Cutting the Deficit

Does this seem realistic to Anyone? We have a Stimulus Package which is unlikely to stimulate, a desire to tap Retirement accounts with taxation, the intent to militarily Downsize, and reinstate Taxes which were always too high. Everyone has lost Sight of the one thing which could bring down the federal deficit: stop Government Spending. There are sure-fire methods to accomplish this alternate Plan, but no one will adopt it. The reason is that Politicians make political capital with Spending, and make nothing by cutting Spending. I will explain How to cut Spending before I will explain the potential methodology of getting Politicians to stop Spending.

The How is simple: Government passes legislation which forbids the payment of any individual personal bills. All individuals again become responsible for their own Accounts. The Government is entailed solely to pay off any debts incurred by Citizens by the previous process, if their Income is less than a detailed magnitude; a factor which is to be changed yearly, based entirely upon a basic Needs formula. The individual will have to obtain their own finance, find Bankers willing to underwrite the Risk, and convince these Bankers they are a viable Debtor who can repay the Banks if the Government denies their claim. Government takes a draconian stance in paying for anything–whether it is Social Security, Medicare, Medicaid, or any other form of Welfare; the Government refusing Payment if alternate funds are there.

The truly Poor will be protected by the provision of Emergency Services staffed solely by permanent Staff on Salary. There will be long Waits, filled reception rooms, and medical staff providing least-Cost medical care. No one will go there unless they have to go there, but they will at least be fully-Staffed; the Government will itself provide ombudsmen services to aid in Firing unqualified or negligent care. Applicants for Government Spending otherwise must submit their own Proposals in detail, in which they themselves have paid the Developments Costs for such initial Planning (guaranteed to eliminate over half of the Spending Proposals from the Get-Go). Congressional and legislative staffs will only get expert Opinion as to whether the Projects are viable. Allocations will only be made upon Applicants’ projected Budgets, and application for future refunding cannot be made for 3 fiscal years. The Costs can come down, and come down drastically, but it takes a hard-line approach. lgl

Descriptions of Selectivity

Tim Harford can give One a prospective of the current Downtime. Everyone knows of the occurrence of a Recession, though Most only get prepared to endure hardship in paying their mostly unchanged Monthly bills. I was once asked what a Recession consisted of: I thought for a moment, then said it was a nebulous economic circumstance where Communication companies freeze their billing Prices for a year or more. I have since been forced to alter my definition since, as the Communication industry has found Price reductions or suppressions does little to halt Cancellations. I now tentatively suggest Recessions are a Condition where Routing schedules can be delayed 96 hours without fear, due to the lack of compression at the delivery site. This highlights the fact that Recessions are in the eye of the Enduring. It is surprising how many successful businesses have started in the tail of a Recession; Success seemingly generated by the revised business format.

Calculated Risk itself attempts to quantify a Recession, based upon empty Office space. The trouble with the Graph lies in its inability of its forecast to predict the modular temporary increase under Crisis conditions, where Conditions seem to get better for a short Period before a continued descent. This consists of the Period of continued business reorganizations in which the lost Clientele is expected to be recaptured; the businesses not recognizing that this Clientele has altered in nature: currently lacking in size, magnitude, or market share. The recognition of development of a brand new Clientele will again incite a Downsize effort with reduced Headquarters. The depth of this second dip is the real indication of the severity of the Recession.

A lot of People attempt to explain when it is the best time to buy Stocks. I hear that a lot! What amuses me is the fact that I get asked for my formula often, and then by Those who occupy Positions which are supposed to express expertise in Investments. After all of this discussion and commentary, no one can give definitive expectation of how the markets will open on Monday. I once mentioned after Madoff that a Ponzi scheme was solely in the eye of the law enforcement officers; Everyone else had to wait to see if the business format made Money, or not. I had a Mother, plus additional Aunts and Grandmothers, who claimed my Morals were too loose; of course, I have never seen some Bill Gates or Warren Buffet charged with truly scandalous financial scheming. It seems that Profitability has something to do with the equation. lgl

