trump University staff tried to persuade students to pay for additional services.

Separate from Schneiderman's complaint, Trump University students have sued. According to the California class-action complaint in front of Curiel, a one-year apprenticeship that Trump University students were promised ended after students paid for a three-day seminar. Attendees who were promised a personal photo with Trump received only the chance to take a photo with a cardboard cutout. And many instructors were bankrupt real estate investors.

Trump, at the rally, dismissed the cases as the work of "a sleazebag law firm" and suggested that Schneiderman's intervention was politically motivated.

"I could've settled this suit numerous times. Could settle it now. But I don't like settling suits," Trump said.

Chris

I would think that Trump gave all of those students a lesson that they should never forget, a fool and his money are soon parted. Who pays 36 grand to go to an unacredited school, to learn what they could get for free at the local library?

Do you really need someone to say, For next week, read chapters 5-9" ? And now that you have your lesson in "real life" go forth and prosper. And you should quicky recoup your tuition because you will run into people that lack you knowledge.

Commenter

The broad masses of a population are more amenable to the appeal of rhetoric than to any other force.- Adolf Hitler
I'm a bit of a P. T. Barnum. I make stars out of everyone. - Trump
There's a sucker born every minute. - P.T. Barnum

Commenter

"The receptivity of the masses is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must harp on these in slogans until the last member of the public understands what you want him to understand by your slogan." Adolf dead, enter the Trump. Make American great again!

Margy

"There is a cult of ignorance in the United States. and there always has been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured through the false notion that democracy means that 'my ignorance is just as good as your knowledge." - Isaac Asimov

J

Trump university proved there is a sucker born every minute.

Joe

Trump univ sounds like it was a school that taught real estate investing as an off shoot of trumps tv show. Nothing said it was an accredited degree college. No real estate license school is and they all have 3 day courses to learn real estate then you have to take a state test to get your license. You can go to a regular school that costs $100 or spend $36k at trump univ. it's the same class. It all sounds like a PR stunt .

factChecker

Cheating thousands of people, just trying to better themselves, out of millions of $ might be unimportant to Trump. That is the problem. He has no conscience.

Big Al

Ignorance is investing your money in a non certified educational institution because it is pitched by a so called "celebrity". If you do something foolish, dumb or stupid own up to it and use it as a learning experience. Don't expect others to pay for your mistakes.

[Feb 28, 2016] Is An Un-Great America Headed For The Abyss Warren Buffett Says No The Two-Way

NPR
...on Saturday, billionaire Warren Buffett used his annual letter to Berkshire Hathaway Inc. shareholders to say, in effect, relax.

The country may have challenges, but the doom-and-gloom predictions are "dead wrong," Buffett wrote.

Instead, "babies being born in America today are the luckiest crop in history," he wrote.

... ... ...

Buffett's annual letter to Berkshire investors is so closely followed because he so often makes the right calls about the economy. And in this year's letter, he makes it clear that he considers the "negative drumbeat" about America to be very misleading.

[Feb 21, 2016] Minskys financial instability hypothesis

Notable quotes:
"... Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages shifts back towards the hedge borrower. ..."
"... from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. ..."
"... In other words, people are momentum investors by nature, not value investors . ..."
Wikipedia
Minsky's financial instability hypothesis

Hyman Minsky's theories about debt accumulation received revived attention in the media during the subprime mortgage crisis of the late 2000s. The New Yorker has labelled it "the Minsky Moment".[11]

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.[5]

Application to the subprime mortgage crisis

Economist Paul McCulley described how Minsky's hypothesis translates to the subprime mortgage crisis.[12] McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market:

McCulley writes that the progression through Minsky's three borrowing stages was evident as the credit and housing bubbles built through approximately August 2007. Demand for housing was both a cause and effect of the rapidly expanding shadow banking system, which helped fund the shift to more lending of the speculative and ponzi types, through ever-riskier mortgage loans at higher levels of leverage. This helped drive the housing bubble, as the availability of credit encouraged higher home prices.

Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages shifts back towards the hedge borrower.

McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement – inflation feeds upon inflation and debt-deflation feeds upon debt deflation."

In other words, people are momentum investors by nature, not value investors. People naturally take actions that expand the high and low points of cycles. One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.

Views on John Maynard Keynes

In his book John Maynard Keynes (1975), Minsky criticized the neoclassical synthesis' interpretation of The General Theory of Employment, Interest and Money. He also put forth his own interpretation of the General Theory, one which emphasized aspects that were de-emphasized or ignored by the neoclassical synthesis, like Knightian uncertainty.

[Feb 21, 2016] The Oracle of Oil A Maverick Geologist's Quest for a Sustainable Future

Amazon.com

Print Length: 416 pages
Publisher: W. W. Norton & Company; 1 edition (April 11, 2016)
Publication Date: April 1, 2016
Sold by: Amazon Digital Services LLC

A complete biography of Marion King Hubbert, one of the twentieth century's most influential energy experts, who was dubbed the "father of peak oil."

In 1956, geophysicist and Shell Oil researcher Marion King Hubbert forecast that American oil production would peak surprisingly soon and decline steadily thereafter. Hubbert's prediction outraged the architects of the U.S. oil industry at the time, but it was largely correct. Even amid a twenty-first century shale boom, Hubbert's logic remains a source of debate and controversy.

In a richly researched narrative that surveys Hubbert's papers and correspondence for the first time, award-winning journalist Mason Inman rescues the history of a man who shocked the scientific community with his brilliance, eccentricity, and controversy. The Oracle of Oil shows Hubbert as a man of his era: a time of great intellectual ferment and discovery tinged by dark undercurrents of intellectual witch hunts.

In its portrait of a man whose prescient ideas about sustainability still resonate today, The Oracle of Oil looks to the past to find a guiding philosophy for our energy future.

About the Author

Mason Inman is an award-winning journalist who focuses on energy and climate issues. He has written for National Geographic News, Science, Nature, and The Economist. He lives in Oakland, California.

[Feb 16, 2016] How Right-Wing Billionaires Infiltrated Higher Education

February 12, 2016 | The Chronicle of Higher Education
If there was a single event that galvanized conservative donors to try to wrest control of higher education in America, it might have been the uprising at Cornell University on April 20, 1969. That afternoon, during parents' weekend at the Ithaca...

[Feb 12, 2016] An Interview with Larry Summers

Notable quotes:
"... Theres another aspect of the connection between secular stagnation and inequality that bears emphasis. Experience suggests that in an economy where there are more workers seeking jobs than there are jobs seeking workers, the power is on the employer side, and workers do much less well. A tight economy, where employers are seeking workers, shifts the balance of power toward workers and leads to higher pay and better benefits. That, in turn, leads to more spending being injected into the economy, which supports further economic growth. ..."
"... But I also believe there are many areas in which its possible to reform policy to promote both economic efficiency and equality. One such area is policy to mitigate secular stagnation by promoting demand at times when there is slack in the use of resources. ..."
"... Right, in a democracy, the elected leaders must view the voters as idiots and execute to the total opposite of the expressed policies of the candidates who won. ..."
"... Paul Krugman and Larry Summers both have very good columns this morning noting the economys continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Feds scope for action if the economy weakens. ..."
"... While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate. ..."
"... For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes. ..."
"... This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level. ..."
"... Amazing how unconventional monetary is always the go-to option. Pessimism about the effectiveness of the Feds policy options is well warranted. You only need to look at the results of the last seven years. ..."
economistsview.typepad.com

Part of an interview of Larry Summers at Equitable Growth :

... When I went to graduate school in the 1970s, the prevailing view among economists, captured by Art Okun's book "Equality Versus Efficiency: The Big Tradeoff," was that equality and efficiency were both desirable, but they were likely to trade off-that more progressive taxation would achieve more equality but would inevitably in some way distort economic choices and, so, reduce efficiency, for example.

I believe there are still many areas in which one does have to trade off equality versus efficiency. But I also believe there are many areas in which it's possible to reform policy to promote both economic efficiency and equality. One such area is policy to mitigate secular stagnation by promoting demand at times when there is slack in the use of resources.

Recall that I defined secular stagnation as having at its essence an excess of savings over investment, desired saving over desired investment. There are many reasons for that. Some of them have to do, for example, with reduced investment demand because so much more capital can be purchased with fewer dollars. I think of the fact that my iPad has more computing power than a Cray supercomputer did when Bill Clinton came into office in 1993.

One aspect of that excess in saving over investments is that rising inequality has operated to reduce spending. We are fairly confident that what economists call the "marginal propensity to consume" of those with high incomes is less than the marginal propensity to consume of those with middle incomes.

And so the combination of rising inequality in the distribution of income across income levels and a shift in inequality toward the higher profit share slows economic growth. In normal times, such a change might be offset by easier monetary policy. But in the current environment, where interest rates are very close to the zero lower bound, the capacity for that kind of offset is greatly attenuated.

There's another aspect of the connection between secular stagnation and inequality that bears emphasis. Experience suggests that in an economy where there are more workers seeking jobs than there are jobs seeking workers, the power is on the employer side, and workers do much less well. A tight economy, where employers are seeking workers, shifts the balance of power toward workers and leads to higher pay and better benefits. That, in turn, leads to more spending being injected into the economy, which supports further economic growth.

And so, as Keynes recognized when he wrote to FDR in the late 1930s urging the importance of wage increases, measures that strengthen workers' capacity to earn income by increasing spending power can promote both equality and strengthen the economic performance of the country. ...

pgl :

Excellent interview with this as a key sentence:

"But I also believe there are many areas in which it's possible to reform policy to promote both economic efficiency and equality. One such area is policy to mitigate secular stagnation by promoting demand at times when there is slack in the use of resources."

Summers makes two arguments with respect to promoting aggregate demand:

(1) his case for more infrastructure investment; and
(2) his defense of the expansionary monetary measures taken by the FED from 2008 until recently.

He does note that Obama started talking about "belt tightening" after Summers left the White House and to Summers regret.

mulp -> pgl...
Right, in a democracy, the elected leaders must view the voters as idiots and execute to the total opposite of the expressed policies of the candidates who won.

Or do you think the voters were calling for massive explosions of debt and massive increases in jobs forced by government policies to force exploding labor costs which would necessarily result in exploding consumer prices when they voted Democrats out and Republicans in?

Perhaps you think Bernie Sanders got far more leftist laws passed by being a radical leftist socialist in Congress able to lead a revolution in Congress to redistribute wealth?

The Republican Party is divided by Obama highly divisive politeral tactics which played Republicans against Republicans, doing a far better job dealing with Republicans than Clinton's "triangulation" which implemented massive austerity tempered by government dictates that were highly profitable to crony capitalists in the computer industry. Bush-Cheney served a different set of crony capitalists leading to an implosion in the tech sector dragging down pretty much everything good for the American people. Obama has since created incentives with rewards to both sets of crony capitalists, that has now imploded for the Bush-Cheney crony capitalists (fossil fuels) but still reward the Elon Musk, Bezos, google, hollywood, Ellison, Apple sector.

Neither Clinton nor Obama were allowed to help the bottom 50% of workers because voters demanded austerity by voting for Republican control of Congress in 1994, 1996, 1998, 2000, 2002, 2004, 2010, 2012, 2014, and if Sanders is the Democratic nominee in 2016, then Republican control of Congress in 2016, 2018, and probably 2020 and 2022. And only a Republican president will end the austerity, but it will lead to slower growth, high unemployment, likely severe recession, but wars. Just like the end of austerity of Bush-Cheney.

pgl said in reply to mulp ...
WTF this has to do with what Summers wrote??? Never mind. So much babbling, so little time.
JohnH :
"One aspect of that excess in saving over investments is that rising inequality has operated to reduce spending. We are fairly confident that what economists call the "marginal propensity to consume" of those with high incomes is less than the marginal propensity to consume of those with middle incomes.

And so the combination of rising inequality in the distribution of income across income levels and a shift in inequality toward the higher profit share slows economic growth."

Hate to say this, but Summers is making a lot of sense.

The way to address the problem of slow economic growth is to tax the wealthy, who have a low propensity to consume, and use the funds for government programs (infrastructure, education, healthcare) and redistribution to the poor...exactly as I have been arguing.

JohnH said in reply to JohnH...
pgl should take up his fight with Larry Summers, not me.

But Summers is fairly confident...as pgl just can't accept that a) increasing inequality reduces consumption and economic growth and that b) addressing inequality by taxing high incomes and wealth would lead to increased consumption and economic growth if it was spent on social programs and redistribution to those with a high propensity to consume (the poor).

It appears the we now have two pgls here--one that support high top tax brackets and another who opposes taxing the wealthy.

Or maybe we just have a single, very confused dude!

BenIsNotYoda -> JohnH...
pgl's solution is - give them a rate cut. always. grandmother is ill - give her a rate cut
pgl said in reply to JohnH...
You do know BINY is cheating on you. Good luck getting back with granny.
BenIsNotYoda -> JohnH...
he is not happy because his cheap stocks are getting cheaper.
JohnH said in reply to BenIsNotYoda...
I already called him on demanding QE4, which he advocated as soon as stocks went into correction territory back in August.

It was the same lousy economy. But as soon as stocks started to correct, and pgl's portfolio was getting hurt, he jumped right into action!

lower middle class -> pgl...
I'm trying to avoid being confused.

We hold the folowing as true, correct?

MPC is less than one.

"Income" refers to "disposable income"

As wealth and income rise, consumption also rises.

Falls in income do not lead to reductions in consumption because people reduce savings to stabilize consumption. (the poor get poorer by consuming wealth; wealth inequality accelerates?)

Increases in income do not lead to increases in consumption because people add to savings to stabilize consumption.
(high income people increase wealth faster the low income people while consumption increases; wealth inequality decelerates?)

JohnH said in reply to lower middle class...
General propensity to consume depends on income. Wealthy people tend to save a good chunk of their incomes...and become wealthier. Most people save a very small part of their incomes (middle class) or nothing at all (poor). Obviously there are exceptions to this generalization, as pgl is quick to point out with his tearful evocations of the plight of the 'hand to mouth' rich. But the general pattern is as I have described.

Marginal propensity to spend is a little more complicated, and a lot depends on whether the additional money is seen as a windfall or not. For people who do not generally save much, windfalls may be saved for a while or go to pay off debt, or be spend on durable goods or just spent.

Peter K. :
"In normal times, such a change might be offset by easier monetary policy. But in the current environment, where interest rates are very close to the zero lower bound, the capacity for that kind of offset is greatly attenuated."

Larry Summers agrees with the obnoxious trolls like JohnH and BINY. Monetary policy doesn't help.

I agree with Dean Baker and Bernie Sanders. (This is not to say fiscal policy doesn't work better. Funny how the trolls always toss out red herrings.)

http://cepr.net/blogs/beat-the-press/paul-krugman-larry-summers-and-the-fed-s-unused-ammunition

Paul Krugman, Larry Summers, and the Fed's Unused Ammunition by Dean Baker

Paul Krugman and Larry Summers both have very good columns this morning noting the economy's continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed's scope for action if the economy weakens.

While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.

For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.

This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.

Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.

Paine said in reply to Peter K....
Excellent

Despite a finessed genuflex to inflation

JohnH said in reply to Peter K....
"Larry Summers agrees with the obnoxious trolls like JohnH and BINY. Monetary policy doesn't help."

Amazing, isn't it?

Agreed: "Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment." And the best course is higher taxes on the wealthy, who have more than what they know with to do with.

Taxes on the wealthy directly tackles inequality, increased debt doesn't.

JohnH said in reply to Peter K....
Amazing how unconventional monetary is always the go-to option. Pessimism about the effectiveness of the Fed's policy options is well warranted. You only need to look at the results of the last seven years.

So why not advocate unconventional fiscal policy...which at this point would include taxing the wealthy to fund stimulus? Why constantly flog the debt option, which does nothing to directly tackle inequality?

pgl said in reply to JohnH...
You need to shut up and go read that Ando-Modigliani paper on consumption. Once again you got everything exactly backwards. But then you are the dumbest troll ever.
JohnH said in reply to BenIsNotYoda...
pgl was against tax increases on the wealthy... before he was for tax increases on the wealthy...before he was against tax increases on the wealthy...

but he has always been for lots more debt...

PPaine :
" one persons rent may be another persons incentive "

That relies on a muddled use of the term rent

Which by construction
Means
non supply regulating revenue or income

But still a point lies under that mud dimness of articulation

Separating rents from incentives ain't easy

But in the last analysis
Very often it's very doable

Take my specialty
Ground rent
There are clever ways to tease out the rent

[Feb 09, 2016] Stability breeds instability

Economist's View

New Deal democrat :

On the specific point of the artilce, this strikes me as a similar theory to Minsky's "stability breeds instability" theory. Also I seem to recall Prof. Thoma posted an article showing that the tightness or looseness of credit conditions were a good long leading indicator of conditions about 2 years later.

As an expansion goes on, both businesses and consumers take increasing risks, having been previously rewarded for risks taken. Thus they leave less and less of a margin of safety. This makes it easier for any given shock to overcome that margin, causing both businesses and consumers to retrench. Thus a recession begins.

I'm not sure about businesses, but consumers have been playing it safe throughout most of this recovery, with the personal savings rate increasing over the last few years. So, relatively speaking, for now consumers have a decent margin of safety.

Ben Groves -> New Deal democrat...
Right, but the personal savings rate fell well out of line in the 00's and actually contracted in 2007-8. More like restocking than playing it safe.
likbez -> New Deal democrat...
In addition gas prices are still low.
likbez -> New Deal democrat...
On the specific point of the article, this strikes me as a similar theory to Minsky's "stability breeds instability" theory.


And that is deeply true. Minsky (actually this is Hegel) was and still is right.

Hyman Minsky simply stressed that people's response to stability in financial markets always engenders instability as it encourages more risky behavior. Such behavior is not necessarily irrational, as there are profits to be earned and bonuses to collect as long as the good times last.

In fact, the cycle may extend as long as credit flows and people are hungry for risk. Yet according to Minsky's casino capitalism credit cycle always heads inexorably toward a bust.

At some point risk and reward became out of whack and people start reposition their portfolios defensively, increasing cash allocations. At this point house of cards folds.

[Feb 09, 2016] All this obsession with miniscule rate changes has obscured the need for the Fed and politicians to make significant changes

February 08, 2016 | economistsview.typepad.com

JohnH said...

It is certainly appropriate to question the condition and longevity of this 'recovery,' which was never experienced by most Americans, whose incomes are mired back where they were two decades ago.

Can we infer by all this that liberal economists are finally becoming reflective about the Fed's failure to ignite growth? Old nostrums die hard.

Unfortunately, all this obsession with miniscule rate changes has obscured the need for the Fed and politicians to make significant changes, so that the benefits of low rates are felt throughout society, not just by Wall Street, the wealthy, and affluent homeowners with mortgages.

And, instead of constantly arguing against austerity, why not aggressively tout high taxes on the wealthy to pay for stimulus, which would generate economic growth and address inequality in one fell swoop!

JohnH said in reply to djb...

djb is obsessed with "the rate."

Why not get obsessed with the fact that the Fed could not stimulate new rental housing, despite historically low mortgage rates? As a result of the housing shortage, rents are skyrocketing, sucking up incomes, already hit hard by the unending recession. Result: less money available for consumption, more money into the pockets of real estate moguls.

Why not obsess about real credit card rates, which are higher than they were in 2007? Result: less money available for consumption, more money to VISA and its share holders.

But no, 'liberal' economists obsess only about "the rate," which affects almost nobody but Wall Street banks, their wealthy clientele, and affluent mortgagees.

Let's face it, the Fed has failed in part because low rates and their effects failed to trickle down much. But 'liberal' economists could care less about this. All they care about is "the rate!"

If 'liberal' economists cared half as much about why low rates are not diffusing throughout the economy as they care about "the rate" for Wall Street, then we could believe that they care about the general welfare, not the interests of the 1%.

[Feb 08, 2016] Tech stock collapse sure looks like bubble popping

finance.yahoo.com

Almost all technology stocks are getting hammered yet again on Monday. Salesforce.com (CRM) was down 6% while Facebook (FB) and Microsoft (MSFT) had lost 3%, for example, in morning trading.

And while many see it as a continuation of Friday's rout sparked by LinkedIn's (LNKD) weak outlook for the rest of the year, the damage has been piling up for weeks. Investors are fleeing almost all tech names over concerns about the slowing global economy in general and a reassessment of the potential growth of online and "cloud" markets more specifically.

LinkedIn, pummeled by an unprecedented 44% one-day loss Friday, was one of the few tech stocks rising on Monday, as bargain hunters pushed its shares up 3% in early trading. Still, the shares have lost more than half of their value since the end of 2015.

The widespread tech crash is all the more surprising because almost everyone thought there was no bubble in the tech sector. Last year's market for initial public offerings of tech companies was the slowest since 2009 (and performed poorly throughout the year), slightly more seasoned public tech companies appeared to have already crashed last spring and most of the big tech companies, such as Apple (AAPL), IBM (IBM) and Cisco Systems (CSCO), trailed the market and appeared undervalued by historical measures. Only the so-called FANG stocks -- Facebook, Amazon (AMZN), Netflix (NFLX) and Google's Alphabet (GOOGL) -- did well, with an average return of 83% each in 2015.

But, it turns out, there was still plenty more downside risk to go around. LinkedIn is still off by more than 40% since it reported earnings after the market closed on Feb 4. Although fourth quarter adjusted earnings per share of 94 cents and revenue of $862 million beat the average Wall Street analyst estimate, the professional social networking company said it would earn only 55 cents on revenue of $820 million in the next quarter. And for the full year of 2016, revenue of $3.6 billion to $3.65 billion was less than the $3.9 billion Wall Street had been expecting.

Such a modest disappointment has sparked a massive reassessment of the potential for many Internet stocks. With investors in a panicky mood, the carnage has spread across much of the tech sector but stocks with online business strategies similar to LinkedIn's have been hit especially hard. Workday (WDAY), which provides online software for human resources, was down 7% midmorning on Monday and 37% for the year. Twitter (TWTR) lost 4% and was down 35% for the year. And Adobe Systems (ADBE) was off 5% on Monday and 20% for the year. A daily index compiled by venture capital firm Bessemer Venture Partners of 47 publicly traded cloud software stocks lost 17% just on Friday.

And those famous FANG stocks? They're all down in 2016, as well. After its 3% Monday drop, Facebook was still best of the bunch, showing a modest 4% loss for the year. Amazon was also down 3% on Monday but carries a crushing 28% loss for the year. Netflix was a rare gainer, up 1%, but still off 27% for the year. And Google was down 1% on Monday and 11% for the year.

[Feb 08, 2016] Momo Bad News JPMs Quant Guru Kolanovic Confirms Tech Bubble Has Burst... Again

Zero Hedge
Just over two weeks ago, JPM's Marko Kolanovic, whose unprecedented ability to predict short-term market moves is starting to seem a little bizarre, warned that the next "significant risk for the S&P500" was the bursting of the "macro momentum bubble." Specifically, he said that there is an emerging negative feedback loop that is "becoming a significant risk for the S&P 500" adding that "as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble ."

In retrospect, following tremendous valuation repricings of several tech stocks, last week's LinkedIn devastation being the most notable, he was once again right. And over the weekend, he did what he has every right to do: take another well-deserved victory lap.

This is what he said in his February Market Commentary: " Tech Bubble Burst ?"

In our 2016 outlook and recent reports, we identified a macro momentum bubble that developed over the past years. We explained its drivers (central banks, passive assets/momentum strategies, etc.) and called for value to outperform momentum assets. We also highlighted the risk of a bear market and recommended increasing exposure to gold and cash as well as increasing exposure to nondollar assets relative to the S&P 500 (EM Equities, Commodities, Value Stocks, etc.). Our view was that a likely catalyst would be the Fed converging toward ECB/BOJ (rather than proceed with planned ~12 rate hikes by end of 2018). In line with these published forecasts, the best performing assets YTD have been Gold (+9%) and VIX (+20%) while S&P 500 and DXY are down (-7%, and -2%, respectively). Momentum stocks are down more than 10% with an acceleration of the selloff in last days. Emerging Market and Energy stocks are starting to outperform the S&P 500 (MSCI Latin America by +5% and Energy by +1% vs. S&P 500 YTD). This specific pattern of asset moves is consistent with a Value-Momentum convergence. We think the outperformance of value assets over momentum assets is likely to continue .

Investors often ask us how significant are distortions and risks in equity sectors that are related to a "macro momentum bubble." Specifically, the question is that of valuations in the Technology sector, i.e., "is there a Tech bubble"? Before we share our views, let's first review how passive investing and momentum strategies may have impacted performance of various equity sectors.

Imagine a world in which most of the assets are passively managed and investors are focused on liquidity and short-term risk/reward. Companies that increased in size recently would keep on increasing, and those that got smaller would see further outflows. Past winners would also be considered low-risk holdings compared to past losers. The most successful managers would be those that replace fundamental valuation with a simple rule: buy what went up yesterday and sell what went down. Passive funds would do the same. It is hard to imagine this makes economic sense long term, but it is close to what equity markets experienced over the past several years. In 2013, the Sharpe ratio of the S&P 500 was ~2.7. Assuming a normal distribution of active asset returns, one could (incorrectly) conclude that being just an average (passive) investor one will outperform ~95% of all active investors. In 2014 and 2015, various momentum strategies delivered Sharpe ratios >2. The winning strategy was not just to go with the crowd, but to do what the crowd did yesterday. This type of trend following does not only apply to extrapolating price trends, but also extrapolating trends in fundamental stock data such as growth and earnings. Beyond a certain point, passive investing and trend following are bound to result in distorted equity valuations and misallocation of capital.

While some parts of the Technology sector certainly have reasonable and even low valuations (see our US equity strategy outlook), segments of the Tech sector disproportionally benefited from momentum investing as well as investing based on extrapolation of past growth rates . For instance, a popular group of stocks held by investors is known by the abbreviation "FANG" (Facebook, Amazon, Netflix, Google). We use these stocks as an illustration for a broader group of similar stocks that have the highest rankings according to momentum and growth metrics (and surprisingly in some cases even low volatility metrics). Given that traditional value metrics look expensive when applied to this group, one can compare these momentum/growth companies on a new set of metrics. For instance, one can look at the ratio of current price to earnings that the company delivered over all of its lifetime (instead of just the past year). Another metric could be a ratio of CEO or founder's net worth to total company earnings delivered during its lifetime (see below):

Aggregating all FANG earnings since these companies were listed, one arrives at a ratio of current price to all earnings since inception of ~16x. This can be contrasted to a ratio of price to last years' earnings for all other S&P 500 companies also at ~16x. We think this is extraordinary given that FANGs are neither small nor new companies. In fact, these are some of the largest companies in the S&P 500 and among the largest holdings of US retirees. Given that the three largest FANG stocks are now twice more valuable than the entire US S&P small-cap universe (600 companies), a legitimate question to ask would be " is such a high allocation by long-term investors to these stocks prudent?" Statistically, over a long period of time smaller companies outperform mega-caps ~75% of times. Note also that the current size ratio of mega-cap stocks to small-cap stocks is at highest level since the tech bubble of 2000. Furthermore, such allocation is also questionable from a risk angle . For example, the idiosyncratic risk of holding three stocks in one sector is certainly much higher than the risk of owning, e.g., ~1,000 medium- or small-cap companies diversified across all sectors and industries.

Investors in high-growth stocks expect innovations to drive growth and sustain high valuation. They may even put their hopes in moonshot projects such as cars built by electronics makers, car makers building spaceships, or internet companies building drones. While many of these could result in important technological breakthroughs, they may also be signs of excess and destruction of shareholders' capital in the future. Recent examples of capital impairment in the tech sector are illustrated here and here, and more peculiar examples of past excess can be found here and here. In addition to extrapolated and often optimistic growth forecasts, some of the tech sub-industries have high idiosyncratic risks that are likely underappreciated by the market. Standard valuations models incorporate revenue, growth, and profit forecasts but often do not discount for the lifecycle risk of a business. To illustrate: while we are still traveling in aircraft designed over 40 years ago, social network users' preferences have changed drastically over the past decade (e.g., Friendster and Myspace). A shorter lifecycle is related to low barriers to entry and rapid changes in what is deemed fashionable by young generations (e.g., one cannot build a jetliner in a dorm room, and they don't go out of fashion as apps do).

In summary, we think that the biases of momentum investing and passive indexation have resulted in valuation distortions across assets as well as equity segments including Technology . Over the past years this trend has picked winning assets, sectors, and stocks often with less regard to fundamental valuation and more regard to momentum and extrapolated growth. We believe that 2016 may result in a reversion of this trend that will give an opportunity to active and value investors to outperform passive indices and momentum investors . Even if this rebalancing comes as a result of market volatility and broader equity declines, long term it will benefit capital markets and the efficient allocation of capital .

* * *

Only problem is that this capital reallocation will means countless momentum chasers 'smart money managers' will be out of a job in very short notice.

Then again, judging by some initial reactions, even formerly steadfast believers in the FANGs are starting to bail: moments ago CNBC reported that Mark Cuban announced that he purchased options to sell against his entire stake in Netflix, to wit: "For those of following my stock moves, I just bought puts against my entire Netflix position. "

Cuban posted comments on Cyber Dust social media platform on Friday. Result: NFLX already down -4%, with FB and other tech momos hot on its heels.

[Feb 08, 2016] GRANTHAM The stock market sell-off makes me nervous, but I fear the big crash is coming later

finance.yahoo.com

In his latest quarterly outlook, Grantham, cofounder and chief investment officer at GMO, outlines his views on the markets and the economy.

And in somewhat of a contrast to his recent commentary, sees the oil crash as a big tailwind for the economy and doesn't think the stock market, though it is expensive and potentially heading into a bear market, is going to crash.

"Looking to 2016, we can agree that uncertainties are above average," Grantham writes.

"But I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the slow-burning but huge positive of much-reduced resource prices in the U.S. and the availability of capacity both in labor and machinery."

Grantham adds (emphasis ours):

As always, though, prudent investors should ignore historical niceties like these and invest according to GMO's rather depressing 7-year forecast. The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal.

At current asset prices no pension fund requirements can be met. Thus, we should welcome a major market break that will leave us with more reasonable investment growth potential for the longer term, but I suspect that we will have to wait patiently for such a major decline.

The ability of the market to hurt eager bears some more is probably not exhausted. I still believe that, with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks. That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps. Good luck in 2016.

