The Equanimist

Foray into the post-787-Billion-Dollar-Stimulus-Plan World

Posted in Economy, National Security, Socioeconomy by equanimist on February 14, 2009

In 2007 “people” (increasingly) stopped making mortgage payments, and, by the end of the year, the economy was entering recession. So, before the US had lost 3.6 million jobs, there wasn’t enough money cycling through the economy to drive it. Thus, it stands to reason, the US need not only replace 3.6 million jobs lost but do more (the status quo wasn’t working).

Beyond the obvious (i.e., the US must jumpstart its economy – to overcome inertia) the US must create jobs that pay better than those lost (income was insufficient even to support the economy). Will the $787,000,000,000US plan do that? Does it replace with “money-cycling-through-the-economy” all of the money that would be cycling through the economy had not those jobs been lost plus “more-money” that was clearly necessary but not being provided?

US GDP is presently contracting at about 4% per annum (or more; the Philly Fed recently predicted 5.2% contraction in the first quarter of 2009). If we assume that every single penny in the package will add to GDP (and, by definition, that does not appear to be the case) then, $787 billion USD kicking in over three years is about $262 billion USD per annum – less than 2% of US GDP. (US GDP is approx. equal to $14 trillion USD). Right now, the US needs an annualized rate of GDP-subsidy equivalent to approx. $560 billion USD (or more); that is, baring further losses, losses sustained in Q4 2008 and expected in Q1 2009 should require about $280 billion US. This bill does not provide that sum in all of 2009 much less immediately. So, less than providing enough money to overcome inertia, this package does not even seem to meet the failed status quo.

In the near term, this bill may stop the US socioeconomy from falling off a cliff – keeping people from starving, for example. But, it should not be expected to stimulate (jumpstart) the economy.

If you took my advice and bought gold at the end of October 2008 (≤$750US/oz.), you’ve made money on your investment by now. You might sell it or you might not. Can the price of gold continue to go up? That depends upon factors some of which are shrouded in mystery.

Gold is – obviously – something that an individual or organization can sell to raise cash, so, I expected that the price would come down for a while longer before it rebounded. That notwithstanding (and I do think that there should be a dip) there is good reason to suspect that the price of gold will continue to rise: (1) gold has been a very good investment at almost every time in the last 10 years; (2) gold has held its value even over the last year; (3) in inflation-adjusted terms gold is still very cheap relative to its peak in the early 1980s; and (4) it is either a very misleading advertisement or the US mint is hawking gold – suggesting that the price could go to $2000 per ounce.

More importantly, brace for the worst… The US is not magic. The US is not great because it is the US. Rather, the US has been great because US citizens made it so. Should the topmost tier fail to recognize the error of its ways and make restitution then two strong possibilities present, either (1) the US people will calmly and coolly accept dramatically diminished status and standard of living, or, (2) US citizens will not rest and, as is the wont expressed by immigrants hereunto, will re-wrest power. The US government is preparing for the latter.

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Dropping Money from Helicopters and Other Hard Choices (Update 1)

Posted in Economics, Economy, Political Economy, Political Philosophy, Public Policy, Socioeconomy by equanimist on December 18, 2008

 

i.

Hardly conservative, over-consolidation of wealth at the expense of the US middle class is a reckless game. High productivity and rapidly cycling currency fuel high living standards and rapid growth. Therefore, no long-term solution to the financial crisis is likely to exist apart from (1) upward wage pressure on the bottom 95% of US Americans (2) re-regulation to include incentivization of productivity and innovation and (3) re-inculcation of some sense of civic duty. Near term recapitalization of the US middle class should be the single most effective measure to stave off the ugly prospect of a deflationary spiral.

Much of what is being written, like this short ‘glossary’ entry at the Guardian, explains that “quantitative easing” is akin to dropping money out of helicopters. But, that does not rightly describe recent actions by the Fed. What the Fed has done is to make borrowing very cheap.

Potential borrowers aren’t any more credit worthy now than they were last week (or last year). Moreover, in the event that there are well capitalized bankers who can be persuaded to make risky loans, additional credit now will only kick the can down the road. We all know the one about the guy who borrowed money from Peter to pay Paul.