The Badge of Dishonor

I wish to state for the Record that, for once, I agree with Robert Barro, who thinks the multiplier will be close to zero. Gary Becker and Kevin Murphy can give the Reader some sense of why the multiplier will be low, though they are more optimistic than Barro. My personal vendetta with the Plan (Everyone else can call it a Package, but it is not tied up in a pretty box) devolves upon its few elements of Production expansion, its spread across the landscape to give Everyone a piece of the Pie, and its real potential to balloon Resource Costs. I would change the name of the thing to: How to ignore Consumer Demand Decline by letting the Government Spend It.

I just listened to a Radio Advertising Spot which mentioned Elvis, Spaceships, Big Foot, and a State lottery inside 30 Seconds; why does this remind me of the Stimulus. Maybe this Commentary may enlighten about the overall effect. It talks about Government taking Risks. Who is taking the Risks? All the Policy-makers will be out of Government by the time any of the Loans come due. Who is spending the Money? I can assure Everyone it is not the Households struggling to pay their bills; though I guess they also struggle to pay their Taxes. If Luck holds, the Money will all be spent and Government policy-makers will have found alternate employment before the real Crisis of repaying the debt occurs. Risk to Reputations? Get real! They had no reputation to preserve after announcement of this Plan.

Here are the real Nuts and Bolts of the Economy (Are they talking about the Crazies and Terror-stricken in the Market?). They are trying in the article to convince that Inflation is not actually here, but they only mention no Price change when Consumer Demand is way down. What happens when the later returns to normal, and there is competition for the Goods and Services? The Readers should understand that economic models tell you whatever you may want to find, when Production is below par; a full employment economy never present, but necessary for economic accuracy in models. Don’t blame me–I don’t design these things! lgl

Tyler Cowen has to be read to understand the ramifications of the Mortgage Deal, as I call it. Mortgage-holders may be helped by the package, but I have to wonder. Does it actuate if the 43-38-31 percentages concern One or more of the 2-Income Households losing their Jobs–an increasingly likely Event? Again they are having the Government pay Mortgage banks, but insist that debtors maintain the Mortgages, rather than get ability to renegotiate Contracts originally designed to gouge Money from debtors; who were told that any mortgage gained equity for the household. It only goes to show the traditional methods of foreclosure remain the simplest and most effective Means to cancel such debt. What it needs is only a Government-backed Realtor at the auction Sale of foreclosed property buying a current Market value, and reselling to previous mortgage-holders at that Price; if the individual households can prove viability. Read Mark Thoma if you want the views of all Those who have already paid their mortgages; I especially like the commentary of Robert Reich.

There is a good Post by Calculated Risk on the problem of over-production. There are too many Housing units, cars, trucks, and flat screen TVs. No one doubts that! That is only the grounds for the real Problem: these Markets will not clear until such time as the Price of these Products reflect the over-supply. Everyone, inside and outside of the business clime, insist that this descent be fought ‘Tooth and Nail’. The necessary condition for moving beyond the Crisis is for the markets to clear, but Everyone fights this because of the Write-downs which would have to be taken. How stupid is it to claim that everything is alright, when you are sinking in quicksand? I wrote almost two years ago that the Situation could be saved only if Banks and Businesses wrote down their losses rapidly; We are now far into this Downturn, and most are not admitting their deep losses.

Why do illegal scams seem to multiply during bad economic times? Is it, as I believe, honest businessmen decide to adopt illegal practice, simply to avoid bankruptcy? Soon the Government will not be able to communicate with Taxpayers, except through formal Court process; as One can no longer trust Form letters. I await the first Taxpayer who insists that the IRS verify its rectitude, before filing their Tax Return. There is something corrupt at the heart of the American psyche, and it starts in the format of the original American business style. I think it started with Government abandonment of the hinterland, continually moving Government Services to conglomerate massive offices in major Cities. Out of Sight means unknown, and the later means disrespect. Even military bureaucracy knows One has to have Sentries standing on Street corners to ensure military occupancy, even when greater Costs are entailed. lgl

