Hospital Food for the Mind

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Bernanke, Jackson Hole and the Importance of Being Wrong

And, lo, from the great wilderness, from the antlered gate of the Hole of Jackson, the voice of the Fed, the high priest of the economy, Ben the Reserved has declared what the fortunes of our land shall be; and verily he has declared that it shall be pathetic and the fault of those who…who…who…well, those whose fault it truly is, but now that we are mired in the trap of non-liquidity and are bound ever lower, his hands are tied. And great will be the suffering of all the people. All the people who don’t have a substantial personal fortune, anyway.

I’ve got a question.  How can everybody who declares they have the true answer to our current national economic morass be right? Doesn’t somebody get to be wrong; doesn’t somebody have to be wrong, when opposing theoretical positions and hermeneutical assumptions are irreconcilable? Ben Bernanke, as head of the Federal Reserve doesn’t automatically get to be right about the future of the economy simply by virtue of his office.  Alan Greenspan, his predecessor, is Exhibit #1 for the fallacy of that attribution.

Two Economists Fighting Over Who's Wrong. Photo: Yellowstone National Park

Even a brief foray into the cyberland of pundits, op-ed columnists, and bloggers reveals that every single one of them believes he or she is right about his or her solution to our economic woes.  The reason these folk cite for their veracity is that they can point out who is clearly wrong and therefore is an ignoramus. Only rarely does one find an inspired author who actually is working from a model that has been tested under the withering scrutiny of scholarly review and has been further field tested on the roiling surf of economic reality.

The ultimate test for intellectual honesty would be to have all these very-certain self-proclaimed para-ignoramuses stand under the great antler arch in Jackson Hole, during a wild Wyoming thunderstorm with its hurricane force winds and recite the principles of their economic “truth,” on the superstitious belief that if all they were blowing was just hot air, that would dislodge one of the antlers and…the result wouldn’t be pretty.  That’s certainly much more humane than pseudo-presidential candidate Rick Perry’s lynch mob approach. Of course, he has jumped head-first into the pool of para- ignoramuses who believe they are right because they can point out people who have to be wrong.  Perry evidently has exceptional talent for pointing out who is wrong, along with great hair, but that’s another post.

The World Famous Antler Arch of Jackson Hole, Wyoming. Yes, they are real antlers. I've been there and walked through the arch. Note that I survived. Photo Courtesy: ALifeLessSweet.Blogspot.com

So, who’s going to be wrong? That in my mind is far more important with regard to our pathetic economy than who’s right. To sneakily slip in a biblical allusion, we really need the tares to be winnowed from the wheat.

The facts are that someone is wrong about their economic model/dogma/delusion being the one that will revitalize our economy. They need to either get out of the way or in an act of self-preservation we need nudge them out of the way so the folks with the model that will be guaranteed to work can get their economic engine running in high gear.  That we truly need.

From the pronouncements of Ben the Reserved, it’s increasingly clear that the folks who wrong are getting wronger by the day. After all, the economy stuck in pathetic is just plain wrong.

Detail of Antler Arch, Jackson Hole. Photo Courtesy Jackson Hole Chamber of Commerce

Virtual Deficits in a Virtual Economy

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It seems like a simple enough question: What is money made of?

 

The Spanish "Piece of Eight" 16th-17th Century. World's First Global Currancy. Photo: British Museum, London

The answer, however, is complex, very complex, in fact.  So complex that I am only going to briefly address it.

Money, historically, has been whatever a group of people have decided was an acceptable currency to trade for goods and services.  Here’s the definition from Wikipedia:

Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.

Money originated as commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money is without intrinsic use value as a physical commodity, and derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for “all debts, public and private”.

The money supply of a country consists of currency (banknotes and coins) and demand deposits or ‘bank money’ (the balance held in checking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency.  Bank money is intangible and exists only in the form of various bank records. Despite being intangible, bank money still performs the basic functions of money, being generally accepted as a form of payment.

500 Mixed Medieval Coins. Offered by Dorchesters.com

So, assuming the definition of money is accurate, that “fiat money” is apparently the “gold standard” (of course, gold is no longer the standard for basing the wealth or value of a country’s economy), is “intangible and exists only in the form of various bank records,” my opening question can again be asked: What is money made of?

The whole question of deficits in the United States budget got me to thinking, money has become virtual.  At least almost virtual, in that now money is dynamic, a form of energy of sorts, that can move as photons through fiber optics or as electrons through a copper line, arranged on silicon microchip, or as a radio wave broadcast to a antenna tower or to a satellite thousands of miles into space and back.  And that leads me to ask another question:

How much is an electron/positron worth?  Or a photon?  Or a radio wave?

