High Finance

There is purported debate upon whether the Fed should take on or shed regulatory responsibility. The basic position for shedding regulatory supervision originates among Those who think the Fed should concentrate on areas over which they are most passionate (they have the greatest stake to be protected), while Those in favor of additional regulatory supervision and control tend to come from Empire-building elements from within the Fed itself. There is actually very little judgmental Review of the quality of the supervision itself. The trend I find alarming resides in the Consensus unity which is the current creed at the Fed, both on the Board, and conformity with the financial markets supervised. The actual power of the Fed consists of independent assessment of financial conditions, and to utilize a Referee’s whistle to insist on a return to banking fundamentals, if Conditions get too threatening; a Power easily lost if the economy begins to view the Fed as only the Publicist of the financial markets.

Mark Thoma appears to recognize the same dilemma as I perceive, yet is in support of massive Fed intervention. I disagree, basically because the financial troubles have been industry-developed and need to be reduced by financial market return to normal banking practice, and because the Fed is surrendering its Voice as the final financial Arbitrator. I have yet to hear a Reserve Board declaration that Derivatives have distorted the fractional Reserve process, creating funds only at the cost of instability within the financial formation. The Fed has not done the above, because of their lack of profundity in regulatory controls to handle the widespread use of malfeasant practice.

Brad DeLong and Tyler Cowen provide analysis of one aspect of the financial crisis–which is the Mortgage Crisis. Those who cannot read the economic import of their Statement can be eased by my probable misstatement of their Thought: Risk assessment valued the Risk at only half the actual risk when the Mortgages were issued, and now value the assets at about double the Risk than actually exists. Educated and Uneducated alike insist on assigning a Dollar value to such a Risk, though such an Evaluation relies more on unrealized future gains, than on actual invested funds. Translated, this means that there is more worry over loss of projected Profits, than there is doubt of actual losses incurred. No one mentions that the projected Profits may have been ridiculous in Design originally, given an evaluation of economic growth and its devotion to Housing; without acknowledging the absorbent capacities of other segments of the economy–especially Health and Consumer Retail. lgl

The New/Old Sting

Auction-rate securities resemble the rest of the financial securities mess, as explained in this article by Morgenson. The fundamental problem was that people placed their faith in brokers, individuals totally consumed by Sales, from which they received their own Income. There is an old adage that you learn about the business, or take a more-protected route. People wanted in on the Good Times, but had never heard about the Bad Times; brokers probably included within the ignorance bracket. Everyone wants their high Profits back, totally ignorant still to the nature of markets. Every Winner in the market are matched by Losers to absorb the Cost of the Win, the normal course of market transactions. The only people who could have understood the Risk involved in such securities was the Issuers, and it is debatable if they understood the degree of Risk involved. What is known is that no one with accrued Profits from the transactions have any intention of returning those Profits, let alone the entirety of the Principal; the later a probable impossibility, except through a Government intervention which would be totally Inflationary.

Here is a Case of an honestly dishonest Seller of Blue Sky, settles Suits without repayment, and continuing to sell bad Paper for Hard Money. He will continue until placed in Prison, and may even continue to sell from there, if he can get Cell-phone access. He managed to achieve his Chain-Letter sales throughout the Period when there were good, safe Investments available, unlike the current fed funds rate trailing the Inflation rate, and failed only when Investors found that they needed their money. Manipulators utilize the innate Greed within Us, assuring their ability to spend Our Money in high Living, which We know that We could never afford. Every Generation has to learn that the glitter of Gold has adorned every fraud ever devised; i.e., anything which seems too good to be true, will eat your Money!

This is a priceless Gem with which to end Today’s Post. Restaurants are three times as expensive as kitchen service, but all they need do is maintain Quality, and they can survive Hard Times. Speakeasies and Restaurants did prime business in the Great Depression, and manages success during most Recessions. There is the Social Appearance involved, plus the lack of culinary skill apparent in the kitchen; but the great element of the ‘Denial’ factor may be one of the greatest assets of Restaurants, where People blow the last of their Paychecks in going out to Eat, simply to prove to themselves that they can. They wish to scream at the World, but cannot; therefore, they insist on showing Flash, when there is no Bang! So ends the lecture on Attitude, and its potential injury to successful Investment. lgl

Modrn Market Strategy

I sometimes detest the activities of my fellow man, and the development of ‘Perfect Storm’ conditions may be the worst of the objects of cynical derision which I might express. The Most I can determine from the article is that Rice production has maxed out, Governments are reducing their stockpiles of Rice, the rising affluence of the Third World has been buying up the excess supply of Rice on the International market at a more rapid pace; all leading to sharp increases in the price of Rice. The fact is that only 7% of the World Rice supply is traded internationally, and Vietnam is cutting its Exports by 25%; with Thailand expected to follow suit with a similar restriction. They are the two leading Rice Exporters, but other Rice Exporters have also set Export quotas. Everyone should realize that the reduction of Government stockpiles remains the major culprit, but the long-term conditions of the hard physical labor of traditional Rice production plus urbanization eating up prime Rice production land, will cause the greatest dislocation. It is simply consistent with other dangers to the Food Supply coming from labor asset switch out of Agriculture, combined with the higher Incomes of the developing labor force.

This is Technology? Inclusionary Zoning, Jeff Frankel, and free Internet access may appear to be highly complex technological modeling, though I possess some doubt that it fits in the Technology section. What do I know? Still, I would imagine that creation of ‘Small Town centers’ within Zonal development achieves the longest construction longevity rates. Jeff Frankel is probably right, but James Hamilton is not only support for the Frankel thesis, he outlines the expressible probability of result. Space Invaders might eat Sebastopol, Calif., but they won’t have to watch it on TV.

Why the gloom and doom? There is still no Recession for another Quarter, unless there is a sharp downward revision of the released Numbers. Economists and Wall St. Brokers can breath a sigh of relief, as the Bogeyman has been pushed back again (I could repeat my thesis and belief that the Recession is already over, having started in July 2007, but which was hidden by the greater consumption of American Exports during the Period). The Thrill-Seekers, though, can still find solace in that the Housing Crisis remains, Commodity Prices will remain exorbitant throughout the absorption of the excess Profits of the late Boom, and the Recession will eventually come sometime; as the greatest mass of wealthy Americans remove from Prime Consumption, to the secondary position of Alternate Source Consumers due to retirement. We can only hope that the Kids are as profligate as their parents. lgl

Markets in Everything

The futures markets are always running ahead of the Cash markets–never behind; what does this tell Us about the markets themselves? One has to ask who makes the most from the futures. There is a Pro-rate subsidy for Farmers to entice them to accept futures contracts, estimating they can fulfil the Contracts without loss to themselves. The new Speculators come in with back-pressure Cash which they no longer wish to invest in Stocks, Bonds, or any of the new commercial deriatives; bringing a lot of Cash to the Commodity markets, without a great concentration on Market pricing in markets relatively unknown to themselves. Then there is the deriative-writers themselves, who just happen to be the actual floor Trader firms, that must have Farmer participation to gain the new Speculation Cash coming into the markets. Could it be less the new Speculators missing the Sell-Points, or Traders missing the new Buy-Points? Traders must deal with the Farmers and Elevators on a long-term basis, and also know relatively accurately when this Group must buy on the Cash market to fill futures contracts; they enjoying the Thought of the Rubes coming from the Big City.

I am likely to be terribly paranoid this morning, but one has to wonder about the Republican businessman Regulators of the Bush administration. The airlines go down voluntarily for Inspections, canceling thousands of cheap Ticket prices initiated prior to the rapid Run-up in World fuel prices; while new Tickets for the resumed flights will undoubtedly reflect the new flying conditions, including Fuel Costs. I await any possible new Inspections in the future, content that I no longer have to fly anywhere.

Tyler Cowen has a good Post on ‘Pay-all-that-you-can-drive’, but he is somewhat light in explanation of why companies do not adopt such practice. There would be an estimated reduction of total miles driven under such policies, but such Policies would introduce a Wobble into the Profits schedules of Insurer firms. This would adversely affect Stockholder confidence, plus present excessive damage to programed Executive Incentive Packages. There is no collusion between Insurers on Rate-setting, though the Rules guiding Unfair Competition are understood industry-wide; notice they all utilize Package Insurance programs which vary little, which are priced across a narrow-band range. Remember that the reductions would come only from reductions in premium payments. It is another Case where Regulation could be a good Substitute for free market Price-setting. lgl

Too Dictatorial?

This article tries to define what is a Green Collar Job. Monks in the Middle Ages tried to define how many Angels could sit on the head of a Pin. Jobs are Jobs, and We should be talking about how many industrial Jobs are created by a Green initiative, how many Research Jobs, or how many Transportation Jobs. An Economist should never get involved in deciding color combinations; leave such interesting work to the Politicians. The approach to Conservation also should be altered, at least by Economists. I would like to know how many Jobs will be created by a national law demanding all Utility Users be paid for any Power added to the Grid; how many Jobs would be created in changing over Utility meters, how many Jobs would be created in development of Solar panels, how many Jobs would be created in digging underground flow systems (don’t ask me–too technical). We need a national Conservation policy, and Economists need to concentrate on the possibilities of such a policy.