OK, so maybe not bullish, per se, but Grantham is definitely sounding the alarm on not sounding the alarm on a stock market bubble and resulting crash.

Stocks

Over the last 18 months, stocks are basically flat in what has been by far the most difficult period for investors since the financial crisis.

And this period has really been defined by three things: a crash in oil prices, a continued and relentless slowing of the Chinese economy, and a change in Federal Reserve policy.

On top of all this is the decline in profit margins, which Grantham has called the "most mean-reverting series in finance," implying that the long period of elevated margins we've seen from American corporations is most certainly going to come an end. And soon.

Profit margins are near record highs, and Grantham expects them to fall.

In Grantham's view the Fed holding off on raising rates all the way until December 2015 staved off what could have been a really disastrous year for stocks given the weakness in oil prices and anxiety over China's economy.

And continued assistance from the Fed is likely to send stocks higher, or at least stabilize them somewhat.

The question, then, is whether this sends stocks into a "blow-off-top" where, as Grantham outlines, you'd expect to see a two-standard-deviation event with stocks rocketing higher and the S&P 500 heading to 2,300 before the big crash.

"I must admit to feeling nervous for this year's equity outlook in the U.S," Grantham writes. "But I am not entirely convinced. Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it."

Oil

In addition to not being (overly) concerned with the prospects of a new stock market crash, Grantham also thinks we're about to see the good side of the oil crash that has been a long-awaited part of the US economic narrative in the last year.

"The largest hits from the major oil company responses are behind us, although at $30/barrel (and maybe less) there will be some further retrenchment," Grantham writes.

The oil crash, charted.

He adds: "And now comes the matching response from us, the consumers. Everything we buy has cheaper input costs. The major item of gasoline purchases is a steady jolt of encouragement. Heating bills are also much lower. Could there be a better financial input than this to the group that has been hurting for 30 years - the median wage earner? Not easily."

This is good!

Everything, it seems, is getting cheaper, and according to the latest data out of the BLS released Friday, our paychecks are getting bigger as average hourly wages grew 2.5% over last year in January, roughly matching the largest increase of the current economic cycle (December's gains were revised higher to show annual growth of 2.7%.)

But Grantham goes a step beyond the standard, "Low oil means more spending for consumers" line of thinking (which is why he's one our favorite market thinkers to track).

Grantham further argues that increasing commodity prices, as much as anything else, have been and will be factors ahead of recessions.

Because while 2008 was all about the crash in housing and the stress at major banks, the rapid rise in oil prices and other commodities stressed consumers as much as anything else, in Grantham's view.

And just as this rise was overlooked eight years ago, the crash in prices and the delayed - but positive - feedback to consumers and the economy has been forgotten by the market.

But the benefits are coming. Now.

"Market opinion now, though, impressed with the early negatives that it should have expected and because the offsetting stimulus effect is delayed and weakened initially by some understandable increases in savings, is doing the opposite," Grantham writes.

"[The market] is underrating what will very likely become an important economic tailwind for the next several quarters. Reflecting current opinion, Luke Kawa, a writer for Bloomberg reviewing the oil situation claims, 'One of the biggest surprises in economics has been how the world responded to a period of lower energy prices.' Well, the economic world is easily surprised."

Read Grantham 's full note here " gmo.com

[Feb 04, 2016] Pitchfork Time Elites Have Lost Their Healthy Fear Of The Masses Zero Hedge

Notable quotes:
"... Is it time for pitchforks to restore the natural orders of fear yet? ..."
www.zerohedge.com

Zero Hedge

The following reader comment, posted originally in the FT is a must read, both for the world's lower and endangered middle classes but especially the members of the 1% elite because what may be coming next could be very unpleasant for them.

Elites have lost their healthy fear of the masses

Sir, Martin Wolf (" The losers are in revolt against the elite ", Comment, January 27) and Andrew Cichocki ("Elites are listening to the wrong people ", Letters, January 29) skirt the key issue: global elites have lost a healthy sense of fear.

From the time of the French Revolution until the collapse of communism, what successive generations of elites had in common was a sense of fear of what the aggrieved masses might do . In the first half of the 19th century they worried about a new Jacobin Terror, then they worried about socialist revolution on the model of the Paris Commune of 1871. One reason for the first world war was a growing sense of complacency among European elites. Afterwards they had plenty to worry about in the form of international communism, which remained a bogey until the 1980s.

With the collapse of the Soviet Union and the spread of global capitalism, today's elites have lost the sense of fear that inspired a healthy respect for the masses among their predecessors . Now they can despise them as losers, as the aristocracy of ancien régime France despised the peasants who would soon be burning their châteaux. Surely today's elites are going to learn how to fear before we see any reversal of the recent concentration of wealth and power.

Is it time for pitchforks to restore the natural orders of fear yet?

h/t @ WallStCynic

Looney

Is it time for pitchforks to restore the natural orders of fear yet?

Oh, honey, I thought you'd never ask… ;-)

Goliath Slayer

How they turned us into Pavlov Dogs >> http://wp.me/p4OZ4v-1zD

Stuck on Zero

It's hard to get rid of most of the elites because they have tenure.

tarabel

And most people wouldn't have the faintest idea of where to buy, or more probably rent, a pitchfork anyhow. As for torches? What, are you crazy? Those things are dangerous and would void our insurance policy.

bamawatson

will goldman sucks n shitty bank loan me money to purchase a pitchfork? http://theconservativetreehouse.com/2016/02/03/update-fec-informs-ted-cr...

MayIMommaDogFac...

REALLY LONG pitchforks!

rocker

I'd like a Cattle Prod. You got to believe Homeland is reading this one.

Future Jim

Elites are afraid of socialism and communism?!

The Elites are the ones who created and spread such collectivism because collectivism is how they control the masses, and they make the masses think they are afraid of it so that the masses will demand it. The masses demand to be enslaved by socialism and communism. They are being played.

Elites only fear the free-market. That is why we don't have one.

AldousHuxley

It really doesn't matter what *ism society embraces. What matters more is is the power elite greedy enough to sell out their own kind?

Future Jim

If you think that freedom is just another ism, then you have been played.

It is not about greed. It is about power and control. Money is just a means to that end.

Their own kind? You mean their own race ... their own nation ... their own religion ... ?

CapnJackDaniel

Nice, but a little quick donchathink?

Cadavre

And a roasting spit and rope to tie em by the ankle to the cherry trees lining the national mall, Musollini style. Urinals hanging from cherry trees. Only in America.

One does wonder how inbreds surrounded by expensive advisors so easily lost any shred of fight-o-flight survival skills. Guess the extra bling allows them to dream false dreams.

eforce

The ones who think they are 'top dog' are about to find out the hard way, there is something much bigger at work...

"6. The people, under our guidance, have annihilated the aristocracy, who were their one and only defense and foster-mother for the sake of their own advantage which is inseparably bound up with the well-being of the people. Nowadays, with the destruction of the aristocracy, the people have fallen into the grips of merciless money-grinding scoundrels who have laid a pitiless and cruel yoke upon the necks of the workers.

7. We appear on the scene as alleged saviours of the worker from this oppression when we propose to him to enter the ranks of our fighting forces - socialists, anarchists, communists - to whom we always give support in accordance with an alleged brotherly rule (of the solidarity of all humanity) of our social masonry. The aristocracy, which enjoyed by law the labor of the workers, was interested in seeing that the workers were well fed, healthy, and strong. We are interested in just the opposite - in the diminution, the killing out of the goyim. Our power is in the chronic shortness of food and physical weakness of the worker because by all that this implies he is made the slave of our will, and he will not find in his own authorities either strength or energy to set against our will. Hunger creates the right of capital to rule the worker more surely than it was given to the aristocracy by the legal authority of kings.

8. By want and the envy and hatred which it engenders we shall move the mobs and with their hands we shall wipe out all those who hinder us on our way."

--The Protocols

freak of nature

Fear might be masked, but it's still there.

http://www.washingtontimes.com/news/2015/sep/30/angela-merkel-caught-on-...

Memedada

http://www.rense.com/general45/proto.htm - they're fake.

eforce

You're fake.

Mr. Universe

The thing is that there are going to be a LOT of folks who thought they were elites. Instead they will be thrown under the bus of the approaching hoards to slow them down while the real elites make sure no one escapes that shouldn't be.

They no longer fear the masses as they control the cops and the narrative. What will really work and is almost unstoppable is the ghost in the machine. Seemingly random acts of sabotage, just think if the internet went down for even 2 or 3 days. Who would it hurt most, average folk or ? I have a dream...

css1971

Sternly worded letters will be flying thick and fast.

indygo55

A torch might mess up my nails

tarabel

And you'll need new shoes cause those definitely don't match.

wildbad

https://www.youtube.com/watch?v=USk-ECjYEhI

Lorca's Novena

Lol those guys are so blackwater.... It is illegal to have a standing "army" on 'murrican soil. Private for hire jagoffs arent. And no, it wasnt the national guard.

Chris Dakota

60% of the people who live in Burns work for the BLM.

Looney

Oops! ;-)

alexcojones

I think Pitchforks are way too tame. If this patriot lived today he would be decalared a TERRORIST

The First Hero of the American Revolution

Mark Mywords

" Surely today's elites are going to learn how to fear before we see any reversal of the recent concentration of wealth and power."

Surely, you jest. The proles won't attack the elites. They won't be able to find them, or get to where they live.

Tyler(s), you need to stop posting such meaningless tripe. When the serfs rise up, they will attack what is around them. As always.

bbq on whitehou...

The internet doesnt forget or forgive transgressions. Sins of the father shall be paid for by their sons.
"Where are you going to run, where are you going to hide; no where because there is no where left to run to." - Body snatchers

tarabel

I think you are correct so far as you take your argument. Yes, they will START on their own neighborhoods.

The depth of the fall can be graphed against how far they will go afterwards.

El Vaquero

Then we just cut their supply lines.

knotjammin2

It is our son's and daughter's who protect the elitist assholes. We know where they built their bugouts and landing strips. We built them. We know where the air vents are for their underground bunkers. We built them. We know where the diesel tanks are to power their generators and you can't hide solar panels. No, we know where there going and how to get to them. Soon!!

Mr. Universe

Now you know why the hawaiian's, when they sent a worker down the side of a cliff to bury the chiefs bones in that space reserved for the Ali'i, they "accidently" let go of the rope while he was climbing back up...oopppps, sorry bout 'dat brah.

indygo55

"The proles won't attack the elites. They won't be able to find them, or get to where they live."

Oh you mean like the French Revolution or the Chinese Revolution? Like that?

HardAssets

No, the proles do little of substance. But, the time is reached when even their paid off guard dogs will be tired of the insanity that destroys their own extended families. (The psychopaths can't help but push it to the extremes. That is their egotistical nature. Theyve been indulged since they were infants.) When that day of reckoning comes, the criminals will be very afraid.

The EU 'leadership' bringing in massive outside foreign populations to destroy the existing culture and nation-state is a potential match for the fuse of anger. We see police carrying out orders, but what do they really think ? How bad will they let it get ? Even the Red Army troops refused to go along with it all when the grandmas scolded them for taking part in rolling the tanks toward their own people. And those troops said "Nyet, no more of this." And the USSR was no more.

conraddobler

Maybe they haven't played a lot of sims?

I used to love the old sims of feudal japan where you could set your tax rate at whatever you wanted but the higher you set it the more likely you would get a peasant revolt.

What's going on is precisely this:.....

They have learned how to set the tax rate at whatever percentage won't cause utter chaos and then absolve themselves from said taxes through loopholes AND THEN add on top stealth taxes in the form of currency debasement AND THEN on top of all this they've built a ponzi scheme debt based fiasco that is entirely unsustainable.

I gotta hand it to them they have managed so far to avoid the ire of the peasant class, however methinks that once this shit show rolls into town and starts playing nightly as in reality comes a callin then these same folks are going to need to hide off planet.

Seriously I'd advise them to look into space travel.

DipshitMiddleCl...

The elites today were related to the elites of yesterdays revolutions

They have learned and are keeping track of everything and with the advent of big data and lots of computing power, they know how much time they have before SHTF.

They have quants assessing risk daily, and not just market risk..geopolitical and other stuff.

They dont fear us because they know they can keep ramping up poisoning of our food and other stupid social media gimmicks.

If all else fails, the jackboots will come out in full force.

They've been testing and training these detention methods for close to 100 years. From the gulags of Russia to the West Bank / Gaza strip today of Israel.....its being tried and trued.

And we're next!

~DipshitMiddleClassWhiteKId

carlnpa

The past nine months have set record monthly background checks. I believe we as a "group" know and feel our existence is in danger, and are responding accordingly.

alexcojones

Certainly a patriot CANNOT do it through the ballot box,

Iowa: Days before the Iowa caucuses in 2012, Ron Paul held a commanding lead in the polls and all the momentum, with every other candidate having peaked from favorable media coverage and then collapsed under the ensuing scrutiny. Establishment Republicans, like Iowa's Representative Steve King (R), attempted to sabotage Paul's campaign by spreading rumors he would lose to Obama if nominated. . . Iowa Governor Terry Barnstad told Politico , "[If Paul wins] people are going to look at who comes in second and who comes in third. If Romney comes in a strong second, it definitely helps him going into New Hampshire". The message from the Iowa Governor to voters of his state was: a vote for Ron Paul was a wasted vote.

How t he Republican Party Stole the Nomination from Ron

August

The RNC and their minions would have prevented a Ron Paul pesidential nomination, by any means necessary - up to and including a terrible, just terrible, plane crash. All those lives lost....

pipes

They DID prevent the nomination by any means necessary...and did so, short of crashing a plane. The underhanded shit they pulled in '12 sealed their fate. Kirk2NCC1701

In that case, the Libertarian Party needs to go "full Zio-mode": Take no BS and no prisoners.

Problem is, they are too "individualistic" (divided, heterogenous), and too 'Christian' (raised in "Religion of Serfs") to create another American or French Revolution, or bring about real change.

Note that in the American Revolution, its Founders realized that the influence of Clerics needed to be curtailed, and so they invented the "Seperation of Church and State". The French, OTOH, called a spade a spade, and got rid of the Church completely.

Amerika: Where kids are taught by their parents to believe in the Tooth Fairy, Easter Bunny and Santa Claus -- all the while they believe in "Santa for Grownups", i.e. Winged Nordic Humans (Angels) and a Sky God.

I have ZERO faith that Libertarians will do anyting, other than talk, blog, hold meetings, conventions, have weekend warrior games, or buy any number of Doomsday Products and Services. IOW.. they'll do anything and everything, but March or Protest en mass. They won't even do TV program, much less do a leveraged buyout of a TV channel.

Like I said: "Too individualistic, to truly matter to TPTB". I WISH it were not to, but I'm just calling it as I see it. Alas. If I'm wrong, I'll jump for joy and click my heels.

alexcojones

BTW - Fuck Iowa

And thank you Stanford for Stomping them in the Rose Bowl

Pitchfork Voting Machines

all-priced-in

Do they have to get off the sofa or can they just send it in on Instagram?

[Feb 01, 2016] Faber Cant see another bull market in my lifetime

www.cnbc.com

Faber: Can't see another bull market in my lifetime

Jacob Pramuk | @jacobpramuk
Wednesday, 27 Jan 2016 | 10:12 AM ET
CNBC.com

The world according to Faber</p> <p>Marc Faber, The Gloom, Boom &amp; Doom report, joins Fast Money to give his take on the current market conditions.

Emerging market stocks will outperform U.S. equities when another bull market comes, noted bear Marc Faber contended Tuesday. But Faber sees one problem - he believes markets will not enjoy another bull run in his lifetime.

Still, the Gloom, Boom & Doom Report publisher sees a potential recovery for some emerging market economies, particularly Russia and Brazil, which have endured a recent slowdown.

"There are some that are extremely depressed that could have large rebound potential," Faber said during a Tuesday evening panel discussion at the ETF.com Inside ETFs conference in Hollywood, Florida.

Stock prices have broadly fallen worldwide this year, with lower commodities prices and fears of a global slowdown contributing to investor concerns. Economies dependent on natural resources have been hit particularly hard. Brazil and Russia, once stars of the emerging world, have been damaged by oil as well as political issues.

While Faber has made a name on pessimism, he contended that bright spots for potential growth still exist in emerging markets. He pointed to Cambodia and Vietnam, among other Asian economies.

Mark Yusko, chief executive officer of Morgan Creek Capital Management LLC.
Guy who called $30 oil year ago has more bad news

"I wouldn't take an across-the-board negative view about emerging economies," Faber said.

Another investor on the panel Tuesday stressed that market watchers should not package all emerging economies into one basket. Marten Hoekstra, CEO of Emerging Global Advisors, is particularly optimistic about growth prospects for India, the world's second-most populous country.

His funds have attempted to benefit from consumer demand there through consumer discretionary and staple stocks, as well as health care, telecom and utilities companies. While Emerging Global's India Consumer ETF (INCO) has fallen this year, Hoekstra touted its prospects for long-term investors as consumer spending power grows in India.

Bill McNabb, chairman, president and CEO of Vanguard Group
Vanguard CEO: Expect less from stocks for a decade


He stressed that the Indian economy does not rely on oil or natural resources, which reduces its downside risk if the commodities crunch persists.

"If you're generally negative on oil, you're probably bullish on India," Hoekstra said.

Mark Yusko, founder and CEO of Morgan Creek Capital Management, said during his annual "bold predictions" talk on Monday that India had attracted his attention and would perform better than most emerging economies.


Despite Hoekstra's optimism, widely followed commodities commentator Dennis Gartman, who was also on the panel Tuesday, said that he had no immediate plans to invest in emerging market economies.

"It is the continued reliance upon commodity prices that causes me a great deal of concern," he said.

Gartman contended that corruption in some emerging market governments reduces the safety of investing in those locales.

[Jan 30, 2016] How Central Banks (and Even Keynes) Misled the Public About Banking and Money

Notable quotes:
"... By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website . ..."
"... Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission. ..."
"... Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesnt know how banking works or 2) he is part of the conspiracy to keep the public in the dark. ..."
"... The truth right from the mouth of the worldss oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf ..."
"... Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesnt understand where money comes from… ..."
"... There is evidence that Krugman seems to have great difficulty admitting he was wrong. ..."
"... And what he writes makes me think he doesnt know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong. ..."
"... My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion. ..."
"... I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe Im just too stupid, but it always strikes me that when people simply describe something, they either really dont know, or they are trying to bamboozle you… ..."
www.nakedcapitalism.com

By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website .

In his recent paper, "A Lost Century in Economics: Three Theories of banking and the conclusive evidence" , Richard Werner argues that the old "credit creation theory" of money is true (empirically "accurate"), while both the newer "fractional reserve theory" and the presently dominant "debt intermediation theory" are false. For him, this matters mainly because the false theories are guiding current bank regulation and development policy, leading down a blind alley.

But it matters also simply because we need correct understanding of how the economy actually works, "we" meaning not just economists but also the general public. "Today, the vast majority of the public is not aware that the money supply is created by banks, that banks do not lend money, and that each bank creates new money."

Why is the public ignorant of the truth? Much of Werner's paper is devoted to an account of how the correct theory was pushed out of the conversation, first in the 1930s by the fractional reserve theory, and then after WWII by the debt intermediation theory. One culprit was a shift toward deductive and away from inductive methods. Another culprit, he suggests, was the self-interested "information management" by central banks, i.e. direct suppression of truth in their own publications. And in this suppression, he further suggests, Keynesian academics were at the very least complicit: "attempts were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and lead them away from the important insight that each individual bank creates new money when it extends credit."

In this history, Werner gives special attention to Keynes himself since Keynes seems to have held each of the three theories in succession throughout his life. Keynes' own intellectual trajectory thus foreshadows the subsequent evolution of monetary thought, and so probably is partly responsible for leading successive generations astray. Just so, one apparent legacy of Keynes is that the Bank of England is currently holding all three theories at the same time! "Since each theory implies very different approaches to banking policy, monetary policy and bank regulation, the Bank of England's credibility is at stake." BoE credibility is thus a third reason that all of this matters.

But is it really true, as Werner claims, that these three theories are "mutually exclusive"?

He is at considerable pains to show that they are mutually exclusive, by using a succession of stylized balance sheet examples. The credit creation theory says that banks make loans by creating deposits, essentially expanding their balance sheets on both sides by the same amount. (The borrower of course also expands his own balance sheet, the loan being his liability and the deposits being his asset. In my own "money view", I call this a swap of IOUs.) In this way, money (bank deposits) is created that was not there before.

By contrast, the debt intermediation view says that banks make loans by lending reserves that they are already holding, essentially swapping one asset for another, these reserves having previously been obtained by someone's deposit. The balance sheet expands when the deposit is made, not when the loan is made. Banks merely intermediate between savers and borrowers, and do not create money.

In between these two views, the fractional reserve view says that individual banks make loans by lending reserves, but that the banking system as a whole can and does create money, up to a multiple of reserve holdings. The banking system does create money, but only after and as a consequence of the central bank increasing reserves–this is the famous "money multiplier".

So the difference between the theories seems clear, and it also seems like that difference should be testable empirically simply by watching actual bank balance sheets and seeing what happens when a loan is made. Does the balance sheet expand or does it not? With the cooperation of an actual bank, Werner books a dummy loan and finds that the balance sheet of the bank does in fact expand. This he takes to be scientific proof that the credit creation theory is correct and the others are false.

Not so fast. Let's look a bit closer.

Let me begin by admitting my sympathy for Werner (as I have already hinted by mentioning my own "money view" as a version of the credit creation view). In fact, Werner's heroes–H.D. McLeod and Joseph Schumpeter–are my own heroes as well, and I suspect that graduate school exposure to these authors sent him off on his own intellectual journey just as it did me. Even more, thirty years after that initial exposure, I find Werner's (co-authored) money and banking textbook "Where Does Money Come From?" one of the best introductions to the subject. Last fall I assigned Chapters 2 and 4 in the first two weeks of "Economics of Money and Banking" which I teach at Barnard College, Columbia University. I'm sympathetic.

But I don't think these three theories are quite as mutually exclusive as he makes them out to be.

For me, the central analytical issue is the distinction between "payment" and "funding" .

Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since you have swapped one asset (your house) for another (money). That's the payments perspective.

What about the funding perspective? If we follow the balance sheets through, it is clear that your money holding is the ultimate source of funds for my borrowing. (You lend to Chase, which lends to Citi, which lends to me.) In this sense, we can think of both Chase and Citibank as intermediaries, channeling funds from one place in the economy to another. But, in this example, there is no saving and there is no investment. The sale of the house adds nothing to GDP, it is just a transfer of ownership. The expansion of the banking system has facilitated that transfer of ownership by creating a liability (the deposit) that you apparently prefer to your house, at the same time acquiring an equivalent asset of its own (the loan). Citibank collects the spread between the mortgage rate and the interbank rate; Chase collects the spread between the interbank rate and the deposit rate.

But all of that is only what happens right at the moment of payment. What happens afterwards depends on the further adjustment of all of these balance sheets. One way this could all work out is that Citibank packages my mortgage with others to create a mortgage backed security, and that you spend your Chase deposit to acquire a mortgage backed security (perhaps indirectly through a mutual fund that stands in the middle). In this scenario, the newly created money is newly destroyed, the balance sheets of both Citi and Chase contract back to their original size, and the end result is that you are funding my loan directly. But again, no saving and no investment, just a change in your asset allocation, away from money toward fixed income investment.

Obviously this final scenario is a limiting case on one side. The limiting case on the other side is that you (or whoever you transfer your money to) are willing to hold the newly created money balances as an asset, so you continue to fund my loan indirectly. Now when Citibank securitizes and sells, it is able to repay its interbank liability to Chase, and for simplicity let's say that Chase uses that payment to acquire a different money market asset. One way this could all work out is that a shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral for wholesale money market borrowing from Chase. Again, no saving and no investment, but the new money stays in circulation and is not destroyed.

These are the limiting cases, and obviously anything in between is also possible, depending on the portfolio decisions of Citibank, Chase, and you. But in all the cases, the debt intermediation view of banking is perfectly consistent with the credit creation view of banking. One focuses on the ultimate funding, while the other focuses on the initial payment.

That said, I have to agree with Werner that the credit creation process is all too commonly left out of the story–most modern courses never even mention the payments system–and it is a real (and important) question how this came to be so. It is a further real (and important) question why the intellectual memory of how the process actually works was left to marginalized sections of academia–Werner mentions specifically the Austrians and post-Keynesians. I'm not so sure that it was a central bank plot, though I do think that the shift in academic fashion toward studying equilibrium of a system of simultaneous equations played a role in obscuring the kind of dynamic balance sheet interactions that are the essence of the story.

What I would emphasize however is not the negative but the positive. The fact of the matter is that today the credit creation view is out of the shadows, and no longer the exclusive property of the marginalized . In evidence of this, I would direct your attention to the two Bank of England papers that Werner himself cites: here and here . But I would add to that also the most recent report coming out of the Group of 30 "Fundamentals of Central Banking, Lessons from the Crisis" . On page 3 you will find the following:

"In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank's liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet."

That's the truth that Werner wants central banks to admit, and now it appears that they have admitted it. The next question is what difference it makes, and that's a question for next time. Already it should be clear that progress toward answering that question will require us to be more careful about issues of payment versus funding.

P.S. BTW, the title of this post [at Merhling's site, which is "Great and mighty things which thou knowest not" [?]] is taken from Jeremiah 33:3 which Werner references in a footnote to his title: "should grains of wisdom be found in this article, the author wishes to attribute them to the source of all wisdom." Werner is apparently listening to powers higher than just McLeod and Schumpeter!

tricky rick , January 29, 2016 at 10:11 am

Chris Martenson and other "tin foil" folks have been laying this out in well documented studies for over a decade.

welcome too late to the party.

John Merryman , January 29, 2016 at 10:59 am

I think another aspect that should be considered is the preservation of surplus money through government debt.

For example, Volcker is credited with curing inflation through higher interest rates, but that slowed the economy as well and so reduced the need for money. It wasn't until Reagan had increased the deficit to 200 billion in 82 that inflation seemed to come under control enough that they could lower rates.

Now one way to create higher rates is for the Fed to sell debt it bought to create the money in the first place. So what is the difference between the Fed selling debt it is holding and the Treasury issuing fresh debt, other than the Fed destroys its money and the Treasury spends it on public works, thus Keynsian pump priming.

So who buys this debt, but those wealthy enough to have surplus money. Which suggests that if there is a surplus of money in the system, causing inflation, the easiest place to remove it is from those with a surplus of money.

Now money really does function as an enormous, glorified voucher system and what is more destructive of such a system, than enormous amounts of surplus vouchers?

So given that those with lots of such excess vouchers consequently have leverage over the rest of the system, what way to better preserve this wealth, than to have the public borrow it back and pay interest, even if much of what it gets spent on doesn't produce sufficient income to pay that interest, if not actually lost?

Eventually though even the public can't afford to keep this up, so what is the alternative?

Now most people save for predictable reasons, from raising children, housing, healthcare, to retirement and funerals. So what if the government, i.e., the public, were to threaten to tax excess money back out of the system, rather than just borrow it? Necessarily people would quickly find means to invest into these future needs directly, rather than trying to save up notational value. The problem is that we don't know exactly what we will need for what, which would mean we would have to invest into community and public projects, rather than save for our own specific needs.

While this might seem onerous, consider that we currently live in a highly atomized society, that is largely mediated by that failing financial mechanism. So if we had to start functioning as a more holistic group, with more organic interactions and public spaces and commons, people might have to come out of their shells a little more and deal with lots of other social and personal issues, which might not be a bad thing.

Basically we treat money as both medium of exchange and store of value, but these are different functions, as a medium is dynamic and a store is static. For instance, in the body, blood is the medium and fat is the store. Try storing fat in the arteries and you get clogged arteries, poor circulation and high blood pressure to compensate, which is analogous to our financial issues, with a clogged banking system, poor circulation to the rest of the economy and quantitive easing to compensate.

While the brain might need more blood than the feet, it does neither any good for the feet to rot and die from lack of circulation, nor does it do the brain any good to have excess blood. Similarly we need a stronger social structure and a leaner, more efficient economic medium, in which the excess is stored as the muscle of a stronger society and a healthier environment, rather than just treating them as stores of wealth to be monetized and siphoned away.

Helmholtz Watson , January 29, 2016 at 11:06 am

Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission.

Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesn't' know how banking works or 2) he is part of the conspiracy to keep the public in the dark.

The truth right from the mouth of the worlds's oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

fresno dan , January 29, 2016 at 11:20 am

Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesn't understand where money comes from…

jsn , January 29, 2016 at 11:46 am

In the mainstream world money is just a "veil" that obscures your view of how the divine markets work. They deliberately leave it out because it just confuses things…

No wonder no one in that world saw the GFC coming, they still all claim whocuddaknowed?

larry , January 29, 2016 at 1:37 pm

There is evidence that Krugman seems to have great difficulty admitting he was wrong. He even contends that using IS-LM is a good too for introducing students to the macroeconomy, even when they must unlearn it when they delve deeper in to the workings of the macroeconomy, and this is after Hicks himself rejected it as being an inaccurate depiction of the macroeconomy later in his life. I can't say what Krugman is thinking, but then I don't have to. I can go just by what he writes. And what he writes makes me think he doesn't know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong.

helmholtz watson , January 29, 2016 at 2:51 pm

Yes it's hard to believe that Krugman might not know how money/banking works but he is a very ideological guy. I happen to be sympathetic to many of his ideological views but any one who is intensely ideological is rarely a critical and independent minded thinker. Ideology is way of simplifying complex things and making your self more comfortable, and doesn't lead to knowledge. I am no expert on money and banking but I have read ten books on the subject over the last four years and numerous papers. I am pretty sure I understand it now. I think this guy Werner is right. It seems probable that there was an orchestrated campaign to obfuscate how banking and money creation work and one can imagine why that might have happened. Banking is quite literally a pyramid scheme under even the most conservative circumstances! Such a system can work and makes sense if it is prudently managed, regulated and limited in scope.

My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion.

Christer Kamb , January 29, 2016 at 7:10 pm

Sorry Mr Watson but the swedish Riksbank is the world´s oldest central bank

fresno dan , January 29, 2016 at 11:18 am

I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe I'm just too stupid, but it always strikes me that when people simply describe something, they either really don't know, or they are trying to bamboozle you…

I think the article would have been more enlightening though if the example had been for a house that was TO BE BUILT.
Using that as an example, it seems to me that money is LOANED into existence – the person who wants the home loan has a good reputation, but the whole point of the loan is that they don't have nearly enough money to buy the house.