My own Position on the Stimulus Package

The Student should recognize the Points where aggregate models get into trouble. Read this Post, and figure where it fails; one should remember that it was written by a very good Economist with an excellent Track record. Hint: Mine Cleanup is a highly specialized Occupation, shrouded in major Safety and Environmental regulations. There are few Companies which devote themselves to Mine Cleanup (employing about 16,000 Employees who utilize highly expensive equipment), who treat specific Location cleanups in serial form; maximizing the utilization of the Equipment and steady employment for their Employees. The rest of the analysis is quite correct, there only being discrepancy in the Time Component; one can estimate the Time required will be about 15 years of duration. Readers should understand many Work Schedules cannot be hurried!

Casey Mulligan places this Recession among the three previous Recessions, and explains that the economic times are not so unusual. We are on par with two mild Recessions, but below the Recession of the 1980s which proved to be the worst of any of the Three. The trouble for me is the Question of whether the Stimulus Package passed will be a Plus or a Minus to economic performance. We have a relative stability based upon a steady Product Profit ratio, and the Stimulus will throw a huge amount of Cash into the Economy; which will have a huge impact upon the Product Profit ratios. The Stimulus will work as expected, if the actual change in the Product Profit ratio is mild; the Stimulus will actually be counterproductive, if that change is relatively severe. Unaffected businesses who are not impacted by the Stimulus (some 70% of the total businesses) will be adversely curtailed if their Product Profit ratios have to rise over 4% above the expected Inflation rate of 7%, simply to meet rising Resource Costs. Here is the core of the Problem, and where I believe the Stimulus Package was wrong!

I have been asked what Stimulus I would advocate at the current time. I replied that economies operate differently based upon their total and relative size. Stimulus packages acting upon the total economy did well when Employment was around or less than 100 million Employed; economies affected by capitalization per Worker, and total number of Employed. We are simply too large with massive Labor force to simply throw Cash around, and expect Things to get better by the spread of Cash. We need to create new Sectors of Employment, with an eventual Sector enrollment of 6 million highly-paid Jobs apiece; likely to require a minimum of three such sectors where the Work is of at least 15 years duration, and costing a minimal 30 billion dollars every year of that time interval. Understand that with the Stimulus Package which has been passed and will be spent, it will cost a likely $40-50 billion per year per Sector. This is the basic reason why I did not like the passage of the Congressional Stimulus Package. lgl

Where Wea are At today

Paul Krugman has a nice Post on the Business cycle, with admission that advocates of Keynesian theory took it far beyond Keynes’ desires and comments. He is kind enough to place the focus on the Wear-Out theory of Capital Construction; a basic Statement that there is a Point simple Mechanics cannot preserve continued Production operations (check Cuba under the American embargo, or the Philippines’ final loss of the Jeep Taxis of WWII). Paul does not mention the altered loci inherent in every Recovery, where the economy reorients to a new system of Goals. I mention this factor because it most adequately reflects the stall in the Economy, and the Means by which Recovery is attained.

The Economy runs along in a Boom generating all those great effects that Everyone loves about Booms. Everything is going fine until there is a Point where most Business managers realize that their facilities have the capacity to produce what Consumer Demand wants, and they need to find Investment opportunity outside their own area of expertise. They quickly perceive that real Productive capacity needs little funding beyond what it already does possess. Business talent lack real capacity to switch from Investment to Consumption; they possessing neither Time or Inclination (personal embellishments being quickly funded and realized–I knew one Corporate leader with 7 Homes in all the Vacation Hotspots in the World, while he spent 95% of his time at his New York home). Business leadership invariably adopts the proposition to extend Credit to Consumers, so they will buy more Product and make the Business leadership more Money. Trouble appears in this program, because Consumers have a limited capacity to borrow, based upon their capacity to pay off the loans. Business again finds itself with a build-up of Cash drawing a limited capacity of Profit; the limitation of the Profit ordered by the build-up of Cash.