I am thinking of advocating a national law demanding all Casement Window Manufacturers must offer only a Solar panel construction like a Storm Window which would operate when Shutters are opened; equally combined with regulations stipulating that all Casement windows must be equipped with Power Grid access by a common Plug-In arrangement. I, if I were a Legislator, would need to know the Cost of the new Utility meters, the Cost of the new Window combinations, the Cost of the Plug-Ins, the increased total Cost of Window Casements, and the added Cost for New Housing Construction. Dependent on the total Cost of the Changeover, one could determine if the construction and Sale of old-style Windows should be banned, and whether the law should insist on mandatory Conversion as old Windows were replaced.

Jobs can be estimated from such a mandated Scenario, rather than it is now, when all Conservation efforts are demanded to be Voluntary; with all the higher Costs of Voluntary efforts–lacking Sales and full flow of Cottage industry diseconomies of scale. This is the major detriment to a Green policy, Construction policy will not alter without compulsion, and Transfer Costs will remain too high without mass participation. Compulsive regulation can have a phased Timeframe, but lack of regulation will bring delays which are unacceptable. I say this from a position which doubts the real dangers of CO2 emissions, but knows that the Consumption of Oil must be slowed to retain long-term Resources. lgl

Economics--Old and New

I can’t help thinking that Arnold was having a bad day when he wrote this one, but it still carries some masterful Insight. He was probably looking critically at his own graduate school days, reflecting on the huge collection of neoclasical irrelevancies which he had to integrate, simply to be accorded a good Rating amid his Peers. Arnold does not leave it there, though, and goes on to record some constructive Thought. He establishes a very rational Outline of macroeconomics which maintains a solid consistency. I first want to state that I agree with Arnold in his basic conclusions about macroeconomics, but stay somewhat critical on his methodology of getting to Our common attitude.

1) His work on financial intermediation ignores the reality of necessary Investment potential, whose long-term source must always be Business Profits, and makes up the only component for short-term Investment besides completion of previous Investment opportunities. I remember an old Gangster movie faintly without Name, where James Cain’s gangster boss worried about how to invest the heavy illegal Profits he received on a daily basis. The pressure to invest idle Profits remains far more significant than financial intermediation, and lack of those idle Profits curtail Investment to far greater degree than does lack of believable financial intermediation.

2) The sudden changes in Labor Demand essentially highlights the economic illness resident in the economy; it is not exemplar of a dynamic economy. Labor Category shortages indicates an interdiction between Educational practice and Industrial usage. Education should understand Industrial needs plus Research direction and placement. Failure of this facility brings extreme Social Costs, along with loss of resident Profits from subtraction from Full Employment.

3) Arnold and I are on the same Wavelength on the worth and value of fiscal policy.

4) A central bank endangers All by being any Lender at all. The great value of the fractional banking system is reliance on it. It remains the sole Vender of extreme loan levels which will not in itself create Inflationary pressures, unless reliance on the system is lost. It properly regulates the amount and magnitude of Investment, while it supervises the correct employment of those funds. All deviations from reliance of the fractional banking system remain Inflationary means to evade the Investment limitations to the system, which is basically a primary Control of Inflation. Intervention from a central bank can only create unwarranted Money–propel Inflation. Financial markets would not unravel if financial institutions did not seek to intermingle Credit lending with Investment portfolios; One can be an Investment firm, or a fractional bank, but no one can really be both!

5) Arnold's fifth stipulation should be read several times, and understood. The underlying causation of these trends is relatively unchangeable, as they serve as basic human reaction. People will not alter their basic drives to satisfy economic theory. They will create the same mistakes over and over, simply because there are new Participants who are too busy to educate themselves on the failures of their Elders. Economics must learn to counteract those Mistakes, before they can become injurious, both to the Individual and to Society as a Whole. lgl

Truth in Lending--You figure it out!

Here is access to Studies which might interest my younger Readers, though I will say that I have always been an advocate of internal Self-Discipline as the basic mechanism for success. Modern Education hopes to rescue the low flyer, rather than promote the high flyer, and defeat Incentives in the Process. I would advocate Grading strictly on the Curve rather than the current Advantage-Access, and begin Incentive programs from the lowest Grades. I believe three States are now trying experimental programs to pay poor families Income for their children achieving good Grades; something I believe which provides an education to Adults as well as the Children, as the Former seek to maximize their Income. A last Note I would describe outlines the functional value of educating Children in the values of Education before turning to the actual practice of education itself. I knew an Indian Reservation Superintendent who designed a Lecture series of the advantages of advanced Education and Good Grades for 2nd Graders, which followed later Adults’ Income based on Grade School scores (I did not agree with her Modeling system which was deceptive, but it was quite effective especially with one Parent in attendance; I not knowing the impact upon later Student Grade scores).

The St. Louis Federal Reserve Bank has selected James B. Bullard to replace William Poole, who is retiring after 10 years in office as President of the Fed Bank. I am not privy to the Politics at this Reserve Bank, or on the Federal Reserve nationally, but pressure may have built to replace Poole, who has been a relative Maverick on the national Reserve Board. Bullard sounds like he is a Team Player, with little to indicate he would represent the known Conservative use of Reserve policy, which Poole has long been known to advocate. I do not believe that Fed policy is best served by eliminating Dissent from the Federal Reserve Board. We could come to regret the losses incurred by a switch towards Consensus of Board membership.

This smells of my more laudable efforts. I expect I am luckier than John Whitehead in lacking such an acute Readership. You can get away with so much more, when no one trusts what you say anyway! I would have brought up a digression into a discussion of the greater Risk, rather than what John Whitehead did; apologize for an honest mistake with the flair of a true gentleman. By the way, switch of Risk into Dollar Cost of Reconstruction always presents ‘yellow journalism’ escape from particularly nasty Criticism. lgl

Qualifications

Some manic-depressive Critic suggested I may not understand the basic principles of Monetary policy (actually the Individual involved is a very focused and sincere Economist of acute Intellect, but that doesn’t help my Case). I therefore turn to the great Sage, Wikipedia, to prove his Case for him. I believe in the Superneutrality of money, basically because of the sticky nature of both Prices and Wages. The Case for sticky Wages is well-known and discussed, but Prices can be as equally sticky; this because of the ruling Consumption and Credit-extension practices of the time. The later will not be eased for greater Consumption with the rapidity of extension of easy Capital Investment terms. Investment becomes over-financed, while there is a 11-14 month lag in Consumption practices; this later Event evidenced by the increase in number and magnitude of Consumption Retail Sales. Real Risk has been sharply increased, though nominal Risk is assumed to be reduced. The Condition makes Commodity Markets wobble upward, but with amplified swings of Highs and Lows; the general upward movement assured by excess Resource consumption through the over-financed Capital investment. Many Economists would suggest this would be a perfect condition, though I am not one of them.

The generally accepted source of Inflation remains growth of the Money Supply, though I possess a real feeling that contraction of M1 speeds the Velocity of Money, and therefore of the desire to more quickly aggregate funds; i.e., counter-vector pressure on Prices with suppression of Wages and Consumption Credit conditions. All of this detail enters into my Post of yesterday, where I suggested there was a real connection between contraction of M1 and Recessions. Fed release of Cash into the economy, without expansion of the bottleneck of M1 contraction, simply fuels the Inflation; doing nothing to incite Consumption, easier Consumption Credit conditions, or spur added Production. I am beginning to feel like I am somewhere out there beyond Neptune, so it might be time to bring it home!

Relative Events which are determinate and decisive (at least to myself): Lack of attempts to widen any bottleneck of M1; no attempts to ease Consumption Credit terms and rates of Interest; provision of Money growth only to the financial sectors; lack of support for Wages and Employment; unwillingness to suppress excessive Inflationary pressures in Commodity Markets; and no restrictions from domestic dumping of Consumption Product below Production Costs. The study of Economics will always disturb, simply because it is a balance of an excessive number of variables; none of which can be allowed to meander into dangerous territory. lgl

Nobody else agrees with Me either!

I find Cactus at Angry Bear to be one of the most interesting aspects of the blogosphere, basically because of his lines of exploration; though I possess some degree of hope for his more formal organization (talk about the Pot calling the Kettle black!!). His current effort expresses the same consistency which has made him endearing to his followers; the pertinent information is there, though one may have to dig for it. He finds that Recession has been Our fate 16% of the time since 1959, and that M1 has a definite relationship to the sequence of those Recessions, even if the exact relationship is left undefined. Cactus focuses on the 3.5% drop of the M1 somewhere in the 12 months prior to the occasion of a Recession (which, by the way, is a real Connective to later economic performance), but assumes the Fed has great impact upon the performance of M1; a subject on which there is serious debate. The Fed cannot actually flood the economy with M1, as most people (even Economists) assume; dumping Cash into the Economy by buying Treasuries or other Means advantages Investment Capital, which is quickly removed from M1 without resort to Consumption–it is simply quickly re-invested.

The real Problem is M1, and the reason is simple: All functional economic transitions must channel through M0 or M1. Consumption is universally conducted within the above spheres. M2 and M3 rely on M1 for Cash flow, though they express the actual lowest Time Period of existence within M1; though Bank Reserve requirements basically depend on M1 deposits to extend loans through the fractional Banking system. Long-term M2 and M3 agreements often tie up loose Cash so that M1 dependent Cash reserves do not grow, and passage of M2 and M3 through M1 is markedly short in duration. Nothing feeds M1 deposits with a consistency which guarantees necessary growth of M1 to generate sufficient fractional Banking requirements and Investment funds. Economists stipulate that some M2 and M3 can be utilized for fractional Banking reserves, but more than half of this residue cannot be used because of Issuance types unconnected to the fractional Banking systems involved.