The carpenters and other workers don't get paid until they have done work (they loan their work to their employer), i.e., produced a house (or some portion of it). The money in the loan becomes real because a house that didn't exist now exists. There is more stuff in the world, and there is more money. And I think it explains something important – not any loan is useful. A house worth 100K that is sold for 1000K but than is foreclosed upon – somebody has to take a real loss – either the person who got the home loan, and to the extent that they can't pay the loan back, a builder or the bank takes the loss (if the foreclosed value is less than the original loan value)
So, is that correct?

Again, thanks for the article and I am looking forward to the next one!

paulmeli , January 29, 2016 at 11:23 am

Pick any year post WWII (because the data is readily accessible).

Compare the levels of federal spending and credit expansion.

Federal spending created more money every year except for the years 1998 thru 2007, where it was about even, and for 2006 and 2007 credit expansion was some 50% higher.

Then we got the mother of all credit crises.

Over that post WWII period federal spending created ~$78T while credit created ~$46T.

The common refrain is that federal taxes subtract from federal spending so it ends up being less.

Except in what universe do income taxes accrue only against income resulting from federal spending? It's nonsense and should be derided as such. It's an accounting convenience that does not reflect what is actually happening.

It may make sense for National Accounting (and to keep banksters in the drivers seat) but it makes zero sense in a rational analysis of a real-world system. That is the only way banks could be touted as the source of most of our money.

Despite an otherwise sound argument this article perpetuates the myth.

The banksters apparently have a hold on everyone, including the so-called 'good guys'.

Some justification based on the level of bank reserves or some other convoluted argument in 5,4,3,2,1 …

financial matters , January 29, 2016 at 11:31 am

Very interesting and I'm looking forward to your next installment.

I'm especially interested in the transfer of reserves from Chase to Citi and as you further point out 'Chase possibly using its reserves to acquire a different money market asset. One way this could all work out is that a shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral for wholesale money market borrowing from Chase.'

This seems to be a transmission mechanism for asset appreciation as Eric Tymoigne is getting into is his excellent series:

"post 7 will start the private-bank posts) on monetary policy and the QE -asset price channel will be explained. But here is a short answer:
No bank's don't use cash to buy assets. If they deal with non-bank agents they just credit bank accounts, if banks deal with a fed account holder they debit their reserve balances to make payments.

The link works through interest rate, arbitrage, search for yield, and the fact that QE reduces the quantity of securities available in the market."

"the issue is how they would transfer the funds to make the purchase? They could buy securities if they find a fed account holder willing to sell them securities: Treasury is one, GSE is another one. Non-financial institutions no."

craazyman , January 29, 2016 at 11:31 am

All they do is talk about how the parts of the machine move - which is itself an amazing problem of conceptual collinearity - but not the phenomenon of the machine itself.

More and more you just say "Why not go to Youtube and check out a Rhianna video, rather than read another one of these essays."

Eventually maybe they'll get it. But when they study economics their whole adult life - and nothing else - it makes it hard. It's not like they're dumb or that they lack mental ability. In fact, they're all intelligent individuals who are quite capable in most areas of thinking. It's just that the conceptual language they need to use in order to perceive the phenomenon itself is a language they do not know. And so they look at reality and they try to make sense of it using the language they do know, and because words themselves and the ideas in the words catalyze perception, their limited language is not fully adequate, and they don't see or know that. What can you do? Everybody has to see it for themselves.

At any rate, you'd think by now it wouldn't be so hard. But most people aren't interested in this sort of thing so progress is really slow. Most people just go right to Youtube.

susan the other , January 29, 2016 at 12:28 pm

Adenosine triphosphate. The example several years ago in the comments, by a biologist, that it would be an extinction event for a colony of amoeba if a few of them decided to short amoeba futures and just hoard all the adenosine triphosphate – the one chemical every amoeba must have to transfer energy. Wish it had been an analogy to symbolic ADP which had usurped the real stuff and was being hoarded to make sure it maintained its value.

susan the other , January 29, 2016 at 12:32 pm

ATP

craazyman , January 29, 2016 at 1:10 pm

very nice! you have always impressed me with your thoughtful and penetrating intelligence.

(even though you go off the wacko, foo-foo, hug-the-trees cliff sometimes.)

Clive , January 29, 2016 at 2:16 pm

You assured me susan was a bona ride adjunct professor of theosophical studies at the University of Magonia. I want, nay, I demand my tuition fee, which apparently I had to pay in advance because otherwise 42 other Chinese applicants would be in line for my place, back.

craazyman , January 29, 2016 at 2:45 pm

she's a full profeser of creative analysis. she hugs trees as an adjunct profeser of foo foo philosophy

craazyboy , January 29, 2016 at 4:16 pm

Dunno why they have all these theories. It's simple. The Fed lowers interest rates, the mark to market value of bank assets go up, which greatly improves cap ratios, then banks don't need liabilities anymore. They just can make endogenous money and give it out to borrowers' banks.(it's all done electronically and fast so no one notices) All the Big Guy econ types know that.

All the rest of it is just details banks go thru just for show. Plus they can securitize and sell any assets they think may drop in value. They're smart people.

Now, the other thing all the Big Guy econ dudes always say is once us little folk figure it out, something wonderful is supposed to happen. Maybe I missed it, but what thing is that???

Maude , January 29, 2016 at 11:33 am

You forgot one piece…

Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since you have swapped one asset (your house) for another (money). That's the payments perspective.

Is the house owned free and clear? If not, the exchange eliminates that original liability/asset on someone else's balance sheet so everything is now at a net zero as far as new money circulating in the economy. Banks did not create anything new. They only exchanged one Asset/Liability for another Asset/Liability. Even if the house was paid off 20 years ago, there is no new money created from this transaction. The only way "new money" is created would be through interest paid on Treasuries, and direct deficit spending by federal government.

Mustsign topost , January 29, 2016 at 12:08 pm

debt intermediation theory is this: consumer loans -> salary -> pension funds
kleptocracy is this: privatization -> state spending -> profit

Anon , January 29, 2016 at 12:09 pm

As the commenters on the post at Prof. Mehrling's site have observed, his argument is logically flawed. He concludes: "But in all the cases, the debt intermediation view of banking is perfectly consistent with the credit creation view of banking."

The intermediation view of banking "says that banks make loans by lending reserves that they are already holding," as he explains at the beginning of his piece. In his example, the deposit that is created by the banking system funds the loan. Of course, in both case intermediation takes place but the nature of the intermediation is not comparable.

In the first case, banks have no special status in the economy. After all any of us who has a balance of $100 can lend out that balance of $100. In the second case, the only reason the bank can make the loan is because of a social norm in which the public trusts the banking system and is willing to keep its money in banks. This fact has always been a fundamental component of the credit creation theory of money - it is founded on the public's trust in the banking system. This trust allows banks to expand the money supply - at the potential expense of the public.

While I have great respect for Prof. Mehrling, it is far from clear that he has a good understanding of the credit creation view of money.

diptherio , January 29, 2016 at 12:29 pm

When I looked into the data about 5 years ago, it appeared that only a few large banks were actually operating on a credit-creation basis. Most banks (meaning your local, independent banks and credit unions) appeared to be operating on an intermediation model. Deposits are always the cheapest way to fund a loan, and for small banks, that looks like pretty much the only way they do it – iirc, loans were 60-80% of deposits in most banks. However, at JPM, BofA, etc, their loans were well over 100% of their deposits…like waaaay over. So it looked to me like just a few big players were driving endogenous money creation, while most banks actually were doing, essentially, what fractional-reserve theory says they do.

That's my understanding, but I don't claim to be an expert.

Anon , January 29, 2016 at 12:36 pm

diptherio:

Banks no longer keep their loans on balance sheet, so a simple static analysis of their balance sheet doesn't tell us much about how much credit creation they are doing. To study the degree to which banks create money you have to look at the role they play in the shadow banking system as well.

Skippy , January 29, 2016 at 6:28 pm

Too some degree… my concerns about the shadow sector vastly out weigh the traditional sector e.g. has the traditional sector become [increasingly] just a front house op to generate velocity for the shadow sector, and the latter just needs a – store of – when the economy gets a black eye.

Skippy , January 29, 2016 at 7:17 pm

Therein lies the rub e.g. some fixate on one component of a veritable galaxy of operational scope, so at this juncture on can surmise that new universes of credit are created and inserted into the multiverse to survive on their own [inhabitants luck of the draw]. Maybe theoretical physics would be a better methodology of describing credit activity's at this juncture than thermodynamics, ideology, or socio-economic-political optics…

JeffC , January 29, 2016 at 9:29 pm

There's a confusion here. Suppose a bank with reserves R and corresponding deposits X, in addition to other balance-sheet items, has

R X.

at the top of its balance sheet. It makes loan L, which creates new deposit D to obtain balance sheet

L D *
R X.

The borrower/deposit-holder transfers her deposit to another bank, so the original bank's balance sheet drops down to

L X,

while the new bank gains this on its balance sheet:

R D.

So the sequence is (1) create new deposit D and (2) transfer the deposit to the new bank. This is the money-creation model in action. It is correct.

When we imagine that reserves are being loaned instead, we are actually skipping the balance sheet marked * above. Comparing the balance sheet before and after the skipped one, we come to believe that reserves have been turned into a loan. This is incorrect. The newly created deposit is simply in a different bank. To see what is really going on, we have to consider the loan and transfer separately.

JTMcPhee , January 29, 2016 at 4:57 pm

Can anyone tell me where that $100 came from? Or the $200,000 to buy that archetypical house? We got lots of "blind philosophers feeling their part of the elephant and pronouncing its essence" but where does "wealth" originate, as opposed to money and "assets?"

cnchal , January 29, 2016 at 10:50 pm

. . . but where does "wealth" originate

(MMT – Material Meets Tool X sales) – expenses = profit or loss. If it's profit, that is wealth. If it's loss that is hell.

nothing but the truth , January 29, 2016 at 7:59 pm

"In the first case, banks have no special status in the economy. After all any of us who has a balance of $100 can lend out that balance of $100"

yes you can lend it out, but the bank is 1) at the top of collectors line 2) has backing from the FDIC. When you loan 100$ to someone, you dont have that money anymore. When you lend 100$ to the bank, you still have that money, and about 10 other people have it as well.

JTMcPhee , January 29, 2016 at 8:33 pm

I'm sure it must be obvious to brighter and more subtle folks than me, but where does that $100 that's referenced here come from?

I have an antique wood-bodied block plane (the woodworking kind) made by my great-grandfather ( except for the perfect cast iron blade and two nails). He used tools he made or bought to carve the body and chisel out the throat and make the wedge. I was offered $100 for it recently. Where does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come from? Or all the other $100s that make up " the economy" that the MorgulBankers are conjuring derivatives out of?

cnchal , January 29, 2016 at 11:32 pm

. . .I was offered $100 for it recently. Where does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come from?

From your ancestor's labor in creating the plane and an ongoing demand from people interested in acquiring the plane.

Where the $100 offer comes from is the perceived value of the plane compared to other planes on offer, such as for example the Chinese made crap in Home Depot.

Since it sounds like you didn't sell it for $100, you value it at a higher price. Wondrous market eh.

Helmholtz Watson , January 29, 2016 at 1:46 pm

What is truly amazing about this is that in year 2016 there is still massive confusion and ambiguity about how money and banking work. How can that be? Bizarre!

MaroonBulldog , January 29, 2016 at 6:25 pm

Q. How can that be?

A. Easily: "the false theories are guiding current bank regulation and development policy, leading down a blind alley." If correct understanding would lead to a correct regulation, then those whose interests would no be served by correct regulation will obfuscate correct understanding.

Blurtman , January 29, 2016 at 3:21 pm

Banks lend what they do not have.

MED , January 29, 2016 at 3:25 pm

For the TBTF banks, change the famous "money multiplier". up 10% per Billion

kevinearick , January 29, 2016 at 4:08 pm

Psychograpic Marketing, LSD & Mind Control

Baby yoga for kids living in the forest, who never go outside alone; the highest real mortality rate in the US; and the prototype for Family Law feeding Obamacare in the big city – does it get any dumber than that?

The psychologists are just smart enough to get the majority killed. The markets are an exercise in control, a game, and nothing more, until Little Johnny jumps off Science Building and shorts the insanity all together. Did you see that last impulse, transferring wealth to the Soros clan, now demanding another bailout?

The assumption of emotion-based decisions, lest one be a robot, is ludicrous, but that is the basis of empire marketing. The majority short-circuits itself, with the false assumptions presented by empire media broad band, the frequency it chooses to occupy, to mirror itself, and obsessive-compulsive behavior begets itself. The brain stem is a geared Archimedes Screw.

Because the body is grounded to earth, the dc side of the brain is self-obsessed, and LSD offsets the signal into the noise of the clutch, is no reason to hand your life over to a psychologist printing money. Because the predicitive subconscious exists in a feedback loop with adaptation doesn't mean that everyone is sick, stuck on an empire frequency, and mentally ill if they don't seek diagnosis. Money is not reality, except for those who choose it.

Wall Street sells mortgages with increasing duration, Madison Avenue produces crap for compliance at increasing cost, and the majority indentures future generations with bonds, until they can't. Global finance simply liquidates natural resources and moves, in planetary rotation. Relative to unincorporated farming, the land is largely fallow, but the participants have TV, cardboard and gadgets, dependent upon empire for a battery.

Net, populations vacillate between denial and depression, with growing impulses of anger, in a market for psychologists who see others as a reflection of themselves. Married people raising independent children cannot afford to be quite so stupid. And without such children, the economy can only implode, reflecting the psychologists' own self-obsession.

Do you remember that story about the natives not seeing Christopher's ship, until the shaman pointed it out, when the natives were slaughtered by war, disease and poverty?

Females can breed on equal rights for a thousand years, with males providing the technology, but they will just end up a thousand years behind the curve. Women are bred to think in linear time, and men to think in frequency, because that is what children need. One is the counterweight and the other is the cab.

The majority, focused on self, rides the counterweight to floors on one side, all dead ends, and is jealous of children exiting on the other side. The choice at the crossroad is always the same, investment or consumption. The majority is not experiencing falling living standards and increasing income inequality because some banker provided the money, an excuse, for multicultural unicorn dreaming.

Retired people generally prefer a Fred and Wilma economy, city kids generally prefer a rat race, and once separated for the purpose, the police are generally dispatched to slice and dice families into sausage to feed the former, by authorities always pleading ignorance, majority vote. Once you see those cops, promoting gang awareness, it's time to go. At empire cycle begin, you have plenty of time; now you have none.

When I began writing this, I had no idea where the focus would be, but I do have a pattern database and a linear time translator, such as it is. My wife can tell you the weather 25 years, 3 months and 10 days ago. Choose a wife that enjoys living in the moment, and a husband that enjoys an independent frequency, compliments capable of trust in an untrustworthy world.

My mind is a steel trap, my wife's is Disneyland, and we live in the feminist capital of the world, as you might suspect with an ac mind. Your perspective is your own, if you choose to have one, and we all go through phases, climbing and descending the ladder of consciousness. I am simply sharing, after decades of listening and saying not a damn word, in the empire, on the eve of WWIII.

From the perspective of legacy, which has no clue what is in those libraries, the Internet was designed to extend linear thinking, to nowhere. From the perspective of labor, the Internet was designed to demonstrate the fallacy of limiting yourself to linear thinking. Contrary to popular mythology, choice is not about the color of your tennis shoes made in China.

If it's not anonymous cash, it cannot store value, because independent children are reared beyond empire's grasp, the physical manifestation of intellectual self-obsession, which Sweden is now learning, way to late, a slave to Germany, and Austria in particular. Knowing what needs to be done and doing it are two different things. The psychologists in New Hampshire produce drug addiction, their solution is drug rehab, and Iowa is supposed to be nuts.

You didn't think Keynes sprang from nothing did you?

Skippy , January 29, 2016 at 6:30 pm

From opti to me and from me to you….

http://nautil.us/issue/7/waste/blissed_out-fish-on-prozac

ke , January 29, 2016 at 8:52 pm

Thanks. The wife likes to keep track of water. She's like a human testing machine. Best water I had was up at bay of fungi, big moose. That document on Ford's car made of hemp and plastic was pretty cool, before he was told he would be making cars out of steel, finance.

Always thought I would end up in Australia, but like the doctor thing, the critters have to destroy everything they touch.

Thank again

nothing but the truth , January 29, 2016 at 8:05 pm

keynes is describing a dollar based on gold standard.

your problem is that you refuse to see meaning in the real. you see meaning only in money. and money, now, is nothing. it is a fiction.

all these articles are symptoms of your cognitive dissonance. all your meaning is eventually money and money is eventually nothing.

and from this seems to come the idea that since money is nothing, reality can be created from nothing.

not so easy.

animalogic , January 29, 2016 at 9:35 pm

Fiat money is not a "nothing". But it can certainly become a nothing…if everyone loses belief it it.

Skippy , January 29, 2016 at 10:10 pm

How can one lose belief in each other – ?????

Darthbobber , January 30, 2016 at 12:15 am

"Contradictions, of which money is merely the palpable manifestation, are then to
be transcended by means of all kinds of artificial monetary
manipulations. It is no less clear that many revolutionary
operations with money can be carried out, in so far as an attack on
it appears only to rectify it while leaving everything else
unchanged. We then beat the sack on the donkey's back, while
aiming at the donkey. But so long as the donkey does not feel the
blows, one actually beats only the sack, not the donkey;
contrariwise, if he does feel the blows, we are beating him and not
the sack."

At the end of the day, what ultimately needs to be impacted is not the pieces of paper.
All we can ever do with those is hand people claims against future production.

And when the theory of "managing" an economy stops at the control of aggregate numbers as its only allowable tool to influence the process, it can never accomplish the objective of avoiding major crises.

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[Jan 26, 2016] Saving the Banks and Fabulously Enriching a Few On the Back of the Real Economy

Notable quotes:
"... It has become a machine for transferring income, wealth, ownership, and power to the very top. This is not the new normal. This is financial corruption and the erosion of systemic integrity. Are there any markets that have not been shown to have been systematically manipulated, for years? This is just institutionalized looting. ..."
Jesse's Café Américain
"Give a small number of people the power to enrich themselves beyond everyone's wildest dreams, a philosophical rationale to explain all the damage they're causing, and they will not stop until they've run the world economy off a cliff."

Philipp Meyer

"Wall Street is not being made a scapegoat for this crisis: they really did this."

Michael Lewis

"My daughter asked me when she came home from school, "What's the financial crisis?" and I said, it's something that happens every five to seven years."

Jamie Dimon

"The greatest tragedy would be to accept the refrain that no one could have seen this coming, and thus nothing could have been done. If we accept this notion, it will happen again."

Financial Crisis Inquiry Commission (2009–2011)

The US has been in a cycle of bubbles, busts, and crashes since at least 1995, and more likely since Alan Greenspan became the Chairman of the Federal Reserve in August, 1987.

The cycle is the same, only the depth and duration seems to change in a continuing 'wash and rinse' of the public money and the real economy.

It has become a machine for transferring income, wealth, ownership, and power to the very top. This is not 'the new normal.' This is financial corruption and the erosion of systemic integrity. Are there any markets that have not been shown to have been systematically manipulated, for years? This is just institutionalized looting.

[Jan 26, 2016] Public Investment: has George Started listening to Economists?

Notable quotes:
"... The case for additional public investment is as strong in the UK (and Germany ) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ..."
"... However since the election George Osborne seems to have had a change of heart. ... ..."
economistsview.typepad.com

Simon Wren-Lewis:

Public investment: has George started listening to economists?: I have in the past wondered just how large the majority among academic economists would be for additional public investment right now.

The economic case for investing when the cost of borrowing is so cheap (particularly when the government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority would be pretty large just by personal observation. Economists who are not known for their anti-austerity views, like Ken Rogoff, tend to support additional public investment.

Thanks to a piece by Mark Thoma I now have some evidence. His article is actually about ideological bias in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth survey of leading US economists. I have used this survey's results on the impact of fiscal policy before, but they have asked a similar question about public investment. It is
"Because the US has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports."
Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting was that the economists were under no illusions that the political process in the US would be such that some bad projects would be undertaken as a result (see the follow-up question). Despite this, they still thought increasing investment would raise incomes.
The case for additional public investment is as strong in the UK (and Germany) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ...
However since the election George Osborne seems to have had a change of heart. ...

[Jan 23, 2016] Watch out for this $1 trillion stock bubble

Notable quotes:
"... A structural problem may arise when the liquidity demanded by the ETF exceeds the liquidity availability of some of the underlying holdings ..."
"... Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund. ..."
"... But there are some steps investors could take to manage the risks posed by an index fund-dominated market. In addition to investing some of their stock portfolios in actively managed funds, McCarthy suggests investors take a hard look at how diversified they are. ..."
"... First, he said, an investor could make sure he or she isnt double-exposed to the same stocks. ..."
"... Sometimes its better to be vaguely right than exactly wrong ..."
www.cnbc.com

As volatility in the stock market grows, a handful of experts are raising an alarm about the rise of index ETFs and mutual funds, which has never accounted for this much of the market before.

They warn that the unprecedented amount of index ETFs trading in the market - index ETFs accounted for nearly 30 percent of the trading in the U.S. equities market last summer - could magnify, or even cause, flash crashes.

In turn, that may put individual investors, who are increasingly invested in index funds, more at risk. And many may not realize how exposed they are to the risks of a relatively small group of stocks held in the major indexes, said experts.

Tim McCarthy, a former president of San Francisco-based Charles Schwab and Japan's Nikko Asset Management, has been a longtime proponent of index investing. But he now advises that investors diversify their investment styles as well as their asset classes.

He suggested investors move 25 percent to 50 percent of their equity portfolios into actively managed absolute return funds, preferably those with a 10-year track record and a relatively small amount of assets of between $1 billion to $2 billion. (Research has shown over the years that active managers stand their best chance of success before their assets under management grows too high.)

As always, he said, investors should look for low fees.

A stock bubble in index funds

He said he has grown increasingly uneasy about the risks based on the hypergrowth of index funds, and the price difference between stocks outside and inside index funds.

From 2007 through 2014, index domestic equity mutual funds and ETFs received $1 trillion in net new cash and reinvested dividends, according to the Washington, D.C.-based Investment Company Institute. In contrast, actively managed domestic equity mutual funds experienced a net outflow of $659 billion, including reinvested dividends, from 2007 to 2014.

Meanwhile, the price of the underlying equities in index funds is rising, though no one is sure exactly why. Research by S&P Capital IQ, as of Dec. 31, found stocks that were in the Russell 2000 were trading at a 50 percent premium to stocks that were not, up from 12 percent in 2006. The statistics are based on median price-to-book ratio.

That kind of price difference is seen by some as a kind of canary in the coal mine, indicating that there is a bubble in the stocks of companies held in index funds - and that their prices could come down further and faster than other stocks in a downturn. In turn, that could put pressure on the share prices of the index mutual funds and ETFs themselves.

"It's complicated, but it could be a very big problem," said David Pope, managing director of quantamental research at S&P Capital IQ. He and colleague Frank Zhao studied the liquidity in the market for the S&P 500 last summer and identified the 10 stocks that had the biggest difference in liquidity at that time, compared with the index. They included ExxonMobil, Berkshire Hathaway, Johnson & Johnson, Microsoft, General Electric, Wells Fargo, Procter & Gamble, JPMorgan Chase, Pfizer and PepsiCo.

"A structural problem may arise when the liquidity demanded by the ETF exceeds the liquidity availability of some of the underlying holdings," they wrote.

Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund. An active manager could choose to sell any stock in her fund and thus potentially navigate a downturn better. But an index fund manager has to sell exactly the shares held in the index in the same proportion as demanded by the index. If the fund manager doesn't find a buyer for, say, shares of ExxonMobil, the price of ExxonMobil will fall until a buyer is found.

Assessing the risks

While market theorists have always recognized this as a potential problem for index investing, no one has been sure exactly how it would play out or when problems might arise. As long as there are enough buyers and sellers actively setting prices and trading, index funds and stocks should pose no extra risk. It's just that no one is sure exactly how many is enough.

Indeed, not everyone thinks McCarthy is right, and others point to different risks as bigger causes for concern, including the unknown impact of the way that high-frequency traders place orders.

"So we have two new factors when it comes to a potential market situation," said John Rekenthaler, vice president of research for Chicago-based Morningstar. "There are always new factors. Most of the time, new factors don't play out according to expectations."

He pointed out that two decades ago, people worried about what the impact of 401(k)s would be in the market and whether non-professional investors would be apt to sell more quickly in a downturn. The opposite turned out to be the case.

Even if the risk posed by index investing is rising, the growth in index funds doesn't necessarily pose a huge system risk, pointed out Sean Collins, senior director of industry and financial analysis for the Washington, D.C.-based Investment Company Institute. "The share of assets going into index funds is rising. Does that necessarily cause markets to be dysfunctional? The answer is no," he said.

He pointed out how much more diversity there is now in index investing. Much of the money flowing into index funds has been going into markets in which there hasn't been much indexing before, including emerging markets equities and bond markets.

McCarthy said investors would be wise to look at their portfolios with the emerging risk of index funds in mind. There's not much an individual investor can do to guard against the risks posed by high-frequency trading, short of bowing out of the market entirely.

What investors should do

But there are some steps investors could take to manage the risks posed by an index fund-dominated market. In addition to investing some of their stock portfolios in actively managed funds, McCarthy suggests investors take a hard look at how diversified they are.

First, he said, an investor could make sure he or she isn't double-exposed to the same stocks. He cited the case of a friend of his, a doctor, who had invested in blue-chip stocks, some mutual funds and in an S&P 500 fund that turned out to hold - guess what - many of the same blue chips and tech stocks. In the downturn in 2000–2001, he lost 50 percent of his portfolio.

Every market is different, McCarthy said. But in part because of the flow of money into index funds, the U.S. equities market has become more dominated by a handful of big technology stocks. That's something that index fund investors, like his doctor friend, may not easily recognize now.

As someone who has managed the back end of trading systems, McCarthy said he is increasingly uneasy about the level of index investing and has begun to give speeches about the potential dangers of a market in which a growing number of managers are hamstrung by the requirement that they match their indexes.

But he knows that he's at the leading edge of people talking about it -- and that many think he is warning too hard and too fast. "This is unfamiliar territory for me," he acknowledged. "But index investing has so much power, and it's derivative-priced.

"Sometimes it's better to be vaguely right than exactly wrong," he said.

- By Elizabeth MacBride, special to CNBC.com

Read More › Most absurd ETF trade of all - paying 100 basis pts for it

[Jan 18, 2016] Texas Oil and Gas Production Declining - Peak Oil BarrelPeak Oil Barrel

peakoilbarrel.com

Watcher , 01/17/2016 at 6:58 pm

Well, not really reverse QE, or . . . maybe.

If you're an oil funded Sovereign Wealth Fund and oil is flowing money into you, you gotta put that money to work somewhere and that's likely stock markets. Up bias on them. If oil revs stop being big and govt spending exceeds govt revenue then the SWF will be tapped (along with borrowing to fund that deficit). Neither would extract money from the system (the system being uber macro) so it's not reverse QE.

But . . . it is a down bias on equities. Now THAT can be reverse QE via HFT momentum. Money disappears when equity prices fall.

likbez , 01/17/2016 at 7:33 pm

"Neither would extract money from the system (the system being uber macro) so it's not reverse QE."

But stock market drop is in itself a kind of reverse QE.

" Now THAT can be reverse QE via HFT momentum. Money disappears when equity prices fall."

[Jan 18, 2016] When successful investors warn of a global market crash, we should all be nervous

www.newstatesman.com

newstatesman.com

When successful investors warn of a global market crash, we should all be nervous

Profits are so thin that the slightest pothole could cause a crash.
By
Felix Martin

Print HTML

This year's January sales seem to have extended to the world's stock markets. A week in to 2016, you could buy the FTSE for 6 per cent less than on New Year's Eve. It is the worst start to the year in at least two decades.

What is behind these New Year blues? As ever, when it comes to the markets, there is an embarrassment of plausible culprits and a cacophony of self-styled experts willing to tell you what they are. This time, however, you can also turn to someone whose hard-earned credibility is not in doubt.

Martin Taylor is probably the best-known investor you have never heard of. A legend among the trading cognoscenti, he has returned over 20 per cent a year to his investors for more than two decades. On 4 January, he announced that he was closing his Nevsky Fund, arguing that we are heading for a combination of catastrophes that even the most skilful investor will be unable to avoid. His assessment makes fascinating reading. The root of the challenge that Taylor sees facing the world economy is simple. In December 2015, the US Federal Reserve raised its policy rate from near zero for the first time since December 2008. It is likely to be the start of a cycle. The direct effect is that the cost of borrowing dollars is rising. The indirect effect is that the dollar is strengthening on the foreign exchanges. After seven years in the bargain basement, the greenback is becoming expensive again.

Interest-rate hikes are always a shock to the system but they have happened numerous times before over the past few decades: so why should they be such a problem now? The answer is that, this time, the situation is different in three crucial respects. First, interest rates have been stuck at unusually low levels for an unusually long period of time. (In Britain, the Bank of England's rate has been 0.5 per cent since 2009.) Borrowers throughout the economy have got used to easy money; a generation of homeowners and investors has never seen anything else. After more than seven years of cheap debt, the shock of the old will be all the worse.

Second, a terrible irony is at work in the corporate sector. Companies have responded to the lacklustre recovery from the global financial crisis with Protestant virtue, cutting costs and sweating assets, to make do now in the hope of better times ahead. Yet the perverse result is that even those companies that have not gorged themselves on free money are ill-prepared for the end of the cheap dollar era. Profit margins are so thin and balance sheets so stretched that the slightest pothole may cause a crash.

If we are lucky, that possibility will not materialise. Taylor's third fear already has. In today's financially globalised world, the US dollar is the currency not just of America but of half the countries on the map. Borrowing in US dollars by companies in emerging markets stood at a staggering $4trn as of June 2015. Rising US interest rates will put the squeeze on them, too.

By far the most important participant in this global dollar economy is China. Its companies have borrowed over $1trn. Now, just when the Chinese economy is slowing, its debts are becoming more onerous as the dollar becomes more expensive.