It is obvious that economies stall because of the failure of technological evolution. Busts occur when previous Production practice has been fully-funded, and new technological opportunities for Investment fail to appear is sufficient quantity to provide the actual Stimulus for Production. Government can attempt infrastructure construction, but there is a primary limitation here; infrastructure sufficient to present Travel opportunity and Business Product movement has no Time-component Restraint, and will not attain the Speed necessary to accomplish the Stimulus required. Welfare Transfers only maintain previous Production schedules; they do not expand them. Business expansion depends on factors hard to duplicate by Government, and attempts to do so can make Business conditions more difficult for both Consumer and Business. It is where We are today! lgl

Banking as We know it

The sheep are all bleating, and the herd runs in a common direction, what could go wrong? The Corporations are braying, "No Profits’, while the old ewe banks blare, "Liquidity, Liquidity," while their udders bulge with Cash. Everyone has their Hand out, and the Herd blats, "Stimulus, Stimulus,’ in a sonorous roll of Sound through the entire trotting mass. Problem: Investment Bank after Investment Bank, Car company after Car company, Business after Business all roar, "Taxpayers must give Us Cash, or We will have to start massive Layoffs," but the herd is already ‘Skin and Bones’ when it comes to Employment; where they would functionally have to shut off Production under more Job Cuts. What is wrong with this Picture? Businesses want a replacement for the Consumer, Congresses and Parliaments satisfy every slush-fund lobbyist’s dream, and central banks ensure that all Taxpayers and Consumers face sufficient Currency devaluation to wipe out their efforts to Save for the future. Is it that Business leadership insists that Consumers cannot do anything except Consume, without the permission of themselves?

Here is a summation of Consumer Debt in the UK (note that it is a dated Post); a pattern description of the American Consumer would say the identical same! What is the exact result of Everyone borrowing at the same moment? It becomes a Currency issue, does it not? It is a functional replacement for actually printing Currency, especially easy when the majority of Cash is held as a series of ‘Opened or Closed’ on a machine. Suddenly, no one has to listen to the clatter of the Printing Presses, and billions and trillions can be created simply by hitting a Computer ‘Enter’ key. I may have missed something here, but aren’t markets supposed to determine the value of Products? Are markets and central bank in a War with each other? Someone is trying to deny Reality here, and I would rely on the stability of markets rather than the political whim of central bankers.

I have defied John Hampton’s desires by only scanning his entire Post, but what can Anyone do else under a Time constraint? I recommend the Post to the Reader because of its grasp of the essence of Banking. Solvency is in the Eye of the Beholder, and Bankers work hard to ensure only they see. The Reader should understand that what is discussed all falls between the amounts actually extended by Banks, and the expectation of total value under prompt and total repayment with the Interest generated. The Reader should know that Banks expect a large Return for any extension of Cash, and utilize market-to-market transactions to gain additional Cash to loan, at Profit to themselves. Legislators tend to become incensed about Bankers paying themselves huge bonuses for selling this debt, acting like the return of such bonuses would increase the solvency of the loan structure. It is not true, and legislators are simply mad that Bankers make more money than themselves; on the other hand, the presence of the bonus system increases the pressures to get value from market-to-market transactions. I can’t wait until Someone decides to invent a residual liability for the Debt used in market-to-market transactions. lgl

The failures of Trade

Here is a Post which extends some reality. Some people imagine that the globalization of Old can continue, but Mish provides a lot of viewpoints which carry adverse Signs. Production Costs have increased, Transportation Costs have increased, Everyone owes money to People and Organizations they have functionally never heard of, and Consumer Demand is in decline in almost all of the developed world. Ports are clogged, infrastructures are suffering constant wear, Replacement Costs for that infrastructure is rising out of the Cost realm of most focal points of Trade, and human populations simply inhibiting the flow of Goods. The good old days of borrowing billions to spend billions with high Profits at each end may be coming to an End, what with the major Banks unable even to clearly estimate their Risk. The most frightening aspect the insensitivity of both Consumer and specialized Labor to respond to the old Incentives to maintain the system.