Another hazard is the other forms of payment which Cactus mentions in his Post, which have supplanted the basic M1 format. These other forms of payment are almost always forms of Credit advancement, forms that have replaced easy formation of M1 deposits through Bank advancement of short-term Consumer loans, and rapidly speeded Household Income flow through M1 accounts. Commercial Banking becomes crimped to maintain fractional Banking reserves, and the Fed policy may actually injure this process, by lowering fed funds rates; removing Investor confidence in adequate return from purchase of Bank paper. Raising the fed funds rate from 3% to around 6% could actually far more than double Savings accounts and C.D. registered. First let me stipulate I have never advocated a fed funds rate over 4.2%, and never will; of course, I will never advocate a fed funds rate less than 4.2%. What I am trying to say remains that current Fed policy may be exactly the wrong policy to either fight Inflation, or promote the Bank deposits necessary for economic performance. lgl

The Old Reality

Why does the entire Series of Ecological issues never seem to get off the Drafting Board? Tyler Cowen makes a good stab at explanation of the underlying causation. The Bottom Line states that alteration always involves extreme Cost, and in the absence of per Unit high Profits, development always wilts. Ecologists should realize that Economics is the foundation for all technological development, and that there are still real constraints on Capital finance of technological units; Nuclear Power plants themselves suffering from such constraint, being simply too expensive per Unit. Plug-In hybrid cars face the total Assembly Costs of a new model series, must meet about a 240k Unit Sales expectation per year of production at the expected Sticker price, with an expected 8-year similarity production run. Ideas are great, but Profits inhabit an entirely alternate dimension.

Here is another ‘If Wishes were Horses’ Scenario. The real fault endured by the Truckers lay in this Country’s refusal to Capitalize the Railroad industry sufficiently. There will be no Trucker bailout, basically because of economic fundamentals. The cost of diesel will not come down because there are too many Trucks on the Road. Insurance will not come down because Trucks are too expensive in Unit price due to Corporate profits manipulation, and medical claims upon Accident have accelerated at as high an Inflation rate as any Prices in the Country. Natural forces will bring a like condition as would the planned Slowdown, but not for a decade when the lack of experienced Truckers will force Transportation shortages. Trucker Dan simply hopes for an impact in an industry noted for its lack of response to outside influence, due to the numbers of independent Truckers operating; a condition which Farmers have long endured, but found no relief, even though long aided by Government programs. Their efforts will be swallowed by the market.

Neither united action or Government intervention will succeed when planned alterations violate economic fundamentals. Readers should realize why so little seems to get done so often, though there is such rhetoric expended in advocacy. The economy does not reward Good Intentions, and lack of Reward finds only lack of Capitalization. lgl

Risk

One always hears quite a number of acronyms being thrown around when people are trying to hide some aspect bound to make Everyone scream in horror at some outrage, both by Those who would confuse, and Those who have no real grasp of the situation. The current financial crisis is an excellent Case in Point: Deriatives, CDOs, CDS, etc. The first element should be established that they are all basically Deriatives, whose best definition might be financial instruments which are designed to sell a Wind-Broke horse; i.e., a whole number of financial transactions which possess a poor performance rating are bundled together, and sold under deceptive circumstances as prime-value assets. Their principal function has always been to remove bad Performers from Commercial Banks Credit sheets.

Risk is risk, no matter how it is packaged. It is intrinsic to every financial transaction, and is determined solely by the successful fulfillment potential under the lending conditions. The later are always effectively generous to the Investors, and onerous to the Borrowers. The Investors are indifferent to the degree of difficulty of the lending conditions, and Borrowers have traditionally been less than candid about their repayment potential; Credit Rating agencies and Commercial Banks always delegated to referee the Transactions, and ensure that lending conditions are not usurious and that Borrowers can actually meet the repayment conditions inherent in the lending conditions. The essential element in Risk is that it is very palpable, and very destructive to Everyone if let loose.

The financial crisis came about because Investors wanted higher rates of Return on their investments, Borrowers wanted greater amounts of Cash than the adverse lending rates and their Risk performance would indicate, and Commercial Banks wanted a greater volume of Credit transactions which is the source of their own Profits. Commercial Banks possessed a real Problem which prevented an expansion of Credit, their mandated requirement to maintain Cash Reserves, along with their required maintenance of unresolved Credit transactions on Publicly-reviewed Accounts. They thought on the matter, and came up with a Proposition which pleased Investor, Borrower, and themselves; they would bundle great amounts of Debt, and sell this debt as Securities on the open market. Everything was great, or was it?

Risk being Risk, it was still there and based upon the Borrowers’ effective ability to repay according to the lending conditions of the loans. Sold Securities could be withdrawn from the Public books, by claiming they were Assets after being sold, not Debt at all. Deriative sellers could offer higher rates of Return to Investors because of a supposed spread of Risk across a wider range of instruments, something which this Author does not understand, or actually approve. Commercial Banks found the deriatives to be a Godsend, as they regenerated their Cash Reserves, and allowed for the issuance of more and greater loans to Borrowers, who supposedly found greater capacity to repay under the stipulated lending conditions. Everyone was happy, Investors could enroll their Cash assets at high reward, Borrowers could get an easy extension of Credit, and Commercial Banks could expand their lending base, making good Profits. It was perfect, except that the lending conditions started to intervene, Investors had utilized all their ready Cash, and Commercial Banks were forced to purchase the new Securities from each other simply to get them sold. The Music stopped, and there were no chairs to sit on! lgl

Progressive Income Taxes and Expenditure

Why do We spend so much for Defense? This article explores one sector of the Argument. The American military posture relies on excessive funding of weapon systems of relatively little long-term value, mainly as Business promotion utilize huge lobbying budgets to get legislative support. The article claims that the U.S. spent over $600 billion on the Military last year. This would be about Ten times what Our next closest rival has spent. Is there something wrong with this Picture? I would examine another aspect of the Military situation: the fact that American military Casualties (in Percentage terms) do not vary significantly from other supplied Military forces in the World. The Money spent does not go to reduce the Risk of Our military personnel, or provide more adequate health care for the Injured. Any Keynesian impulse in the military expenditure is equally lost, as military R&D as practiced in the United States stands as the probable most-expensive Research conducted in the World, with little Employment per Dollar expenditure and extremely high Capital expenditure. Americans should worry about an Expenditure which rivals the Cost of Child Rearing in this Country.

I do not agree with this Post, but insist (that’s a laugh) that it should be read: it being the basic defense of the allowed extreme Wage differentials. The author may not realize he also presented the basic premise for a Progressive Income Tax. Occupations affect various numbers of People, and are paid commiserate to the number of People influenced. Reward for Occupations relies, therefore, not upon the quality or quantity of the labor supplied, but solely on the number of People served. An evaluation of the structure asserts that Quality is not served at all in the Process, though I will not enter into a Critique of fat Comedians or Vocalists who cannot stay on Key. I am sure that Economists would agree that the expansion of Supply for any Good or Service requires an increased level of responsibility, as the Injury potential has increased; the famous liability conundrum which Business attempts to nullify through lobbyist action in Congress to eradicate or restrict the Process. A Progressive Income Tax applies a poor system to equate a proper Quality control on Income generation, insisting that quality labor serving fewer People be awarded a greater advantage, while presenting a restriction of the earning potential of that labor which impacts a large number of People.

The Above paragraphs approach the same Problem from different directions. Taxes should be adjusted to provide Incentive to the quality of labor, irrespective of the number of people affected by that labor; and Expenditure of those Tax revenues should be spent to the benefit of all Taxpayers, not just to enhance the Earning capacity of already-privileged segments of the labor force. Economists might acclaim that such integrated Quality Control is not necessary for an economy to function well, but Keynesian theory will operate if and only if the total of the labor force is swayed; Sector or Segment funding will impact the Retail industry adversely, creating an Inflationary environment with distortionate economies of scale. This is not to say that Incentives should be destroyed, or that any Income tax should be so high as to cripple the Growth pattern of the economy. lgl

Banks and Toilets--Anything in Common?

I guess my Lead-In matches my attitude on this gentle Good Friday. Much of the World is still looking for a functional Public Toilet. The sad Scenario may be why Christ accepted Crucifixion in the first place; I know how uncomfortable it can get. I will abandon bathroom humor, though, to state that lack of sanitation creates about One-Fifth of the medical ills of the World, and the article states that the provision of adequate facilities actually provides a Return of $9, for every Dollar invested in the sanitation. I would say that this financial Reward is not likely to withstand real scrutiny, considering the high Cost of sewer and water systems combined with the wide area distribution of the needed facilities; still, adequate sanitation is the only effective Curative to the traditional pandemic scenes.

This Post has some relationship to the above commentary, especially if One is walking to find a Public Toilet. The effects discussed do exist, but may over-develop the Situation. People are going to require Food reserves whether they Walk or not, and lack of exercise in itself causes a wide range of Health problems, insisting on heavy Energy use to correct the residual effects. Take it from Someone who has poured an immense amount of liquid Carbon into Gas tanks: You can ingest an equal amount of Carbon into the body, but you sure won’t get the same rate of Burn; the Word from Someone who has to exercise every day, but never sees the tank empty of the weight of fuel like his truck.