If that all adds up to a dismal outlook for the world economy, Taylor's verdict on the state of the financial markets is perhaps even more worrying. Whereas many of us find William Goldman's verdict on the movie business – "Nobody knows anything" – remarkably apt when it comes to economic predictions, few would bet against an assessment of the financial markets from a man with Taylor's experience.

The successful co-ordination of modern capitalist economies rests on three critical supports. The first is reliable data – about company performance and macroeconomic activity – on which people can base their decisions. The second is the transparency and logical coherence of the frameworks used by powerful non-market actors: central bankers, politicians and regulators. The third is well-functioning stock, bond and currency markets, which generate prices that provide true signals to investors, businesses and governments.

Today, Taylor argues, all three supports seem ramshackle. China is the world's second-largest economy and the decisive market for most emerging economies, yet its own leaders deride its macroeconomic statistics as unreliable. The old theories of monetary policy were discredited by the crash and nothing has yet replaced them, and so no one fully understands what central bankers are doing. The financial markets, meanwhile, are dominated by computer-driven trading. They have become a postmodern parody of themselves, in which prices are determined not by economic fundamentals but by the behaviour of other prices.

With an economic and financial-market outlook such as this, the New Year hangover for stocks hardly comes as a surprise. Yet there is a germ of optimism amid this well-founded gloom. In Taylor's analysis, there is barely a mention of any of the structural economic challenges that have been exercising policymakers recently: the secular stagnation, the slowdown in productivity, the threat of technological unemployment, and so on. The problems that he foresees are, almost without exception, financial.

If this diagnosis is correct (and, in large part, I think it is), it is a reason for hope. We are not condemned to crisis or stagnation by epochal forces outside our control. It is the financial system – rules and institutions of our making – that has gone awry. The hardware of the global economy is in reasonable shape. It is only the software that has become corrupt. As such, it can be debugged. The alternative is a crash.

[Jan 17, 2016] The Price of Oil, China, and Stock Market Herding

Notable quotes:
"... Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy, a slowdown that has now gone on for a few years. While there has been no significant news in the last two weeks, maybe markets are only realizing that growth in emerging markets will be lower for a long time, that growth in advanced economies will be unexciting. Maybe… ..."
"... I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ... ..."
"... Skidelsky, always good, at New Statesman. http://www.newstatesman.com/politics/economy/2016/01/optimism-error ..."
"... So like in subprime bubble investment banks were happy to give money to anybody with breath , again. There are also other connection to subprime bubble here, but of course on much lesser scale. In any case it was a kind of subprime oil . ..."
"... Collapse of oil prices not only revealed who is swimming naked (all shale patch players), but also that the US financial sector forgot nothing and learned nothing from 2008 crash and is as reckless as before, in not more. It also negatively affects conventional oil in the US and elsewhere. ..."
"... Also stock markets now are under additional pressure because sovereign wealth funds are selling their holdings to cover the deficits. And all of them were heavily invested in the USA stock market. This is essentially QE in reverse. ..."
"... I think Blanchard is too dismissive of the possibility of a significant downturn in China. ..."
"... Its not just the effect of their declining purchases of global goods to date that has people concerned. Its what the pace of decline says about their economic prospects in the near term, and how all those stories of leveraged investments in real estate and businesses in China portent possible disaster in a downturn. In other words, there is reasonable fear it will get a lot worse. ..."
economistsview.typepad.com

Olivier Blanchard:

The Price of Oil, China, and Stock Market Herding : The stock market movements of the last two weeks are puzzling.

Take the China explanation. A collapse of growth in China would indeed be a world changing event. But there is just no evidence of such a collapse. ...

Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing.

First, that very low prices lead to such serious problems for oil producers that this will end up affecting the United States and dominating the scene. I have no doubt that some countries and some companies will indeed be in serious trouble; indeed, some already are. I can also think of ways in which low oil prices also change the geopolitics of the Middle East, with uncertain effects on oil prices. I find it difficult to think that these will dominate the direct real income effects for US consumers.

Second, that the low prices reflect a yet unmeasured decrease in world growth, much larger than is apparent in other hard data, and that the price of oil, like the celebrated canary in the coal mine, is telling us something about the state of the world economy that other data do not. There is no historical evidence that the price of oil plays such a role. But suppose, for the sake of argument, that, indeed, the low price told us that China is really slowing down. (The fact that non-oil commodity prices, for which China plays a bigger role than for oil, have decreased much less than oil does not support this interpretation.) Then, we would be back to the previous conundrum. It is hard to see how this could have such an effect on the US economy and in turn on the US stock market. Another variation on the theme, which has been raised in some columns, is that the low oil price reflects a slowdown in the United States far beyond what the other current data are telling us. There is zero evidence that this is the case.

Maybe we should not believe the market commentaries. Maybe it was neither oil nor China. Maybe what we are seeing is a delayed reaction to the slowdown in the world economy, a slowdown that has now gone on for a few years. While there has been no significant news in the last two weeks, maybe markets are only realizing that growth in emerging markets will be lower for a long time, that growth in advanced economies will be unexciting. Maybe…

I think the explanation is largely elsewhere. I believe that to a large extent, herding is at play. If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices. Why now? Perhaps because we have entered a period of higher uncertainty. ...

So how much should we worry? This is where economics ... gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover... If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited.

One has to hope for the first scenario, but worry about the second. marcus nunes :

There´s certainly been a lot of recession talk. Some trends are worrisome.
https://thefaintofheart.wordpress.com/2016/01/17/the-plunging-economy/
pgl :
Olivier gives us an interesting and thoughtful discussion of different explanations. I loved his close:

"So how much should we worry? This is where economics stops giving an answer. Or, more specifically, where it gives the dreaded two-handed answer. If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover, just as they did last summer, and this will be seen as a hiccup. If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession. The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited. One has to hope for the first scenario, but worry about the second."

In the first scenario - he is saying the fundamentals suggest a recovery of stock prices. And so many people who don't get financial economics claimed the market was over priced simply because P/E ratios are above "historical averages". Of course these clowns have no clue what Olivier means by the fundamentals.

anne :
Supposing that the work of Robert Shiller is still meaningful, stock market prices have been very high. Stock market prices have been high enough that if historical pattern holds there is reason to expect either a sustained period of little gain or significantly declining prices.

Of course, I know that interest rates have been historically low. I also know that returns from corporate revenue have been increasingly going to leading executives and shareholders rather than to ordinary workers. I even know that careful analysts like Brad DeLong * think stock prices were long relatively low, though why has never been clear to me other than an unfortunate historical fear of holding stocks.

Nonetheless, Shiller's data are disturbing because the reasons for high stock prices are evidently not well understood.

* I will have to look for the DeLong analysis

Sanjait -> anne...
Consider the basic cash flow models of how stocks get priced. The fundamental model is that a stock is worth the discounted value of its future cash flows.

With this in mind, realize that stock PEs are *suppposed* to be higher ceteris paribus when interest rates are low. The discounting rate on a stock moves with prevailing treasury bond rates.

Different analysts might have different earnings forecasts and choose different discount rates to fill the model, but to a rough approximation, the low prevailing interest rates explain almost all of the spread between current PEs and historical ones.

Avraam Jack Dectis :
.
Skidelsky, always good, at New Statesman. http://www.newstatesman.com/politics/economy/2016/01/optimism-error

.

likbez :
"Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States."

He completely missed "shale oil" boom in the USA.

Essentially it was something like conversion of junk bonds into oil, as profitability of those players was questionable even when oil was above $100 per barrel. In other words that was a very expensive oil that was often sold at discount. It was all EBITDA reporting world in which new money for shale companies were very low cost and abundant. No questions asked loans.

So like in subprime bubble investment banks were happy to give money to "anybody with breath", again. There are also other connection to subprime bubble here, but of course on much lesser scale. In any case it was a kind of "subprime oil".

Collapse of oil prices not only revealed who is swimming naked (all shale patch players), but also that the US financial sector "forgot nothing and learned nothing" from 2008 crash and is as reckless as before, in not more. It also negatively affects conventional oil in the US and elsewhere.

Now there are something between $200 and $500 billion of oil related junk debt on the books on banks. And chances for them to be repaid are slim unless oil recovers to previous, above $100 levels. Of cause banks can also take equity in case of bankruptcies but assets were re-evaluated sharply down. So it's again "mark to fantasy" loans situation.

Also stock markets now are under additional pressure because sovereign wealth funds are selling their holdings to cover the deficits. And all of them were heavily invested in the USA stock market. This is essentially QE in reverse.

Some US banks can suffer a shock too. Mostly regional banks. But, for example, Well Fargo has exposure around 17 billion. Some other banks (GS?, Chase?) were also greedy. Around 20% of investment banks revenue were coming from energy. This will change. The total is not life threatening but still pretty able to cause a chain reaction. And if economy slows down and price of oil remains low (say below $50) than not only all shale companies are going to be bankrupt as they have only a limited time to "extend and pretend". There will be a chain reaction to real estate, transportation, municipal bonds, etc. Mostly limited to particular states, of cause.

For example shale oil bust will affect real estate markets in at least five states.

=== Start of quote ===

JPMorgan Chase (JPM) CEO Jamie Dimon, in a call with analysts this week, acknowledged there may be "slight negatives" for the bank related to commercial and real estate trouble in Dallas, Denver and Houston.

http://money.cnn.com/2015/01/16/investing/oil-price-fall-banks-hurt/index.html

== end of quote ===

So it looks like the situation is quite different from what Olivier assumed. IMHO if oil stays low for this year it can became pretty dangerous.

Sanjait :
I think Blanchard is too dismissive of the possibility of a significant downturn in China.

It's not just the effect of their declining purchases of global goods to date that has people concerned. It's what the pace of decline says about their economic prospects in the near term, and how all those stories of leveraged investments in real estate and businesses in China portent possible disaster in a downturn. In other words, there is reasonable fear it will get a lot worse.

Notice that global markets have been following China down. That points us to where the source of the negative surprises are coming from.

[Jan 17, 2016] Oil and US share prices tumble over fears for global economy

www.theguardian.com
Sowatree -> Ibmekon, 2016-01-14 00:24:57
I did hear on the radio last week that there appears an economic war is being played out between Saudi Arabia and Iran. Truth of this I don't know.

But, what does concern the world at these prices are major trading companies may go bust. On derivatives and oil futures somewhere someone is carrying huge losses.

And, concerning the world economy derivatives are a markets of 70 or more trillions dollars , enormous markets, as Warren Buffet once said derivatives are financial weapons of mass destruction.

Somewhere in the world financial system huge losses on derivatives are sitting.

World Politicians shied away from the tough decisions under the guise of quantitative easing. QE appears to have caused greater missallocation of resources.

2008 financial crisis is reemerging from its dormant position. 2008 was just push further down the road.

Social Cohesion in Britain needs this time to really all be in this together.

Ibmekon -> Sowatree, 2016-01-14 09:01:38
" On derivatives and oil futures somewhere someone is carrying huge losses. "

The Big Lie - "zero sum game".
If that is true - play Monopoly in your own time with your own money.
That "zero sum game" pays billions in profits - so where does the money come from ?

"Financial institutions held OTC swaps with a notional value of $505 trillion at the end of 2014, "
http://www.bloomberg.com/news/articles/2015-08-06/europe-moves-to-reduce-risk-in-505-trillion-derivatives-market

Ibmekon -> Ruth Williams, 2016-01-13 21:42:54
Would love to know that myself.
This is a much too specific question for an economist - like asking for the winner of the 2-30 at Kempton.
Perspective is always a good thing -

Debt per Citizen £24,560
Interest per Year £39,648,610,427
UK Debt £ 1,590,708,970,219
Debt as % of GDP 80.81%
http://www.nationaldebtclocks.org/debtclock/unitedkingdom

BantosaurusRex , 2016-01-13 21:14:21
This is what happens when central banks across the world inflate the biggest bubbles the world has ever seen by keeping interest rates at near zero percent for 7 years. Let's make one thing clear - China is not the only culprit for the latest fears over the global economy, to say that many western economies such as the US or the UK have recovered or are on the road to recovery would be disingenuous to say the least.

We have been scraping along at the lowest rate of so-called "recovery" (debt-fueled with ZIRP) after a recession despite these interest rates - what would it have been like if rates were increased a couple of years ago? One can only guess, but it would be fair to estimate that we would be back in a recession.

So, here we are again, back at the latter stages of the next cycle in the boom-bust oscillations of our global economy - and "is this time different"? Yes, but only by the measure that this time there is little that central banks can do to mitigate or even slow the financial crisis. The 2008 crisis never really ended, this year we will undoubtedly see that the real part of that crisis is about to unfold - capitalism should be allowed to take place this time, and if that means huge corporations filing then so be it.

Ibmekon -> BantosaurusRex, 2016-01-13 21:24:02
"if that means huge corporations filing then so be it."

I agree - but they are Ok, in fact loaded with cash.

"May 8, 2015 At the end of last year, U.S. non-financial companies held a staggering $1.73 trillion in cash, up 4% from the $1.67 trillion on hand at the end of 2013, found Moody's."
http://www.forbes.com/forbes/welcome /

So much of the debt has been loaded on sovereigns - what will they do - file for bankruptcy ?

John Olesen , 2016-01-13 21:17:29
OPEC should not allow members to sell oil at a financial loss. Oil is trading below its intrinsic value and there are serious imbalances in the market. Member countries that sell oil below market value lose money in two ways. They add supply to a depressed market and they lose money on the transaction itself. It would make much more sense for OPEC to target minimum profitability as their primary goal for all members rather than trying to use their market position to eliminate producers in the United States.

Since most of the large energy companies in the United States are publicly traded, it would be better for OPEC members to use their profits to purchase equity in these companies rather than trying to make them unprofitable. I propose that OPEC target a specific and stable price long term and then to adjust that price for inflation. For instance, if it is determined that all members can profit at 70 dollar oil, then they should lower production when the price is below that and increase it when it is above that. Member countries then use a percentage of their profits to increase their reserves with share purchases of other non-opec producers, thus increasing reserves long term.

ID7586903 , 2016-01-13 21:33:29
Saudi Arabia has again badly miscalculated. By pumping vast amount of Oil, KSA thought it could sink America, Russia and Iran oil companies and Economies
Well it seems KSA is going broke! I am celebrating...
Ibmekon -> ID7586903, 2016-01-13 21:58:05
Make of this what you will. There is talk of Aramco being floated - biggest IPO ever.
http://www.wsj.com/articles/saudi-arabia-could-list-crude-reserves-in-aramco-ipo-1452509304

Current Saudi finance minster is Ibrahim Abdulaziz Al-Assaf

"After leaving academia, Ibrahim moved to Washington, DC where he represented Saudi Arabia at the International Monetary Fund (IMF) and the World Bank
...
In addition to being finance minister, Ibrahim is a member of the board of directors of Saudi Aramco (since 1996), the state-owned national oil company,
...
https://en.wikipedia.org/wiki/Ibrahim_Abdulaziz_Al-Assaf

makesnoadasense -> ID7586903, 2016-01-13 22:03:02
I wouldn't celebrate too soon, it would appear that there is a looming $200bn debt over American oil and gas...

https://www.rt.com/business/220619-shale-debt-us-companies /

coplani , 2016-01-13 22:25:44
Is this history repeating itself?...but in China.
1998 Russian financial crisis.....Their stock market collapsed followed by a run on the ruble which was devalued.
Most Russians suffered as their pensions, wages etc were severely devalued.
Same could be happening today in both China and Russia...

Financial war....Dinosaurs versus dinosaurs.
How to wreck a country....Trash it's markets and currency.
It's the law of the jungle.....The strongest survive.
However Russia and China will not take it lying down....Scary times indeed.

It seems that the Chinese market is under the greatest pressure...only to be propped up by the government pumping money into it. (printing money)...result will be their currency devalues and everybody in China suffers.

It has happened many times to many countries before...e.g. Germany, Argentina, Brazil, Russia etc....

Ciarán Here -> coplani , 2016-01-13 23:21:25
It's not Russian or China that is "printing" money have you not heard of quantitative easing in the USA $85billion dollars a month.
Penfisher , 2016-01-13 22:28:30
Two quick points.
First, OPEC has increased flow to destabilise Russian & Iranian profits. However, this situation demonstrates that the price of oil should never have been much higher.
Second, China has a better approach to wealth re-distribution than OPEC nations and all advanced economies. If a genuine desire to increase economic activity were expressed then wealth sitting in secret accounts and held by the top 10% would be taxed & spread to the true wheel of economy: ordinary people with poor purchasing power.
bonkthebonk , 2016-01-13 22:50:54
Finally time to unwind?

When the debt merchants, the money alchemists and voracious volatility vultures start panicking (Hey, it's all relative. Don't worry, THEY'LL be fine) and looking for 'safe havens' (anything deemed to have an intrinsic value, but still not gold as, 'we're not bloody savages, y'know...yet'), when prices, particularly the golden goose commodities that kept them in (debt fertilised) speculative clover in their (hopefully fitful) sleep, start to reflect genuine economic reality, then you know it's probably squeaky bum time for the hapless cannon fodder that didn't cause this train wreck, reaped little of its rewards, but nevertheless will bear the brunt of its consequences yet again.

ronnewmexico -> bonkthebonk , 2016-01-13 22:58:38
High rate temporary debt junk bonds are already failing. Those issued on the small oil drillers. But it is a relatively small part of the junk bond market itself nevertheless financial institutions overall.
Small companies are due to fail and will. the larger ones will pick up the pieces at rock bottom prices and things will go on.
ronnewmexico , 2016-01-13 22:55:07
The numbers anywhere in developed economies don't support recession. China by the worst guesses is still par on GDP. By most takes between 4 and 7 increasing GDP. With the looming effects of el nino on India I would not say it could enter a recession in the next 6 months but that would be a isolated event. The US no where close. People are taking the low oil prices as a read on the economy. It is not this time global consumption is going up not down. It is a supply glut.
SirWillis -> ronnewmexico , 2016-01-14 00:39:56
I live near KSA, and I see first-hand how corrupt and morally bankrupt the whole thing is. I also see how incredibly subsidised EVERYTHING is. The people of these countries are little more than spoiled children, with no incentive to work properly or even understand the businesses they are in. Russia has a much more diverse economy, in KSA it is almost entirely oil. The rest of it is industries that rely on oil money - such as the construction sector.

Offering an IPO on KSA's oil will expose the total incompetence and corruption behind the company, I don't know how they hope to hide it all. So, you're right, all is far from well. I will be packing my bags at the first sign of revolution, which I predict will be in 3-5 years. I don't think people yet realise how bad things are going to get once KSA implodes and Iran and ISIS seek to take advantage. It's going to be ugly, and I must admit, I'm a little scared.

PhilPharLap , 2016-01-13 23:21:51
the reason you have a collapsing global economy is because the idiots created one through a battery of Free Trade Agreements that were aimed at over -riding local sovereignty and democracy and accessing scab labour on an international scale

It didn't work did it - by dismantling local industry and exporting manufacture to countries like China the middle class in the West made itself redundant

Welcome to the great unwashed guys - you are one of us now and with less skills to survive - I don't think your economic and managerial skills will impress anyone

You did it all to yourselves ...Get in the queue for the welfare you denied others - and reflect:

"So the last shall be first, and the first last: for many be called, but few chosen."

Or alternatively put - "and wait your turn!"

ronnewmexico -> ronnewmexico , 2016-01-13 23:52:05
People are confusing the stock market with the economy. The economy is ho humming along. The market is artificially inflated in value by above stated factors. Not by a whole bunch but enough to make a sell off of minor sort a probable.
Earnings will once again be real and not a thing of less stock per earning share., Report
AshleyPomeroy -> ronnewmexico , 2016-01-13 23:59:03
I wish I could upvote this twice. It's not like e.g the dot.com crash, where a bunch of hopeless money-losing pipe dreams fell apart. Facebook, Apple et al actually make a profit and have a niche, it's just that with so many other investments offering desultory returns, the stock market has been pumped up by desperate speculators.
Blackbag1999 , 2016-01-14 00:21:18
I am not sure why people think the Saudis are in trouble.

Most of the shale is becoming uneconomical to recover if you believe the forward curve. $50 oil for 5+ years, they will need closer to $100 to go back to the capped wells. The frackers are just taking the first 30% of the cheapest oil to produce (1st 18 months), capping and moving on. They are churning through oil reserves at 3 times the rate to do it.

They can still do it until they get to debt repayment. Anyone thinking the industry got ultra efficient over night is optimistic feller.

The reality is shale gas is not the primary concern. They want rid of artic, deep water and tar sands. My guess is the Saudis would be more than happy to let the US be the swing producer as shale is far more flexible. Shale was the trigger not the problem.

mrfunbro , 2016-01-14 01:43:18
I'd be quite happy to see the whole stock market free fall. The current inequity and greed deserves it's reward. Money for nothing investors and free loader corporations that don't pay their share of taxation will be the ones who go down. A new system is required to break away from the old established power and energy companies that have led us to the brink of devastating our planet.
backatchya , 2016-01-14 02:00:21
The capitalists are the victims of themselves. Fortunately for them, they own the wealthiest states on the planet. And therefore, can always expect welfare, social assistance and
bail-outs whenever they burst another bubble. Socialism for the rich.

We are a stupid species to put up with this casino scam. If you disagree with the ponzy scheme, start by supporting Sanders in the U.S. and Corbyn in the U.K. At least it's a modest beginning to opposing these criminals.

If_Not_Why_Not , 2016-01-14 02:50:01
China stock piling oil is a good idea, may help explain recent capital outflows , of which the article does not explain the opaque /nebulous financial details of these movements. It maybe China shuffling pieces on a board.

"The country's global trade surplus widened by 21% to $60bn in December. Over the whole year it was $594bn. The country's trade surplus in December with the European Union, its biggest trading partner, increased 36.8% to $15.6bn. The surplus with the US contracted 6% to $19.4bn."

No doubt the figures need to treated like all PRC figures.
That said it is undeniable that China had another huge trade surplus.
Yet despite this they manage to cheat on their exchange rate and devalue the Yuan.
The Currency/Trade Wars are in full swing..

HollyOldDog -> litesp33d1 , 2016-01-14 14:32:01
By then then most of the oil residues, waste and plastic products will reside in the Worlds Seas and Oceans. I've not seen much movement to remove the plastic gyres floating around the Southern Pacific Ocean. Land waste management has serious flaws as well. The only 'waste management ' in the UK that is booming is all the junk that motorists chuck out of their cars when mobile - they must think that plastic bags hanging from tree branches 'adds' to natures wonders. In a resturant car park the other day were 2 used babies nappies left in a parking bay - some people are scum and these couldn't have been poor.
Peter Sembol , 2016-01-14 03:35:11
Incredible how low the West in cahoots with Saudi Arabia will stoop, and all in an attempt to crush Russia economically and politically. And the media continues the deceptive narrative about troubles everywhere, brought on by 'competition' among oil producers, except pointing to the true and only reason behind the low oil price. The public in general swallows the 'explanations' forgetting that the ball started rolling downhill immediately after the USA twisted Germany's and other western European countries to impose sanctions on Russia in retaliation for it's welcoming Crimea back to the Motherland. In the name of this geopolitical game, the good people of USA, Canada and other countries whose significant part of income derives from natural resources and related products, are loosing their jobs by the thousands. All is well and according to the plan, as long as Russia suffers more than the West, and will be the first to bite the dust. The world economy will then be turned around to everyone's relief.
MattSpanner , 2016-01-14 04:43:08
Seems the FED's recent interest rate rise was premature. If another 2008 does happen calls to abolish it will grow ever louder, especially since economic chaos will smooth Trump's path to the White House, and Trump has made FED abolition one of his campaign pledges. After repeated failures catastrophes under Greenspan, Bernanke and now Yellen it seems the FED is surplus to requirements., Report
NWObserver -> MattSpanner , 2016-01-14 05:35:59
What will they do after abolishing the Fed? Will they have a single national currency or allow each bank (or any other entity) to issue its own currency and let these different currencies compete with each other?

If they continue to have a single national currency, who will issue it and set the monetary policy? Another Central Bank or the government? If it is going to be another Central Bank what exactly is the point of abolishing the Fed? Why not change the law to allow the government to remove the Fed's board of governors and appoint those they think are more competent than Janet Yellen and other governors, since abolishing the Fed will anyway require the repeal of the law establishing it i.e. it too needs Congressional approval. If the government is going to be issuing the currency and set the monetary policy, in what way would it be superior to the Fed doing the same?

If they allow any entity to issue its own currency, what currency will the taxes be denominated in?

ronnewmexico -> MattSpanner , 2016-01-14 05:42:12
Well the predictions were for four rate hikes in the year. Now perhaps we see two. The one already and another. Things get better and it is up to four. The dow only dropped three hundred or so and the S and P is above its support level, which is about 1857 to my dim recollection.

So till we exceed that support to the downside, really things are not bad. A wash out was probably a necessary thing.

I think people are overdoing this thing. The media seems to be hyping the decline which may account for all the sell side prognostications.
Earning are just beginning. If I see indications that earming are the mover behind the sell off I would have concern. Alcoa all things considered was not that bad. Certainly not as bad as the tape today. OIl by my guess is the real mover as the new lows have people spooked.
I am not to worried it can flip up or down but it really is only a small part of the market nowadays not what it was in yesteryear.

So I repeat this is overdone, that is my opinion. Those calling gloom and doom on this action, no offense but this little resembles any major sell off of a lasting duration spiral down. What is the mover….low oil prices? The rest of the market benefits from low oil prices.

Sentiment can drive things lower but really only for so long. Chinas last numbers reported were better than expected. Me being cynical and seeing the talking heads talking things down anticipate it is the big money movers trying to create some action on the short side. How long they keep this up is a guess. But it requires someone to keep pressure on to move it down. Without new bad news on China, what is the precipitive factor….nothing new here.

ekaai Kaewaniti , 2016-01-14 05:52:46
Unfair market system, Complete waste of time, energy and resources. Destroy all the stock markets along with corporations and Banks. It is time we stop playing this ridiculous economic game and start concentrating on the real issues that we are facing. Poverty, Conflicts in the middle east, environmental degradation, climate change, and many more. What is the root cause of all of these problems? Yes it the socioeconomic system capitalism with its flawed monetary system owned by the corporations and the Banks that does not care about the well being of planet or nature and the well being of all human beings but only care about their own wealth, power, fame, egos. Such idiots!!!!! stop playing their game and move to a new fair game called RBE and other similar systems.
werdzwerth , 2016-01-14 07:17:28
It is very stupid of us to base our economy on something as unstable and selfish as the Stock Market, as well as something as unstable as governments, democratic and otherwise. It is about time we became as intelligent and clever as all these whizz kids who invent amazing technology and make amazing discoveries. It is about time we became whizz kids at organising an intelligent and reliable economy. For us.

Why do banks charge an interest on loans? If the function of money is to get the economy started and running, then the work done and the profits made should be a sufficient reward. Banks could actually give money away on a non-return basis, so long as the money goes to people who will spend it, this spending lending to more spending.

Perhaps the private owners of the current private currencies want more than a sound economy, perhaps they want power, and want to exercise this power just to know for real that they have it? Perhaps they are not fully-fledged human being animals but suffer some form of genetic or social affliction that makes them behave in dangerous anti-social ways? Perhaps they don´t give a fig about other human being animals - other than those who serve their biological wants and needs? Perhaps shareholders are afflicted in the same way?

Perhaps we could form our bank to issue our non-returnable money, and even decide what work is worthwhile and is done and what work is not worthwhile and so will not be done?

Millions of years ago, so we are told, some fish came out of the sea and survived. What I am suggesting is a work and economy evolution of a similar scale. Current economic theory has us all drowning in the quagmire of self-interest-driven chaos, self-styled as a "social science". Perhaps we could come out into fresh air and create a diversity of human activity on a par with the diversity of living things on land and in the air that came from those first brave fish that ventured beyond known limits?

Columbus did not go over the edge of the world but discovered a whole New World.

Perhaps we need to go beyond even the "thinking outside the box" box?

Thank you.

criminalswelcome , 2016-01-14 07:35:29
Who funds international terrorism try the oil rich countries in the Middle East so let's assume the Yanks have got smart for once and are flooding oil market to bring down these economys .
The end game is destabilise them then pick up their oil industries for a song and influence just who makes Middle Eastern policys by economic means .
Bit of a dream but hey nothing falls down in price to this extent without a hidden reason given its a fossil fuel that should be rising to maintain supplies for the long term .
litesp33d1 , 2016-01-14 08:09:40
The economy is like a super tanker and these results are still the effect of the ripples of the economic crash almost a decade ago. The result of lower oil prices will be that ordinary people will start to realise they have more disposable income than they did a year ago and start spending that money on more shit they don't need and the economy will swing back with a vengeance.
paddyryan , 2016-01-14 08:24:08
Well surely all those neoliberal economists can't be wrong....it must be the fault of that evil Mr corbyn and his army of trotskyists.....HA HA we are on the slippery slide to another global crash folks ...
SeeNOevilHearNOevil , 2016-01-14 08:45:19
Sigh....the stock market....virtual money and speculation...Worst thing ever created causing insane chain effects in economies. Although....why were economies booming before when Oil price was low? Cause sure oil companies profits go down, but every other business that uses the oil increases their profit. Isn't this also a good reason to start doing something about being so oil dependant?
humbleandpoor , 2016-01-14 09:50:16
Once in a lifetime chance for the USA to escape from the strangle whole of the Saudi oil grip.
Fracking gives them a chance to break with the Saudi s or even break them for good.
Failure doesn't t bear thinking about, and we all know where Obama s sympathies lie - but in modern America who cares.. the battle is between the giant bureaucracies, not the democratic froth on top of the cake.
Always remember America in you hour of destiny there were Americans long before there was the USA . And will be long after it is gone. And for the love of God .. COLUMBUS did not discover America. Which ironically is named after a Welch sheep farmer.?
Americo FrontHoovesintheWellies was his full name. Knew a thing or two about sex and sheep., Report
Eugenios -> humbleandpoor , 2016-01-14 15:28:25
Most US oil comes from Canada and Mexico, a very small percentage from Saudi Arabia. But they have enormous financial influence through bonds, obviously, and buying media and politicians. Also Israel and Saudi Arabia have been working together under the table for some time, as was obvious during the Gulf War, and now in their efforts to begin a war against Iran. Fracking has never been any threat to the Saudis--the cost is too high. Their present lowering of oil prices is directed against Russia, surely in cahoots with the US.
HeadInSand2013 , 2016-01-14 17:54:25

Oil and US share prices tumble over fears for global economy.

