deficts, debt, money, and democracy

The questions of deficits and debts are not at all black and white. For example, they're gray enough to hold the $14 trillion US debt and leave many well intentioned people arguing whether this is good, bad, or indifferent. There is no formula for how much debt is too much, particularly if you're a nation state, and a nation state that prints their own currency. Now individuals, businesses, or other non-money printing entities find out when debt is too great when they can't pay off what they have and no one will lend you anymore money. However, if you can print your own money, in the end, the only real measure of too much debt is inflation and/or the destruction of the currency.

Deficits and debts are effects with underlying causes. All debt isn't bad, in fact investment debt, that is something which over the course of time will be paid off and creates more wealth is both necessary and good. However, debt created to simply continue an untenable status quo is bad debt, leading eventually to insolvency. And this is the great question of American debt, both public and private. Rob Johnson of New Deal 2.0 has an important talk looking at America's debt question. It accompanied a longer paper he co-authored with Tom Ferguson and that is well worth reading.

In the talk and paper, Johnson makes some important points in discussing the whole US debt question. First, he has asks how much debt is too much and he points to the currently popular notion put out by Rinehart and Rogoff, authors of the book, This Time's Different, that at 90% of debt to GDP, debt becomes detrimental. He's skeptical and gives his reasons. I'd have to agree. While the 90% formula comes from subsequent articles, I read the book and it gives academic writing a bad name. The historical figures beyond fifty years are at best not rigorous and many would have little value. So, if the 90% trigger is based on that, it's at best very soft. Good enough for economics I suppose. Johnson and Ferguson then put out some interesting points on how we account the debt, and these are valid.

Their second point is the more important point of what caused the debt, and here they hit the nail on the head. It is the capture of our politics and government by the moneyed interests of Wall Street and mega-corporations. Most importantly, Johnson points out the problem of the military-industrial complex and its strength due to the fact that for over a half-century now, it has become one of the greatest generators of pork in DC and has protected itself by divvying up the spoils across congressional districts to insure protection. This is an especially timely point as at comes at the fifty year anniversary of Ike's farewell address warning on the military-industrial complex. Unfortunately, the warning went unheeded, and even more unfortunately, Ike set the precedent for American politicians leaving office to lament the mess they had made and complain about an increasingly broken system as they washed their hands of it.

Johnson and Ferguson conclude by focusing on the scourge of money in politics and particularly its impact on our financial system and of course the resulting trillions of dollars the financial crisis added to the debt. Which, directly goes to the question, "Can we grow out of this debt?" To which my answer is no, not until our financial and political systems are fixed. And that "growth" is going to be different than the past century's industrial growth with which we are familiar.

With the help of money poured into the political system over the past 30 years, the financial industry exploded both public and private debt in America to the point where it is no longer simply a debt problem, it is now a money problem. Debt is in many ways money, and what the financial industry has done is created a vast pool of money at the top or tangential to the real economy, requiring ever more money from this financial pool for any given amount of economic activity. It has done this by increasing debt for every economic activity, say for example credit cards for consumption, and at a larger level with securitization releasing what should be illiquid debt, say mortgages, immediately back into the greater liquid money pool. This has tremendously distorted the real economy and made the entire system liquidity junkies, which is provided by the Fed with both cheap interest rates, and as that became insufficient, directly monetizing the debt.

Thus, we get to the point of money creation, and what we have seen first and foremost in the massive debt creation of the past 30 years is an abuse of the money creation monopoly given to the Fed and the banks a century ago. We need to look again at this monopoly and we will find not only is it not necessary, it is detrimental. It has certainly never been democratic. Many aspects of money creation need not go through the banks, the monopoly should be broken, but that would require a rethinking, reforming, and evolving of our political economy.

FDR against payroll tax cut

Think! Think! It ain't illegal yet.
-- Funkadelic

About six years ago, maybe to the day, I was sitting up in the offices of Dean for America, and someone who had come to the campaign supposedly as a Labor representative came up to me and said, "Let's announce cutting the payroll tax." Now I had heard plenty of bad political ideas up in Burlington, but this one shot straight to the top. It's the political equivalent of suggesting we get a big gun and shoot ourselves in head, the reaction is instantaneous and primal.