Everyone should read this Post from Greg Mankiw. I must admit that I have some minor, or more serious, reservations about 2,3,4,6,8,9, and 12. The practice of Tariffs and Quotas have not been shown to actually constrict economic performance; location advantage of Production has basically never been proven outside base materials and metallurgy. There is more discontinuity in flexible and floating exchange rates–especially in recessionary periods. American farm subsidies forestall the complete conquest of Agriculture by the Corporate world, and their elimination would not actively alter the Exports or Import fractions currently endured; such elimination, though, would raise Food Costs by an estimated 25%. Social Security will become unsustainable only if a lengthy deflationary period persists over years, otherwise; actual payment for the system remains relatively unchanged–if no further services are granted. The Minimum Wage debate is where Greg might be completely wrong, as the data expresses a contrary condition. So much for the absolute Consensus between economic factions.

Even the old Revolutionaries were confused–Past and Present. The search for causation is always self-oriented, and researched only for personal defense, as this Post will outline. The Taiping Rebellion was driven by a religious fanaticism, tactically commandeered by Western soldiers of fortune utilizing modern weaponry for the Times, and directed against the propertied classes which were the Target of Mao’s Revolution much later. The Western military leadership was responsible for the success of the Taiping Rebellion, which later failed under native leadership. Western intervention was the factor for Taiping success, and so must be accounted for the huge human death toll; they supplying the means of destruction and the success for the Movement to spread. The later success of Mao came from the inability of their opposition to effectively fight, rather than the religious or political superiority of Mao’s message. The causation of both Rebellions rested on the level of Corruption expressed by Chinese leadership, and little else. lgl

Old Man River--Just keeps rolling along

I have long tried to put a Pricetag on St. Valentine’s Day, though the women get somewhat dangerous when you mention the Expense. You cannot put a price on Love, not if you want to continue. Here has got to be the most expensive Valentine Present ever conceived; I think it was fob for the men, so they would think they could afford a special Christmas for women alone. Anyway, if they maintain the rate of expenditure capsuled within 18 months; it will be the greatest Inflationary pressure ever designed–like they could not limit themselves to spending say $10 billion/month to replace a financially dry financial sector. A lot of Economists–even some very good ones–approve of this splash award, though I wonder at the efficacy of bidding up a limited supply of Product in a rapid market move; remember, I listened yesterday to one Cable News outlet discussing $300/barrel Oil again, though they discussed this in a far off Period–like the proposed completion of the Stimulus.

Consumer confidence seems to have hit a new low, as indicated by the University of Michigan index. The Federal Reserve came out with a forecast survey expecting a 5.2% decline in the first Quarter. I, on the other hand, do not feel threatened by anything but the Stimulus bill. Consumers are paying off a major portion of their Consumer Credit while Most continue to retain their Employment. The Housing sector has tanked, and will get worse; it, though, is predictable with Contractors already adjusted for the expected decline. Retailers can expect a flat year even with the Stimulus, but nothing seems to indicate that anything will get much worse. I might be the Pied Piper, but maybe the economy will blow up a nice melody if the Stimulus does not balloon Wholesale prices.

I would advise my Readers to glance at this article, though I do not want to present much insight as to my Thoughts. I did enjoy the commentary that individual choices are often imperfect; a reflection that individual choices brought Us the Stock and Real Estate investment witnessed in the last few years. Some 70% of individuals adopt an optimistic attitude based upon the fact that the alternatives are unpalatable. The rest are ‘Gloom and Doom’ creatures such as myself, who are surprised that only about 40% of their dire predictions prove true! In no case does Anyone scope their Retirement funding around the concept of making a 4% annual Return on their Retirement Accounts. Maybe We do need a professional Keeper. lgl

Where's the Beef (Stimulus?)