Show Me the Money! Graphic Representation of a Photon creating an Electron and a Positron. Image: David Horman

Take a look at what (graphically) is the reality of our money today.  When I get paid, my company transfers my “pay check” to my bank account using electrons, which are stored as organized electrons inside a silicon chip that is connected to other microwires.  When I go to the grocery store or the gas station and enter the code for my debit or credit card organized packets of electrons flow to my account, checks to see that I have sufficient electrons arranged to virtually verify there is enough electronically defined money in my account that it can subtract the correct amount and then add it to the store’s account.

That raises an interesting question.  Is the deficit real or virtual?  Are the words being thrown around that we are trillions of dollars in debt based on reality?  How do we really know what the deficit is, if it exists at all, beyond a vituality that has no tangibility?

As the nation with the largest Gross Domestic Product in the world, what would happen to the country, indeed the world, if we hit the reset button?  And can anyone really prove what would happen?  It’s not like we have to open Fort Knox and hand out gold ingots to all the money we supposedly own ourselves?  Where is it written in stone that we have to pay huge sums in interest on this virtual debt?  And if it is only written by an act of legislation, why can’t it be changed?

Many economists state that we are in a liquidity trap.

In its original conception, a liquidity trap results when demand for money becomes infinitely elastic (i.e. where the demand curve for money is horizontal) so that further injections of money into the economy will not serve to further lower interest rates. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate.

Dr. Paul Krugman, Nobel Prize Laureate in Economics, Princeton University professor and New York Times columnist, has stated that inflation targeting as the solution to a liquidity trap, “most nearly approaches the usual goal of modern stabilization policy, which is to provide adequate demand in a clean, unobtrusive way that does not distort the allocation of resources.” (Krugman, 2009).

A second Nobel Laureate in Economics, Joseph Stiglitz (Columbia University), shares Krugman’s perspective :

[G]overnments can improve the outcome by well-chosen interventions. Stiglitz argues that when families and firms seek to buy too little compared to what the economy can produce, governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. At the microeconomic level, governments can regulate banks and other financial institutions to keep them sound. They can also use tax policy to steer investment into more productive industries and trade policies to allow new industries to mature to the point at which they can survive foreign competition. And governments can use a variety of devices, ranging from job creation to manpower training to welfare assistance, to put unemployed labor back to work and cushion human hardship.

The key issue, in light of our living in an age in which money is virtual, that it is almost a literal description of currency to call it electrons or photons, the rules for how to manage the debt and the interest we pay on it is for all intents and purposes, purely arbitrary.  At the same time, the rules provide a basis for the orderly exchange of goods and services. Despite this need for order, the pressure on the American public continues to grow.

If, for example, Congress decided to decrease the amount of interest we pay on the national deficit by even half a percentage point (it is now approximately 3%) it would pump billions into the economy, freeing up the suppression of demand especially on the middle class.  It would be a de facto tax break that might result in the reduction in the deficit more quickly.

 

Debt as a Percentage of GDP: USA, Japan, Germany. Image Courtesy: Alex1011.

I’m still thinking about this idea and its implications.   It might be unworkable.  It might be conceptually accurate but not possible to implement.  But as you can see from the chart above, the level of public debt as of 2009 stands at about 62-63% of the nation’s GDP.  And though the U.S. has the largest economy in the world with a GDP of $14.26 trillion over three times that of Japan and Germany, that percentage roughly calculates as ≈$8.9 trillion.

CORRECTION to my original conclusion:

As of today, the United States’ national debt is $13,795,134,710,938.49.  The total interest bearing debt for the country in October 2010 is 3.047%.  This interest rate has been falling by a few tenths of a percent year by year.  For instance, the interest in October 2008 was 4.009%, and a year later, 3.362%.  These decreases represent substantial billions of dollars of relief.

Still, the debt itself is a crushing reality.  TreasuryDirect.gov provides an easy to understand explanation of what the debt and deficit are and how they are managed on a year to year basis:

What is the difference between the debt and the deficit?

The deficit is the fiscal year difference between what the United States Government (Government) takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays. The items included in the deficit are considered either on-budget or off-budget.

You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the U.S. Treasury to borrow money to raise cash needed to keep the Government operating. We borrow the money by selling securities like Treasury bills, notes, bonds and savings bonds to the public.

The Treasury securities issued to the public and to the Government Trust Funds (Intragovernmental Holdings) then become part of the total debt. For information about the deficit, visit the Financial Management Service web site to view the Monthly Treasury Statement of Receipts and Outlays of the United States Government (MTS).