Mark Thoma does his usual creditable Job of outlining the creation of the Federal Reserve system in its present form; read it to understand its preventive measures, but also the fears behind the measures. I have always held an sanguine attitude to bank failures and bank Runs. I think the central bank system is operated to forestall any individual outbreak, and believe that this position remains basically wrong. The later Events are far more effective in keeping Bankers honest in their Trade, than will any form of Regulation. The central Bank system should ensure the greater stability of the banking community as a whole, though throwing individual Bankers to the wolves because of their adverse monetary policies. The Reader may not think I am serious about this, but I would like to see about five Banks forced into Receivership per year. It would induce far less wastage of liquid assets overall, and leave Bankers personally responsible for their own fortunes. lgl

Medical Science

I ran across this while surfing, by way of Mark Thoma and EurekAlert. The Poll size was small, only 1026 Respondents, so the Sampling error of plus/minus 3% for a assumption majority of Case studies through the Sample series may be technically correct, but culturally in error; the glaring point is attenuation of the data because of no establishment of the number of Working adults within the Household. One might get the opinion that I disagree with the findings of the Poll, which I do not; in fact, I agree with the data so much that I feel more adequate sampling support should have been undertaken.

The key Quotation within the article is given here:

Once again, there are contrasts in how Republicans view the United States’ standing on these elements and how Democrats and Independents rate the U.S. As an example, four-in-ten (40%) Republicans believe the U.S health care system is better than other countries when it comes to making sure everyone can get affordable health care, compared to just one-in-five Democrats (19%) and Independents (22%) who share that belief. On each of the four elements tested, Independents are within a few percentage points of agreement with Democrats, and both are significantly separated from Republicans.

Democrats will win the Health Care debate, and there are realistic Grounds for belief that Victory is essential to improvement of American quality of Life. Drugs are too expensive, medical equipment is too expensive, and Specialist services are too high in Cost. We need three times the Capital investment in fundamental medical care, and need to cut extensive medical care Costs by 90%. We have to expand accessibility to All, but We can do so only with an induced medical insurance program, and clearly outline limits to the medical care given–both in terms of overall Costs, along with injecting Steroids into extreme medical care. There are medical fanatics who scream ‘Murder’ when extended medical care is not given, even if the Patient is 91 years old, and the treatment series runs in excess of $5 million. The real Goal of our medical services must be to get People out of here, as gently as they came into the World. lgl

The Right Moves

Does this article sing to you Soul? It doesn’t? Well, if things continue, it will most certainly blare its siren song to your pocketbook. Lump iron and iron pellets are base materials for Steelmakers. They are already rather high in Price, and negotiations will drive them higher, but can the World economies pay Increases of 65-71% and 86% for the coming year? Ore Producers and Steel Mills think that the World can, and are backing their beliefs with signed Provision contracts. This basic mess is occurring throughout the Materials provision markets, and with 85% of Commodities markets expecting Price increases in excess of 30%, what does it say about the possibility of Recession? It can only mean real Price-Markups for the total range of Consumer Products, during a Period when the basic components of Household Income is not rising, and accessory components of Household Income are showing the least resiliency expressed since 1993. I think the Speculators are finally going to get their serious Recession, this due more to financial and productive mismanagement, than it was ever due to Fundamentals.

Markets show almost no loyalty to Anyone, and Oil dropped below $100/barrel because of the drop in World consumption of the stuff, in view of the increase in Price. My Sketch-Pad is the most victimized thing in the World, and slandered by almost Everyone, but to my method of Thinking, consistent Oil Consumption patterns for 4 months should push Oil below $80/barrel. Does this seem like a Relief? It really should not, as Fundamentals would claim Oil should carry a Price-tag of about $63/barrel, and there is only a 40% chance Oil will reduce to $80/barrel due to massive liquidity in the Markets; accounted by Hedge Fund invasion of the Commodities. The Funds are fleeing everything, except the Markets which cannot endure liquidity.

I still would favor an exclusion policy signed by the major industrialized Players in the World, which set Purchase limits on Commodities by any entity in their national markets, until such time as the Entity can present residual proof of designed Consumption of the Product. This would basically limit allowed Buyers and Sellers to Those involved in the production or consumption of the Commodities. Most of my colleagues in the blogosphere will acclaim this as incipient communism, but the practice of Registered Participants in the Markets is old, and it puts all Buyers and Sellers into the same Pit based upon common directional need. It might be the Cure, and could not possibly be worse than the disease. lgl

What may kill the Goose

The truly horrid effect existent in economic life consists of deviant practice seems always to be the cheapest route. Coal production has suddenly become more Profitable, so heavy investment shifts to the Coal industry, exactly when We are trying to curtail CO2 emissions. I have always been the advocate of the Double-Whammy, where Utilities must by law make as much investment in alternative energy systems as they pay in increased Costs to purchase traditional fuels. The beauty of the system resides in both increased Energy production under heavy consumption, and that alternative energy systems will assume a natural increase in total Output percentage. Now to convince Legislator, Economist, and Utility owner that the system is the best conversion methodology.

A cold Splash on a warm March day! It does not require much Comment, the article says it all. The Producer Price Index means a bit more than the CPI, which tells one only where the Economy has been, whereas the PPI tells one where We are likely to go. Cutting Fuel and Food out of the Estimates becomes increasingly foolish, as Fuel absorbs an increasing percentage of Disposable Income, and Food increases in percentage of actual Purchases. People are buying less but Eating better, and Driving less but paying more. Everyone become a Gourmet as One can drive to less Entertainment, which cannot be budgeted in the new Household reality. What worries me is the new direction of the Construction industry, there is too much Housing for both the Apartment complexes and new Housing to be filled at the same time; one or the other is going to be a big loser, producing more bad paper and lower Unit pricing.

China may be in even more trouble than the United States. They already have the Inflation, and they have not developed the domestic and alternate foreign markets to cut themselves free of the American economy. The antipathy between Japan and China extends beyond the cultural, with China notorious for shoddy Workmanship, and Japan fanatical about Quality Control; all within the Context of each other being the only real alternative to a slow death from a failing American economy. Everyone realizes the EU will not step into the breach, they with a long history of raising Trade barriers to protect ancient Interests. The World economy is like the Wind farm I know of, where the Vanes do not turn simply because no one is willing to do the High-Rise maintenance on the Equipment; not matter the level of Capital investment already implanted. lgl

The Mortgage Crisis

Many of my Readers want to know what is going on in the Mortgage Crisis, and Arnold Kling probably gives the best test for the venues to examine. Read his commentary before I screw up your ideas about the Crisis. Bringing it down to fundamentals, it is all about equity, but how does One explain equity so that it is easy to understand. Let’s start out real simple(ton), and state that an immense amount of Housing has been constructed in the last 15 years. This Housing construction was accomplished because Mortgage bankers became very inventive in the creation of instruments, establishing new ways and Rules to pay for this Housing. An Addendum which gathers importance later lay in Retail development of equity financing to pay for enhanced Consumption patterns, which was sold to Consumers without Reservations attached. The helium tanks were built and filled to blow up the Mortgage Balloon.

The Mortgage bankers supplied a great amount of liquid Cash assets, and Land prices, Construction Costs, and Housing began a rapid rise in Price; while Retail Sales maintained good position because of the easy available Cash. Times were Great, and Housing equity seems the panacea for a lack of a Savings rate. A glimmer of gloom did appear, in that actual equity was shrinking, as the residual value of the Housing less the Mortgage debt owed upon it was decreasing in percentage size in relation to the Cost of the Housing. Clouds started to appear on the economic horizon, as Materials Costs and Resources began to increase in Price faster than Receipts from Labor and Equity Return, due to the excess draft placed upon those Materials and Resources. Consumers suddenly found themselves pressured by higher Budget expenditures for basic Goods and Services than were evident when the Mortgages were originally taken out, and they start finding methods to reduce their Maintenance Costs. Retail Sales did not exactly flounder, but they did not grow at the necessary rates to increase Household Incomes. Housing was placed on the Market with a greater Need to Sell, and found fewer qualified Buyers. Housing Prices wavered, then began to drop. The Age of Negative Equity in Housing was born, sliding-scale Mortgage rates went up, and Mortgage payments increased in monthly Cost. People started to pay more for their Homes, than the Housing was worth; and they could not unload the Housing because of lack of Buyers. Foreclosure again entered the lexicon of American Business language.