I suffered some degree of entrapment by this Paper(pdf) by Irving Fisher, brought to Us by a Tim Schilling’ Post. Fisher wrote during the aftermath of the Great Depression, being a contemporary of Keynes. There is relatively greater clarity in Fisher’s writings than ever was found in Keynes, and Fisher may be as correct today as he was then, though the terms may confuse. I have always personally felt that lengthening periods of expansion, in themselves, led to economic decisions which were over-optimistic; Participants becoming entrapped in their own Expectations, without recognition that the Profit ratios in such magnification would reduce, because of higher Resource pricing, higher Transit Costs, and a higher degree of Competition. Factors take hold which were previously inexperienced and unexpected, all of which generated higher Costs combined with higher-priced Sales Costs. Ordinary Debt service becomes harder and harder, until a position of internal insolvency evolves. Interest payments become impossible thereafter.

This article is relatively consistent with the above commentary, and mentions the truth that Stimulus will not work as long as Banks are deleveraging. They are in this process because of the added Costs of Debt service outlined above. Banks are unwilling to adopt debt extension which has already proven a failure, and all circumstances indicate the Production matrix will not alter for the applicant loans. Attempts to provision Stimulus will be almost entirely inflationary; a simple addition to the increased Production Costs of the competing businesses. The Inflation will add a greater difficulty to the problem, where Government aggregation Costs will increase as the assumed Debt grows.

Arnold Kling suffers greatly from being taken out of Context and misquoted. I possess some Salvation from being less-Read, thereby relatively immune from online slander. I join with him, though, in greatly doubting the efficacy of any Stimulus plan. We are rapidly increasing the Costs of Stimulus (as it is all debt generated), without any effective measure of its value. No one has forwarded any analysis of the Price pressures applied to Resources by this Expenditure, when this Spending must be in direct competition with already struggling business formats. How many additional Businesses will be forced into bankruptcy with Employment lost, solely because the Stimulus package has made their Operating Costs too expensive under the limited number of their Sales? lgl

What are We doing here?

William J. Polley sometimes makes me think I have written his stuff, though I definitely have not, especially this comment. I really worry that the Stimulus Package will actually crush the Recovery, by distorting basic Materials pricing. One must remember that Retail prices and the Retail Demand Curve have already stabilized under Recession conditions, and the Stimulus will raise those Retail prices; they could not do otherwise. Consumers, though, have stable Incomes which will not increase drastically until Businesses start to show good Profits. I do not see anything which would create the necessary Consumer Demand for the Stimulus to succeed.

The second element I find disturbing is centering the Stimulus around Banking, most importantly, the major conglomerate Banking corporations. You can give all the Money you want to Banks, and get Businesses to even draft large amounts of Cash from those Banks which they will spend. The trouble lays in the fact that the last thing any will spend it on is Wages, the immediate source of loss of control of the Cash. Business wants retention of that control to derive Profits from it; they will never get Profits from that Cash until it gets into the hands of the Consumer. Business management cannot seem to understand this; maybe I should make the Declaration that all funds in the Stimulus should be paid to Bank and Business only if they have given all Employees a 4% increase in Pay.

I have probably lost even Paul Krugman and Brad DeLong with that Call for a Worker Pay Raise. It does not matter, but it is intrinsic fact there will be a retreat down the Demand Curve in response to any Retail Price hikes; that retreat will equal about 4% by my estimate, with Household expenditures already absorbing over 90% of Income in Maintenance Costs. One does not feed a horse, by forcing the grain up the wrong end. I don’t know how this will turn out, but I am pulling on my nose already. lgl

Exile these People from New York and D.C.

There is a term I wanted to use for Mr. Geithner’s Plan, though I know I cannot use the one which keeps coming to mind; Cursing foresworn on the basis of Good Conduct. The quoted $2.5 trillion potential Cost is not Stimulus, but a ‘Buy-out’ Bid. The Recipients are offering to sell a used Ford, while Geithner wants to offer the Price of a new Ferrari. Geithner may not know this, but the toxic assets were not worth that amount when they were first issued in a wildcat Boom. Banks are not lending because they are waiting for the federal Government’s free Cash; some 77% of their total assets would have to a total loss, a sum which must put the Banks leadership in the docket with Bernie Madoff for a traceable Ponzie scheme. Does no one understand such a level of asset disappearance is an indictable offense?