The question I ponder is why is the United States budget designed so it is forced to “borrow money to raise cash needed to keep the Government operating”?  In a reality of virtual money, what is the purpose of this system, which from my perspective appears to be at best archaic and at worst  a system of financing to guarantee an eventual national financial implosion?

Is the debt real or virtual?  Is the money we supposedly owe ourselves tangible tender or bank fiat money?  If it is the latter, what is to prevent us from taking a revolutionary step of redesigning what the dollar really is?  As I asked at the beginning, how much is an electron worth?

Watch for more in the coming weeks.

A Recession Forty Years in the Making–Updated

This Great Recession  Didn’t Happen by Magic…My Rant

The Sniffer Returns. Photo Courtesy: Smith Detection UK

When last the Sniffer’s image appeared here on Extreme Thinkover, he (well, I think he’s a he) was celebrating the passage the the health care reform act, having sniffed out the “radiation” of American Health Insurance Providers and other members of Big Medicine’s failed assault against the legislation, spending undoubtedly hundreds of millions of their subscribers’ dollars in the process.  That money was intended by those who paid it, whether it was the funds directly from the insured or their employers, to pay for health care not to pay lobbyists and advertising to defeat every effort and piece of legislation devised to make it better.  Fortunes spent without consent.  A cruel form of taxation without representation.

We will probably never know how much money Big Medicine squandered in their complete and total defeat, as the benefits of health care for all Americans already taking effect, item by item, promises a future of access to medical care that for over two centuries we have never had the right and many have been denied by sheer accident of their socioeconomic status or a simple preexisting condition.

Now we have the right.  Obviously, we should be celebrating, right?  Right?

Political Memory Distortion

Some of our citizen sisters and brothers continue to snort and paw like an angry bull over the fact that they now have to participate in a society that cares for the medical needs of  all its citizens (joining finally nearly every other First World nation and many others), not just as country that rewards those who would hoard their worldly goods as if none of those around them had any role in the accumulation of that wealth.  In their anger, from distorted recollections of an earlier geopolitical battles, they call it socialism, an incoherent misunderstanding of that term in the history of political systems.  It is not socialism.

A Republic’s Highest Value

To the contrary, it is the highest value of a democratic republic: Sharing.  It is that simple.  In a democratic republic, one of the blessings of liberty is sharing.  To treat another as you would want to be treated.  We are now a large nation, over 300 million people and growing.  The day of a flat birth rate has passed.  It takes a lot of organizational structure to insure that the ideals and the order of a democratic republic are nourished over time.  It cannot be done by stinginess, or by isolationism.  The age of the Rugged Individualist has passed.  We now are connected in ways even those of us in our middle age could not dream of.  We now live in a shared world, a shared connectivity at the speed of light, the evolution of human ingenuity turned up on high, the 20th Century a platform for the 21st.

Equality consists in the same treatment of similar persons–Aristotle, 384-322 BCE.

Most of all it cannot be done by refusing to share in such a way that those with the most are continuously provided with more through no merit of their own, denying the dreams of those in the middle to improve their lot in life, it too a blessing of liberty, and effectively squelching the chance of those at the lowest rungs of life from ever daring to dream that those above them might welcome them to take those steps and dream those dreams out of their poverty.

The right to achieve prosperity in a democratic republic is not the exclusive right of those who have already achieved it through their own effort or inheritance.  At the same time, those who have achieved prosperity have no right to hoard their prosperity so that those who are trying to achieve it as well are denied their right to share in its blessings, regardless of their beginning station in life.  With all due diligence those who are prosperous must ensure that the efforts of those who desire to be so as well are rewarded and their growing prosperity welcomed.  But because human beings all have differing gifts, desires, capacities, and health, a democratic republic can exist living by its highest ideals when the prosperity of the whole also ensures the rights of the whole.

Rant complete.

An Unexpected Proof of Concept: 40 Billionaires’ Pledge

What I wrote in the previous paragraph is not just a flight of fancy or a theoretical construct that never would be tried by the very most prosperous people in our country.  On August 4, 2010, the foundation begun by billionaires Warren Buffet and Bill Gates announced that 40 billionaires have so far pledged to give away at least half of their fortunes during their lives or at their death.  Called The Giving Pledge, the list is available publicly online and, according to Buffet and Gates, this is only the beginning of their project.  For instance, the Wall Street Journal reported one of the pledger’s rational:

In an interview, Tom Steyer, founder of hedge fund Farallon Capital Management LLC in San Francisco, said he and his wife had planned to give away their wealth but decided to go public after Mr. Buffett called.