The real trouble faced by the American economy lays in the adamancy of the financial community, which will not allow Homeowners to be helped, without their being bailed out of the financial mess they themselves designed for their own personal profit. The financial community refuses to register their losses, and restrict extension of Credit services to necessary economic operations, until such time as they receive the promised Profits they designed for themselves; at rates of repayment which was always excessive and unreasonable. They reaped vast Profits from bad loan extension, relent such Profits again in bad loans, and now insist on repayment before they will allow liquidity to return to the American economy. The Fed and Congress accept this position, and attempt fulfillment of the financial community’s demands, rather than actually help Mortgage-holders, and return the economy to normal rates of Return. I must admit most Economists would disagree with the later assessment, but it is regrettably true. lgl

Terrorism

Are WE back to the old Cold War Deterrence theories? We are in trouble if this is Our approach. They never worked during the Cold War, and are less likely to work today. The best approaches could be channeled Internet sites which draw in Terrorists affiliates, get them to denote their money to favored Counter-Terrorist funding, and provide links to film footage of Terrorist results featuring devastated Peoples dressed in common Mid-Eastern dress and speaking forms of Arabic. Pressure should be applied to Western News agencies to suppress basic footage of damage done in the Western context, while highlighting Injuries done to Islamic settings by Terrorist activities. Western News agencies should be pressured to emphasize the huge Costs to Islamic societies attributed to Terrorist activities. A classic Propaganda example would be a film showing a Terrorist bombing of an Islamic market, and a Comparison display of how many common Consumption Goods had been destroyed by the bombing, and a later Shot of the number of common Islamic consumption products which could have been bought by the funding devoted to the Terrorist attack. Air-Time to play this type of film should be purchased on Islamic stations, while Western News agencies should be banned from selling images of damages to Western societies from Terrorist activity to Islamic stations.

A good vehicle to dissuade Terrorist affiliation and/or funding is purchased Air-Time on Islamic stations listing Islamic deaths from Terrorist activities, the listing based upon Name, number of family Survivors, Occupation, and the where and how of their deaths. The Recitation should be set up in Commercial Advertising Spot Timing and Placement, and always include at least ten Dead individuals listed in a calm analytical Voice while showing as many Photographs of the Individuals as possible. The entire practice should be directed towards volume, with correct citing of the date of Death. The real value of such Marketing of Death is the absolute accuracy utilized in such broadcasting.

The fundamental principle behind all Propagandist activities lay in the awareness that People are not Fools, and any inaccuracy will immediately be pounced upon by Our enemies for counter-propaganda purposes. Volume is the key to such efforts, and at least 1000 deaths per year should be noted. The guiding message shown must be the Cost to Islamic societies of such Terrorist support, and should be run on all TV and Radio stations in Terrorist areas; Saturation is the desired Goal in Terrorist areas, with combination with Interviews with prominent Islamic leadership of their views on Terrorism. Their advancement of Terrorism will be seen as cruel and injurious to Islamic societies, while their criticism of Terrorism will disassociate Terrorist elements from their religious base. Americans will do best to put Terrorists and Terrorism on Record, which advocates would find difficult to deny. lgl

The New Deal-Makers

Does the Bear Stearns deal remind of black market deals done in the dark of the Night? The Louisiana Purchase by Thomas Jefferson came immediately to mind as I read this article this morning. The significance can be considered in the same light: secret negotiations in a closed service auction with no Public notification, restricted access to both Bidding and Commentary, Sale far below par without Investor input, with a final Sale price below acceptable Market valuation. This was an action designed to save Bear Stearns from bankruptcy, could it not be worse than the bankruptcy itself to the financial markets? The activity of the Fed in the Transaction remains partially unexposed, itself somewhat a Violation of the rules of the Road.

A Correspondent and old Antagonist of myself, Robert M. Liu, sent me this Public Letter over the Weekend:

Please join me in calling for the resignation of Fed chairman Bernanke before it's too late or before your hard-earned savings become worthless printed paper. The single most serious mistake with the most disastrous consequences made by the Bush Administration is not the Iraq War as the anti-war political left claims (which in my opinion is the Administration's greatest achievement with far-reaching historic significance that will be recognized by future generations), but the appointment of Bernanke -- an economic quack who pretends that a 4.8% unemployment rate is still above America's natural jobless rate.

There is clearly a wide inflationary gap in the U.S. economy because of an oversupply of printed paper currency. If the Fed refuses to stop its printing machines, the price of gold could zoom way beyond 1000 dollars per ounce. Who would trust the U.S. government when it comes to money matters? And if the U.S. government can't be trusted on money matters, why should anyone trust it on other global issues? If the U.S. government can't protect the reserve currency status of the U.S. dollar, why should we trust it on security issues when American citizens' financial security is under attack by none other than the Federal Reserve?

The Bush Administration came into office with the promise of lower taxes. But the kind of runaway inflation that is currently hitting American pocketbooks is equivalent to double-digit tax increases that exceed whatever the Democratic Congress would ever dare to propose. I look forward to a John McCain Administration coming to office to fix America's fiscal house and suicidal monetary madness! Ladies and Gentlemen, please join me in calling for Bernanke's resignation. Bernanke, resign! Bernanke, resign! Bernanke, resign!

I cannot agree with the vehemence of the Letter, but can understand the Sentiment behind the rhetoric. The trouble resides in the fact that the Chair of the Federal Reserve is not truly the Issue. Whoever sat in the Chairmanship would have been chosen by the Wall Street leadership who picked Bernanke, the result of the Bush surrender to the demands financial leadership of the Country to attain political support. This Process of allowing the Regulated to chose their own Regulators has brought the financial crisis, and a return to Recession. Beware of the Rich choosing their own path to greater Wealth, a sure guarantee of Monopoly, and loss to the Individuals excluded from the Process.

(I will now publicly apologize to Robert for publication of his Letter without his permission, and using my own Quotation marks in the doing of such; but it is not the greatest offense We have committed against each other) lgl

One Should Not Work on Sundays

Dean Baker gives Us this Gem (pdf) which should be on a required Reading List somewhere, even if I may disagree with some aspects of the Paper. I join with Dean, who insists that the Benefits of Trade are over-inflated, while the hazards of Trade are ignored. I believe that Trade does far more for the creation of Income Inequality, than it has ever achieved at Production Efficiency. Actual Full Employment could truly depend upon Trade restrictions and Tariffs, the fundamental position assumed by most Trade models. A lot of Trade Inequalities could be reduced by adequate Taxation, a position acceptable by and to almost no one. Trade Agreements deal with Taxation on only in-coming Products, and ignores the greatest Run of Products in every domestic economy; an idiotic Piecework which could only present Production distortions in the first place. Such a policy adoption will always present opportunity to Trade Products, and a spiral loss to domestic production from taxation for local unit provision of services; this alone would appear to give Import Products an average 8% advantage over domestic production. I think I might have talked myself into a Corner, with a need to explain ‘Spiral Theory’; and I was planning a easy Sunday morning.

The basic condition of Spiral theory states that there are certain economic conditions which create periodic benefits or disadvantage to the Production process. The imposition of local taxation on domestic production for Social Services, while leaving Import production free of this taxation, remains the dominant Concept in my defeated brain this morning (I ate too much at a St. Paddy’s Party last night); though I can assure there are numerous instances in the economic performance of the modern economy. Market competition finds defeat in Offerings of these competitive Products, because of an artificial Production Costs schedule imposed upon one set of Products. I have long known, and should have argued, that all Market and Trade Agreements include the innate Right to employ exterior taxation on advantaged Product, until such time as all competitive Products enjoy the same Tax disadvantage.

Would the above presented Advocation serve to eliminate Spiral production schedules? NO! It would bring on equalization of Tax Schedules throughout the World, as Trading partners recognized the lack of Production enhancement to be derived from artificially low taxation schedules. Business would cease their Production flight based upon easier tax rates in other Countries. The later would also witness the advantage of Wage increases to retain less-educated labor cadres, where their Skill levels combine with their low Replacement Cost as increase of Profits. The grind to the bottom for Labor would be halted, when active lower labor Costs would only be replaced with evaluative taxation at any rate. No Production advantage is excised, but no individual manipulation inside the Production process could be exercised for competitive advantage. lgl

American Failure

NATO is still with Us, and expresses all the incompetence of the League of Nations, which failed in the 1930s. It started out as a Defense Protocol, thought to metamorphose into a ideological platform to espouse an agenda of its own manufacture, and feels justified in attempts to reorder the internal structure of its members; contrary to traditional practice of the societies involved, and often at cross-purposes to the legal entities of responsibility in the area. NATO seems to ignore the EU and its edicts, and entices Entrants with Aid promises, basically to eliminate member countries’ needs for a military budget of their own; basically by the promise of American assistance, which the United States can no longer afford. The area of Operational Control has been shifting Eastward, every since Roosevelt and Churchill signed the Northern Atlantic Treaty Organization Accord in the northern Atlantic in WWII. No one explains why the United States should be in a regional alliance when it is not a geographical entity within the region, why the United States should supply a great Share of the Expense of the funding for the Organization, or why the EU is not the controlling force within NATO. I have espoused American withdrawal from NATO since the 1980s, and know that I could get a majority of Americans to support such a Withdrawal at a Savings of perhaps $80 billion per year; why do We allow American Military and Leadership cadres retain this membership, when it costs great amounts easily spent elsewhere, and has the effectiveness of the prior mentioned League of Nations.

A great part of the American modern tradition and Problem resides in the political refusal to rid itself of old ineptitude, before plunging into a matrix of new horrors. Floyd Norris spells out the new implications of the Bear Stearns Bailout. Commercial Banking divested itself of Deposit protection guarantees established by the Federal Government, in order to avoid the Regulations imposed to sustain the viability of those Deposits; doing this by venue of financial instruments which were unregulated and capable of raising Cash without restrictions. They pulled in the Cash, made the bad loans, and demand protection from the Government now that the entire structure is failing. The fact is Government will not enforce adequate Regulation, when it is imposed against the desires of Those regulated; yet, protection from failed performance is still demanded. The horror of all this destruction is that Federal Reserve Regulators placidly watched this debacle develop for thirty years without Comment or Reproof, knowing that sooner or later the other Shoe would drop!