The economists have been telling us that there is little danger for the US economy to be pushed into recession by a slow-down in the Chinese economy - referred to here as "global economy". More importantly, in election years the US Markets have never been good indicators of the US economy, anyway.

The real reasons for the US market plunge are the trades conducted on behalf of the Wall Street tycoons and the Saudi Royal Family. Both are doing their best to push the markets down, because they are deeply worried of having another Democrat in the White House, come January 2017.

The Wall Street tycoons are apprehensive about getting dragged into courts for their financial mischiefs during the last decade. The Saudis are concerned that the US leaning further toward Iran, which will encourage their internal oppositions to demand reforms, which could include getting rid of the Royal Family. So, both the Saudis and the Wall Street tycoons have a common cause. They will "keep at it", until they can be sure that the next US president will be a Republican.

Eugenios , 2016-01-14 18:45:56
"National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter's wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy."

Karl Marx

[Jan 17, 2016] Oil price woes deepen as Iran vows to add 500,000 barrels a day

Notable quotes:
"... America threatened Russia some time ago about meddling in the affairs of Syria ..."
"... The US is really going for broke on crashing the oil price ..."
"... All of this to try to contain Russias military rearmament made possible by sky high oil prices ..."
"... Has the west finally gotten wise to the Saudi money that flows into extremist groups? Would seem so. West seems to be doing everything it can to contain the Saudis. eems to be doing everything it can to contain the Saudis. ..."
"... Yes because of millions of refuges that Arab countries caused by supporting ISIS it is completely natural for west to go after Saudi Arabia and its allies sponsor of ISIS. So they got what they deserved. Today I also read that the markets in Saudi Arabia, Qatar and Emirates collapsed and I think this a beginning of an end for them. ..."
"... The Iranians deciding that their revolution has matured sufficiently for them to plainly state we dont wish death on anybody, our religion is about peace, and to demonstrate our sincerity well urge our people to stop such rhetoric would contribute to Irans rehabilitation as a more or less normal member of the global community of nations. ..."
"... This has to be the beginning of the end for the Saudis and Qataris and their utter crapulence, all at the expense of the rest of the World. OPEC has no answer for this and is completely impotent to do anything about it. The cartel is busted. ..."
"... And so it seems with oil. There has to be a base production cost which doesnt vary and I doubt that the Saudis or Iranians are selling it at under that cost - they both need a modest profit - so, one wonders, if they can make that modest profit at $30 a barrel, think how much they were making at $100 ..."
"... The U.S and Iranians are using each other against their own allies. U.S is using Iran to put pressure on Saudi so that they keep producing more oil to bankrupt Russia, despite it destroying Saudi economy. Iran is using USA as a counterbalance to Russia because as much as they want Russias help, they dont want Russia to become too strong in the region. ..."
"... In my view Iran was never quite the bad guy that the western governments portrayed it to be. We certainly have differences. But if you compare Iran and Saudi Arabia there is no contest - Iran is far less a bogeyman. ..."
www.theguardian.com

The Guardian

Sean Mcmahon , 2016-01-17 19:10:22
The funny thing is that the sanctions have probably helped Iran as it had to survive with less. Iran now gets access to it's foreign banking about 50billion net and can start exporting again.

Saudi is burning through its reserve cash and it's populace are used to getting things for free, will they survive low oil revenues like Iran or is the House of Said on the brink of annihilation? Talk about shooting yourself in the foot!

It's amazing how detrimental oil has been to the middle east. If only they could have gone down a similar path to Norway....

Jahanzeb Ahsan , 2016-01-17 18:56:59
Seeing Iran to go into economical slow down was a depressing sight. OPEC definitely took a huge share of IRAN'S oil fortune and that time can not come back. PART of it was Iran's fault agreed, but since Iran's sanctions are lifted you cant blame it.

It's just taking a share of what it has lost in years. This will indeed afftect gulf region and other oil exporting countries but HEY BACK TO REALITY!!! Indeed its bad time since oil is already record low thanks to Fracking. This time is like dubstep for environmentalists who are dancing on oil price beats. No one is actually explaining the actual picture behind the scene as hundred of thousands of jobs are being slashed. Its like a death sentence for oil workers like me. 1 year since graduation as a petroleum engineer still no job worried to pay debts and there are countles like me. In short low oil prices won't make things better but worse.

Xavier Cournet , 2016-01-17 16:21:17
"The French-listed aircraft maker Airbus also looks set for a significant boost from the sanctions ending"
It is the first time, a British newspaper says "French aircraft maker Airbus". Yes Airbus is principaly a French company and not a European one contrary to what British newspaper often say.
ID241823 -> lifeintheusa , 2016-01-17 17:24:40
Indeed...the magic answer is interesting to say the least. America threatened Russia some time ago about meddling in the affairs of Syria and other cooperative business tactics. This manipulation is more about the benefits beneath mainstream media...plus, it is an election year...of course, oil is welcome and plentiful...somehow...it always is election time...though the added incentive does make Russia cringe a bit...these United States knew the only way to allow Russia to feel pinched was this way...so her and her cohorts have combined efforts to achieve their goals. Hmmm...
MerlinUK , 2016-01-17 14:41:56
Hammond is such a prostitute with his comments. They have been sucking up to Saudi/Qatar and UAE for decades, but now they are all on the slippery slope, he says 'dump them all and start courting Iran'. The man has no shame whatsoever.
opyniated -> MerlinUK , 2016-01-17 15:15:12

dump them all and start courting Iran

Best thing he has said in his career. Dump the wahhabi sheikhs while your heads are still standing on your shoulders.

sokolnik100 , 2016-01-17 14:28:57
The US is really going for broke on crashing the oil price:-
1 Deal with Iran (to increase supply)
2 Saudis pumping as much as they can (favour to US who turn a blind eye or help their regional aspirations by financing ISIS and AQ)(note the price was going nowhere until Ukraine/Crimea appeared then suddenly it started going down whilst Saudi currency actually appreciated)
3 Letting the US export oil (more supply)
4 Letting Turkey take oil from ISIS (more supply)

All of this to try to contain Russia's military rearmament made possible by sky high oil prices.

DDDFFF -> sokolnik100, 2016-01-17 14:38:39
that's correct as well as containing the Saudi, Qatari sponsored terrorist groups
ElfenLied2 -> DDDFFF, 2016-01-17 14:50:05
I thought that the Saudis see the terrorism as their own failure as well?

It's not controversial that it is oil money that has caused the situation, but the Saudis seem as powerless as anyone else to stop it.

Glenn Middleton -> sokolnik100 , 2016-01-17 14:50:16
Remind us why so many shale producers in america are going bust because of oil prices.
DDFFF , 2016-01-17 14:19:04
May the terrorist funding by Saudi and Qatar comes to halt by cheap oil prices. They had made the decision to make it cheap but it is not Iran's decision to make it expensive again. Which believe me Iran doesn't like to do so especially that through the sanction years Saudis, Qatar, Emirates played a nasty role in OPEC by getting rid of production sluts(it was to do by limiting each member to a certain production level but as Iran was sanctioned they thought it is the best way to hurt Iran's share of OPEC by getting rid of it) now this is the only reason they cannot increase the oil price as well as they cannot control Iran's production . Iran will produce even more and has a fresh supply of Cash and its economy is more robust to be only based on Oil so what I want to tell the Saudis, Qatari, Emirates and their allies is to fuck off . Because through these years you were sponsors of ISIS, Cause hundreds of thousands of death tolls and millions of refuges in the world that you have not taken a single refugee and the whole EU and North Americas must pay for it now. YOU GOT WHAT YOU DESERVED ARABS. Hope Iran become friend with Israel too and teach Arabs another lesson.
MerlinUK -> DDDFFF , 2016-01-17 14:39:49
Recent events with Saudi princes assaulting maids in the US (then claiming 'diplomatic immunity' and skipping the country before charges could be laid against them) could also be a factor, as it has woken people up as to what the Saudis are really like.

The highway between Bahrain and Saudi/UAE is like the M25 at weekends, with Wahhabi hypocrites rushing to Bahrain to get pissed and laid. It's been like that for decades. They claim to be pious and expect their subjects, contractors and ex-pats working out there to do as they say, not as they do.

Tresidentevil , 2016-01-17 14:18:48
Saudi Arabia is therefore finished as a regional power. Economy crippled by low oil prices. Iran meanwhile has had to endure an embargo for a decade, resulting in a tougher economy that is far more diverse.

Has the west finally gotten wise to the Saudi money that flows into extremist groups? Would seem so. West seems to be doing everything it can to contain the Saudi's. eems to be doing everything it can to contain the Saudi's.

DDDFFF -> Tresidentevil, 2016-01-17 14:26:32
Yes because of millions of refuges that Arab countries caused by supporting ISIS it is completely natural for west to go after Saudi Arabia and its allies sponsor of ISIS. So they got what they deserved. Today I also read that the markets in Saudi Arabia, Qatar and Emirates collapsed and I think this a beginning of an end for them.
MerlinUK -> Tresidentevil, 2016-01-17 14:35:26
It really brings David Cameron and the Tories' sucking up to the Saudis into clear perspective, doesn't it, as their credit rating for buying arms will be taking a nosedive. Watch BAE Systems shares start to wobble this coming week.

It also leaves the Royal family in somewhat of a quandry, as who is Price Charles going to sword dance with now?

FunctionalAtheist , 2016-01-17 14:02:50
Iran adding to the current supply glut in oil was an inevitable consequence of the deal. Still, the timing is particularly bad, with the crash in commodities feeding a gloomy mood in stock markets around the world.

A deflationary spiral for the global economy is now a little more likely, with excess capacity in a range of manufactured goods, from steel to I-Phones, in addition to the glut in oil and other commodities.

But, that glut is not Iran's fault. The prisoner exchange was good to see.

Next I'd like to see a symbolic move by Iran: move on from the "Death to America" (and Britain, and Israel) rhetoric. Islam needs some public relations help. The Iranians deciding that their revolution has "matured" sufficiently for them to plainly state "we don't wish death on anybody, our religion is about peace, and to demonstrate our sincerity we'll urge our people to stop such rhetoric" would contribute to Iran's rehabilitation as a more or less "normal" member of the global community of nations.

MerlinUK , 2016-01-17 13:53:33
This has to be the beginning of the end for the Saudis and Qataris and their utter crapulence, all at the expense of the rest of the World. OPEC has no answer for this and is completely impotent to do anything about it. The cartel is busted.

I guess that nobody likes the Wahhabi hypocrites any more.

StuartHX , 2016-01-17 13:39:21
I suppose it all depends on how much Iranian oil is pumped into the system as a proportion of the total, but then what is the 'right' price for oil anyway?

It reminds me of a supermarket conundrum - 'What's the price of a packet of Pringles?'. This comes from the notion that in one supermarket they're £1 each or two for £1.50, in another they're £1.25 but one a 'buy one get one free' deal, in another they're £1 each but buy two and get one free... and so on. But not only this - all of these deals change weekly.

So you begin to wonder, given that a packet of Pringles costs the same to make whatever price they're sold at - and the manufacturer wants to make a modest profit - why can you never determine the true price?

And so it seems with oil. There has to be a base production cost which doesn't vary and I doubt that the Saudis or Iranians are selling it at under that cost - they both need a modest profit - so, one wonders, if they can make that modest profit at $30 a barrel, think how much they were making at $100

copyniated , 2016-01-17 13:32:13
Apparently, according to reuters, Saudi Arabia paid Somalia a $50 million bribe to break diplomatic relations with Iran. Iranians, themselves, would have paid the Somalian government more to beak off diplomatic relations.

But hey, why complain? It's free! Cheers 'Salman the Barbarian'!

copyniated -> Katrin3, 2016-01-17 17:06:42
Saudi Arabia, Israel, Bahrain, Sudan, Somalia, United States, The Comoros and Djibouti all do not have diplomatic relations with Iran. UAE recalled its embassador in sympathy with Sheikh Salman the Barbarian. Iran needed UAE before as it was used as a port for importing into Iran(a sanction busting avenue) but since sanctions are lifted, middlemen are no longer required which means UAE will lose an annual income of $11 billion and Iran will gain. Very sad!

I hope that The Comoros and Djibouti will soon reestablish relations because it is hurting Iran's economy.

Vizier , 2016-01-17 12:57:10
'The UK has played a central role, and I hope British businesses seize the opportunities available to them through the phased lifting of sanctions on Iran. ' said Philip Hammond.

His department was instrumental in sanctions against Iran while other countries, particularly Germany and France, were lukewarm. Which countries will now benefit? Answers on a postcode, marked 'Clue', to Philip Hammond.

Phil_Paris , 2016-01-17 12:45:31
Iran is closer to a development [nations] like Turkey than to Saudi Arabia. Saudis have always been unable to do anything else than watch oil go out of pipelines into tankers, they have no agriculture, no industry.

Iranians want to industrialize like Turkey, but that doesn't mean democracy and personal freedom. Development gives more means of control and repression to autocrats too, like we have seen in Russia, Turkey, continental China. Not all countries are able to move to democracy like Taiwan and South Korea

TomBakerIsGod , 2016-01-17 12:23:25
It is hard to understand why the Guardian labels low oil as an actual woe for the World. It mainly hurts countries like Russia and Saudi Arabia, while in the West we all benefit from cheap fuel.
copyniated , 2016-01-17 12:18:08
Doubt it. The news was already in the market and has been for some time. No surprize.

Even if does go further south, it would be temporary and besides the wahhabi regimes of Arabia are the ones who will suffer the most. Either way, good news for Iran.

SchraderBrau -> copyniated, 2016-01-17 14:34:34
The U.S and Iranians are using each other against their own allies. U.S is using Iran to put pressure on Saudi so that they keep producing more oil to bankrupt Russia, despite it destroying Saudi 'economy'. Iran is using USA as a counterbalance to Russia because as much as they want Russia's help, they don't want Russia to become too strong in the region.

The (seemingly) more likely scenario is to make the excuse for war against Iran this year.... "We really tried with these guys but now we have to 'regime-change' them". That will result in a MASSIVE war.

A less likely scenario is that USA (at a shot to nothing) thinking they might actually replace saudi oil-fields propping up the $ with IRanian ones. And Iran (at a shot to nothing) thinking they might take the U.S out of Israel's pocket. As unlikely as either of these scenarios are, all bets are off this year. Both those latter plays could push Israel and Russia closer together, resulting in a MASSIVE war which the U.S would lose.

Either way, a MASSIVE war is coming and this development is more significant than people think.

Vizier -> MrPeevley, 2016-01-17 13:05:51
In my view Iran was never quite the bad guy that the western governments portrayed it to be. We certainly have differences. But if you compare Iran and Saudi Arabia there is no contest - Iran is far less a bogeyman.

It is always worth remembering that nearly all the September 11 hijackers were Saudis, none were Iranian. ISIS was funded and armed by Saudi Arabia, not by Iran. You can draw a direct line from Saudi Arabia through the carnage in Iraq and Syria directly to the terrorist attacks in Paris.

Whenever the west talks about 'Iran being a state sponsor of terrorism' they mean one thing and one thing only: Hezbollah.

Disclosure: I have a low opinion of Saudi Arabia so my comments are biased.

[Jan 16, 2016] Is this the end of the bull market?

www.cbsnews.com

Whether the losses deepen or an oversold rebound materializes depends mainly on two things: Crude oil prices stabilizing (despite the lifting of Iranian oil sanctions) and the Fed delaying further rate hikes (until market confidence has been restored).

The economic data certainly supports a dovish turn by the Fed. Headline retail sales dropped 0.1 percent, with 2015's performance by consumers the weakest since 2009. Industrial production fell a larger-than-expected 0.4 percent in December. U.S. freight volumes are falling for the first time in three years. Wal-Mart (WMT) is firing 16,000 workers and closing 269 stores globally.

[Jan 16, 2016] Welcome to a new era of volatility on Wall Street

Notable quotes:
"... It was easy for many years, says Bill Barker, portfolio manager at Motley Fool Asset Management, whose three mutual funds control about $600 million. That was not an accurate display of what happens in the market all the time. ..."
"... Over the past 12 months, an investor in an S P 500 index fund has lost nearly 5 percent, including dividends. But over five years, they're up a total of 60 percent, and over 10 years, they're up 79 percent. ..."
"... From 2012 until last summer, investors basked in a market where the Standard Poor's 500 rarely had a bad day. The widely followed index fell more than 1 percent less often than Los Angeles has rainy days, about 8 percent of the time. During that span, the S P 500 also completely avoided a correction, which is what traders call a sustained drop of 10 percent. ..."
"... What makes the volatility even more painful to endure is that many analysts are forecasting stock returns to be lower this year and in the coming years than in the recent past. So investors are facing the prospect of higher risk without much higher reward. ..."
www.cbsnews.com

The vicious drops feel even more unsettling because they're such a departure from the placid and strong returns that investors had been enjoying for years. Like vacationers returning from a warm beach to a slushy commute to work, the shock of change is making something already painful even more so.

Now investors just need to get used to it, analysts say. "It was easy for many years," says Bill Barker, portfolio manager at Motley Fool Asset Management, whose three mutual funds control about $600 million. "That was not an accurate display of what happens in the market all the time."

The painful return of big price swings serves as a reminder that investing in stocks can be harrowing, especially if investors focus on the day-to-day moves.

That's not to say investors can't still win over the long term. Over the past 12 months, an investor in an S&P 500 index fund has lost nearly 5 percent, including dividends. But over five years, they're up a total of 60 percent, and over 10 years, they're up 79 percent.

It's just that analysts expect the volatility to continue. The remarkably calm stretch from late 2011 through last summer was an anomaly.

From 2012 until last summer, investors basked in a market where the Standard & Poor's 500 rarely had a bad day. The widely followed index fell more than 1 percent less often than Los Angeles has rainy days, about 8 percent of the time. During that span, the S&P 500 also completely avoided a "correction," which is what traders call a sustained drop of 10 percent.

... ... ...

What makes the volatility even more painful to endure is that many analysts are forecasting stock returns to be lower this year and in the coming years than in the recent past. So investors are facing the prospect of higher risk without much higher reward.

[Jan 15, 2016] What If There Is No Fed Put - Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time

Notable quotes:
"... His conclusion: Global equity markets are suffering so far in 2016 because the Fed's primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries ..."
"... Yeah, I think you cant have your equities implode and expect the world to still clamor for your currency and government bonds. The categories are linked by confidence in the U.S. economy. ..."
Jan 15, 2016 | Zero Hedge

His conclusion: "Global equity markets are suffering so far in 2016 because the Fed's primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries"

If he is right, watch out below, especially if hints such as this one by San Fran Fed president John Williams, who famously admitted several days ago the Fed was wrong about the "benefits" from crashing out, are an indicator of broader Fed thinking:

  • WILLIAMS DOESN'T SEE SIGNS ASSET VALUES DEPRESSED, BELOW NORMAL

With the WSJ adding that "Market Volatility Unlikely to Deter Rate Rises Over Next Few Years" - hardly what the abovementioned desperate traders wanted to hear...

NoDebt

It's time for some Bob DiNiro from Copland:

You blew it!

https://www.youtube.com/watch?v=hqPRwq3QJsk

Manthong

It all depends upon how a handful of banks are positioned.

F the rest of the country and world.

NoDebt

"We disagree. The Fed no longer works implicitly for equity investors (i.e., "the Fed Put"); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar."

Even if the assumptions are correct, just look where the BOJ ended up seeking precisely those same goals.

herkomilchen

Yeah, I think you can't have your equities implode and expect the world to still clamor for your currency and government bonds. The categories are linked by confidence in the U.S. economy.

[Jan 15, 2016] Art Cashin Comments On Today's Crash The Fed Will Try Anything

Zero Hedge

"The Fed will try anything," warns Art Cashin, calmly explaining that markets "are in 'deep concern' mode," currently and if the S&P hits 1857, "there might be another whole new round of selling." The Fed's solution, Cashin stoically explains to a dumbstruck CNBC anchor, that "it doesn't matter that it hasn't worked in the past," The Fed will unleash moar QE to save the world.

The venerable Art Cashin unleashes some rather uncomfortable truths and no one dares disagree with him...

[Jan 15, 2016] Bill Gross' Advice To Traders As Stocks Crash

Zero Hedge

Some more Gross courtesy of Bloomberg:

... ... ...

In his e-mail, Gross said that zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable.

His conclusion: "The wealth effect is created by leverage based on QE's and 0% rates."

In other words, it was all an illusion.

[Jan 14, 2016] Neoliberalism was also economics departments orthodoxy for decades

Notable quotes:
"... It should never be forgotten that the conservative orthodoxy -- of low taxes on the wealthiest, deregulation of finance, small govt deficits, and the need for inequality to spur individual initiative -- was also economics departments orthodoxy for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions. ..."
"... 70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedmans Capitalism and Freedom and Free to Choose barely saw any push-back from other economists in the op-ed pages. ..."
"... Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street. ..."
"... Nonsense. Polls of profession economists opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even. ..."
economistsview.typepad.com

Lee A. Arnold :

It should never be forgotten that the "conservative orthodoxy" -- of low taxes on the wealthiest, deregulation of finance, small gov't deficits, and the need for inequality to spur individual initiative -- was also "economics departments orthodoxy" for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions.

It's been a first-rate intellectual scandal, perpetrated by some of the biggest names in the economics racket, and with most of the lesser lights tagging along, for fear of ostracism.

And most of them STILL don't have a clear view of what the real problems are.

Lee A. Arnold -> anne...
70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedman's "Capitalism and Freedom" and "Free to Choose" barely saw any push-back from other economists in the op-ed pages.

"Conservative orthodoxy" can be laid squarely at the feet of the economics departments, up until the crash. If the ones who are supposed to know better, don't make a concerted effort to refute the tons of nonsense spouted in the name of economics, then they should resign their tenure.

Lee A. Arnold -> pgl...
It most certainly WAS taken as the orthodoxy. Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street.
pgl -> Lee A. Arnold ...
"Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence."

Not even remotely true. Criticized by liberal economists. Blasted by the conservative economists who refused to work for the Reagan White House. Even blasted by a young Greg Mankiw but that is before he drank the Bush Kool Aid.

Lee - your claim here is just wrong. And the more you defend it, the worse it gets.

Lee A. Arnold -> pgl...
Nonsense. Polls of profession economists' opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even.

(1992 -- responses from 464 US economists):

  • "A large federal budget deficit has an adverse effect on the economy" 78.7% agree (includes 'agree with provisos').
  • "The money supply is a more important target that interest rates for monetary policy" 56.7% agree.
  • "As the USSR moves toward a market economy. a rapid and total reform (i.e., "going cold turkey") would result in a better outcome than a slow transition" 57.6% agree.
  • "A minimum wage increases unemployment among young and unskilled workers" 78.9% agree.
  • "An economy in short-run equilibrium at a real GNP below potential GNP has a self-correcting mechanism that will eventually return it to potential GNP" 50.8% agree.
  • "Changes in aggregate demand affect real GNP in the short run but not in the long run" 52.8% agree.
  • "Lower marginal income tax rates reduce leisure and increase work effort" 55.4% agree. (Alston et al., "is there a global economic consensus?" AEA Papers and Proceedings, 1992)

[Jan 13, 2016] Three Ways to Help the Working Class

Notable quotes:
"... Yes. The ratio of population to jobs needs to change dramatically. Bust out of the old cycle where the ratio thru out the cycle remains bad. Yes even at the peak of employment ! We need a far higher sustained rate of spending on domestically produced goods and services ..."
"... One problem with MMTers is they talk about very common ideas, like deficit financed spending, and pretend like they just invented something radically new, while completely failing to acknowledge or address the rest of the conversation that others have been having for years. ..."
"... Oh no! Whatever you do, cried Brer Rabbit, Dont throw me into the briar patch! ..."
"... ...So long as business interests dominate the political process, it will be hard to reverse the trend toward increasing inequality. ..."
"... Mark and most of his ilk support an open door for corporations to import smart, hard working and desperate workers from around the world...impact of that at the margins for wages(along with many other things) have been a disaster for the bottom 80% over the past 30 years. ..."
economistsview.typepad.com
I have a new column:
Three Ways to Help the Working Class : ... In graduate school, I was once told that "people don't have marginal products, jobs do." What does this mean? ...

I wish I would have connected the last part to the Supreme Court case on public unions.

RGC :

"If you took 100 dogs and you buried 95 bones in a field and you told the dogs their job was to go out and find a bone, what's the very best case scenario? The best you can possibly hope for is that 95 dogs come back with bones. Five dogs can't get bones. More likely, some dogs will get lucky; they'll stumble across a few extras. Some may have better skills; they'll find three or four. So, the number of dogs that come back without bones may be ten or fifteen.

(c. 9:38) "The conventional economist would gather the dogs together, the ones that had no bones, and train them to sniff out bones more effectively. Then they would send those hundred dogs back out into the field and tell them to go come back with a bone. And, again, the best you can get is 95 dogs with bones. What's wrong is that there aren't enough bones. There's nothing wrong with the dogs. The bones are the jobs. There's nothing wrong with the unemployed. There simply aren't enough jobs.

- Stephanie Kelton at the Summit on Modern Money Theory in Rimini, Italy. She is Creator and Editor of New Economic Perspectives. Her research expertise is in Federal Reserve operations, fiscal policy, social security, healthcare, international finance, and employment policy.

PPaine -> RGC...
Yes. The ratio of population to jobs needs to change dramatically. Bust out of the old cycle where the ratio thru out the cycle remains bad. Yes even at the peak of employment ! We need a far higher sustained rate of spending on domestically produced goods and services
sanjait -> RGC...
The very conventional new Keynesian response to a shortfall in demand is expansionary demand management policies.

One problem with MMTers is they talk about very common ideas, like deficit financed spending, and pretend like they just invented something radically new, while completely failing to acknowledge or address the rest of the conversation that others have been having for years.

RGC -> sanjait...
It's cute the way you make obviously ignorant assertions with such apparent confidence.
PPaine -> RGC...
Don't be too harsh. He very often makes good points. Why he's so hard on MMTers escapes me

Has he read kalecki Lerner and Vickrey ?
The young James Meade
The young Lawrence Klein

The Post war macro left
These are not MMTers

anne -> PPaine ...
http://www.nytimes.com/2013/10/22/business/economy/lawrence-r-klein-economist-who-forecast-global-trends-dies-at-93.html

October 21, 2013

Lawrence R. Klein, Economic Theorist
By GLENN RIFKIN

Lawrence R. Klein, who predicted America's economic boom after World War II and was awarded the 1980 Nobel in economic science for developing statistical models that are used to analyze and predict global economic trends, died on Sunday at his home in Gladwyne, Pa. He was 93.

His daughter Hannah Klein confirmed the death.

As World War II was ending, Professor Klein, widely regarded as a brilliant theorist, disputed the conventional wisdom that the postwar period would drive the American economy back into a long depression.

Using his econometric models based on mathematical equations, he predicted correctly that the pent-up demand for consumer goods and housing after the war, coupled with the purchasing power of the returning soldiers, would result not in economic crisis but in a surge in spending and a flourishing economy.

Though he often testified before federal bodies and served as an economic adviser to Jimmy Carter during his 1976 presidential campaign, Professor Klein chose to remain in academia - he taught economics at the University of Pennsylvania for 33 years - and rejected an offer to join the Carter administration.

"I am just an academic giving advice," he told People magazine in 1976. "If you are a technician and are asked for help, it is a social obligation of citizenship to give it."

Professor Klein's use of vast survey data to build statistical economic models for the United States and several other countries has been adopted by economists around the world. "Few, if any, research workers in the empirical field of economic science have had so many successors and such a large impact as Lawrence Klein," the Nobel committee wrote in awarding him the Nobel Memorial Prize in Economic Science....

anne -> PPaine ...
Where is a reference? Repeated name-dropping, with no references is widly inconsiderate. Since you use the names repeatedly, why not just have a set of references to put down?

What should a person read of Lawrence Klein?

anne -> PPaine ...
http://mrzine.monthlyreview.org/2010/kalecki220510.html

1942

Political Aspects of Full Employment
By Michal Kalecki

http://works.bepress.com/cgi/viewcontent.cgi?article=1027&context=timothy_canova

March, 1997

The Macroeconomics of William Vickrey
By Timothy A. Canova

http://crookedtimber.org/2015/12/17/piketty-meade-and-predistribution/

December 17, 2015

Piketty, Meade and Predistribution
By MARTIN O'NEILL

anne -> PPaine ...
http://community.middlebury.edu/~colander/books/map.html

1980

MAP: A Market Anti-Inflation Plan
By David Colander and Abba Lerner

Preface

This is a small book about a big topic. This is not the usual book on inflation, simplified- or oversimplified- to make accepted doctrines intelligible to the layman. It presents a new plan- MAP (Market Anti-inflation Plan)- that makes it possible to succeed in curing our inflation. The ideas in it are not easily absorbed. They form a radical new framework- a new way of looking at inflation, and indeed at all macroeconomics, which is at the same time only a synthesis of many divergent old trains of thought. As Albert Einstein said, "Ideas should be expressed as simply as possible, but not more so." We think we have made the book intelligible to nonspecialists, even though its ideas are challenging for all readers, and perhaps even more so for advanced economists.

We approach inflation as an economic problem, but we make allowances for political realities in designing MAP. Although we believe MAP should be adopted in some form, the book is not written from an advocatory position. We try to consider all arguments, both pro and con, and do not attempt to minimize potential difficulties.

The methodology is realytic - an unusual word that indicates a contrast with analytic. This means that we are primarily concerned with solving real problems. We believe that the book also contributes importantly to extending theoretical understanding, but it does this only where necessary to solve the problem at hand. *

* http://www.britannica.com/EBchecked/topic/1085393/Abba-P-Lerner#ref849102

Sandwichman -> RGC...
Ah-ha the lump of bones fallacy! Dogs looking for bones will create a supply of bones as a consequence of their demand for bones.

Dog gets no bone.
Dog starves.
Vultures (capitalists) eat meat off dead dog.
Bones!

anne :
http://www.nytimes.com/2016/01/12/us/politics/at-supreme-court-public-unions-face-possible-major-setback.html

January 11, 2016

Supreme Court Seems Poised to Deal Unions a Major Setback
By ADAM LIPTAK

WASHINGTON - The Supreme Court seemed poised on Monday to deliver a severe blow to organized labor.