I didn’t even mention the ‘Crowding-Out’ effect of trying to attempt to draw that much Cash from an over-stressed economy in the previous paragraph. The amounts discussed are equal to more than a Year’s tax revenues for the federal government, and never could be repaid at all, even if We did not have another Recession over the next twenty years. Understand this is a huge amount for a very temporary Fix; and is effectively equivalent to tripling the total federal payroll for a series of years; with no one showing up for Work. There is no way such funds could possibly be withdrawn from the economy to pay a very specialized financial sector; it will cripple the overall economy just in the funding aspect. It also does not look forward, simply consisting of promising Banks that the federal government will repay them for losses already incurred.

My eyes begin to glaze, and my Mind delves into pathological Thoughts, as I listen to members of Congress complain only of a lack of detail. I truly would enjoy ramming that detail up their rears with a Jackhammer. The Geithner Plan makes as much sense as my own fairy tale Stimulus plan: give Everyone a Tax Holiday for two years, then impose a tax rate of 70% without any deductions at all. Both Plans give much, promise nothing, and will mean nothing at the end of two years. My worst fear is that when firewood becomes scare, and people will start debasing Currency in their attempts to keep warm. lgl

The Line Wolf Speaks

Recessions would be a Great Depression, except for down-to-earth economists like Jeff Cornwall. He again brings the evidence that Recessions basically mean that the Economy is looking for a different Business format and direction. Notice that none of the listed Start-Ups received any Stimulus aid from the Government, and managed to acquire the Capital anyway. The real point here states that Private Sector Capital had lost faith in the currently traditional businesses of the Time, and went looking for a viable alternative. Government propping up Business enterprise has historically worked very poorly, and that support tended to become permanent until the business was basically abandoned. The shortage is not in funds, but in business talent; I would be ashamed to admit that I had a billion dollars of assets, and couldn’t make a Profit.

I have known of Senator Ben Nelson since I was Ezra Klein’s age, and know some individuals who have served with him on Corporate boards or State Democratic committees. He tries to talk to me once in a great while, and I protest I never heard of him and am extremely busy. He actually does not totally represent Our fair State; most notably, having difficulty in paying Property taxes (what does that remind of?). Ben and Warren Buffet may be brilliant in their own way, but I feel gratitude that Our paths so rarely cross. I obviously malign Ben as badly as does the Eastern liberal establishment, but at least it is not as bad as some pithy commentary heard right here in the State of Nebraska.

Now a rapid turn to the current theory of the moment–the need for Stimulus. Economists studied the Great Depression, and decided that the mechanization of the FDR administrations were utterly necessary for the Recovery following it. Still, there is little actual evidence that the measures actually helped all that much; though one must remembers that many measures actually established a stable business format, from which a viable economy could be built upon. I won’t go into that aspect much, except to say the Robber Baron Period at least came to an end, and Americans had safe avenues of investment and Saving. The trouble came in the trade of Economics, which developed a huge compulsion to be Activist; i.e., stating that Government policy and Stimulus could be a help, when it could quite easily be a retardant to economic recovery–especially in intensive obstructionist regulation. I am in favor of no Stimulus at the present time, but it does not even sell in Nebraska–let alone D.C. lgl

Walk like an Egyptian

One of the great elements of Economics which few of Us discuss consists of the Concept that Economists want the Reader to think as the Author thinks. Economists, probably more greatly than any other Authors, want allegiance to their own Thought patterns. Economists are forever defining themselves to themselves and Readers as Keynesian, Ricardian, Hayekian, or devotee of von Mises. I could name a dozen other Authors and methods of Thought, but probably gave the major Thought pools. It is this sectarian segmentation, and the battle deriving from it, which provides any color to the Dismal Science. It is why I find this Post by Tyler Cowen so entertaining. Keynes really based most of his theses on assumptions rigorously discussed, but somewhat unproven. He never precisely defined why consumption fell off with a rise in Income, never explaining that the consumption fall-off was a necessary condition for the rise in Income in the first place; and that Expenditure pattern reduction was and is solely a continuation of individual policy of asset aggregation, and no break with previous pattern. It is a simple Statement that reorientation away from Consumption precedes the rise of Income.