The current crisis is in some ways not unlike a balloon that, having developed a tiny pin prick, gets a big hole in it. It deflates and cannot be re-inflated until it’s patched. The balloon need not deflate entirely if something can interrupt the process. Might we not either (a) stop up the hole until it can be permanently patched or (b) balance loss with gain?

Unlike an ordinary balloon, a hot air balloon is at once inflated and constantly hemorrhaging air. In fact, there is a current of air flowing through the balloon. This is kind of what the current economy is like. Right now there is a shortage of air flow (liquidity) and a big hole (a lack of confidence). So to avoid a nasty tumble, supply air (real money) until the hole can be patched.

ii.

For some time now nothing has been worth more than some smaller fraction of the price at which it sold because of shrinking real relative middle-class profit shares. Only over-confidence made possible too-easy credit, which, in turn, made the relatively high US lifestyle possible in the face of excessive wealth consolidation.

As is well documented, real profit shares distributed to the bottom 95% of the US population peaked decades ago and income inequality has since risen sharply. A graph of top decile income shares makes this pretty clear (from Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” The Quarterly Journal of Economics, Vol. CXVIII, Feb 2003, issue 1).


At the outset of the Great Depression of the 20th C. income inequality was very high. In years that led up to US involvement in the Second World War, income inequality plummeted, and, it remained relatively low and constant for decades. Disparity in income ramped up throughout the 1970s and exploded in the 1980s (and again in the 2000s; see the International Labor Organization press release cited below) not because productivity and profits began a long decline but because the uppermost decile (later the uppermost 5% and, still later, some smaller fraction thereof) accorded itself increasingly large pieces of the pie (for specific data to augment the above see, for example, Productivity change in the nonfarm business sector, 1947-2006 at the US Dept. of Labor, and Historical Income Tables, Table H-2 and No. HS-26. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Families: 1947 to 2001 at the US Census Bureau). This graph, unfortunately, stops at 1998. The International Labor Organization estimated that “in the United States in 2007, the chief executive officers (CEOs) of the 15 largest companies earned 520 times more than the average worker.

Now fully 80% of US Americans make a real relative pittance unprecedented in the post-war era. That they don’t think they’re poor doesn’t mean they’re not – only that authority figures from the lowliest parent to the Commander-in-Chief have successfully convinced US Americans to compare down and trade down the socioeconomic ladder (to a more or less indentured servitude as debt ballooned).  See, for detailed analysis, the Trade Union Advisory Committee to the OECD summary of “Growing Unequal?” (to which I have linked here).

I reiterate what I have previously written: to attribute the current crisis to a lack of liquidity is to miss the point entirely. The balance of US stewards now promulgate economic visions and institute policies without even a foothold in reality. On the one hand, average US Americans are sold an outsized bill of goods while, on the other, the elite who profit on sales hoard and lobby for deregulation to further consolidate means. When convenient, the US consumer is ‘resilient’ and can be depended upon. S/he won’t ‘let the terrorists win’. S/he’ll ‘go out and spend’. And, ‘The free market will sort itself out.’ When convenient, consumerism is decried and the same beleaguered people are told that it is some fault of the US consumer that s/he cannot manage money and, moreover, that s/he does not need (or deserve) and should not get a bailout!

Credit cannot and will not now change the fact that many among the bottom 95% can no longer afford to pay debts they’ve been encouraged to amass, and, will (if furnished) only run the average US household further into debt (compound the problem per se).

But, the point is moot. Bankers should not be so foolish as to make loans that they know borrowers cannot repay. Potential borrowers, then, should not contract loans. Therefore, home prices should continue to plummet until they are priced so cheaply that these poor citizens can afford them. Likewise, goods and services should be sold ever more cheaply or sit on store shelves because the unreal equity (over-confidence) that fueled US consumerism is vanishing. Businesses, then, should be unable to meet their obligations and, unable to recoup even costs, they should fail putting more people out of work.

Mounting job losses, then, should force more homeowners into foreclosure or disadvantageous home sales… More importantly, US productivity and means of production along with the service sector should contract sharply as the supply of goods and services races to catch up with rapidly contracting markets. But, in the event that this is the new economy of extraordinary income inequality, the world furnishes way too many material goods and services – that is, precisely, in a new low-income world too many people are currently employed.

iii.