I looked up and said, "Do you even know what the payroll tax is?" And then without waiting for an answer shouted, "It's social security. So, let me get this right. For the last month, Richard Gephardt has been pounding the shit out of us from one end of Iowa to the other, saying Howard is going to cut social security. He's doing this because the great vast majority of people who are going to caucus in a few weeks, are above, at, or near retirement age, few with savings, and even fewer with pensions. And you want to announce we're going to cut the funding mechanism for social security?!!!"

That's your big time Democratic presidential politics folks. At that point, it was getting darker and colder up in Burlington by the day. The campaign, which was really quite a beautiful thing, was being heavily infested by the DC leech class. These were people who normally would go with the established front runner, but Trippi and Dean had confused the issue way back in the spring. And by December, if you didn't know better, it seemed Howard was on his way to the nomination, so the leeches were attaching themselves to every campaign orifice. But ho-ho-ho Bubba, we had the last laugh on that one, didn't we?

So, when I heard about Obama's payroll tax cut, and even better it being reported as a Democratic gain, it was like a bad flashback. Yesterday, the Huffingtonpost had a piece making it all so clear stating,

But an array of other Clinton vets has stepped up to handle the sales job on taxes on the Hill and in town. Key names include: Lawrence Summers, Gene Sperling, Ron Klain, Jack Lew and John Podesta. Austan Goolsbee, chairman of the Council of Economic Advisors, is an early Obama advisor, but he's philosophically in tune with the economic views of the Clinton types.

Doesn't that just conjure up the image of the capitol as rotting piece of flesh oozing with maggots?

Make no mistake folks, the payroll tax cut is a direct attack on social security. Greider has a good short piece to the nut, though he's far too kind to the bastards. He quotes Nancy Altman of Social Security Works. I ran across this Altman piece within hours of the payroll tax announcement, as she instantly realized the threat it was. She had a great quote from FDR, which says it all,

"I guess you're right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics."

People need to think about this a good long while. Much of the creation and structure of social security goes against what gets purported as "liberal" economics and politics today. You're raising taxes in the middle of the Depression? You're making poor people contribute? We need to rethink a lot of things.

oil, economy, and constitutions

We at the height are ready to decline.
There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
-- Brutus, Julius Caesar

Little remarked upon has been the price of oil return to $90 a barrel. The last time we saw $90 was two years ago, as oil rapidly retreated from its $147 all time high, with the global economy in full meltdown along side the financial mess. But the more relevant time oil hit $90 was the first, October of 2007, which was the official start of the recession. In watching the American economy sputter and shake as oil climbed mid-decade, the question was at what price does the cheap oil dependent American economy no longer function well? I concluded somewhere around $90 a barrel, which if we're already there, doesn't bode well for vigorous future growth prospects.

Another question is why is oil at $90 a barrel when, as nice piece on Seeking Alpha points out, US oil demand is down 7% from its 2007 historical highs and "developed world is still down 4.5% from its 2007 high, which has led to a substantial increase in global inventories of crude and crude products. We currently have 10% more global inventory of crude products than we did back in 2004 when crude prices started their march higher."

The simple answer to this is dysfunctional commodity markets and the Fed's pumping dollars into a corrupt and dysfunctional financial/banking system. They have to go somewhere, and they're going into equity and commodity markets, creating asset inflation across the planet. Which now acts as a corruption tax on the rest of us, as inflated assets prices are just another way our financial lords extract money from all of us without in anyway providing value to the economy.

We have a dysfunctional/corrupt economy at this point, pretty much in every aspect, and whether its the Fed or the soon to be enacted DC tax cuts, simply pouring money into a dysfunctional/corrupt economy helps matter neither in the short or long run. We have completely missed the high tide of the recent crisis, failing in anyway to change the course our economy has been set on for the last thirty years. Instead we have locked in an economy that works for ever fewer and grows an ever starker line between haves and have-nots -- an untenable position for any republic.