A great part of the current American tragedy comes from the self-serving attitude portrayed rather effectively by this article. It basically complains of the lack of Corporate leadership talent, then proscribes exactly the wrong curatives for the ailment. A half-dozen Trainees can be supervised for about the same Cost as can One, and Trainees serve as excellent Staff for the busy Executive; the Trainees finding a great education on the needs of effective management by the hands-on experience. In-house promotion is much cheaper than Market-Search for effective talent, who has to be retrained in Corporate procedures anyway; remember, in-house promotion allows for prior-Wage connectivity. The value-concept of New Blood for innovation remains too expensive, especially as the New Blood does not understand the Contact procedures of the organization he is about to join; new ideas must attain a Consensus acceptance, and this requires knowledge of Who to reach and how to reach them. Americans have a tendency to excuse failure gently, when it should not be accepted at all. lgl

Future as Reflection of Past

Mish brings Us another excellent Post on the foolishness of Currency intervention. He doesn’t mention the base, underlying cause for Currency intervention, which is One or more nations have embarked on a policy which violates basic economic principles, and other nations are attempting to prevent the economic disunion by the nation responsible actually paying for its aberration. Almost all analysts would softly assert that the Bush administrations were such an economic disaster; the soft assertion because the People who pay their Salaries and Benefits have all derived serious Gains from the corrosive economic polices. The rapacious Wealth reaped incredible advantage, while the total Community has suffered from the Excesses. Analysts belong to the Ten-Percenters, and do not criticize the One-Percenters who pay their Salaries.

The Section of Mish’s Post which reflected true honesty I shall repeat:

As long as the US keeps spending money it does not have on things it does not need and cannot afford, the dollar is going to be weak. If Paulson does not know that he should be fired. If he does know that he should have the integrity to come out and say it.

If the US wants a stronger dollar all it has to do is eliminate the budget deficit. If it wants lower oil prices all it has to do is eliminate the deficit, get out of Iraq, and stop wasting oil on needless military missions.

It's that simple but sadly no one in either party other than Ron Paul is willing to make those kind of statements. Instead the silly talk goes on and on.

The Terrorist Attack on 9/11 was indeed a terrible thing, but was Iraq and Afghanistan anything more than a act of hubris? Bush insisted on showing he was an ‘Action’ President, but there was no place to attack which could be turned into a media Event. Saddam could kill Millions, but he was brought down because of the potential ‘Air-time’ available. The Bush Tax Cuts were enacted only after the American economy was in the process of recovery, and there exists unexplored evidence that the Tax Cuts actually delayed the reorganization of the economy through lessening the value of already invested Capital by immediate increase of Capital Equipment Costs. The Tax Cuts quickly reasserted the growth of Federal Debt, and forestalled every attempt to curtail that increase. Iraq and Afghanistan quickly turned into a financial Sink, where needed federal revenues flowed down to a non-productive sewer at ever-increasing rapid rates. One has to ask why We spend more on a Population equivalent to one of Our larger States which We have never spent on the States themselves, when that Population is bound to hate and be angered by Us, no matter what Gains might be accomplished by themselves in the long-run. Contemplate Our Sins as well as Our Virtues, and wonder why Our Virtues come to resemble Our Sins. lgl

Uncertainty and Sanity

What do Edmund Phelps, Milton Friedman, and William Buckley have in common? In my case, anytime I started to agree with them, I felt threatened by mysterious forces just beyond my Sight. Ed Phelps wrote this Commentary, and I started to nod my head; then shivered at the thought of the demons which would spring out at me. I decided I must come up with a Counter-Proposal as chant to ward off the evil Gods. Brad DeLong (check the first Link of the Thoma Post) is somewhat on the right Path, though I doubt he holds the silver bullet to defeat the mad beasts of Risk. I consider the Issue, and decide that Risk must reside in the contrary feminist (I await the Picket line outside my window for that comment) nature of Markets.

I will spell out my Contention: Can a Market exist without Uncertainty? The Market must possess some degree of misinformation in order for a competitive Price to appear. Will not adequate information eliminate the Risk? This decision would also dictate the elimination of the Market as well, would it not? Going further down the Road of Uncertainty, can any Risk exist without some level of Uncertainty? I probably have already proven that I know little of which I speak, even if the basic relationship between Uncertainty and Risk remains untouched. I still review my basic premises, and decide that it has basically escaped my poor intellect, but will forward some dross anyway.

Price cannot exist without Risk, which cannot exist without Uncertainty. Elimination of Uncertainty will eliminate the Market structure in entirety. This seems simple enough, but One could wonder why I would stipulate it. Here is where it gets a bit tricky! Markets show a strange power, basically because the human mind insists on an evaluative structure; in other words, humans demand a Price structure. Others will contend I have not proven that Uncertainty must exist for a Price to be established, though it is somewhat intuitive that some Risk must exist for a competitive Price to originate. Still, the Uncertainty of the final outcome must drive the competition necessary for a viable Price; without which there would be no Market. It is my basic Contention that pressure for a Market (to define a understandable Price) pressures for the establishment of Uncertainty, based upon the innovative process of finding new utilizations for Resource or Product to create the necessary Uncertainty. Too Complex? Bill Buckley always insinuated that I had a Mind like hopeless Bread dough, which wouldn’t rise to the occasion. lgl

Old-Fashioned?

The Federal Reserve will have to stabilize the Dollar, if it continues to plunge, and this Morning’s Consumer reports are bad. I still have ten minutes before I can access them (real truth, I will await Others' hard work of going through them; follow my Comment tomorrow if bad). Bernanke and Co. thought they could pull off an easy Credit flow to steady their friends in the banking sector, but Europe Central Bank did not yield; and the Dollar began to spiral down. The aid to the Markets was only temporary, except for the rush for high-priced Oil. It is my belief that the coming Consumer reports will indicate that all measures by Congress and the Fed failed to bolster Consumer Confidence and Sales; Numbers mean nothing if they came entirely from Food and Fuel sales. We have heard the drumbeat of liquidity ever since 2000, and We missed the real rattlesnake in the wood pile.

Congress could achieve more with fiscal policy today, than could the Fed with monetary policy. I would personally like to witness the Bush Tax Cuts cut short early, prior to their expiration date. This is about as likely of occurrence as Congress accepting Term Limits. It would firm the Dollar on international markets, where Oil price is being driven upward as lower American Consumption supplies less need for Capital investment; Everyone holding excess Dollars except for American Consumers. The Republican Move in Congress will probably hold force, even though All recognize that Social Program funding will never be cut, and the ridiculous nature of Federal budgeting will continue through this Congress. Reliance on economic measures which have no hope of passage is as effective as the Bush Budgets being estimated with the Bush Tax Cuts expiring; though they actively seek continuance of the Tax Cuts. The World is moving on, but Washington insist on concentration of Second Millennium initiatives which failed even before the Period was complete.

John Palmer espouses a Sentiment with which I concur, the trouble being that the rest of the World agrees with that view; with the exception of the Federal Reserve, who insists the total number of registered Dollars out there makes no difference. There is an old-fashioned formula that you make a ratio of actual Dollars/actual physical GDP for some past Period of time, and compare it to a current similar ratio. You could with effort construct an entire Series of these ratios, including the past year with effort, and it might tell Someone something about the Inflation rate. Some Number-Crunchers even say such material could help explain the Inflation rate. I often wondered why gifted Mathematicians and Economists did not utilize this practice. Could it be that transparency does contain liquidity as Tyler and Felix asserts? lgl

The New Government Model

I read this Post by Tyler Cowen, including following the links to Paul Krugman and Tyler within the Post. It brought me to contemplation of the old deadly Question of ‘What if.’ Their discussion of practices of arbitrage and Time stirred the fossils resident in my brain, and I considered the functional aspect of Time upon Our relative existence. I also conceded it might be more worthwhile to go out and have a Drink instead (I medically limited to some type of stimulant as Coffee or Iced Tea these days–another ridiculous Time element). Still, I convinced myself of the value of writing something on the relationship of arbitrage and Time. The folly and fallacy of Government intruded into my Thoughts at this Point, and has led me to an advocacy of Government revision.

I decided to follow sound principles of arbitrage, and propose a Constitutional amendment which would fundamentally alter the organization of Government. Representatives, Senators, and Presidents (which could be extended down to State levels and below) would not be elected for an arbitrary Period of Time, but for a specific expenditure of Government revenues. These levels of expenditure would have to be quite large, in order to avoid an outrageous increase in Campaign hipe. I would suggest $3 trillion per Representative, and $7 trillion for Senators; the Cost accounted by a total of Budgetary items approved for passage which were made by themselves in the performance of their office; their Salaries likewise would be set as a percentage of amounts spent, I would suggest about $150k per trillion dollars paid in segments of $100 billion of expenditure. The President should be given an Expenditure allowance of $10 trillion, and equally be paid $150k per trillion dollars spent. All Officers of Government appointed by the President, and/or approved by Congress, could likewise be appointed by a total Budget and remunerative Pay based upon segment completion.