Congress must act now

The housing market cannot be expected to resolve itself any time soon. As clearly illustrated in the following graph (excerpted from, “‘Pay option’ mortgages could swell foreclosures,” MSNBC.com) foreclosures should be expected to accelerate through the first half of 2009 and only briefly stabilize in the second half before the bottom likely falls out on the housing market in 2010.


In the meantime, socioeconomic stability and quality of life, in addition to productivity and innovation, should continue to deteriorate. Poor, hungry, homeless, shiftless people are not conducive to democracy and should be expected to undermine national security and public safety. [Even wayward adolescents know what Libertarians and Republicans reject – that poor, hungry, homeless, shiftless people are easily “turned”. (Why do we feel allegiance? To whom and to what institutions do we feel it?)]

Still, these are only risks (however probable).

The fastest, surest way to avert these risks is to revalue goods and services by proxy relative to the bottom 95%. The more dollars there are chasing some constant goods-and-services the more expensive they will be. If hoarders cannot be persuaded to recapitalize the US middle class (i.e., furnish dollars to prop up their own way of life) then it falls to legislative bodies and appointees to make the hard choice. Give real money to those who will spend it and more to those who are more likely to spend it than to those who won’t. (Heaven forbid, right? Redistribution is only “right” when money moves up the socioeconomic ladder.)

Still, no long-term solution should be complete that does not effect upward wage pressure. That is, if the US middle class does not have continued support when government programs wind down, all else being equal, things will just revert. So, for example, though enough money might stabilize property values over the short- to medium-term, property values will again fall right away as government money is withdrawn. Bring income inequality back down to more optimal levels (approximately what it was throughout the 1950s, for example).

Short of legislation of pay scales, radical upward wage pressure will only be effected by either increasing the number of jobs out of all proportion to the worker pool or decreasing the number of workers to fill those positions that exist. To that end, I reiterate, it seems most reasonable to impose controls over outsourcing and insourcing as same controls are in the interest of national security.

Giving banks money does nothing to any of the aforementioned ends. Stop doing it. As ought be clear, this cannot and will not jumpstart the US economy and, it would be achieved just as well if the US middle class were recapitalized – dropping money from helicopters.

Response to Global Trends 2025, Part II: Clean Is Good (Formerly "Green Is Good")

Posted in Corrections, National Security, Political Economy, Public Policy, Socioeconomy by equanimist on December 18, 2008

Global climate change hasn’t gone on holiday because the US is staring down the barrel of a financial gun. There remains no doubt that the world is warming, and, there is vanishingly little room to speculate that human activity is not to blame (at least in some part). According to the Intergovernmental Panel on Climate Change (IPCC) Climate Change 2007: Synthesis Report:

Global atmospheric concentrations of CO2, CH4 and N2O have increased markedly as a result of human activities since 1750 and… in 2005 [concentrations of CO2 and CH4] exceeded by far the natural range over the last 650,000 years. Global increases in CO2 concentrations are due primarily to fossil fuel use, with land-use change providing another significant but smaller contribution… There is very high confidence [equal to or greater than 9 in 10 chance] that the global average net effect of human activities since 1750 has been one of warming…

The report continues, relatively small changes are already baked into the system. But don’t let small numeric values fool you. We can be quite confident that these same small changes (less than 1 or 2 degrees Celsius) will put tens or hundreds of millions under “increased water stress”, while negatively impacting food production, increasing risk and damage of flooding, and adversely affecting human health (pps. 50-52). Again, the consequences of changes that cannot be avoided do not bode well for the future. The effects of continued unmitigated global climate change could be catastrophic.

If for no better reason than we are playing a far riskier game than Russian roulette, clean is good.

“But,” you say, “It [R&D] is a huge economic burden. I don’t live in Africa. What do I care if Africans die of thirst? And, I can afford healthcare. Besides, this global warming might be good for US farmers, for a while anyway.” Right you are. But, here’s why you should care anyway.