One thing we have seen is the growth of power in the Fed, which has now been institutionalized over the past two years. The most radical element of the tax cuts, and don't kid yourself it's a very radical bill, and may very well, as planned, lead to a short-term funding problem rather quickly. So my suggestion, in two years as the Fed hauls out QE IV, we begin associating the buys with actual programs. So in 2013, as the now perpetual payroll tax cuts cause a short-term funding problem, Ben puts it to the bondholders, "This week's fifty billion is for social security? Yay or Nay?" Ok, I forgot to add we make the bondholders sort of an extra-constitutional senate. And there you have it, as the French say, "voila", a cutting of social security.

So Caesar comes to America, as the old German said, first time tragedy, second time farce.

on empire, reform, and the LADWP

There it is, take it.
-- W. Mulholland on the first water coursing the Los Angeles Aqueduct

The history of the Los Angeles Department of Water and Power(DWP) is one of the great stories of US history, offering great lessons on many things, now, maybe most importantly on reform. The DWP was created over a hundred years ago to bring water to Los Angeles, without taking water from everywhere else, Los Angeles would have remained a dusty little desert byway. It was started by a man with vision, William Mulholland and his first vision was to take the water that drained from the Eastern Sierras into the Owens Valley and pipe it a couple hundred miles south to Los Angeles. There were two great obstacles. The first was the building of the aqueduct. The second was relieving the current Owens Valley water users of their rights, initiating one of the most under reported wars in American history led by Mr. Mulholland and the DWP against the farmers of the Owens Valley. Today, it's always a hoot to head up to the northern Owens valley, over 300 miles from downtown LA, and run into vast fenced areas marked, "No Trespassing! Property of LADWP".

Ten or so years later, the DWP would add electricity to its mix, and grow to become one of the most powerful public agencies in the country. Today, the DWP is the great heart for the vast empire which is Los Angeles. Now, LA takes water not only from the Eastern Sierras, but the Western, and from the Colorado river too. The majority of its electricity comes from a number of coal plants in Nevada, Utah, and Arizona, while the Department itself evolved into one massive byzantine bureaucracy, fighting off all change and crushing all personalities who attempt reform.

The LA Times has two good stories on the DWP and the tragic state of California politics. In the first, two appointees of LA's hapless Mayor Antonio Villaraigosa bicker so much the DWP hires...wait for it....a psychologist, to try an smooth things over. Old Mulholland must be violently spinning in his grave! For almost twenty years, I've watched the DWP chew up and spit out so-called reformers, at one point I even sat in a couple meetings with a self-proclaimed reformer on the top floor in the chairman's office. He left no impact. And just to show who is in charge, in the second article, the DWP bureaucracy announced forget switching to renewables, coal works just fine.

Los Angeles should be leading the world in solar energy production. When you fly into LAX you should pass over an ocean of roofs making energy. But ask anyone in the solar industry and LA is a dead zone, and that's because of the DWP. The DWP not only controls LA's water and electricity, but they also give to the city itself a share of the revenue, over 6% of its budget, thus making the city itself an ally of the status quo. The DWP represents the problem of entrenched interests, and they can be public or private, for any system that is in need of change. In this particular case of a powerful public agency, whose bureaucracy fights off as a threat all attempts at change.

The DWP is just another example of entrenched power and interests that dominate this country at this point. The Department's history represents a natural order of politics, where a vibrant new creates, gradually institutionalizes, and then eventually grows stagnant, to the point vitality is considered a threat. When things reach such a level, there's no hope of changing the institution itself, instead power must be broken-up, it needs to be distributed, so change can take place. There is no middle ground, no splitting the difference when things have reached such a point. Reform is simply those losing power, and those gaining.