In a closely watched case brought by 10 California teachers, the court's conservative majority seemed ready to say that forcing public workers to support unions they have declined to join violates the First Amendment.

A ruling in the teachers' favor would affect millions of government workers and culminate a political and legal campaign by a group of prominent conservative foundations aimed at weakening public-sector unions. Those unions stand to lose fees from both workers who object to the positions the unions take and those who simply choose not to join while benefiting from the unions' efforts on their behalf.

Under California law, public employees who choose not to join unions must pay a "fair share service fee," also known as an "agency fee," typically equivalent to members' dues. The fees, the law says, are meant to pay for collective bargaining activities, including "the cost of lobbying activities." More than 20 states have similar laws.

Government workers who are not members of unions have long been able to obtain refunds for the political activities of unions like campaign spending. Monday's case, Friedrichs v. California Teachers Association, No. 14-915, asks whether such workers must continue to pay for any union activities, including negotiating for better wages and benefits. A majority of the justices seemed inclined to say no.

Collective bargaining, Justice Anthony M. Kennedy said, is inherently political when the government is the employer. "Many critical points are matters of public concern," he said, mentioning issues like tenure, merit pay, promotions and classroom size.

The best hope for a victory for the unions had rested with Justice Antonin Scalia, who has written and said things sympathetic to their position. But he was consistently hostile on Monday.

"The problem is that everything that is collectively bargained with the government is within the political sphere, almost by definition," he said.

The court's four liberal members were on the defensive, asking whether there was good reason to overturn a 1977 decision by the court that allowed the fees....

anne -> anne...
http://www.nytimes.com/2016/01/09/us/politics/union-fees-friedrichs-v-california-teachers-association.html

January 8, 2016

Mandatory Union Fees Getting Hard Look by Supreme Court
By ADAM LIPTAK

The justices have already voiced skepticism about making people give money to public unions. They may now be ready to rule that it's unconstitutional.

PPaine -> anne...
The unins have no choice but to attack on all fronts

Public sector insulation from savage attacks ended long ago
This is just a after dinner beltch by the union eaters

Peter K. :
One way to increase worker bargaining power is to employ aggressive macro (fiscal, monetary, currency/trade) policy so that labor markets are tight and businesses are fighting over workers.

In the late 90s, labor shared in productivity gains as unemployment fell below 4 percent. This ended with the tech stock bubble which morphed into the housing bubble.

As DeLong recently wrote:

"What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained."

It could be that achieving aggressive macro policy is as difficult politically as making the environment more favorable towards unions.

If we look at the post-war social democratic years, both helped raise living standards. Also the financial system was much smaller and much more regulated.

Peter K. -> Peter K....
http://www.huffingtonpost.com/brad-delong/global-economic-depression_b_8924596.html?1452263364

DeLong's quote

Peter K. -> Peter K....
Other ideas include work-sharing during downturns, and shorter hours.
Sandwichman -> Peter K....
"Oh no! Whatever you do," cried Brer Rabbit, "Don't throw me into the briar patch!"
pgl :
Point #2: "We also need to do a better job of providing the educational resources people need to reach their full potential."

I can see conservative economists echoing this but what specifically do they want policy to do to make this happen? More Pell Grants No - they want to cut that kind of support. Now Greg Mankiw will tell you that you will get a great education if you manage to get into Harvard and pay $300 for his textbook!

mulp -> pgl...
If getting a Harvard PhD for every worker means that the California farm worker cutting broccoli and lettuce, or changing bed pans for the bedridden in nursing homes, gets paid $120,000 per year, then I'm all for eliminating poverty by education.

My guess is education is not the path to eliminating poverty.

If you think education is the solution, explain why it takes a college degree to pay farm workers, home care workers, child care workers, cleaning people who scrub toilet, middle class wages, instead of simply paying them middle class wages right now.

RC AKA Darryl, Ron :
"...So long as business interests dominate the political process, it will be hard to reverse the trend toward increasing inequality."

[Actually it is the interest of management and the capital owning class that are dominating the political process. Businesses would do just fine if wages were higher, rent seeking - not so much.]

Peter K. :
https://www.jacobinmag.com/2016/01/yanis-varoufakis-interview-jeremy-corbyn-greece-eurozone-tsipras/

The Man Who Knew Too Much

An illustrated interview with former Greek finance minister Yanis Varoufakis.

g :
Mark and most of his ilk support an open door for corporations to import smart, hard working and desperate workers from around the world...impact of that at the margins for wages(along with many other things) have been a disaster for the bottom 80% over the past 30 years.
PPaine -> Paine...
Even the great dani rodick and joe Stigilitz could push tis harder
But they are one worlders

An honorable club but... Perhaps we need bordered areas to heal themselves first with national policies of true full employment and balance trade forex

Denis Drew :
That's right ... You cannot make the retail clerk any more productive. That's talking about the people I care about: bus drivers (taxi drivers -- me :-]), home carers, janitors, etc. But, you can make the economy they inhabit more productive -- and then the economy can pay them more (not less every year!): why barbers in France get paid more than barbers in Poland (classic example).

US per capita income in 1968, $15,000. In 2016, $30,000.

Minimum wage nearly $4 an hour below what it was in 1968 (adjusted). Ditto for the price of US labor across the mid-to-lower board.

US mid-to-low labor price so extraordinarily low that half (HALF! -- 100,000!) of Chicago's gang age, minority males would rather join a street gang. Then there's my gang, Chicago's old (mostly retired) American born taxi drivers. Wouldn't get us into that job today for $500, if lucky, for 60 grueling hours.
http://www.cbsnews.com/news/gang-wars-at-the-root-of-chicagos-high-murder-rate/

The core American trouble isn't wages not keeping up with productivity per se (though that parallels); the core labor sickness is wages not even remotely approaching what the consumer (not the boss) might be very willing to pay.

We do not need to attract businesses that provide good jobs -- the jobs cannot be good if the pay is miserly. High wage opportunities don't happen -- they are made (ask Jimmy Hoffa).

Educational resources are not needed to help retail clerks reach their full potential. Good pay for retail clerks is needed to help Detroit's schools reach their full potential. Nationwide: poverty area schools don't work because students (and teachers!) don't feel it worth making the effort -- given the job market doesn't promise anything remunerative enough to strive for when it's time for them to go to work.
http://www.amazon.com/gp/product/B00332EXDM/ref=dp-kindle-redirect?ie=UTF8&btkr=1

"I believe this is mainly due to differences in bargaining power." Which is mainly due to absurdly unenforceable labor laws in this country which -- uniquely in all markets -- allows one side in the labor market to bully the other side out of being able to meaningfully bargain. Simple enough solution: make union busting a felony (like every other kind of market warping -- try to take a movie in the movies and telling them you were only kidding).

The labor laws enabling collective bargaining have long been in place; the need for collective barraging presumably settled. So when are progressive states going to begin -- one state at a time; forget Congress -- to make these laws enforceable? Federal preemption means individual states cannot subtract from national law, but states may add. In Maryland for one, Democrats have a 33-17 edge in the State Senate and a 91-50 edge in the House. WA, OR, CA, IL, NY, anybody listening?

IS ANYBODY, ANYWHERE LISTENING?! Retail clerks (and their hungry families) desperately want to know.

PPaine -> PPaine ...
Criminalize anti union activity
mulp -> Denis Drew ...
Conservatives want lower gdp growth.

Or else they believe in free lunch economics:

Step 1. Cut wages to increase profits
Step 2. Produce more and price it twice as high
Step 3. Demand government allow workers to borrow at high interest rates to buy twice as much as before their wages were cut in half
Step 4. Blame government, and especially Obama when the math does not work out.

If you want faster gdp growth, you must pay workers, who are after all 99% of the consumers, more and increase their pay faster.

Economies are zero sum.

It is possible to time shift, say by exporting more than imported and taking the difference and saving it by buying debt, or stored labor, in other countries, but at some point, the process is reversed. For the US, savings has flowed into the US blocking exports and increasing imports. At some point, that will need to reverse. Someone will need to work more and consume less. That will need to be the 1% because for decades, most US workers have worked more and consumed less, unless they got to borrow and consume so they will need to work more and consume less.

Unless there is a massive redistribution of wealth, either war, or bankruptcy. Trying to tax wealth to redistribute will only destroy the wealth. After all, 99% of the wealth in the US was not built by labor, but inflated into existence by pump and dump asset churn or by high rents inflating decaying scarce assets in price.

[Jan 10, 2016] Comprehensive financial planners now do a lot of the work that family attorneys did in generations past

www.nakedcapitalism.com

Jim in SC , January 9, 2016 at 8:57 pm

I think that comprehensive financial planners now do a lot of the work that family attorneys did in generations past. This is partly because the sort of person who goes to law school now is much more intellectual -- and thus often a little more introverted and socially inept–than in years past. Watergate caused that, I believe. All of a sudden everybody was interested in the mechanism of the law. Fifty years ago a right-of-way agreement from the local utility was three sentences. Now it's five pages single spaced, in some English derived technical gibberish.

Anyway, you really need the professional when somebody dies. That professional is far more likely to be the financial planner than the lawyer these days, in part because the financial planner is paid by assets under management, rather than hundreds of dollars per hour, so the financial planner would be paid anyway. I think it is rare to see attorneys designated as executors of estates these days. They charge six percent by statute, and that's too much for many people's blood. God forbid that one should be appointed to manage a trust with multiple beneficiaries. They'll stretch it out thirty years.

[Jan 09, 2016] For the Wealthiest, a Private Tax System That Saves Them Billions

mobile.nytimes.com
Neretva'43 | Jan 9, 2016 10:33:05 AM | 77

Re: dahoit | Jan 9, 2016 9:51:32 AM | 74

here is an important article for you. While the whole article is astonishing I'll post just one small passage. If someone can not figure out who the real (not perceived) enemy than s/he is lost cause.

"For the Wealthiest, a Private Tax System That Saves Them Billions"
http://mobile.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?_r=3

"We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice," said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. "At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system."

[Jan 09, 2016] Intellectual property and the decline of the U.S. labor share

Equitable Growth

The paper -by Dongya Koh of the University of Arkansas, Raul Santaeulalia-Llopis of the Washington University in St. Louis, and Yu Zheng of the City University of Hong Kong-takes advantage of newly updated GDP data from the U.S. Bureau of Economic Analysis. While the Bureau is constantly releasing new data on economic growth, it also revises previous data. Sometimes those revisions show an increase in total U.S. economic output, and sometimes the revisions show a change in the composition of that output. It's the latter kind of revision that's important in this case.

In 2013, the Bureau of Economic Analysis updated its treatment of a variety of issues, including how it treats research and development spending. The BEA previously treated R&D spending as a business expense but, as the BEA realized, it makes more sense to think of spending that could potentially boost a firm's output as a capital investment. As the authors of the paper show, counting investments in intellectual property as, well, investment significantly increases the amount of investment showing up in the data. According to their calculations, intellectual property products have increased from 8 percent of U.S. investment in 1947 to 26 percent in 2013.

Accounting for this kind of capital investment means that the decline in the U.S. labor share starts much earlier than previously thought. According to the paper, the decline starts in 1947, which would mean the labor share was declining throughout the period it was famously stated to be constant. But not only does the decline start earlier than previously thought-it's also much larger. It's actually twice as large. And the increase in intellectual property products explains the entirety of the decline.

[Jan 09, 2016] That's rich! Why so many wealthy Americans think they're middle class

Jan 09, 2016 | Salon.com

Earlier this year, for example, Hillary Clinton made headlines when, in response to a question about her personal fortune, she claimed her family was "dead broke" when they left the White House. That statement followed New York Gov. Andrew Cuomo's top aide casting those making $500,000 a year as merely upper middle class.

According to IRS data, 99 percent of American households make less than $388,000 a year, and 95 percent make less than $167,000 a year. The true middle in terms of income - that is, the cutoff to be in the top 50 percent of earners - is roughly $35,000 a year.

While Lew claims his private-sector compensation was not "in the stratosphere," the data suggest otherwise.

According to New York University records, Lew was usually paid between $700,000 and $800,000 a year as the school's vice president, while also receiving a $440,000 mortgage subsidy. Lew also earned $300,000 a year from Citigroup, with a "guaranteed incentive and retention award of not less than $1 million," according to an employment agreement obtained by Businessweek.

[Jan 07, 2016] 5 of the Worst Examples of Biased and Distorted Media Coverage of Education in 2015

Notable quotes:
"... Sure the myth of meritocracy and American exceptionalism is all over public education, however, Im not sure this is the fault of teachers themselves. Public curriculum is now mostly controlled from without, and teachers are largely constrained as to what they can teach, when they can teach it, and how. The constant battery of tests really limits the freedom teachers have in offering a variety of materials, because if those kids dont produce exactly what the test maker is looking for, it could be their job on the line. You cant teach bell hooks, if you dont have a teaching job to begin with. ..."
"... Too true! I keep returning to Paul Goodmans classic screed, Compulsory Miseducation . 1964. Crapification has been with us a long time. We are now harvesting its rotten fruits. ..."
"... I only wish American teachers had anywhere near as much agency as you think they do! Are you aware who controls the curriculum, and how politicized this is? While I taught in the nations largest public school system, it was under mayoral control. His education chancellors were mostly non-educators (a lawyer, and, most briefly and notoriously, a publisher), and hired private contractors and spent millions of public money on charters. ..."
"... The curriculum has been hijacked by the Common Core, which dictates which materials can be covered, and how it can be covered. ..."
December 31, 2015 | nakedcapitalism.com

kings , December 31, 2015 at 6:19 am

today's Republicans and defending teachers(and firefighters and police) to the very last stand. Yes, public education is one of the foundations of our country, and should never be 'privatized'(um, stolen) to a political bidder. But also, teachers(and f's and p's) generally make outstanding salaries, paid for by property taxes, and have their retirement funded, and are allowed to strike to add more whenever they like. Oh, then they can retire after 20-30 years and still receive significant pension benefits.

The 'everyone pays' for the select few is a problem in this country, and is never discussed in any media that I see.

Teachers' personal money is the most common source of funding for classroom projects. On average, teachers spent a total of $398 on school supplies in 2009-2010 and an additional $538 on educational materials." The total expended that year by the nation's 3.7 million teachers? A whopping $3.5 billion.

And it's not just teachers. According to the Summer 2012 issue of NEA Today, the newsmagazine of the National Education Association, 66 percent of education support professionals – a category that includes bus drivers, custodians, lunchroom staff, secretaries, security guards and skilled trades people – dig into their pockets to help kids in need. Their expenditures? An average of $216 per employee per year."
http://www.truth-out.org/news/item/12504-public-school-teachers-spend-billions-of-their-own-money-on-student-needs

(sigh) too often i hear people complain about property taxes & schools…now dayz i suggest we all stop paying the tax and enjoy the short life span the bored & uneducated kids will rein on us!

jgordon , December 31, 2015 at 7:03 am

I have a general antipathy towards teachers; no matter how well intentioned they are, ultimately they're still responsible for indoctrinating the world-view and cultural myths required for children to become good corporate state consumers/employees. No matter how progressive and enlightened the curriculum, nor how lavish the facilities and small the class sizes, Howard Zinn won't be taught.

I won't say that all education is bad–but compared to what passes for education now in America, I believe that our students and society would be better off if we had no education at all, since what we have now is leading society and humanity off a cliff. Therefore the only real problem I have with breaking up teachers unions and closing schools is that they'll probably be replaced with something even more corporate and soul-destroying.

Uahsenaa , December 31, 2015 at 8:30 am

I think you're blaming the wrong people for this. Sure the myth of meritocracy and American exceptionalism is all over public education, however, I'm not sure this is the fault of teachers themselves. Public curriculum is now mostly controlled from without, and teachers are largely constrained as to what they can teach, when they can teach it, and how. The constant battery of tests really limits the freedom teachers have in offering a variety of materials, because if those kids don't produce exactly what the test maker is looking for, it could be their job on the line. You can't teach bell hooks, if you don't have a teaching job to begin with.

jgordon , December 31, 2015 at 11:19 am

teachers are largely constrained as to what they can teach

Well that's exactly my point. Teachers are ultimately servants to the corporate state. They have little to no free will themselves. They will train their students to be model employees and insatiable consumers–who love America because patriotism, or they will be fired.

I'm not blaming them for their lot. Teaching is certainly a crappy, and unappreciated job in this society–and there is something admirable about someone who chooses to wear such a hair shirt, even if there is no point to it. I'm saying that the whole apparatus of public education in America should be radically redone, and until it's redone this whole institutional (public and private) education debacle should be suspended immediately. The cultural/social monoculture it's creating is a genuine danger to humanity.

Torsten , December 31, 2015 at 3:57 pm

Too true! I keep returning to Paul Goodman's classic screed, Compulsory Miseducation . 1964. Crapification has been with us a long time. We are now harvesting its rotten fruits.

All the Trump supporters (and let us not forget, e.g., Spiro Agnew, superhero vanquisher of the nattering nabobs, and his minions), all those B and C and D and F students who now can vote away the pensions of the teachers who gave the voters those grades. .

There's lots of revenge voting going on.

Inverness , December 31, 2015 at 11:29 am

Jgordon, your comment begs a lot of questions. I'll try to address them. As a former New York City teacher, I'd like to share my views.

I only wish American teachers had anywhere near as much agency as you think they do! Are you aware who controls the curriculum, and how politicized this is? While I taught in the nation's largest public school system, it was under mayoral control. His education chancellors were mostly non-educators (a lawyer, and, most briefly and notoriously, a publisher), and hired private contractors and spent millions of public money on charters.

Since you mentioned it, what about what is taught, and who controls that? The curriculum has been hijacked by the Common Core, which dictates which materials can be covered, and how it can be covered. This was developed by many non-educators who don't have a clue about how children and adolescents learn, and this is reflected by the abysmally low test scores, even in regions where there were no problems before. Even before the Common Core, you have the New York States Regents exams, which trivializes history, making it impossible to teach properly, unless you want to risk your job (remember, low test scores, bad ratings).

Furthermore, you mention that teachers don't teach Howard Zinn. Well, I'm shocked at how many enlightened, left-leaning teachers I met in the States, considering the huge propaganda campaign waged against progressive thinking, that most certainly did not end with the McCarthy era in the 1950's! So you're working in a nation which has actively tried to target, and even destroy, the careers of people left-leaning or sympathetic to "enemies of the State." I always felt like I was one unpopular move away from becoming a New York Post headline, for daring to challenge the mainstream perception of Hugo Chavez and for discussing why many consider Bush a war criminal. I have had to deal with complaints from principals and parents. I soldiered on for years, but after awhile, your health suffers.

Also, keep in mind that history teachers in New York must somehow manage to teach a ridiculously overloaded curriculum. They cannot choose to stop everything and really teach in a more meaningful way, because they are judged by their students' test scores. They mustn't anger their administrators and superintendents, who are scared of politicians and parents. I would love to have had more freedom to teach the way I wanted to, most of the time. To cover a worthwhile secondary source like Zinn means having the time and resources to do that. Also, it means that you will be supported by your administrators and parents. This is extremely difficult, even in a state like New York, which is not nearly as open-minded as it claims to be.

Covering historians like Zinn would also be easier if we had some control over our classroom materials. Who do chooses and writes the textbooks? Many textbook authors must please Texas, the largest state. This does not exactly encourage, shall we say, the most progressive thinking. Teachers often have to fight to just get their photocopies done, and straight lecturing is forbidden. So they have to rely on the texts their buildings provide them. Teachers also get a bit paranoid, since anything - ANYTHING can get them smeared in papers like the New York Post and the The New York Daily News. So I agree that Zinn's views should be a part of the curriculum, but much of TPTB aren't exactly on my side.

You also need to understand that if the US doesn't produce mostly progressive economists, university presidents, politicians, lawyers and citizens…why would teachers be so different? The US, with a mainstream press that promotes Hillary Clinton as the ideal presidential candidate, is not exactly a hotbed of innovative thinking. Teachers aren't magical people, despite what Hollywood tells us, which features teachers that can somehow transform poor, hungry students into academic stars, fueled by charisma, sugary snacks, and iron will alone.

Thank you for bearing with me this far (if you that's the case). I know so many talented teachers in New York who seemed to work themselves so hard, so it kind of kills me to read these kinds of blanket statements. Forget Hollywood's hackneyed portrayal of teachers. For me, the real miracle is that after all of the hatred, union-busting, conservative propaganda, deprofessionalisation, …the real miracle is that there still are some fantastic teachers in the field.

[Jan 06, 2016] Another Slow Year for the Global Economy

Notable quotes:
"... Sometimes … demand is restricted by the fact that nobody has any money in their pocket. ..."
"... the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged. ..."
"... Modern neoliberal economics is just an ideology not a science. It exists to justify the current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling class. ..."
"... [Economists are] clueless about the real world because their fat paycheck magically appears in their bank account, while producing nothing. ..."
Jan 06, 2016 | naked capitalism

By Ashoka Mody, Professor of Economics at Princeton. Originally published at Project Syndicate

For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%.

The question is why. According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years . The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations of 2007-2008 have largely receded. So what accounts for the sluggish economic recovery?

One popular explanation lies in the fuzzy notion of "secular stagnation": long-term depressed demand for goods and services is undermining incentives to invest and hire. But demand would remain weak only if people lacked confidence in the future. The only logical explanation for this enduring lack of confidence, as Northwestern University's Robert Gordon has painstakingly documented and argued , is slow productivity growth.

Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured by an illusory sense of prosperity in much of the world. In some countries – notably, the United States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking were mutually reinforcing. At the same time, countries were amplifying one another's growth through trade.

Central to the global boom was China, the rising giant that flooded the world with cheap exports, putting a lid on global inflation. Equally important, China imported a huge volume of commodities, thereby bolstering many African and Latin American economies, and purchased German cars and machines, enabling Europe's largest economy to keep its regional supply chains humming.

This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank, Bear Sterns, from collapse. With the eurozone banks also deeply implicated in the subprime mortgage mess and desperately short of US dollars, America and much of Europe began a remorseless slide into recession. Whereas in the boom years, world trade had spread the bounty, it was now spreading the malaise. As each country's GDP growth slowed, so did its imports, causing its trading partners' growth to slow as well.

The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system. Eurozone policymakers, by contrast, rejected monetary stimulus and implemented fiscal austerity measures , while ignoring the deepening distress of their banks. The eurozone thus pushed the world into a second global recession.

Just when that recession seemed to have run its course, emerging economies began to unravel. For years, observers had been touting the governance and growth-enhancing reforms that these countries' leaders had supposedly introduced. In October 2012, the IMF celebrated emerging economies' "resilience." As if on cue, that facade began to crumble, revealing an inconvenient truth: factors like high commodity prices and massive capital inflows had been concealing serious economic weaknesses, while legitimizing a culture of garish inequality and rampant corruption .

These problems are now being compounded by the growth slowdown in China, the fulcrum of global trade. And the worst is yet to come. China's huge industrial overcapacity and property glut needs to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption networks have to be dismantled.

In short, the factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year. Emerging economies will remain weak. The eurozone, having enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. Rising interest rates on corporate bonds portend slower growth in the US. China's collapsing asset values could trigger financial turbulence. And policymakers are adrift, with little political leverage to stem these trends.

The IMF should stop forecasting renewed growth and issue a warning that the global economy will remain weak and vulnerable unless world leaders act energetically to spur innovation and growth. Such an effort is long overdue.


ArkansasAngie , January 6, 2016 at 6:17 am

"But demand would remain weak only if people lacked confidence in the future"

Sometimes … demand is restricted by the fact that nobody has any money in their pocket.


James Levy, January 6, 2016 at 6:45 am

Is he kidding:

The only logical explanation for this enduring lack of confidence, as Northwestern University's Robert Gordon has painstakingly documented and argued, is slow productivity growth.

Real wages for a hefty percentage of the population haven't risen since 1971. Most people are treading water or losing ground. Over 90% of the modest gains since the 2008 crash have gone to 1% or less of the population. But the problem is productivity! And this guy has a tenured job at Princeton. Standards for employment there must include smug self-assurance, ideological blinders, and the inability to assimilate any facts not cogent to people richer than you are.


Jim Haygood, January 6, 2016 at 11:37 am

If Princeton's most illustrious alumnus can finally make some serious loot in the private sector, soon the author will be toiling at the Bernanke School of Economics.

Skippy, January 6, 2016 at 8:18 am

Productivity is the cocaine of the labour pool, like the old cocaine ad of the 80s in Calif [during the epidemic].

White square room about 6M X 6M, top shelf sale executive sort doing laps like a con and the verse goes like…. I do cocaine because I'm more productive… so I make more money… so I can do more cocaine… over and over and with each litany increases his speed until a blur….

Skippy…. the end is a wrung out wretch sitting on the step of some low socioeconomic apt talking about losing, wife, kids, job, everything…. w burnt out dopamine receptors as a lullaby till morte'

efschumacher, January 6, 2016 at 8:50 am

Here in the US:it's not like there's a shortage of work to be done to fix the massively inappropriate national infrastructure – to make it human sustainable – I mean for the 'little people'. There is of course the perennial lack of congressional vision and long term planning. There lies a huge root of the problem.

RabidGandhi, January 6, 2016 at 9:12 am

Is this meant as a good cop/bad cop contrast piece with the Ann Pettifor post?

Here, I gave up any hope of Mody being at all earnest when he cited Rogoff and Reinhart (!!!). Then the rest of the article completely self-destructs: weak productivity and insufficient innovation are the issue?

When combined with yesterday's NYT article on inequality, the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.

Stephen Gardner, January 6, 2016 at 9:33 am

Modern neoliberal economics is just an ideology not a science. It exists to justify the current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling class.

cnchal, January 6, 2016 at 9:43 am

. . . the only takeaway is that most economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.

They are the useless eaters. [Economists are] clueless about the real world because their fat paycheck magically appears in their bank account, while producing nothing.

Here is Mody

The US economy began to emerge from its recession in the second half of 2009, thanks largely to aggressive monetary policy and steps to stabilize the financial system.

Totally clueless.

susan the other, January 6, 2016 at 2:02 pm

"Lack of confidence" – let me count the ways. This is a phrase to match every vacuous denial of human economic chaos ever pontificated. Yuck.

[Jan 05, 2016] Citi turns 'underweight' on US stocks

The S&P 500, ended the year down 0.73 percent after three straight years of double digit gains.
Notable quotes:
"... Alain Bokobza, head of global asset allocation at Societe Generale, told CNBC last week that he was expecting the S P 500 to absorb the Fed rate hikes this year and finish the year flat at around 2,050 points. ..."
finance.yahoo.com

Citi strategists led Robert Buckland highlighted the potential for weaker earnings per share (EPS) momentum in the U.S., in a note released on Tuesday. EPS is an important metric used by analysts and is used an indicator of a company's profitability.

"Fading EPS momentum and rising Fed funds mean that, after six consecutive years of outperformance, we cut the U.S. to underweight," Citi said in the note.

... ... ...

David Kostin, chief U.S. equity strategist at Goldman Sachs, told CNBC in December that stock markets could be mostly flat in 2016. Meanwhile, Alain Bokobza, head of global asset allocation at Societe Generale, told CNBC last week that he was expecting the S&P 500 to absorb the Fed rate hikes this year and finish the year flat at around 2,050 points.

[Jan 05, 2016] A stock-market crash of 50%+ would not be a surprise - or the worst-case scenario

finance.yahoo.com

By many, many historically predictive valuation meassures, stocks are overvalued to the tune of 75%-100%.

In the past, when stocks have been this overvalued, they have often "corrected" by crashing (1929, 1987, 2000, 2007, for example) . They have also sometimes corrected by moving sideways and down for a long, long time (1901-1920, 1966-1982, for example).
... ... ...

Stocks are wildly overvalued on historically predictive measures

According to several historically valid measures, stocks are now more expensive than they have been at any time in the past 130 years, with the exception of 1929 and 2000 (and we know what happened in those years).

For example, the chart below is from Yale professor Robert Shiller. It shows the cyclically adjusted price-earnings ratio of the S&P 500 for the past 130 years.

As you can see, the current PE ratio of at least 26 is miles above the long-term average of 15. In fact, it is higher than at any point in the 20th century, with the exception of the months that preceded the two biggest stock-market crashes.

[Jan 04, 2016] Dollar Dominance Deconstructing the Myths and Untangling the Web

Notable quotes:
"... The US empire is one of Multi-National corporations and International Trade Deals. ..."
"... Im intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. ..."
"... The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland. ..."
"... By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive . … Over the course of the next six years the dollar experienced a meteoric rise in value. ..."
Jan 04, 2016 | naked capitalism

washunate , January 4, 2016 at 10:43 am

The US empire is one of Multi-National corporations and International Trade Deals.

I'm intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. One of the most successful Big Lies in our domestic political discourse is to blame convenient corporate villains instead of the public officials who are responsible for decision-making and implementation.

This isn't the 1980s anymore. The global financial system (post Bretton Woods) collapsed somewhere there in the 1990s. Today, things are held together by direct imperial threats, not corporate board rooms.

Synoia , January 4, 2016 at 10:50 am

The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland.

Synoia , January 4, 2016 at 10:47 am

It is not dollar hegemony that rules the world, but the global financial system which gives the dollar its place of privilege.

Syllogism? What came first the chicken or the egg?

Where to begin – one could suggest the author read Chapter 1 of Wray's MMT and rewrite considering sector balances and fiat currencies, and present the different line of argument which would arise.

MyLessThanPrimeBeef , January 4, 2016 at 1:18 pm

Unless you entice, seduce, leave no other option for the workers but to borrow, at ever lower rates, thank God.

Then, you can export jobs overseas. Wait, that's how we have managed so far…that, and renting out rooms/beds/bathrooms in your apartment.

Left in Wisconsin , January 4, 2016 at 1:29 pm

"By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive ." … "Over the course of the next six years the dollar experienced a meteoric rise in value."

Maybe not central to the main argument but I found this claim (in bold) implausible.