(1) Addiction to oil is bloody expensive. According to T. Boone Pickens’s Pickens Plan the US currently imports nearly 70% of the oil it uses at a cost of about $700,000,000,000US per annum and will spend about $10,000,000,000,000US (ten trillion USD) on foreign oil over the next ten years. These numbers aren’t strictly accurate since the bottom fell out from under the oil market. At $49 a barrel, it’s about $263,000,000,000 per annum. But, barring total worldwide economic collapse, $49 per bbl. may not last. [Saudi Oil Minister Ali al-Naimi recently indicated that oil has a “fair” price of about $75 per bbl., so, OPEC may move to cut production. (Am I missing something? Isn’t $49 the fair price, the market price? $75 is the price after market manipulation!) And $75 per bbl. is down from June when $100 per bbl. seemed reasonable to the Kuwaiti finance minister.] So barring disaster, with no further interruption and at relatively “flat” reserve estimates over the mid-term, oil ought be expected to fluctuate between $49 and $150 per bbl.

In perspective, US GDP is presently valued at approximately $14.4 trillion. So, at $263 billion, the US annually spends about 1.8% of GDP on foreign oil; at $100 per bbl., that figure rises to about 3.7%; and, at $150 per bbl., that’s nearly 5.6% of GDP! Even if oil settles back down into the twenty dollar range, at $25 per bbl., the US will continue to pay nearly 1% of GDP (about $130,000,000,000 per annum) on foreign oil, a foreign tax on US productivity paid not by big US corporations alone but individual US citizens.

(2) And do not be deceived, the Saudis do not and will not show the US any special treatment. Sure, their king likes to hold hands with ours but, they’re not partners. Case in point, according to Gulf News, “Saudi Arabia’s King Abdullah Bin Abdul Aziz [recently] stressed that Saudi Arabia and other Gulf states did not and will not give any amount of money to the US for that purpose [i.e., the financial crisis].” Translation, The US is dependent upon disinterested foreign oil producers for continued national security.

Why do we stand for it? Why do we continue to lay prostrate at the feet of despots like Abdullah Bin Abdul Aziz? Well, as T. Boone points out, we only import 14,700,000 bbl. of oil every day. The other 6,300,000 bbl. come from US fossil-fuel magnates who collect another nearly 0.8% of GDP at a rate of only $49/bbl. and as much as 2.4% of GDP at $150/bbl.!

It should be clear, (3) energy production must go green and whoever holds the means of producing clean energy will be future king, and, it should be self-apparent that (4) real or imagined depletion of limited resources creates real potential for inter-regional and international conflicts. Wind farming, solar cell, fuel cell, hydroelectric and hydrothermal technologies will ensure continued US hegemony and will make “free-”market capitalists big bucks. But, the US procrastinates. Procrastination provides opportunity for technological powerhouses (e.g., Japan, Germany and Korea) and motivated states (e.g., United Arab Emirates and other Europeans) to gain the upper-hand and, further, runs the risk that money and means run dry in the interim.

According to the CIA’s World Factbook US foreign debt currently ranks number one in the world at $12,250,000,000,000 while US current account balance ranks dead last at $ -731,200,000,000. In a crisis of confidence (not unlike the current financial crisis) might there come a time when these extravagant Joneses get a knock at the door from debt collectors? Will the US find a new foreign securitizer? The answer seems a stern, “No.”

Will the US kowtow to some foreign superpower in the way that Europeans now kowtow to Russia? When Abdullah grabs George’s hand is it in friendship, or is he really telling the world, “George is my bitch.” How will these debts be paid?

Still, the US controls extraordinary means of production and a vibrant, albeit decimated, scientific community. There remains the possibility that the US can rally and rise to the occasion, as it has done throughout its history. But, it’s a closing window of opportunity. With jobs rapidly disappearing, manufacturers facing bankruptcy, no plan to tackle staggering imbalances, and rapidly gaining technological rivals, the US will either create jobs, secure manufacturers’ viability and aggressively develop future technologies or be eclipsed by foreign rivals.

For these reasons, it must be “unthinkable” that US policymakers do not reinvest in infrastructure now. A clean revolution offers fundamental solutions to all of these problems. And, if it costs even a trillion dollars in investment capital this small sacrifice will pay for itself in less than ten years at one tenth the estimated cost of foreign oil over the same period.