Mr. Steyer made the pledge to support what he sees as an effort by Mr. Buffett to show how those who profit from capitalism can help improve society.  “We want him to succeed in reshaping the way people think about the private enterprise system,” Mr. Steyer said.

MSNBC reported that the United States has about 400 billionaires, some 40% of the world’s total, and their net worth is estimated at $1.2 trillion.

Some of the billionaires have a very specific goal in mind for their pledge.  George Lucas, filmmaker and creator of the vast Star Wars empire stated,

“My pledge is to the process; as long as I have the resources at my disposal, I will seek to raise the bar for future generations of students of all ages,” filmmaker George Lucas said. “I am dedicating the majority of my wealth to improving education.”

Finally, Warren Buffett co-founder, remains ever the optimistic example for First Citizen in our democratic republic:

“We contacted between 70 and 80 people to get the 40. A few were unavailable. We don’t give up on them. Every saint has a past, every sinner has a future. We’ll keep on working,” Buffett said.

Thank you, Mr. Buffett and Mr. Gates.  You get it.  But we are not done here…

So What Next: A Recession Four Decades in the Making

How bad is it?  Ironically, out of the past a major player has come to the horrified realization that the policies of the past forty years, in which he played a major role, beginning with the disgraced Richard Nixon, set in motion the recessionary calamity we are trying to survive.

David Stockman, who was the director of the Office of Management and Budget under the evangelist of  “trickle down economics” and the fomenter of the doctrine that all government is essentially bad, Ronald Reagan, wrote these words published in the New York Times:

Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

Although I politely disagree with Mr. Stockman’s criticism of Keynes, arguing as would Paul Krugman, Nobel Prize winning economist, that had Keynes’ economics been followed, instead of Reagan’s supply side fantasy, we might have avoided some of the damage Mr. Stockman places right at the door of the Republicans, who claim they want more of the same.

As our nation moves along the unstoppable path of time toward the General Election in November of this year, Mr. Stockman’s accusations against his own party are even more troubling.  He continues:

But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.  Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts. (Emphasis added)

Delusion or Voodoo Economics: Your Choice

Dr. Krugman, however, agrees with Mr. Stockman on one major point: tax cuts will not help our economy outgrow the deficit now, any more than they did by the time Ronald Reagan left office in 1989.  Earlier this  month, also in the New York Times, Dr. Krugman wrote:

Now there are many things one could call the Bush economy, an economy that, even before recession struck, was characterized by sluggish job growth and stagnant family incomes; “vibrant” isn’t one of them. But the real news here is the confirmation that Republicans remain committed to deep voodoo, the claim that cutting taxes actually increases revenues.

It’s not true, of course. Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt…

But we’re talking about voodoo economics here, so perhaps it’s not surprising that belief in the magical powers of tax cuts is a zombie doctrine: no matter how many times you kill it with facts, it just keeps coming back. And despite repeated failure in practice, it is, more than ever, the official view of the G.O.P. (Emphasis added).

Are we at an impass: Yes.  I have done a lot of counseling during my career and one thing I have seen dozens of times is that a person who is suffering a delusion is not aware of the distortion of reality that is affecting them.  Voodoo, and I will place it squarely in the Hollywood horror genre’ and not the religion of many who live in and around the Caribbean, and the image of zombies, plays on our deep fears of somehow having our dead bodies overtaken and made to do nasty things to, well, anyone, but, in this instance screaming attractive American teenagers.

In terms of economics, the accusation of either, is to say something is deeply wrong, but we know that.  What we are suffering from, is the gathering force of economic distortions that have gathered for forty years.  Forty years.  How many really smart people, in both parties, noticed this, and said exactly nothing?  Was it delusions or voodoo?  How could that be, though?  The delusional cannot recognize their delusions, and the zombie’s revivified by voodoo do not know they aren’t supposed to be in that very state.  Does that mean there are not any really smart people left in either party who can figure it out?  A tantalizing question to ponder, I admit, but the answer is no.

If the Answer is “No,” What was the Question, Again?

The question, in the end, is not whether there were smart people following the economy for the last forty years; there were.  The question is how over forty years did nobody get it?  Since Richard Nixon brought the Union to its knees politically and economically, hundreds of economic models have been built, hundreds rejected because they didn’t work.  Computer modeling has entered the 21st Century–Economists of all stripes have access to these computers and run probably terabits of data through them to test the accuracy of their latest theory.

And yet we wallow in the debris of a Recession still threatening our national prosperity and influence, whose roots are easily traced to forty years ago.  This is a topic that must be more closely examined in the months ahead as the election approaches.  I think the Sniffer has a new assignment.