[Jan 03, 2016] Irving Berlin on Taxes

Notable quotes:
"... I am always struck by the difference between the oligarchs of today and those (a very small group) who ran the uk in the late 17 and 18 century. Proud, brutal but they taxed themselves as necessary to build effective institutions and instruments in the service of common goals ..."
"... in this culture we recognize the Midas touch as a positive good, rather than the curse the Greeks knew it to be. ..."
"... My feeling has always been that taxes are the price you pay to live in a civilized society. Conservatives are obviously opposed to that. ..."
"... An even more commercially successful writer, J. K. Rowling, has expressed similar enlightened views. There ought to be a hall of fame for such folks. ..."
"... To become a hedge fund billionaire you can have no heart and you can have no soul. You must be a ruthless predatory bastard with no concern for morality or justice. So it is not surprising that the question of whether you owe something to others doesnt really register with hedge fund billionaires. ..."
economistsview.typepad.com
Chris Dillow on our " narcisstocracy ":
Irving Berlin on taxes : The New York Times reports on how some of the US's richest men are dodging taxes. Compare this to the response of Irving Berlin when his lawyer offered him a tax shelter:
I want to pay taxes. I love this country.
He even wrote a song expressing this sentiment. He said: "I owe all my success to my adopted country." ...
He embodied -- knowingly so -- a point made by Herbert Simon, that we westerners owe our fortunes not so much to our own efforts but to the good luck of living in societies which enable us to prosper - which have peace, the rule of law and material and intellectual resources ...
Now, songwriting is pretty much as individualistic an activity as one can find; But even songwriters require a conducive environment such as musical traditions on which to draw and a marketplace for their work. Berlin knew this: 1930s Siberia had no equivalent of Tin Pan Alley or Hollywood.
If even songwriters owe their wealth to social capital, how much more true is this of hedge fund managers. They would be nothing without wealthy investors or large liquid financial markets: how many billionaire fund managers are there in Burkina Faso?
Which poses the question: why, then, don't hedge fund managers have the same attitude to paying tax as Irving Berlin? It could be that they are more motivated ... by personal greed. But there might be another reason..., they believe their wealth is the product of their own "talent" and so they are entitled to it... Others of us prefer to call it an example of one of the disfiguring diseases of our time - narcissism.
Perhaps there's another explanation, though. Maybe hedge fund billionaires are greater geniuses than Irving Berlin who have contributed more to human happiness. But how likely is this?

ilsm:

More of Berlin:

https://en.wikipedia.org/wiki/Stay_Down_Here_Where_You_Belong

Groucho Marx did that one on Dick Cavitt.

pgl:

"The New York Times reports on how some of the US's richest men are dodging taxes."

But Jay Bird just today declared corporations ARE paying their taxes. Really? There is no such thing as Base Erosion and Profit Shifting?

pgl -> Jay...

You need to get a life. Start with laying off the booze.

Roland:

I am always struck by the difference between the oligarchs of today and those (a very small group) who ran the uk in the late 17 and 18 century. Proud, brutal but they taxed themselves as necessary to build effective institutions and instruments in the service of common goals

EMichael:

Berlin realized that he did not build that.

Robert Marshall:

What is more likely is that songwriting and billionairing require very different character traits to reach the top. I wish I knew what it took to be a songwriter, but to be a billionaire, you have to think the right way to go about life is to try to get as much as you can for as little as you have to give up, and not even that if you can get out of it. And yet in this culture we recognize "the Midas touch" as a positive good, rather than the curse the Greeks knew it to be.

SomeCallMeTim:

Is it unseemly to infer that maybe these MOTUs hear the same dogwhistle symphony they fund? Or are they above that sort of thing, and just 'have a business to run'?

DrDick:

My feeling has always been that taxes are the price you pay to live in a civilized society. Conservatives are obviously opposed to that.

Jay -> DrDick...

You take the mortgage interest deduction?

Tax dodger!

DrDick -> Jay...

I rent.

DrDick -> DrDick...

And I take essentially nothing except the personal deduction.

Ken D :

An even more commercially successful writer, J. K. Rowling, has expressed similar enlightened views. There ought to be a hall of fame for such folks.

Benedict@Large -> Ken D ...

Why is everyone so concerned with diagnosis? We know that great piles of money in few hands leads to no good, and that is enough. Tax it away. Then let the formerly rich use their newly-freed time writing poems describing the beauty of skimming from other people's cash flows.

DeDude:

To become a hedge fund billionaire you can have no heart and you can have no soul. You must be a ruthless predatory bastard with no concern for morality or justice. So it is not surprising that the question of whether you "owe" something to others doesn't really register with hedge fund billionaires.

[Jan 01, 2016] Economics Joke Time

Notable quotes:
"... GDP. Great deposits of poo. ..."
"... [The financial crisis is worse than thought …] ..."
"... – Yes Prime Minister, A Real Partnership ..."
"... Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. ..."
"... "Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails. ..."
"... "Economists put decimal points in their forecasts to show that they have a sense of humour" ..."
"... "Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." ..."
December 30, 2015 | naked capitalism
Posted on by

... ... ...

The Standup Economist has a routine that has become a classic:

And of course, there are the economist variants of the lightbulb joke, originating in a 1994 Wharton Journal, as later recapped in Forbes:

Q: How many economists does it take to change a light bulb?

A1: None. The darkness will cause the light bulb to change by itself.

A2: None. If it really needed changing, market forces would have caused it to happen.

A3: None. If the government would just leave it alone, it would screw itself in.

A4: None. There is no need to change the light bulb. All the conditions for illumination are in place.

A5: None. Because, look! It's getting brighter! It's definitely getting brighter!!!

A6: None. They're all waiting for the unseen hand of the market to correct the lighting disequilibrium.

tony, December 30, 2015 at 6:12 am

Q: What do you call an economist that makes a prediction?

A: Wrong.

ben, December 30, 2015 at 3:28 pm

Two economists are walking on the street. They notice a pile of horseshit, and the older one says to the younger one: "I'll pay you twenty thousand if you eat that." The younger one ponders for a moment, then agrees and eats it. They walk a bit more and run into another pile of horse feces. So the younger one tells the elder: "I'll pay you twenty thousand if you eat that!". The older economist considers the offer and starts eating. After a while the younger economists stops and asks: "What was the point of this? We both ate a pile shit and neither of us got richer." The older one answers: "What are you talking about? We both produced and received twenty thousand worth in income and services."

GDP. Great deposits of poo.

Clive, December 31, 2015 at 5:41 am

"This economy is really terrible."

"How bad is the economy?"

"The economy is so bad, this year oysters are making fake pearls…"

"The economy is so bad, organised crime just laid off 10 judges…"

(and so on)


Paul Jonker-Hoffrén, December 30, 2015 at 7:27 am

"Knock Knock!"

"Who's there?"

"It's Return to Growth!"

Two years later…

"Knock Knock!"

"Who's there?"

"It's Return to Growth!"

And ad finitum…

Clive, December 30, 2015 at 6:21 am

"Knock Knock"

"Who's there?"

"Janet Yellen"

"Well there's no need to shout, I heard you knocking"

Joaquin Closet, December 30, 2015 at 7:42 am

The number of economists is the only thing that contradicts the Law of Supply and Demand.

craazyboy, December 30, 2015 at 9:00 am

Q: How many economists does it take to change a light bulb?

A: Three. A micro-economist to hold the ladder, a macro-economist to rotate the room, and a university economist to develop the math model and forecast how long it will take.

Ulysses, December 30, 2015 at 9:56 am

A mathematician, an accountant and an economist apply for the same job at an oil company.

The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer hard and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four – give or take ten percent, but on average, four."

Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

Paul Tioxon, December 30, 2015 at 10:02 am

What do you call a cruise ship sinking with 500 PhD economists chained below deck?

A good start.

allan, December 30, 2015 at 10:03 am

Frederic Mishkin.

Yves Smith, December 30, 2015 at 4:32 pm

Oh, that is good!

Paul

An economist is someone who will tell you tomorrow why what they predicted yesterday didn't happen today.

An economist, a physicist, and an engineer are stranded on an island with a can of food, and no opener.

The engineer says, "Let's smash the can open with a rock and eat".
The physicist replies, "Naw, that's going to splatter the food all over the place. Let's light a fire, the expanding gases will force the can to pop open and presto: warm food!"
The economist says, "Bad idea: the can will explode and the food will be all over the place. Now… let's assume we have a can opener…."

Blue Meme

A physician, an engineer, and an economist were discussing who among them belonged to the oldest profession. The physician said, "Remember, on the sixth day God took a rib from Adam and fashioned Eve, making him the first surgeon. Therefore, medicine is the oldest profession."

The engineer replied, "But, before that, God created the heavens and earth from chaos, thus he was the first engineer. Therefore, engineering is an older profession than medicine."

Then, the economist spoke up. "Yes," he said, "But who do you think created the chaos?"

aj

The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They're both wrong.

fresno dan

Pareto's law of optimal economic theory:
an economic theory has reached an optimal state when no other economist can make it wronger

pat b

The Third Law of Economists : The two economists theories don't add up.

twonine

"Economics is extremely useful as a form of employment for economists."
― John Kenneth Galbraith

gordon

JKG has some excellent one-liners. My favourite:

"The trouble with competition is that in the end somebody wins."

Joe Hill

"Again, since I'm not an economist I really have no idea what the wrong solution is."

~ @RudyHavenstein

Ramanan

[The financial crisis is worse than thought …]

James Hacker: Bernard, Humphrey should have seen this coming and warned me.

Bernard Woolley: I don't think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know.

James Hacker: What about Sir Frank? He's head of the Treasury!

Bernard Woolley: Well I'm afraid he's at an even greater disadvantage in understanding economics: he's an economist.

– Yes Prime Minister, A Real Partnership

JEHR

More economist jokes here: http://www3.nd.edu/~jstiver/jokes.htm

flora

Economists: purveyors of fictions upon which the superstructure of organized robbery is raised.
(apologies to Ambrose Bierce)

Synoia

Q: What do you call an Economist who tells the truth?

A: Unemployed.

Ivy

If you laid all the economists end to end,

it would probably be a good thing.

They still wouldn't reach a conclusion.

ben

A farmer and two bankers are shipwrecked on an island. Two weeks later help finally arrives. The bankers greet their rescuer who remarks how well they look.

BankerA: "we realised the potential of the natural resources on this island were tremendous".

BankerB: "I created some fiat money, we divided it up. I lent BankerA ten times my share for a coconut farm startup, he invested ten times his share in an accountancy startup."

Rescuer: "well that's amazing, only where is it all, I don't see any produce – how did you actually survive?"

BankerA: "We each used our debt to invest in futures given the fertile land it was clear the land could generate wealth once labour was applied. We both realised significant paper profits. Oh and we ate the farmer"

--

Bankers live off our backs.

Nortino

What did the supply curve say to the demand curve?

If you shift a little to the right, I'll give you some more of what you want.

_________

Why did the economist cross the road?

Because his models predicted he would.

TG

"Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails.

Synoia

Hmm, it seems you should take your own advice to heart. :-)

What is a person called who claims to predict the future and has a history of 100% failure in predictions?

a) A Charlatan
b) An Economist
c) A prophet

afreeman

In the same vein:
econ entropy: money invented from hot air evaporates, what do you expect?

Warren

"Economists put decimal points in their forecasts to show that they have a sense of humour"
- William Gilmore Simms (https://twitter.com/TheBrowser/status/680887672890589184?s=17)

TG

How many economists does it take to screw in a lightbulb?

Only one, but the lightbulb has to be hanging from the ceiling. Because economists can only screw things up.

Minnie Mouse

It takes one economist to change a light bulb and take the entire power grid down.

James McFadden

"Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." Lyndon Johnson

[Dec 30, 2015] On Pareto Opt imality

Notable quotes:
"... the ideal markets that would produce Pareto Optimal allocations dont actually exist ..."
"... moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isnt. ..."
"... In short, Pareto Optiimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit. ..."
"... The next step in graduate students indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a principle of compensation. The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens. ..."
Dec 30, 2015 | Economist's View
Sandwichman, December 30, 2015 at 10:06 AM
"Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal."

What they don't learn is that

1. the ideal markets that would produce Pareto Optimal allocations don't actually exist and

2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isn't.

In short, Pareto Optiimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit.

The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens.

anne said in reply to Sandwichman

Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bull----.

[ Agreed completely and I think this an important conclusion. ]

Paine said in reply to anne

Yes

Sandy gets the guts of it

Though

The compensation principle is precisely what Pareto rule is all about

Yes we can scramble the goods all we want so long as in the end everyone is at least as well off as before the scramble

In a pure exchange model this is less exciting then in a one period production model

Going on to an inter temporal model with an infinite horizon gets into real juicy Wonderlands

The academy makes it's living as much by distracting fine minds as training them

anne said in reply to Sandwichman

The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest....

http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

December 29, 2015

Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN

The very wealthiest families are able to quietly shape tax policy that will allow them to shield millions, if not billions, of their income using maneuvers available only to several thousand Americans.

anne said in reply to Sandwichman...

Supposing I understand the essay, Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."

Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire.

Sandwichman said in reply to anne

No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.

The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.
;

anne said in reply to Sandwichman

I understand the argument and I am entirely right:

Roger Farmer is just writing the logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin of Species."

Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire" capitalism. Spencer sold a biological justification, Farmer is selling a logical justification of Empire capitalism.

anne said in reply to Sandwichman

I needed to be sure the argument was as empty morally as I supposed initially, but I supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial capitalism. Plato's "Republic" conceived amorally. ;

anne said in reply to Sandwichman

A mean little essay, carefully subtle and mean.

Paine said in reply to anne

But Anne as sandy points out Roger blows up the use of Pareto by his future generations argument

Those unable to establish their preferences are unaccounted for in the scrum

He uses this to draw a bold distinction between securities markets and fish catch of the day markets

Paine said in reply to Paine

It's not the way I'd make his point

But his distinction is important

Some are impacted that are not participating

Third party effects that can not be resolved even with repeated " games "
Because the players are not yet present

anne said in reply to Sandwichman

Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed.

The bottom line is that NO ONE would have ever paid any attention to the not just "weak" but nonsensical concept if it didn't serve the function of justifying and ultimately glorifying great inequalities of wealth and income.

[ Agreed completely, but this argument runs with mine. ]

anne said in reply to Sandwichman

Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it in a way that opens up space for countless side arguments that leave Pareto Optimality unscathed....

[ The issue is that Roger Farmer leaves Pareto Optimality unscathed, and this is an essential point. The essay is beyond the morality of now, but there is no beyond. ]

[Dec 30, 2015] IMF chief Lagarde warns of disappointing global growth in 2016

Notable quotes:
"... Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases. ..."
www.theguardian.com

The IMF managing director, Christine Lagarde, said the prospect of rising interest rates in the US and an economic slowdown in China were feeding uncertainty and a higher risk of economic vulnerability worldwide.

Added to that, growth in global trade has slowed considerably and a decline in raw material prices was posing problems for economies reliant on commodities, while many countries still had weak financial sectors as the financial risks increase in emerging markets, she said.

"All of that means global growth will be disappointing and uneven in 2016," Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis dampened growth. In October, the IMF forecast that the world economy would grow by 3.6% in 2016.

... ... ....

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases.

Lagarde warned that rising US interest rates and a stronger dollar could lead to companies defaulting on their payments and that this could "infect" banks and states.

[Dec 29, 2015] The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed

Notable quotes:
"... The obvious candidate for this dark force [correlation between (rising) inequality and (low) growth] is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves -- for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals. ..."
"... The real problem is that money does not go to where it should go, as we see for example in the United States. The money does not flow into the real economy, because the transmission mechanism is broken. That is why we have a bubble in the financial system. The answer is not to tighten monetary policy, but to reform monetary policy so as to ensure that the money gets to the right place... ..."
"... As Stiglitz notes, the transmission mechanisms are broken. Economists trickle down monetary policy might work in theory, but not in practice, as we have seen for the last seven years, when low rates dont trickle down and were wasted instead on asset speculation by the 1%. ..."
"... Reform of the Fed, and the end of cronyism are essential to making sure that the stimulus of low rates gets to Main Street, to ordinary people, and not primarily to asset speculators. ..."
"... The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to fight phantom inflation. ..."
"... And in one sentence Summers illustrates exactly why we dodged a bullet in not appointing Summers to be Fed Chair. Preserving the power of the Fed is not the most important policy. Changing the Fed composition so that it is more consumer friendly and not dominated by Wall Street interests is the most important policy change needed. ..."
"... the Balkanized character of US banking regulation is indefensible and would be ended. The worst regulatory idea of the 20th century-the dual banking system-persists into the 21st. The idea is that we have two systems one regulated by the States and the Fed and the other regulated by the OCC so banks have choice. With ambitious regulators eager to expand their reach, the inevitable result is a race to the bottom. ..."
"... Summers is also calling for higher capital requirements. Excellent stuff! ..."
Dec 29, 2015 | Economist's View

'The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed'

This is the beginning of a long response from Larry Summers to an op-ed by Bernie Sanders:
The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed : Bernie Sanders had an op Ed in the New York Times on Fed reform last week that provides an opportunity to reflect on the Fed and financial reform more generally. I think that Sanders is right in his central point that financial policy is overly influenced by financial interests to its detriment and that it is essential that this be repaired.

At the same time, reform requires careful reflection if it is not to be counterproductive. And it is important in approaching issues of reform not to give ammunition to right wing critics of the Fed who would deny it the capacity to engage in the kind of crisis responses that have judged in their totality been successful in responding to the financial crisis.

The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation. ...

JohnH said...
Disagree!!! There is more to this than just interest rates. There is the matter of how the policy gets implemented--who gets low rates. Currently the low rates serve mostly the 1%, who profit enormously from them. Case in point: Mort Zuckerberg's 1% mortgage!

"The obvious candidate for this dark force [correlation between (rising) inequality and (low) growth] is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves -- for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals."

http://www.bloombergview.com/articles/2015-12-24/cronyism-causes-the-worst-kind-of-inequality

As we know (although most here steadfastly ignore it) the Fed is rife with crony capitalism. As Bernie pointed out, 4 of the regional governors are from Goldman Sachs. Other examples are abundant. Quite simply, the system is rigged to benefit the few, minimizing any potential trickle down.

If a broad economic recovery is the goal, ending cronyism at the Fed is likely to be far more effective that low interest rates channeled only to the 1%.

JohnH said in reply to JohnH...
Stiglitz:

The real problem is that money does not go to where it should go, as we see for example in the United States. The money does not flow into the real economy, because the transmission mechanism is broken. That is why we have a bubble in the financial system. The answer is not to tighten monetary policy, but to reform monetary policy so as to ensure that the money gets to the right place...

Small and medium enterprises cannot borrow money at zero interest rates - not even a private person, I wish I could do that (laughs). I'm more worried about the loan interest rates, which are still too high. Access for small and medium enterprises to credit is too expensive. That's why it is so important that the transmission mechanism work..."
http://www.cash.ch/news/alle/stiglitz-billiggeld-lost-kein-problem-3393853-448

And let's not forget consumer credit rates, which barely dropped during the Great Recession and are still well above 10%. Even mortgage lending, which primarily benefits the affluent, have been stagnant for years despite historically low rates.

As Stiglitz notes, the transmission mechanisms are broken. Economists' trickle down monetary policy might work in theory, but not in practice, as we have seen for the last seven years, when low rates don't trickle down and were wasted instead on asset speculation by the 1%.

Reform of the Fed, and the end of cronyism are essential to making sure that the stimulus of low rates gets to Main Street, to ordinary people, and not primarily to asset speculators.

Peter K. said in reply to JohnH...

Bernie Sanders:

"The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to fight phantom inflation. "

http://www.nytimes.com/2015/12/23/opinion/bernie-sanders-to-rein-in-wall-street-fix-the-fed.html

EMichael said in reply to Peter K....

It is hilarious.

"He's right! But his policies are wrong!"

You couldn't make this up......

JF said...
The financial system reform legislation in 2017 will also need to include these matters:

1. Licensure fees and higher and more differential income taxation rates based on the type of financial trading ratios the entities have (in order to direct more emphasis to real-economy lending and away from speculative and leveraged positions used in the financial asset trading marketplaces, so hedge funds probably would face the highest rates in income taxation). For a certain period after enactment these added taxes would be payable by the banks using their excess reserves, which will simply be eliminated until the reserve accounts return to the historically normal period when excess reserves were very small (there would no longer be a need for IOER, as the excess would be eliminated by operation of the taxation statutes). Attaching added ways & means statutes to all the financial service entities also serves to 'cover' some more of huge financial risk held by society and produced by them while the success of this huge sector actually contributes to the financing of self-government - which is also an indirect way to attach high Net Worth being used).

2. New statutory provisions need to reach any and all entities in the financial community regardless of definitions based on the functions they serve or provide (or the way they are named - so yes, the prior separation for deposit-management banking from investing activities can still happen, but this only helps to define which of the differential provisions apply, not help the entity escape them). Perhaps as a result Bank Holding Companies and other large entities won't use a complex network of hundreds of subsidiaries as these would not then serve as a way to avoid taxation, regulatory standards on what are prudent expectations, or supervision; or be used simply to obfuscate -- so investors and regulators can't see the truth of matters.

3. The newly named central bank needs to hold the discretion to buy Treasury bonds directly from the Treasury. This would discipline these fundamental asset-trading marketplaces and the huge primary dealer group of entities, and weaken the fox-and-hen-house influence on public finance.

4. New accounting approaches for the central bank would clarify what happens should the Congress direct redemption amounts or asset sales for the public's purposes. A good portion of the current FRB's book of owned assets can be redeemed or sold without affecting the 'power' of the central bank, and the proceeds used then, for example, to lower payroll taxes via a direct transfer to the social security trust fund's set of accounts).

Senator Sanders, good stuff. Bring out the vote, let us get others in Congress with whom you can work.

BillB said...
Summers: "The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation."

And in one sentence Summers illustrates exactly why we dodged a bullet in not appointing Summers to be Fed Chair. Preserving the power of the Fed is not the most important policy. Changing the Fed composition so that it is more consumer friendly and not dominated by Wall Street interests is the most important policy change needed.

Summers argument is the same we always hear from so-called "centrists." "You hippies should shut up because you are helping the opposition."

You hear the same sort of argument with respect to Black Lives Matter.

pgl said in reply to pgl...

On financial regulation - Summers is spot on here:

"the Balkanized character of US banking regulation is indefensible and would be ended. The worst regulatory idea of the 20th century-the dual banking system-persists into the 21st. The idea is that we have two systems one regulated by the States and the Fed and the other regulated by the OCC so banks have choice. With ambitious regulators eager to expand their reach, the inevitable result is a race to the bottom."

It is called regulatory capture.

Summers is also calling for higher capital requirements. Excellent stuff!

[Dec 27, 2015] Summer Rerun Why America Will Need Some Elements of a Welfare State

Notable quotes:
"... Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care. ..."
"... Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. ..."
"... Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire ..."
Dec 27, 2015 | naked capitalism

An excellent column by Martin Wolf in the Financial Times, where he is the lead economics editor. Starting with principles put forward by Ben Bernanke in his recent speech on income inequality, Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care.

James Levy, December 26, 2015 at 4:32 pm

I have no idea if Marx was right, in the long run, or wrong–the verdict is still out on the long-term viability of industrial capitalism, which is less than 250 years old and creaking mightily as I write this. It may be that when Rosa Luxemburg said that the choice was between Socialism and Barbarism, she underestimated how likely barbarism was. What I do know is that capitalism today isn't just too ugly to tolerate, it is downright murderous. Its imperatives are driving the despoliation of the planet. It's love of profit over all else is cutting corners and creating externalities that are lethal. But it has made a few percent of the global population comfortable and powerful, and they are holding onto that comfort and that power come hell or high water (and, ironically, if things continue apace both are on the menu).

Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We're asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they're literally dead meat if they don't and therefore opts for survival over position. I am not enthusiastic that this will happen before it is way too late to save more than a fraction of the current world population, and send those people back to the lifestyles and thought patterns of 30 Year's War Europe.

    1. digi_owl

      Its a generational thing. Right after WW2, many of the elite had just that epiphany that unless they have the common people behind them, they are toast. But now they are dead or dying, and their grandkids are basically once more thinking that they can go it alone. This because they have not had the required experiences that help develop the wisdom.

      Reply
  1. Paul Tioxon

    What Marx saw long ago, we can see today, and without relegating ourselves to his analysis, come to our own conclusions. Contradictions, summed up well by Lincoln as a house divided against itself cannot stand is just as true today. Millions of guns to protect the citizenry from tyranny have only resulted in a 1/4 million murders and 5 times as many shootings since Jan 1, 2000, some placing people in wheel chairs and other crippling gunshot afflictions, and more and more institutionalized state oppression, economic exploitation and miserable lives propped up in an alcoholic haze until the liver or brain gives out. We have more food than we know what to do with so we throw away almost as much as we eat. And we have eaten ourselves into morbid obesity, diabetes and heart disease. The contradictions abound from the kitchen table to the kitchen cabinet of the White House where there seems to be nothing passed so freely as bad advice.

    The Welfare State arose from the sacrifices of the population in giving their sweat, blood and tears to defend their nation during war, to be rewarded for their sacrifices, rewards which were demands for power sharing and more in the paycheck, more benefits and more time to enjoy the life spent in a more prosperous world. It seems to me that Obamacare is not simply in death spiral all of its own making, but even more so, because it is the best attempt capitalism can produce in an America that is the most capitalist of societies down to the marrow its bones. Little competition from the Church or the social relations between nobles and subjects set for in the laws that were disestablished to free markets for commodification and money making. Money making enterprises structured the laws from slavery, to the voting franchise with little from the state to cushion any of the hardships of life in America.

    Health care is the largest industry we have. It is approaching 20% of the GNP. I remember the great national freak out in the late 1970s when congress realized it was approaching 10%. Nothing seems to be stopping the costs from spiraling upward and onward. No risk of deflation here where nothing is spared to save a life, operate on some poor little afflicted child, or buy a piece of equipment the size of an office building that shoots a proton beam at cancer, one cancer cell at a time.

    When Obama Care becomes a clear burden to even the democrats who can point to it now as some sort of accomplishment, and it is an accomplishment for the people who finally get to see a doctor, get into a hospital, get that operation or diagnosis that saves their lives, when even those accomplishments number in the millions, it will be part of a health care industry for which $Trillions of dollars can no longer be justified or even funded. As that financial collapse approaches, it would be better for politicians to declare the defeat of a program better rolled into one universal single payer system currently operating as Medicare, than try to reform, shore up or the old tried and true public lie, get rid of its waste and corruption.

    Declare victory with Medicare as the solution and put everyone into it. The only paper work left should be each person's medical history with diagnosis and healing as the happy ending to the story.

    Reply
  2. jgordon

    There is a fundamental error in perception in the Western world that is so pervasive that people can't even see it. As a most basic component of a healthy society people need to be able to survive at a local community level without outside support. Only after that is taken care of should people concern themselves with luxuries, inter-community and international relations.

    Welfare–not to mention other government services–can appear to have positive impacts if one only looks at their effects in isolation, however I think there is a devastating and pernicious impact on people's ability to form community bonds and have local resilience with things like welfare.

    Also, let's also not forget that Americans consume far more of the earth's precious resources than any other group in the world. Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire. Do these recipients of empire benefits have a moral right to share in the loot of empire? Perhaps instead of domestic welfare it would be more ethical for the American empire to provide social benefits for the indigenous peoples who are forced from their lands to work like slaves for the empire's benefit. Although admittedly if the American empire used it's loot for the benefit of the foreign peoples whose lives it destroyed then there'd probably be nothing left to spread around to the military, or to pacify and police the domestic population. So I suppose that's not a serious proposal.

    Reply
    1. Left in Wisconsin

      Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire

      This is obviously not true. Unless every social democratic country in the world is considered as a piece of the American empire. And even then, I would argue that we can easily afford a generous welfare state with a small shift in priorities away from (globally destabilizing) defense spending to social productive spending on human development.

      Reply
      1. jgordon

        Obvious to who? America lavishes so much money on its military not only because of corruption, but also because it has the world reserve currency and is a guarantor of the safety of international shipping. These facts are inextricably linked to the America's status as the world hegemon. The empire provides order and structure, and enforces the extraction of resources from the periphery to the center. The bread and circuses are inextricably linked to the empire's military activities and trying to tease them apart will only lead to collapse of the entire system sooner than it will otherwise happen.

        "Social Democratic"–now that's an interesting phrase. Did you know that Syria is a democracy, and was an extremely prosperous and well-education nation prior to 2011?

        Reply
        1. Vatch

          "Did you know that Syria is a democracy"

          Here's a telling paragraph from the Wikipedia article about Syria:

          Hafez al-Assad died on 10 June 2000. His son, Bashar al-Assad, was elected President in an election in which he ran unopposed.[68] His election saw the birth of the Damascus Spring and hopes of reform, but by autumn 2001 the authorities had suppressed the movement, imprisoning some of its leading intellectuals.[84] Instead, reforms have been limited to some market reforms.

          [Dec 27, 2015] The Sneaky Way Austerity Got Sold to the Public Like Snake Oil

          Notable quotes:
          "... When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in. ..."
          "... Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution. ..."
          "... the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do. ..."
          "... The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things. ..."
          Dec 27, 2015 | naked capitalism
          LP: You indicate that this approach to budgeting was invented as a way of making the New Deal acceptable to the business community. How did that work? Over time, who has benefitted from it? Who has lost?

          OC: Back in the 1940s, workers were fighting for their rights, class struggle was heating up, and soldiers would soon be returning from the fronts. At that point, a new business organization, the Committee for Economic Development (CED), came together. Led by Beardsley Ruml and other influential business figures, the CED played a crucial role in developing a conservative approach to Keynesian economics that helped make policies that would help put all Americans to work acceptable to the business community.

          The idea was that more consumers would translate into more profits - which is good for business. After all, the economic experts and budget technicians said so, not just the politicians. And the business leaders were told that economic growth and price stability would go along with this, which they liked.

          But things changed progressively over the 1970s and early 1980s. Firms went global. They became financialized. The balance of power between workers and owners started to shift more towards the owners, the capitalists. People were told they needed to sacrifice, to accept cuts to social spending and fewer rights and benefits on the job - all in the name of economic science and capitalism. The CAB was turned into a tool for preventing excessive spending - or justifying selected cuts.

          Middle class folks were afraid that inflation would erode their savings, so they were more keen to approve draconian measures to cut wages and reduce public budgets. People on the lower rungs of the economic ladder felt the pain first. But eventually the middle class fell on the wrong side of the fence, too. Most of them became relatively poorer.