Benefits and Advantages could occur from this Process. Legislators and Presidents, and appointed officials, would be able to extend their terms of Office by less expenditure, but only at some reduction of personal Pay. Voters could determine what their elected officials will cost to themselves, and whether they like the Individuals that much. All would likely concentrate to greater degree on budgetary performance, and less on campaign funding. We could eliminate Retirement and Pension funding for Our elected Officials with a stroke of the Constitutional pen, much as they have worked to eliminate Our own Retirement security with the years. All officialdom would be on set Fees which they could not extend, and therefore would express great concern on the Issue of Inflation. They would likewise desire to stabilize the Dollar, and desist of Government borrowing which undermines the foundation of the Dollar. Special Interests might even find themselves ignored, as Congress finds greater value in budgetary stability. lgl

The New Political Mechanics

How to turn a minor Recession into the Great Depression, no Batteries required, with only an erector set of absorbed bad paper. The Federal Reserve has decided to become the quintessential Rube coming to the big city, willing to buy any gold-plated brick that Anyone can paint. All Sales are guaranteed to be final, and not worth the Paper they are written on. No need to declare Bankruptcy, the Fed will buy the Contents of the garbage can. And People have been asking me how We are getting the high Inflation! The Fed has found a new way to print Money, by taking perfectly good Script, and trading it for down-the-road taxation on Americans to pay for the mess. Is it not wondrous how White turns into Black, and Policy becomes Kindergarten silly puddy?

I must say that I was surprised by the Fed action, and even more surprised by the Market reactions to the Fed decision, I ignoring the News yesterday while Everyone decided to jump back into the Markets. I ask myself what projected action the Fed could take next Week, once Stockholders realize that the Fed’s expensive Window-Dressing will do absolutely nothing to promote Corporate Profits. The context of the Message bothers me somewhat, as it is a Green Flag to continued writing of bad paper while Consumption Demand stays down, with tacit understanding remaining that there is no market for that Paper. It is probable that the only real result may be the opportunity to declare justifiable Losses for next year’s Tax Returns. No one but I may mention this, but We have already spent more on the Credit Crisis than We had on the Savings & Loan Crisis of the mid-1980s; it notable that both were created by the same segment of the economy, who in both instances created Lending practices deficient in Repayment potential, solely to generate extreme Profits for themselves.

This might be a prime example of the malfeasant behavior of the Money Lenders. The Money Lenders come, convince local Yokels to purchase what they do not understand, draft their huge personal Profits, then wait for the deals to unravel. They always do, as they are too complex and intricate for all qualifications to be met; the malfeasance on their part resident in the knowledge that the mechanisms must work perfectly without leeway, else they will inevitably led to crisis and default. The last leaving the Yokels, this time as usual Taxpayers, with a bill much larger than the original amount that they had hoped to avert. The Money Lenders make Millions from the deals, and Taxpayers wind up paying Billions for those deals. There was the old political joke that said Politicians were Criminals in $400 Suits ($4k today with Inflation); Bankers and financial analysts must be assumed to wear $150,000 Suits. lgl

Modern Banking

My main Sampler in Florida writes that I am missing the boat, as it is getting so bad that Mexicans are emigrating back to Mexico. I doubt that it is quite so bad, but think the Justice Dept. might consider prosecution of private equity moguls for the perpetuation of the newest and most expensive form of a Chain Letter. I must have been asleep when $2 billion deals became small potatoes; maybe the Bankers were equally slumbering. The major component of these deals has always seemed to borrow to buy these companies, then again remortgage to pay off the Purchase deal, borrowing excessively to gather Cash to negotiate the next deal. The only result seems to pack the purchased companies with debt, with the deal-makers getting their billionaire cut of the Profits. Would one trust and an Investment broker who engaged in such activity? Why is the leadership of our major banking systems in hock because of these activities, and why should Depositors be committed to covering this garbage?

The Fed attempts to keep our new banking format afloat through provision of liquidity will assuredly be directed to the fuel tanks of this nation. The liquidity does save Bankers for a while, but is it worth it; remember We have a slight glut in current Oil supplies. We even have a measurably smaller supply of Heating Oil, with less need of it than two months ago. Farmers are going to return to the fields shortly, and they must run, else Food Prices will only have begun to skyrocket. We have to hold a stable Dollar far more than We need enhanced economic performance, which will not come as long as Fuel and Food is consuming discretionary funds of the Consuming Public. I know that the Fed wants to save their fellow Bankers, but We need at least 100 Points added to the Fed rates.

The exact problem with the banking system can be found in this article. Citigroup is shoving good money after bad, trying to save wealthy investors who took Citigroup’s word that the new instrument investments were good. Citigroup’s previous fund acquisition practice may have been fraudulent, but it is an even greater fraud to endanger Depositor accounts in hopes of saving bad investments. The wealthy investors should be made to understand that the prior commitments were high risk investments, with a high level of potential loss. Their recourse may be Civil Suit, but it is not demanding ensured Deposits to cover their losses. The Fed and the FDIC should place a crimp upon such adverse money accounting. lgl

Real Evaluations

There is a debate (pdf) about whether Immigration has a linear effect upon Wages because of acceptable Substitute limits of labor, or imperfect Substitutability of immigrant labor with native labor actually enhances the position of native labor with higher Wage opportunity. Ottaviano and Peri contend natives can find higher Wage opportunity from the imperfect Labor substitution, while Borjas and Co. find any Gain to disappear under adequate Sampling. I would suggest that labor substitutability is an imperfect vehicle to promote Wages, when the only difference relies on transference of language skills and Skill levels are to be found and utilized in both native and immigrant origin economies. Immigrants will and do absorb native Wages as they usurp native Jobs, said expansion of labor elements innately suppressing natural Wage Gains. The discussion, though, may be of little long-term economic impact, as I believe that Immigration may be only a short-term Event series, with this Wave of immigration to recede within the next decade.

Paul Krugman puts forth a good expression of the financial crisis, but maybe he fails to advance the rationale behind the Crisis itself. I could turn biblical, and start mooing about the fat cows, followed by the lean cows, and still not give much understanding for my Readers. I will attempt a less metaphysical approach. We put in a half-dozen years where Tax policy, fiscal policy, and monetary policy were all directed to rapid growth expansion. Everyone responded as expected, and business spread. Widespread expansion was achieved, then Payday came. This caused a little consternation, as the Profits were not there to pay for that level of business expansion. Consumers were not spending sufficiently, because their own Income has not increased to the equivalent level necessary to pay for such consumption. Mortgage-holders were being told they would be paid, just as soon as Households make the requisite Income. The vast Profits from the growth boom had been invested, and suddenly the repayment structure was in doubt. The Profits which should never have been, were not going to be repaid by subsequent revenues which could not of been. The Runs on financial markets started, as what were Paper Profits began to disappear in mid-air. Now Everyone scrambles to repay what never truly existed, and never should have existed.

I find that Dean Baker basically agrees with myself over the financial crisis, though he might disagree with my assessment of the worthless nature of the Paper Profits engendered in the growth years of the Bush administration. One always has to wonder at an economy where the middleman fees are the fastest-growing segment of the economy. It is now the probable greatest impediment to economic growth in the economy through the attempted repayment of these fees, and policymakers need recognize that it is economically unsound to attempt protection of this Income, as well as being morally unsound, as Dean suggests. lgl

The New Markets

Here lies a Story which presents personal identification. I have a Brother-in-law who had a Son-in-law, who ordered a Computer equipped with Vista for his favorite Daddy-in-law. He had made a widespread search of the Internet, and settled on this Computer. Both Brother-in-law and Son-in-law had experience with Computers, a probable 30 years between them running Windows. I myself have 15 years with Windows, though I cannot be considered truly Windows-sharp. Brother-in-law tried to switch Applications between XP and Vista, and lost an entire series of Drivers. Brother-in-law, Son-in-law, and Computer illiterate self could not tell where or how the said Drivers disappeared into the ether. A Call--several Calls actually–were made to the manufacturer, before it was decided to send a Replacement for an obvious defective machine. Second machine arrived, and Brother-in-law attempted transference of Applications from XP to Vista. Drivers disappeared into the ether. Several more Calls to the Manufacturer, the result being refusal to send another machine which will not work, and a return of Payment. Son-in-law again searching the Internet for a satisfactory Computer, though the group Brothers-in-law are beginning to think it best to access a brick-store Vendor.

Standard Government interference can be witnessed here, a Process similar to the Vista experiment. Ethanol subsidies are no longer sufficient to make such Production competitive with alternate land uses. The switch of land production to Corn has brought real Price increases in alternative Food grains, and the American Consumer–joined with the rest of the World–suffers from a real 20% increase in Food Costs. The ethanol subsidies have not accomplished a great deal otherwise, perhaps propelling a potential 0.5% of all American vehicles for a month’s duration; the previous was a sincere Guess, but I do not imagine it could be that far off. I know the industry is building infrastructure, and has yet to take off, but where is the fuel source for the Take-off?