on empire

Hitler, Churchill, Mussolini, Stalin, Roosevelt--towering figures that the world would never see the likes of again, men who relied on their own resolve, for better or worse, every one of them prepared to act alone, indifferent to approval--indifferent to wealth or love, all presiding over the destiny of mankind and reducing the world to rubble. Coming from a long line of Alexanders and Julius Caesars, Genghis Khans, Charlemagnes, and Napoleans, they carved up the world like a dainty dinner. Whether they parted their hair in the middle or wore a viking helmet, they would not be denied and were impossible to reckon with--rude barbarians stampeding across the earth and hammering out their own ideas of geography. -- Chronicles, Bob Dylan

The American people, to our great credit, have never been imperialists, and the public story fed on the empire was always a version of the satirical quip the ancients used on the Romans, "They conquered an empire defending themselves." But with the fall of the Soviet Union, certain segments of the American "intelligentsia" began to push for an American embrace of, and pride in, empire. This effort was particularly intense after 9/11, but it never moved very far. The Atlantic became a main promoter of imperial propaganda, and Robert Kaplan its hack propagandist in-chief. If you ever read Mr. Kaplan, you will find he's both deeply paranoid and very clever. Amazingly, he has traveled the world being scared witless at pretty much everything he finds. Combined with active tutorial from the great Sith lord himself, Darth Kissinger, Mr. Kaplan became our premier intellectual imperialist. Though he's never had much popular impact, in the great halls of government, far from any democratic interference where the decisions on America's global interests are made, Mr. Kaplan is tragically influential.

So, it's always distressing to see Mr. Kaplan's thinking pop-up, especially in a long op/ed in the Washington Post, where far too many will take it seriously. Mr. Kaplan's piece, as always, is first and foremost a lament for the great days of the Cold War, when one good empire confronted one bad empire. He writes,

Now the other pillar of the relative peace of the Cold War, the United States, is slipping, ...There will be no sudden breakdown on our part, as the United States, unlike the Soviet Union, is sturdily maintained by economic and political freedom. Rather, America's ability to bring a modicum of order to the world is simply fading in slow motion.

He adds,

Currency wars. Terrorist attacks. Military conflicts. Rogue regimes pursuing nuclear weapons. Collapsing states. And now, massive leaks of secret documents. What is the cause of such turbulence? The absence of empire.

Phew, there's so much wrong with this, it's hard to know where to start. As, I stated, Mr. Kaplan's view of the world comes from a very deep, call it an existential fear, those thus frightened are great advocates of order, desperately appealing for its existence even if it's not there. Yes, there was certain "order" to the Cold War world, but to call it orderly is simply crack-pot, just ask South-East Asia, Africa, or Central and great parts of South America. Mr. Kaplan is a great fantasist, but all great empires need their myth-makers.

However, Mr. Kaplan is correct. America's ability to impact the planet to its self-interest is indeed lessening. Most amazingly, it is America's actions of the last 20 years that have most accelerated "the anarchy" Mr. Kaplan most deeply fears. In Mr. Kaplan's eyes, the greatest promoters of our neo-global anarchy are the Chinese and Iranians. He writes,

While the Soviet Union and the United States were both missionary powers motivated by ideals - communism and liberal democracy - through which they might order the world, China has no such grand conception. It is driven abroad by the hunger for natural resources (hydrocarbons, minerals and metals) that it requires to raise hundreds of millions of its citizens into the middle class.

and,

Yes, empires impose order, but that order is not necessarily benevolent, as Iran's budding imperial domain shows. U.S. threats against Iran lack credibility precisely because of our imperial fatigue resulting from Iraq and Afghanistan. Out of self-interest we will probably not involve ourselves in another war in the Middle East - even as that very self-interest could consign the region to a nuclear standoff.

To say these statements are incredulous gives them far too much credit. The statement on the Chinese and natural resources has absolutely zero credibility coming from the capital of nation that is 5% of the world's population and uses 25% of the world's resources. America's policy toward the Mid-East has for seventy years been shaped by one concern and one concern only, and sorry AIPAC, it's oil.

Better is Mr. Kaplan's dread of the American foreign policy establishment's greatest fear, the great Iranian threat. Bureaucracies have long memories. It's amusing to hear Mr. Kaplan talk of Iran's "imperial domain", not since Darius right? But in Mr. Kaplan's mind, Iranian imperial influence extends a foot passed their border in Afghanistan, Iraq, and Turkey -- some empire.