          I suppose this shows the limits of democracy when information, knowledge, and ultimately power are unequally distributed.

          LP: You're really talking about birth of austerity and the way lies about public spending and budgets have been sold to the public. Why is austerity such a powerful idea and why do politicians still win elections promoting it?

          OC: Austerity is so powerful today because it feeds off of itself. It makes people uncertain about their lives, their debts, and their jobs. They become afraid. It's a strong disciplinary mechanism. People stop joining forces and the political status quo gets locked down.

          Even the
          name of this tool, the "cyclically adjusted budget," carries an aura of respect. It diverts our attention. We don't question it. It creates a barrier between the individual and the political realm: it undermines democratic participation itself. This obscure theory validates, with its authority, a big economic mistake that sounds like common sense but is actually snake oil - the notion that the federal government budget is like a household budget. Actually, it isn't. Your household doesn't collect taxes. It doesn't print money. It works very differently, yet the nonsense that it should behave exactly like a household budget gets repeated by politicians and policymakers who really just want to squeeze ordinary people.

          LP: How does all this play out in the U.S. and in Europe?

          OC: The European Union requires its members to comply with something called a cyclically adjusted budget constraint. Each country has to review its economic and fiscal plans with the European Commission and prove that those are compatible with the Pact. It's a ceiling on a country's deficit, but it's also much more than that.

          Thanks to the estimate, the governments of Italy or Spain, for example, are supposed to force the economy toward some ideal economic condition, the definition of which is obviously quite controversial and has so far rewarded those countries that have implemented labor market deregulation, cut pensions, and even changed the way elections happen. Again, it's a control mechanism.

          In the U.S. this scenario plays out, too, although less strictly. Talk about the budget often relies on the same shifty and politically-shaded statistical tools to support one argument or the other. Usually we hear arguments that suggest we have to cut social programs and workers' rights and benefits or face economic doom. Tune in to the presidential debates and you'll hear this played out - and it isn't strictly limited to one party.

          LP: How do we stop powerful players from co-opting economics and budgets for their own purposes?

          OC: Our education system is increasingly unequal and deprived of public resources. This is true in the U.S. but also in Europe, where the crisis accelerated a process that was already underway. When children don't get good educations, the production of knowledge falls into private control. Power gets consolidated. The official theoretical frameworks that benefit the most powerful get locked in.

          In the economic field, we need to engage different points of view and keep challenging dominant narratives and frameworks. One day, human curiosity will save us from intellectual prostitution.

          craazyboy, December 25, 2015 at 10:10 am

          Most people don't eat, go to college, use healthcare, rent or buy housing on the east or west coast, or purchase military equipment (except perhaps small time stuff like assault rifles), so the BLS greatly underweights(or hedonics prices, or just pulls rent data outta their butts) these things in the inflation data they create. The Fed then goes into a tizzy if the data comes in a few tenths of a percent below 2%, even if the data spent years above 2%, and floods the country in liquidity so our job creators – banks and large corporations – will hire us and give us raises, and once they finish doing that, the BLS will signal that inflation is 2% and the Fed will then know all our problems are solved. It just takes time.

          See the book "Treasure Island" for how things are going on the revenue side. But more tax breaks for large corporations and the wealthy are needed so we don't force them to do any illegal tax avoidance stuff and they will then happily pay whatever they think their fair should be. Might be zero. They will then have money to buy stuff too, which is a big plus as well, when you think about it.

          So clearly, you can see why deficit spending almost seems inevitable.

          Then the next problem is we still have unemployment, and something needs to be done about that. For instance, lots of room for more government contracts for social purposes. Take Obamacare. Place a single source contract, now estimated between $1 and $2 billion, with a Canadian systems company that employs independent contractor Indian programmers. Eventually, we have Obamacare!

          We can do this if we just get serious about this and say "No More Austerity In America!"

          likbez, December 27, 2015 at 9:31 pm

          Emperor Severus is famously said to have given the advice to his sons: "Be harmonious, enrich the soldiers, and scorn all other men"

          Brooklin Bridge

          Can education provide the solution?

          I suspect that the educational bias occurs at all levels in the sense that much the same misinformation is provided regardless of neighborhood but progressively wrapped in more elegant pedagogical flim-flam-ery for the owner class. Basically, the bias changes, but not the message, as one goes from poor (austerity – this is your lot in life) to wealthy (austerity – you were born to make the tough decisions, it's in your genes – and you'll just have to accept the rewards, man up to your destiny and toss em a quarter on Sundays). The upper class does get a far better education, but the bias is or becomes unconscious over time.

          Basically, aristocracy is a nasty brutish cycle that keeps upping the ante of consequences.

          washunate, December 26, 2015 at 8:09 am

          Yves, INET and NEP and others have been lecturing that topic for years. How many trillions of dollars do we have to deficit spend before the failure of things to improve indicts the hypothesis itself?

          Maybe what matters is not the amount of the spending, but rather, the distribution.

          And what is so bad about deflation? The attachment of moral judgment to inflation and deflation is rather bizarre outside of establishment monetary economics. The basic monetary problem confronting the bottom 80% or so of American households is inflation, not deflation.


          Dan Lynch, December 25, 2015 at 11:27 am

          I don't buy the article's historical narrative.

          Conservatives have ALWAYS opposed spending on social programs and ALWAYS used the deficit as an excuse (unless the deficit was due to war or tax cuts for the rich). This was true during the New Deal; FDR himself was a deficit hawk.

          Nonetheless for years the public supported social programs and no politician dared to cut them. Not only were the politicians worried about votes but also the welfare state was a way to head off a left wing revolution.

          What changed? I would say the change began in 1976 with the election of Rockefeller-funded Jimmy Carter, who immediately launched an austerity program. Support for Keynesian economics was further eroded by the 70's stagflation which we now know was caused by Mid East oil but at the time the "left" were like deer in the headlights, with no clue what to do.

          The final nail in the coffin was the fall of the Berlin Wall and the collapse of the USSR, discrediting communism. After that, "there was no alternative" to corporate capitalism. Or more accurately, the left was slow to formulate an alternative and to this day is still struggling with an alternative as we have observed with Syriza. It's not enough to oppose austerity, you have to have a constructive plan to fix things.

          Vatch, December 25, 2015 at 12:40 pm

          History teaches us that peacetime austerity can be horribly disastrous. Some examples:

          British austerity during the 19th century included the Great Irish Famine of 1845-1849: The Irish population was about 8 million people in 1841, and the death toll of the famine was at least a million. This is a huge percentage loss of life. Due to the combination of deaths with emigration and births that did not occur, the 1851 population of 6.5 million was estimated to be about 2.5 million lower than expected. Since food was exported during the famine, this was definitely an extreme case of austerity.

          Soviet austerity during the 1930s: Millions died, and food was exported during the famine period of 1931-1933. Austerity is often associate with conservatives, so I guess conservative austerity enthusiasts must be pleased with the performance of the eminent conservative Josef Stalin.

          Chinese austerity during the Great Leap Forward of 1958-1962: Tens of millions died - perhaps as many as 45 million. The same irony about conservatives and Stalin is true about conservatives and Mao, but on a far greater scale.

          Merry Christmas.

          ben chifley

          july 24 2015: Krugman:Ignore the 'MIT gang' at US economy's peril Paul Krugman says while economists of the '70s discarded Keynes, he never went away at MIT.‏
          http://www.chron.com/opinion/outlook/article/Krugman-Ignore-the-MIT-gang-at-US-economy-s-6404243.php

          MIT: Libertarian Haven | Independent Political Report‏
          http://www.independentpoliticalreport.com/2011/01/mit-libertarian-haven/

          Soros | MIT Global Education & Career Development‏
          https://gecd.mit.edu/go-abroad/distinguished-fellowships/explore-fellowships/soros

          washunate

          This is a pretty remarkable piece of rambling drivel. To the extent coherent points can be taken away from this, it appears there are at least two major flaws:

          1) There is absolutely no link between public opinion and CAB. Germany chooses to have national healthcare, passenger rail, and renewable energy. The US chooses to have national security, predatory medicine, and car-dependent sprawl.

          2) There is absolutely no link between austerity and concentration of wealth and power. France has a much more equal distribution of wealth than the US. Yet the US has run enormous deficits while France is supposedly constrained by the techno mumbo jumbo nonsense of the EU.

          The notion that 'austerity' is sold to the public is just a blatant falsehood. Americans don't support the budget priorities in Washington. It's a collective action problem, not a public opinion problem.

[Dec 27, 2015] This Junk Bond Derivative Index Is Saying Something Scary About Defaults

Bloomberg Business

Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2 percent, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis.

What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of zero percent. In fact, they average somewhere in the 26 percent range, which would imply 29 defaults over the next five years instead of 41.

So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5 percent to 5.5 percent. (For comparison, the rating agency Moody's is currently forecasting a 3.77 percent default rate.)

[Dec 27, 2015] 2016 will be a year of living dangerously for the global economy

Notable quotes:
"... WW I happened after 20 yrs during which the the superpower Britain had been blatantly replacing their dwindling economic influence by demonstrations of military powers. Now which nation today is siphoning off by ever more military means the products and raw materials of others, while not even caring a bit about welfare for the majority of their own citizens? ..."
"... But its so much easier to make propaganda against Mr Putins public appearances than seriously address the point that this guy is genuinely popular at home precisely because he refuses his country to be a sellout to USAs 1O %. ..."
Dec 27, 2015 | The Guardian

marketingexpert -> HorseCart 27 Dec 2015 14:38

If the big borrower nations like GB and USA were honest, it would be electoral suicide because all they could promise is massive reduction in living standards back to a level we can afford

And that will happen either by progressive erosion or catastrophic bubble burst and economiccollapse.

But It is so much easier Lefty fashion to promise jam today for everyone, and invent bogus bogeymen to pay for it all, or pretend you can borrow or print to prosperity. Anyone north of a five year old can see through such nonsense from the day they trade mars bars for marbles,

Buy gold, or farmland.

lingyai -> SrdeAth 27 Dec 2015 14:25

that's what the US has all those military bases around the world for.. can't have the world reserve currency being threatened...

KillerMarmot -> Lafcadio1944 27 Dec 2015 14:25

Neoliberalism is going to provide prosperity when clear-eyed analysis shows Neoliberalism to be little more than subjugation to oligarch rule and the most egregious inequity the world has ever known.

Actually the world is more prosperous than it has ever been. Over the last few decades, billions of people have been lifted out of abject poverty into something resembling a modern lifestyle. Infant mortality has been falling steadily. Life expectancy has been raising steadily. It is resounding triumph, but one that is little recognized,

Marjallche -> gilesjuk 27 Dec 2015 13:02

Yes I actually think it is, as dependencies breed fear of being exploited, breeds distrust as to whether the other side does or does not threaten with blackmail etc. I got the idea from Keynes, who saw stability in self-reliance of nations and instability in population import, which threw the balance in favour of big capital.

Marjallche -> JudiHoskyn885 27 Dec 2015 12:57

WW I happened after 20 yrs during which the the superpower Britain had been blatantly replacing their dwindling economic influence by demonstrations of military powers. Now which nation today is siphoning off by ever more military means the products and raw materials of others, while not even caring a bit about welfare for the majority of their own citizens?

But it's so much easier to make propaganda against Mr Putin's public appearances than seriously address the point that this guy is genuinely popular at home precisely because he refuses his country to be a sellout to USA's 1O %. Another pre WWI parallel. PS it seems to be a very anglo-saxon notion that the upper 10% belong to a better and preferable breed of humans. The rest being granted the "freedom" to crawl in the dirt and die in the name of "freedom" for the preservation of their "democratic" 1%ers privilege.

Iconoclastick 27 Dec 2015 12:54

It was bad in 2012, it's got far worse.

as the chart below shows, if there is anything the global financial system needs, is for the rating agencies, bond vigilantes, and lastly, general public itself, to realize that the UK's consolidated debt (non-financial, financial, government and household) to GDP is... just under 1000%. That's right: the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country's GDP. To call that "game over" is an insult to game overs everywhere.


http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdp

Sammy Johnston -> gilesjuk 27 Dec 2015 12:41

All political parties follow the will of the banking families and corporate elites. The economy is in it's intended state, gearing up for the third world war, the formation of world government and the eventual digitalization of currency world wide.

To state that cameron has any control is naive. To say corbyn can be effective to oppose it is naive. We need to eliminate our current elite and start a new paradigm to have any sense of freedom again.

MancuMan -> eveofchange 27 Dec 2015 12:50

Aye, a few million people got murdered by the Communists but apart from that and the lack of joy in life for the survivors it all went very well indeed and we should give it another go.

ldopas -> eveofchange 27 Dec 2015 12:37

I see you have been studying the socialist comics again.

Evidence tells us, evidence, that capitalism has problems. Lots of them. But it does work for the most part, and the model of capitalism also when there is a disruption mostly recovers like a cut in the skin that heals. Socialism wherever tried ALWAYS has produced poor if not catastrophic results, and once a downward spiral is established there is nothing to stop it, no mechanism in place to heal it like capitalism.

So my money, pun intended, is with capitalism.

Look if you are fed up of our capitalist first world services, infrastructure and healthcare there are still a few deluded places where some sort of socialism exists; Cuba for example where everyone is equal in poverty and their infrastructure is non existent, perhaps N Korea?

Ask yourself this. when a country that is poor and gets the chance for democracy, why do they always go more capitalistic?

eveofchange -> jonsnow92 27 Dec 2015 12:25

I have told you what would happen if capitalism continues.

I opposed Stalin and his ilk, and his corruption of socialism. But under even he, Russia escaped the economic collapse of the thirties, and was invaded by a country that had been ravaged by capitalism's collapse . Russia even emerged stronger.

The nationalised economy worked perfectly, and defeated capitalist Germany (although Hitler himself,introduced aspects of socialism--as did the UK and US). But without a workers and working class democracy, nationalisation will not work for any length of time .

jonsnow92 -> eveofchange 27 Dec 2015 12:17

unless consciously overthrown by a working class takeover for socialism, would still carry on. What do you want?

It didn't work in USSR did it? The working class took over and it didn't end up in milk and honey on the streets. Same for East Germany - apart from the genius of Trabant not much else going on until the people started voting with their feet jumping walls and going to capitalism. And I didn't mention Albania, Cuba, North Korea and other great success stories from socialism.

BTW - in socialist countries you couldn't have a strike as the working class was in power and as Stalin said: "why would the working class strike if they are in power?"

eveofchange 27 Dec 2015 12:02

The problem is capitalism, as Marx correctly pointed out and analysed. One "solution" always leads to a worse problem---and it cannot be resolved,or solved Eventually there is either a major war, between desperate capitalist states fighting over shrinking markets, or there is a gigantic crash.--or both.This literally wipes out productive capacity, and thus the problem of "overproduction" is temporarily "solved". The same cycle is then repeated, to it's inevitable conclusion--again.
Millions, throughout the world, even in the UK, are made destitute by this, or even die--but capitalism, unless consciously overthrown by a working class takeover for socialism, would still carry on. What do you want?

> newsfreak 27 Dec 2015 13:33

The ambiguity of economic and financial forecasters tend to reach proverbial limits. They make a living out of ambiguity and what later end up being frustrated expectations: "2016 will be a year of living dangerously for the global economy" yet "there will be no explosion in 2016, but a fuse will be lit." How dangerous is a lit fuse? The whole financial world system is a sham based on printing currencies with no backing standard. At some point there will be a wake up call, a reality check, and a devastating free fall.

ID7829806 27 Dec 2015 11:58

Economic forecasting is a mug's game.

But a lot of people get paid a lot of money to do it. Forecasting is of course, at best, an inexact and purely speculative effort (I nearly wrote 'an inexact science', but there is nothing scientific about it, at all).

Those who have the confidence/cheek/arrogance to predict, tend to stick close to the average of an (emerging) consensus, if there is one. Commentators keep looking around and over their shoulders - no one wants to look silly - and so feed-on and affirm each other. Few stick their necks out - but then, if they do, they are likely unknown or a maverick, and does anyone therefore notice, or care?

A broken clock is right twice a day, but who wants to predict that the clock will fall off the wall (unless they have inside knowledge)?

Larry, you may be right. Or you may be wrong. 2016 is an Election Year in the US, which suggests 'nothing to see here' for the next 12 months. But then again, it didn't stop the last crash happening.

But the feeling in your water could be right, precisely because we are in unknown and unprecedented territory. The historic economic 'rule-book' hasn't so much been torn-up in recent years, rather - quietly - put back on the shelve, and self-consciously ignored.

These are unprecedented times. So: who knows what might happen? An unprecedented economic implosion round about 2017 is possible. Or not. But on a balance of probabilities: something without precedent is likely to happen (for good or ill): and none of us will have predicted it.

Dan_de_Macy 27 Dec 2015 11:58

Prediction:

Going South: Why Britain will have a Third World Economy by 2014 Paperback – 14 Jun 2012

http://www.amazon.co.uk/Going-South-Britain-Third-Economy/dp/0230392547

Reality:

http://www.theguardian.com/politics/2015/apr/17/imf-chief-praises-british-governments-handling-of-economy

Iconoclastick 27 Dec 2015 11:50

Other stuff building up a storm on the horizon...

Forget About Junk Bonds, This Is the New Credit-Equity Disconnect Investors Should Be Watching
Can contagion spread to stocks?

http://www.bloomberg.com/news/articles/2015-12-15/forget-about-junk-bonds-this-is-the-new-credit-equity-disconnect-investors-should-be-watching

This Junk Bond Derivative Index Is Saying Something Scary About Defaults. Markit's CDX index is pricing in a 2008-like selloff.

http://www.bloomberg.com/news/articles/2015-12-16/this-junk-bond-derivative-index-is-saying-something-scary-about-defaults

[Dec 24, 2015] In 2012, Greek pension funds, which were obliged under Greek law to own government bonds were hit by debt write-down and lost about 10 billion euros or roughly 60 percent of their reserves

econbrowser.com
Jeffrey J. Brown

In reading the following NYT article about the Greek Crisis, with an emphasis on pensions and pensioners, I recalled Professor Hamilton's post on the US Social Security system. To borrow Warren Buffet's phrase about finding out who is skinny dipping when the tide goes out, I wonder if the tide has just receded faster for Greece than for the US, in terms of over promised and under-funded Social Security and pension plans, especially in regard to vastly underfunded state and local government pension plans. And of course, federal government owns both the asset and the liability for the Social Security Trust Fund

http://www.nytimes.com/2015/06/09/world/europe/greece-pensions-debt-negotiations-alexis-tsipras.html?hpw&rref=business&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

Greece's social security system was troubled even before the crisis, already divided into more than 130 funds and offering a crazy quilt of early-retirement options that were a monument to past political patronage.

In 2012, the pension funds, which were obliged under Greek law to own government bonds*, were hit by a huge debt write-down as those bonds plummeted in value. As a result they lost about 10 billion euros, or $11.1 billion - roughly 60 percent of their reserves.

Greece's creditors, seeking to make the Greek labor market more competitive, insisted that the government reduce the amount companies and workers must contribute toward pensions. And they insisted that Greece reduce its minimum wage so that those who do contribute have smaller outlays.

At the same time, the pension system was becoming an even bigger component of the social safety net, absorbing thousands. People like Ms. Meliou retired early, either because of the sale of state-owned companies, because they feared their salaries would be cut and thus their pensions would be smaller, or simply because their businesses failed. Few are living comfortably, and many support unemployed children.

*Remind you of another system?

[Dec 24, 2015] An Aging Society Is No Problem When Wages Rise

Notable quotes:
"... Hey, if the plutocrats won't raise wages then they will need to raise the payroll tax cap on Social Security. They should have thought of that before starting so many wars. The Bonus Army will not be denied. ..."
"... Raise it my foot, they need to eliminate it. The cap has always been more welfare for the rich. ..."
"... Why not eliminate the income cap ($118k) entirely and start taxing capital gains and dividends for Social Security too? Members of Congress pay this tax on 65% of the salaries ($174k), while 95% of all wage earners pay this tax on 100% of their earnings. ..."
economistsview.typepad.com

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

RC AKA Darryl, Ron said...

Hey, if the plutocrats won't raise wages then they will need to raise the payroll tax cap on Social Security. They should have thought of that before starting so many wars. The Bonus Army will not be denied.

DrDick -> Darryl, Ron...

"they will need to raise the payroll tax cap on Social Security"

Raise it my foot, they need to eliminate it. The cap has always been more welfare for the rich.

Bud Meyers -> DrDick...

Why not eliminate the income cap ($118k) entirely and start taxing capital gains and dividends for Social Security too? Members of Congress pay this tax on 65% of the salaries ($174k), while 95% of all wage earners pay this tax on 100% of their earnings.

mulp

"We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised."

Illogical!

If wages of younger workers were maintaining the same gains over their previous generation peers, and in fact, gained even more due to reduced supply of workers relative to steady demand for labor as the large boomer cohort leaves the labor force to the smaller subsequent generation.

Instead, conservative free lunch economicntheory, itself grossly illogical, has led to cuts in wages as a matter of policy based on the idea that workers are not consumers, so gdp can grow faster if workers are paid less, leading to a larger supply of consumers with pockets of money being created by the tinker bell of wealth.

While changing demographics might require higher payroll taxes, say younger generations having more kids than the boomer generation and being stay at home parents than boomers were, in reality, the younger generations are moving further along the trend line of working more, just like the boomers.

Incomes are falling leading to reduced gdp growth because that is driven by labor incomes which are labor costs, and lower gdp means lower wage income means lower tax revenue with a fixed tax rate.

Social Security has structural problems simply because conservatives have sold Americans a bill of goods, promising something for nothing.

TANSTAAFL

As a leading edge boomer, I've had the best of both good and bad policy. Great big government benefits when young to give me a great start in life, followed by bad policy tax hikes for me paid for by screwing the generation of children I did not have, and now 68, getting the great big government Social Security benefits Reagan signed into law in 1983, doubly great because, my big government start in life lasted to 2001 and made me very rich from simply working and living like my parents who were shaped by the depression. And Republicans can not cut my benefits because I'm hidden in the biggest block of the Republican base who almost all depend on Social Security.

[Dec 24, 2015] The Fed Has Created A Monster And Just Made A Dangerous Mistake, Stephen Roach Warns

Zero Hedge
Stephen Roach is worried that the Fed has set the world up for another financial market meltdown.

Lower for longer rates and the proliferation of unconventional monetary policy have created "a breeding ground for asset bubbles, credit bubbles, and all-too frequent crises, so the Fed is really a part of the problem of financial instability rather than trying to provide a sense of calm in an otherwise unstable world," Roach told Bloomberg TV in an interview conducted a little over a week ago.

To be sure, Roach's sentiments have become par for the proverbial course. That is, it may have taken everyone a while (as in five years or so) to come to the conclusion we reached long ago, namely that central banks are setting the world up for a crisis that will make 2008 look like a walk in the park, but most of the "very serious" people are now getting concerned. Take BofAML for instance, who, in a note we outlined on Wednesday, demonstrated the prevailing dynamic with the following useful graphic:

Perhaps Jeremy Grantham put it best: "..in the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006."

Indeed. It's with that in mind that we bring you the following excerpts from a new piece by Roach in which the former Morgan Stanley chief economist and Yale fellow recounts the evolution of the Fed and how the FOMC ultimately became "beholden to the monster it had created".

* * *

From "The Perils of Fed Gradualism" as posted at Project Syndicate

By now, it's an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization.

A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

The challenges of the post-inflation era came to a head during Alan Greenspan's 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

In retrospect, this was the template for what became known as the "Greenspan put" – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed's market-driven tactics.

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

Largely for that reason, and fearful of "Japan Syndrome" in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

Today's Fed inherits the deeply entrenched moral hazard of the Asset Economy. The longer the Fed remains trapped in this mindset, the tougher its dilemma becomes – and the greater the systemic risks in financial markets and the asset-dependent US economy.

Full post here

* * *

Roach goes on to say that we're already seeing the beginnings of what may very well turn out to be a dramatic unwind as high yield rolls over and the emerging world struggles to cope with a soaring dollar (remember, even though EM has largely avoided "original sin" i.e. borrowing in dollars, at the sovereign level, corporates are another story).

As an aside, those interested in a comprehensive account of what Roach covers in the article cited above are encouraged to reach David Stockman's "The Great Deformation."

[Dec 23, 2015] The neocon's abiding faith in the so-called revolution in military affairs (RMA) has proved to be a colossal failure

peakoilbarrel.com

Glenn Stehle, 12/22/2015 at 12:11 pm

Watcher said:

This stuff about giving up . . . why do you want to give up. Fund weapons to prepare to TAKE what you must have.

But, as John Mearsheimer explains in this article, the neocon's abiding faith in the so-called revolution in military affairs (RMA) has proved to be a collossal failure:

In particular, they believed that the United States could rely on stealth technology, air-delivered precision-guided weapons, and small but highly mobile ground forces to win quick and decisive victories. They believed that the RMA gave the Bush administration a nimble military instrument which, to put it in Muhammad Ali's terminology, could "float like a butterfly and sting like a bee." ….

The real trouble comes once the United States owns the country it has overrun, and the Americans are seen as occupiers and face an insurgency. The RMA is largely useless in combatting an insurgency, against which a large army is needed, as the Bush administration has discovered in Iraq. But once the United States commits huge numbers of soldiers in a country like Iraq, it is no longer free to invade other countries because it is effectively stuck in a quagmire.

https://www.opendemocracy.net/democracy-americanpower/morgenthau_2522.jsp

So in light of that colossal failure of the RMA in Afghanistan and Iraq, what now?

The chest thumping rings a little bit hollow, to say the least.

Watcher, 12/23/2015 at 10:36 am
Rest assured if the Air Force had won its preference, there would have been no US Army involvement nor anyone particularly on the ground. There is no proof that the boots on the ground are required to hold territory makes any sense when you can dictate policy with precision strikes. And you can. "Do this, or die." After all, how many US Army or UK Army boots on the ground were required to remove Gadaffi?

Nobody "found out" that you had to have troops on site to do things. The Army lobbied for that to be sure they didn't lose funding. As did all the Congress critters with Army bases in their districts. As opposed to Air Force bases.

Think about it. Do you really think carrier based bombing is necessary? If you needed more sorties, you could send more Air Force aircraft. But the Navy has to defend its own funding, too.

Jimmy, 12/23/2015 at 11:26 am
"There is no proof that the boots on the ground are required to hold territory makes any sense when you can dictate policy with precision strikes. And you can. "Do this, or die."………"

Where have you been since 2001? If all it takes is air power to dictate policy then please explain to my why USA isn't dictating policy in Afghanistan, Iraq, Syria and Libya and seeing enthusiastic compliance with said policy by those on the ground. Removing Gaddafi is not difficult with air power however it took guys with AKs on the ground to put a bullet in his head.

If you suggest launching multimillion dollar air campaigns every time a handful of kids with RPGs and AKs get uppity you'll quickly find yourself on the losing side of the balance sheet of war. Keep it up for too long and you'll be broke. Your rivals will make sure of it with a very small expenditure.

You've obviously never served in the military. Dream on.

Fred Magyar, 12/23/2015 at 12:53 pm
If you suggest launching multimillion dollar air campaigns every time a handful of kids with RPGs and AKs get uppity you'll quickly find yourself on the losing side of the balance sheet of war. Keep it up for too long and you'll be broke. Your rivals will make sure of it with a very small expenditure.

Yup!

https://goo.gl/DMxx4f

The entire concept of 'GROUND' and 'TERRITORY' is so last century…
What matters today is digital control and governments just don't get it.

oldfarmermac, 12/23/2015 at 12:03 pm
While I generally disagree with Watcher on economics, I have to agree that he has a point regarding the efficacy of air power and infighting among the various branches of the armed services for status, resources, and political clout.

It is nowadays obviously possible to literally bomb any country with any significant industrial infrastructure back into the stone age using conventional, meaning non nuclear, bombs, and to do it at far less cost in men than putting troops on the ground.

One modern bomber, flying out of reach of anybody on the ground equipped with less than the latest and hardest to get anti air technology, can take out a dozen bridges, or a tank farm, or a water treatment plant, or a dozen office buildings- or for that matter a dozen hospitals. One or two " sorties" is enough to wipe out almost any kind of major industrial installation, or damage it past operation for many months on end.

In WWII, most of the bombs dropped landed hundreds of yards to miles away from the intended targets. Modern bombs can literally be aimed at a given WINDOW in a large building, with a very high probability of not missing that window more than a few feet, and actually hitting it quite often.

It is not a question of " can't be done" but rather whether the aggressor is willing to pay the price in the court of public opinion at home and world wide, and deal with the political repercussions.

So far no nation with the capability of bombing this way on the grand scale has been willing to actually do it.

But this does not prove that it will never be done.

All the major powers in WWII would have done it, if they had possessed the ability to do so at that time, if the leadership had concluded it would save the lives of countless men of their own and brought the war to a faster conclusion.

The US for instance firebombed some German cities with results that were ac quite comparable to the destruction of Hiroshima and Nagasaki with atom bombs.

And for what it is worth, we seldom hear much about nuclear weapons, except the scare stories involving mutant creatures and radioactivity levels being so high people will not be able to live where the bombs fall for centuries.

In actual fact, if only a few bombs are used, and they are designed so as to minimize fallout, people will be able to live where they are dropped within a decade, no problem, in terms of the big picture.Sure a few kids, maybe a lot of kids, would get cancer, but that would be a minor problem compared to lack of water , food, shelter,employment, etc.

One "MIRV" ICBM loaded with neutron bombs, or a couple of flights of heavy bombers protected by fighter air craft, could just about wipe out the entire urban population of a fair sized country in a matter of minutes or hours at the most.

There wouldn't be enough people LEFT to seriously dispute possession of the country with an occupying ground force.

I PRAY such a grand scale genocidal air war will never come to pass, but anybody who has bothered to look into the TECHNICAL possibility of such a war understands that it COULD HAPPEN.

At one time I read a book about the history of WWII once a week or so for a couple of years. It got to be a personal quest to understand how it started, and how it played out, and why.

The folks who argue that bombing the hell out of the Germans did not prevent them from increasing production of some armaments deliberately miss the point, for partisan reasons. The question should be rephrased, how much MORE would the GERMANS have been able to produce, and how many MORE men, and how many MORE planes and guns etc, they would have been able to put on OFFENSIVE rather than DEFENSIVE assignments.

The bombing nay sayers also avoid discussing the obvious