We now have Diary farmers screaming they need protection from those Milk Sellers who are so irreverent as to sell Milk labeled ‘Free of Artificial Growth Hormone’. The Farmers’ Association, Afact, feels victimized that Consumers are informed with potential loss of Sales for themselves; they committed to the real gain of an extra gallon of Milk per Cow per day. The Reader should feel sympathy for the poor farmers, though certain accessory elements should be assessed. The extra Nutrients must be added to the Cattle feed, if the quality of the Milk is to be maintained; reducing the value of the added Milk by approx. 60%. The Milk produced without Growth hormone actually cuts Milk Production by a Gallon of Milk per Cow per day; maybe cutting the supply of Milk to the Market by about 8% per Day, a situation which Consumers pay for every time they pick up a jug of Milk; something which might propel about 20% of the Retail price of Milk. I don’t look at Milk labels, only the Dates of Expiration, and now I am drinking Soy Milk anyway. It is obviously an area which must be Government-regulated. lgl

Traditional Values

It is all a question of where We are at, as this article tries to explain. I know that Our trouble started in July of 2007, though the traditional Numbers never appeared; hidden by increasing foreign sales of American product, and a higher Inflation rate. I also believe it ended in January, after American business had then to record their losses for 2007. It was a strange Recession all around, with Unemployment coming after the end of the Recession; this due to the recorded losses of 2007, and the stagflation effects of a Oil price which refuses to drop though the fundamentals for a high Oil price do not exist; Oil shortages are not there, and Speculation models continue to buy at high Prices. I find it hard to imagine that the Funds will be capable of turning a Profit in the Commodity markets anywhere in the first two Quarters of the new year, as there is nothing to basically push for increased Prices. I truly believe We have weathered the Storm, and now only must contain the Cost of the Clean-Up.

Here is a good explanation of the situation, and one which I do not believe that the Fed is helping in any manner. Wall Street and the Commodity markets were too expansive since 2005, due to their mechanical Buying pattern produced by automated Buy models. It caused a rise in the market approx. 20% more than was realistic, and the endured Recession has reset Market prices, though it has still to work itself through the Commodities. The Fed cannot help with a growth promotion of low Interest rates, which will erode the Dollar, and which will maintain the Commodity prices. Consumers will not extend their purchase patterns as their Household Income does not increase, and the Markets will not advance. I am not an Expert in the area, but cannot see the great loss of liquidity in the economy; only a loss of Profits coming from the financial markets, which because of the Fed’s close association with the financial community, becomes a Fed commitment to protect. There are times when I am extremely opposed to Fed policy, and this is one of them.

This article might miss the import of what is happening, though it is excellently written. The article assumes that niche Banking to serve specific Customers is the real Propellent towards the move to small Banking. I think the Movement is far more extensive than simple niche supply. The large Banking systems has become commercial investment organizations, and have abandoned the traditional aspects of Banking, though their traditional Customers are still consumed with the traditional needs supplied by Banks. I await the arrival of small Banks for mainstream America, as replacement for the lost traditional practices of Banking. lgl

The Concentration of a Friday Morning

This blog entry from the CBO Director presents a good challenge to define the advocacy of the article. The basic statement that flexibility in the Tax Cost of any carbon emissions limitation would be more valuable in terms of economic performance, than would be high emissions costs from either a Carbon Tax or Caps; I disagree with that position, by the way, thinking that flexibility would increase Abatement Costs, increase Carbon emissions through a distortion of Investment schedules, and subsidize the heaviest Polluters. The Reader should remember this assessment comes from myself, who has scant belief in Carbon emissions abatement in the first place. I enjoy the discussion far more because of the potential source of Tax revenues for a malfunctioning Governmental Cash flow, than I do for poor science success in environmental protection.

Serious Readers may be interested in this trash talk, which is a basic discussion of the responsibility expressed by institutional mismanagement in the late, great financial crisis. All can agree that some banking systems were diligent in their efforts to protect Investor assets, and some were not. All agreed that All should have expressed due diligence, and that the failures should be held to account. The problem comes in the fact that the Offenders were of such magnitude as to drag down the success of the Virtuous. I love the general trend of the Report, which is a finessed repetition of the old ‘He did it!’ I, on the other hand, would define it differently; something on the order that there was too much Cash out there coming from untaxed Business Profits, and financial instruments had to take a bath, simply to restore relative value to a bloated system. People do not like restored value, of course, because they cannot play at being high-Rollers any more.

I have great faith in Paul Krugman as an Economist, but less trust in his political commentary. Hillary’s greatest Selling Point is that Bill will be back in the White House, if she doesn’t divorce him prior to Inauguration, and most People trust Bill to provide a successful administration–even Republicans–through the operative function of Consegulaire. Let’s face it, they have worked well together ever since Arkansas, and it will wind up a good team. Obama has too many unknowns, and McCain would carry the mantra of the Bush years. This is definitely not my support of any Candidate, simply a Statement that in the absence of Anyone electing me President, you get what you get. We may get the great flowering of American Civilization, or a descent into the new Dark Ages; of course, it is much more likely to define the political flair of an Eisenhower or Coolidge. lgl

Wrong Being Right?

Cactus gives Us a Post which should be read twice by Anyone interested in the impact of taxes upon economic growth. He wanted to make the point that the total percentage of Income paid as taxes went up every year of Democratic administration, and declined in every year of Republican administration. He did not point to the effect of increasing and decreasing Tax percentages as a factor of economic stimulus. The Outline of that Effect may best be seen in the Third Tax Year after the alteration of the Tax percentage. Tax percentage increases seem almost universally to stimulate business activity, Tax percentage decreases appear to present no stimulus of business activity. Is this only an unmoderated casual effect, or does the harsher impact of Taxes incite the business community to greater efforts to raise revenue; maintaining their after-tax Income levels?

Here is another Gem from Cactus; I am picking on him today, but it is simply forwarding of the comments of others. My first Statement on the commentary is it is unfair to suggest the Airbus 330 Tanker is for either mid-air refueling, or for Troop transport. It is most definitely not to bankrupt CRAF; the Air Force would feel slighted, if detailed to transport Troops. The real reason for the Airbus 330s is Air Force fear; doubt that the Navy can protect Sea routes for ocean-going tanker fleets. The Air Force does not want to be caught on the ground because of lack of fuel; the real reason for 197 of the beasts. The real Question becomes ‘Can these things safely land with 210,000 lb. of fuel aboard?’ I would suggest that a fleet of 1000 planes capable of carrying 40,000 lb. of fuel aboard would be much safer, and actually more Cost-effective.

Calculated Risk tells Us that the Fed Beige Book is downbeat, and provides comparison with the December 1990 Beige Book as criteria for a recessionary outlook. My commentary to it all states that it is not as bad as it looks, but Everyone seems to insist that We make this a recessionary Election year. My own personal Thought is that We already had Our recession, starting in July of last year, and ending last January. New Orders in manufacturing do not seem to be so much down, as level with the first of last year. Housing is tanking, but wait until Home prices equal 2005 prices; then I will start to get scared. We know that Corporations have more Cash on hand than ever before; it seems that it is only those deadbeat Mortgage-holders who are filing for bankruptcy. It seems that even the Construction industry is holding to some degree of full employment. Now I know that things look bad, and Retail Sales are down, but Time can only be eating up Credit Card debt. We already have the Stimulus Package, and Everyone will get their bac’kish for Voting, so can We cut down on the morbidity? lgl

Real World Application of Ethics

Where does it come from? Over 350 Hedge Funds have over a billion dollars apiece, and there are some 15,250 Hedge Funds in total. This is pure guesswork on my part, but it would seem that a Hedge Fund would require at least a half-million dollars to even involve oneself in the Trade, and at least $3 million to be a stand-alone business entity. It sounds like a tremendous amount of money, and it is; but the most important aspect of Hedge Funds may be their position as Price-setters, due to their automated Buy-orders. The mechanisms allow Stock prices to go up, but provide restrictions in allowing Stocks to drop; adverse Stock information must push through the morass of automatic Buy limits, before it can establish a new floor price for the Stock. One can say that the Buy limits employed by Hedge Funds for any one Stock is so low, that there is little impact on Stock price. The reality states that 15,000 Funds operating in conjunction establishes a basement price for a Stock, especially as Sell orders most often lack magnitude themselves. Artificial shelving prices are created for Stocks, based on very little volume, while Stock and Commodity price increases are quickly integrated into the mechanism, and not easily discarded.

Europe has a long history of dealing with financial disturbance and artificial booms, extending back prior to the French Revolution. They realize that most economic balloons are generated by financial manipulations of unscrupulous Traders, who promise quick Profits from new ventures. These new deals, or planned investment concepts, rarely involve an actual deep entanglement of the economy, mainly involving resident investment funds during the periods in question. The basic structure of the economy, which churn up the investment capital, finds little alteration. Inflation has little tie with economic growth, and suppression of Prices hardly ever provides challenge to long-term economic growth. I agree with the European philosophy, and do not witness any measurable increase in economic growth through adoption of a Plunger mentality; i.e., any plan to promote rapid growth rates.

Boeing is utilizing it paid-for legislators to scuttle the Tanker deal between Northrop Grumman and the Military. Boeing’s basic fault lay in failure to provision the Air Force Decision-Makers with the Perks which cashiered the previous Boeing deal for the Tankers, and this group rejected the Boeing deal because of losses to their planned Retirement portfolios; a process that the Airbus parent company could run an End-around by promise of European employment to decision-makers after their military retirement. Does the previous Statement sound cynical? Perhaps the cynicism resides in the reality of it, bureaucrats resistant to surrender a high-value escape after completion of public service–one of the real employment incentives of such Service. The threat of a little Prison time, or the occasional Suicide, does not dismay Those trapped in a Pentagon office; a position already somewhat similar to a prison term. lgl