Mr. Kaplan finally gets to the real point of his piece, building a bigger navy, for which he's become a prominent shill over the passed few years. He concludes,

Americans rightly lack an imperial mentality. But lessening our engagement with the world would have devastating consequences for humanity. The disruptions we witness today are but a taste of what is to come should our country flinch from its international responsibilities.

Again, most of the disruptions we're observing today are not from America's lessening our engagement with the world, they are in many instances the results of an over half-century Pax Americana. We need to understand one of history's great lessons, the weight of Rome's imperial conquests eventually crushed the republic. In the last fifty years, the US has shaped global events to a greater extent than any nation, led by great promoters of fear and paranoia like Mr. Kaplan. It has had at best mixed results abroad, but it has been completely detrimental domestically. The United States needs to lessen our engagement with the world and begin worrying about our problems at home, we can start by slashing the military budget and our oil use.

At a time, when for the first time in history, a great number of the people living have some notion we share a relatively small and limited planet, America can help lead a world ordered not on the dominant self-interests of one or two countries, but with an understanding of the mutual common interests of six billion souls.

USA INC

You pays your money and you takes your choice.
-- Aldous Huxley

In this era of neo-bipartisanship, the one thing we could get Mr. Obama and the new congress to agree on is a re-branding effort. Let's be officially called USA INC. A few decades from now, people will look back at 2008 as the year of the official start of state capitalism. It is the year, mega-corporate dominance became unchallenged. You could pick a couple events of that year that best illustrate the dawning of corporate rule, most importantly the subservience of all our democratic institutions, but the most obvious were the actions of the Fed.

The Fed was giving money to everyone and everybody with some sort of ranking in the Fortune 500, and then some. The big banks, investment banks, foreign banks, foreign governments, GE, and Harley Davidson. Everyone who was anyone got money, all done with no democratic oversight. The most important thing to understand is the precedent the dumping a bunch of money into the system created -- a system of too big to fail. If you're above a certain size, you are now perpetual, there is no ability for the system to correct. Following this precedent, the ECB announced today, it will pump euros, estimates of two trillion and up, to keep the present European system perpetually operating.

Many schools of thought think this will inevitably lead to inflation, but that's never seemed quite right. Mr. Greenspan proved long ago, that you can keep asset prices inflated, while the resulting "trickle" into the economy wouldn't cause larger inflationary pressures. This was especially true if you could keep pressure on wages and deflate manufacturing costs with a massive off-shoring of production to lower wage areas of the planet. In turn, this allows the great pool of money floating in the asset markets to seek greater growth, thus, higher profit areas of the planet, outside the old industrial eras of Europe, the US, and Japan, after all, this is very much still an industrial capital system.

With all the dumping, or if you prefer transference of money by the central banks to the top of the system, the trick for state capitalism in avoiding inflation is to keep too much of the money from seeping to the bottom. In Europe, as demonstrated by Ireland and Greece, this is done by cutting the public sector, the social safety net, and increasing unemployment. In the US, it has been done with high unemployment and what will soon be with Mr. Obama and the new Congress a no doubt vigorous cutting of government spending.

I couldn't figure out how this was all working and where it leads to, but Ames in an email last night gave me the precedent from Russia in the 90s stating,

Well maybe Russia offers an explanation. Let me think: in the 90s, especially 92-96 or so, something like this happened: Almost everyone's wages went to worthless, everyone's savings and pensions were definitely worthless, connected banks and industrial outfits and bankers wound up getting shitloads of Central Bank-printed rubles pumped their way, and an oligarchy class grew out of that, but at the same time, there was so little PHYSICAL money in most parts of the country that by the mid-90s, barter was I believe more common than money for goods. This went on until Putin took power, or shortly after he took power (and oil started rising too). He rationalized the corruption.