Response to Global Trends 2025, Part I: Country at a Crossroads

Posted in *HIGHLIGHTS, National Security, Politics, Public Policy, Socioeconomy by equanimist on November 26, 2008

US technological and strategic advantages are not insuperable and, the US has lost luster (if not real ground). To retain (or regain) global standing, US “elites” must voluntarily or US stewards must demand that they take aggressive proactive roles developing innovations that will assure continued great power status or be willing to (1) leave successive generations a weaker and increasingly less relevant US, (2) experience real declines in domestic standards of living and (3) leave the US and its allies prone to a hostile multi-polar world wherein destruction might be mutually assured and success might be mutually precluded. Will the US rise to the challenges of 21st century leadership?

First on a long to-do list is an overdue green revolution. The world wants power to fuel rising standards of living. Fossil fuels will be insufficient to supply demand (esp. within a context of global climate change). Whoever develops cost-effective low-impact energy solutions to meet ever increasing energy needs will wield extraordinary power in a new middle-class world. Alternatively, it seems only reasonable to assume that emerging-power energy requirements will significantly raise the possibility of international conflict.

Second, significant overtures ought be made to bring China and Russia into the Western fold. Western powers ought not appease these rising Eastern powers and, there is no sense in antagonism. (Does Poland need missile defense, for example? Should not a meaningful US umbrella suffice?) Western civilization is not a cult of democracy but a democratic solution to the problem of good governance. Is there no room in the West for liberalization on different tracks? Is there no possibility that we might learn something new? We are not so young or so unstable that we cannot stand a little competition. Parallel development of effective governance strategies ought not be viewed with fear but with healthy skepticism. China, in particular, does seem to be following a liberalization strategy and, as such, may be seen to approach Western-style socialized democracy vis-a-vis democratized socialism.

Third, while excessive nationalism is generally insupportable and counterproductive, the US is clearly spread too thin. More care must be taken that globalization is not a race to the bottom. Global Trends warns against some vague “protectionism” that might be better described as isolationism (and xenophobia?) That the US cannot recoil from the world does not admit that the US can afford the consequences of too liberal foreign policies. A balance must be found between the national and global interest.

Fourth, the US must reinvest in infrastructure (to include human capital). Among themes that recur in Global Trends, the US despite extraordinary natural, intellectual, cultural and technological resources is losing ground. The implication is US infrastructure is failing for lack of maintenance. The Ayn Rand model of Greenspan’s “free-”market capitalism is failing. Too liberal market policies have resulted in nearly four decades of radical redistribution of wealth on the one hand and decelerating pace of US innovation on the other. For as long as US stewards continue to indulge libertarian market fantasies and refuse to make hard choices, US infrastructure will deteriorate because self-interested individuals cannot be counted upon to make consistently wise strategic decisions. Isn’t that why we adopt governance over anarchy in the first place? Complacency and profit taking (profiteering?) have left the US vulnerable and pose real danger to US standing.

Are you civics literate?

Posted in Socioeconomy by equanimist on November 26, 2008

The Intercollegiate Studies Institute recently reported that most Americans don’t know a whole lot about civics and economics. Elected officials know even less! According to ISI:

More than 2,500 randomly selected Americans took ISI’s basic 33-question test on civic literacy and more than 1,700 people failed, with the average score 49 percent, or an “F.” Elected officials scored even lower than the general public with an average score of 44 percent and only 0.8 percent (or 21) of all surveyed earned an “A.” Even more startling is the fact that over twice as many people know Paula Abdul was a judge on American Idol than know that the phrase “government of the people, by the people, for the people” comes from Lincoln’s Gettysburg Address.

Take the civics literacy quiz at ISI!

OECD report on income inequality is released

Posted in Economics, Political Economy, Socioeconomy by equanimist on October 21, 2008

A newly released report from the Organisation for Economic Co-Operation and Development ranks the US third worst on a measure of income inequality ahead of Mexico and Turkey. Further, income inequality correlates with decreased social mobility, and it is projected that the failure of social programs to address the affects of the widening gap will have substantial negative socioeconomic affects for some time to come.