The result though was that assets bubbled out of control a few times and collapsed spectacularly twice plus once somewhat spectacularly in 1995, before Yeltsin stole the '96 election (which sparked the big final bubble of that era). Inflation for consumer goods was a nagging problem, but that was largely because a) Russian industry collapsed and everything was imported, and b) the government rolls grew massively with bureaucrats who all wet their beaks at every stage of the distribution/sale. Still, I think inflation was kept in check from total hyperinflation by a classic monetarist policy, in fact that was the condition of each succeeding World Bank/IMF loan: that the money wasn't distributed to the people, only to the financial system.

OK, yes, a bit more extreme then where we are, but all the processes are the same. I guess the lesson here is state capitalism will end the same way as state communism did, with eventual systemic insolvency due to an inability to correct though the protecting and institutionalizing of an unsustainable status quo.

We need to get on a different path, the future lies in part with restoring and reforming this republic.

Ireland and our political economy

Whalen recommended this very excellent piece on Ireland in the NYRB, it really should be read. It contains a couple of very important points and thoughts that are as relevant for the United States as for Ireland. First, it gives a great description of the distorting power of bubbles, in this case the Irish housing bubble. The piece gives these figures,

Many counties have more ghost estates than Leitrim—Cork has ninety of them—but Leitrim emerges as Ireland’s champion when empty houses are compared to the number of the local population. NIRSA’s director Rob Kitchin calculates that 2,945 homes were built in Leitrim between 2006 and 2009 when the growth trend suggested that only 588 would be needed—an oversupply of around 400 percent.

In 2006, at the height of the boom, construction accounted for almost a quarter of Ireland’s GDP and occupied a fifth of the workforce...Bank lending for construction and real estate rose from €5.5 billion in 1999 to €96.2 billion in 2007—an increase of 1,730 percent—while house prices doubled in the six years to 2006.

That folks is a bubble. It distorts the economy, and, depending on its size, can do so on a massive scale. Thus after it pops, no amount of money poured into the system is going to reflate it. In a related note, the Case-Shiller index released today, shows US housing prices continuing to fall across the country.

Secondly, the piece does a nice job explaining the culpability and complicity of the Irish political class in creating the bubble. Now, this doesn't in anyway absolve the fraudulent actions of the bankers, but it does show again, despite the protestations of the Greenspans, Bernankes, Summmers, Geithners, Clintons, and Obamas, we know enough about money to prevent bubbles. It takes an active and forceful regulatory environment, limits on size and scope, enforcement against fraud, and limits on leverage.

Finally, the piece concludes with just an excellent paragraph on what wrong with the Irish political economy, but could just as well be applied to the US:

It was a little too good to be true that Ireland could go from the pre-modern to the post-modern without ever fully creating the structures and habits of a modern democracy. Large chunks of classic democracy were missing—the shift from religious authority to public and civic morality; the idea that the state should operate objectively and impersonally rather than as a private network of mutual obligations; the notion of the law as a universal and neutral check on everyone’s behaviour, whatever their status…. Plonking a hyper-charged globalised economy on top of such an underdeveloped system of political governance and public morality was always likely to create an unbearable strain.

While, you can argue one way or other about whether the Irish ever developed a rule of law, a de-clanning of politics, and a vibrant public and civic morality, there is no doubt the US at some point had moved in these directions. It also can be said, the plonking a hyper-charged globalised economy on top of the US political economy ripped asunder all these things. It has not just been labor arbitraged by corporate globalization, but government regulation, the rule of law, and maybe most important of all, public and civic morality.

At the end of the 19th century, Oscar Wilde quipped, "America is the only country that went from barbarism to decadence without civilization in between." But being very much a product of contemporary Europe, the vibrant democratic public and civic morality at the bottom of much of American society at that time, would have been lost on him, just as today it is lost on us. If we are to have self-government, we have to renew and revive our public and civic morality. Know one thing, it is not comprised of listening to presidents, or watching 30 second ads, or voting every couple of years, it is the actions we take on daily basis and the motives behind them. You've been given a clear view of the greedy violent rabble who have floated to the top of this decaying republic, each day, they do more to secure their reign. They will only be stopped by a concerted effort of the American people, defining and reviving self-government for the 21st century.