The full report is big bucks and rather long, but the press release can be accessed at the OECD here. A pdf version of the Trade Union Advisory Committee to the OECD summary has been posted courtesy of UNI here.

If you’ve got time, please, read it and pass it on.

This is a Private Drive. No Trespassing.

Posted in Political Economy, Public Policy, Socioeconomy by equanimist on September 17, 2008

Continued Fed bailouts will only put the bottom off. Systemic injury must be sustained or illiquid debt must indefinitely pass from hand to hand. The difference between a stricter Capitalist Fed and a Fed that socializes only losses is as follows: loss is not evenly distributed among financially responsible parties: the shrewdest financial minds have time to reposition themselves to avoid it (viz., financial loss).

Here, I would like to refer my readers back to the paper buried in a link within my first post below (December 2007) and to elaborate on its conclusions.

Illiquidity in the financial markets is only symptomatic of a disempowered (insolvent?) consumer. S /he must now be furnished real dollars from real coffers with which to make real purchases. To effect this a firewall must be erected. Outsourcing/insourcing must be dissuaded. Though there may be a myriad ways to do so, ensuring the reliability of shipments and adhering to a strict (extant) migration policy seem the most reasonable methods.

As previously suggested, the best way to ensure shipment reliability is to check every container and the actual contents thereof to ascertain with certainty whether or not those contents conform with US regulation, which (as evidenced by the recent troubles) cannot be done abroad in a manner consistent with US standards. This does not bar foreign investment in the US or unfairly tax anybody to socialize profits, but provides an adequate framework within the spirit of US tradition to protect US democracy from detractors foreign and domestic.

Further/likewise, insourcing must be nipped in the bud. It would be nice if living standards around the world suddenly raised but the global will does not yet exist and no minority group of nations can effect it by force. Ergo, careless optimistic globalization must be replaced by cautious nationalistic globalization.

The US economy will be made solvent or reposition itself on the broad socioeconomic continuum. Put another way, the US middle class will be re-empowered or the US socioeconomy will adjust. History makes the latter almost unthinkable.

"Duke’s Up!" (Update 1)

Posted in Socioeconomy by equanimist on May 19, 2008

Dear Reader,

I am jerked out of a sound hibernation by clear visions of things to come and submit to you that Americans must remember to look out for Americans.

If we don’t uphold the laws of the land, modernize our infrastructure, provide social structure supplemented by substantive and adequate social programs, furnish sufficient educational opportunities and offer abundant good jobs at good pay to Americans, what will happen?

A country must put its interests ahead of foreign interests because other countries cannot be expected to put their interests on even equal footing with foreign interests. Much less can every foreign nation be expected to deal fairly with a country.

It is unreasonable to expect, for example, that the Chinese or the Indians or even the British will put American interests – American ideals – on equal footing with Chinese, Indian or British interests, respectively. We have different ideals, and we are convinced that ours are better than theirs. Much as I love Chinese cinema, Indian food and Burberry, I hate oppression, poverty and surveillance. I cannot support Chinese censorship, Indian mismanagement and British CCTV. I would change those things about those respective nations. Still, it is only reasonable to expect that the Chinese would censor me, the Indians would impoverish me and the British would surveil me.

But, I take what I can get from China, India and Britain. I predate other cultures and they feast on me.

The American Free Market, in particular, is huge and relatively rich – even still – because we have built a thriving middle class. Everybody wants to sell to our market. But they aren’t particularly enamored of our middle class: they don’t want to pay to play. They would sell to us for as long as we have the money to buy, but they wouldn’t give us the money to buy. Our own economic titans have been sapping the middle class for forty years!

I realize that there are a great many Americans, in particular, who think that all nationalism is poison. Taken to the extreme, it is. Still, remember: nationalism nationalized the colonies.

Americans continue to be vulnerable. Bearing in mind that protectionism exists along a continuum, Americans must be protected from predation. That duty falls to Americans. Stand up for yourselves! The bastards are trying to get you down.

the Equanimist

Posted in Economics, Economy, Political Philosophy, Public Policy, Socioeconomy by equanimist on December 21, 2007