It surprises me that Tyler’s blog partner, Alex Tabarrok, immediately precedes Tyler’s Post with an excellent example of Thought-Speak from Jim Hamilton; it not being important in this instance that he is quite correct in his assumptions. Hamilton could not agree that ‘ wage or price rigidities’ were responsible for the current Crisis; it instead had to be ‘technological frictions’. I must repeat that I wholeheartedly agree with Hamilton’s assessment, but it is even more an expression of the Economic ideation I am discussing. The Reader is well warned that deviation from the exact terminology will get One outlawed from the herd in Economics, no matter how minute the herd.

I immediately drop down the list of Posts which I read, and find this. Failure always brings the fragmentation of Thought, the raucous bleat of new proposed dogma, and innocence truly lost in the swell of personal self-interest. Readers should understand that the true Faith will be reinstated, with only minor change in the verbal bible, and all it will take is a functioning economy once more. Economic belief only takes a marginal increase in economic success, whether the rationales have relationship to the success, or not. Such is the state of the Economic profession. lgl

Understanding the Crisis

Gavin Kennedy is an excellent author , and I would have my Readers contemplate this article. He discusses the ‘Risk-aversion’ of Banks for lending, especially to other banks. I am going to let the Reader study him, and go into a discussion of economic development. Original economic speculation through the Great Depression of the 1930s had determined an ‘Either-Or’ economy where Capital and Materials had either to be spent on Consumption, or on Investment; due to the limitation of Resources and the limited degree of Profitability of previous economic expansion. Economic Thought alters under the impact of Keynes and Keynesians to a position where Consumption should be maximized, and Investment should be accomplished by debt assumption; never stated, the Resources are considered inexhaustible (what discussion is made, talks of magnitudes where Resources are far in excess of limited amount of usage). Economic expansion, under this set of Expectations, seems unlimited and self-sustaining, as long as there is a flow of Cash to make repayments of the debts assumed. The trouble comes when Reality reasserts that there is indeed a shortage of Resources, the prices of those Resources rise in response, and the Profitability of previous successful enterprise is lost; the Profits necessary to repay the assumed debt gone into the expenditure Land, Labor, and Maintenance. Here, the House of Cards made of whatever is the Currency of the Moment collapses.

The sense of the above Argument answers the Question of Why, under Boom conditions, there is such pressure to expand to new Markets; reducing the repayment Costs in real terms by more Product sold in fresh Consumption areas. The Problem starts when the Debt is also spread to new markets to establish Distribution markets and obtain Resources; check of Product sales leads immediately to great fear of further debt aggregation, when no new markets can be explored and with heavy debt in all markets. Banks, the repositories of debt obligations, are the first to be shaken; realizing the huge draft of Profits which had to drawn to pay for the huge debt, when Product sales was indeed highly limited per market sector. Here is the real source of the Risk-aversion.

There is no sense in provision of more Cash to Banks, without actually buying the toxic debt. Banks realize that Business will never repay that toxic structure, based upon the limited Product marketing capability. Banks are even more averse to extending like debt instruments to Businesses which they know market structure will never support on current debt obligations, let alone drafting higher repayment Costs. Bankers are the first to recognize a economic Downturn, as they witness balance sheets unable to balance. lgl

The Masses

Where are you on the ‘Doom and Gloom’ scale? Slate magazine has this article citing the decline of economic defeatism. I am not worried about the robust strength of the American economy, but knowledge of the history of the Roman Republic restrains my enthusiasm. The similarity of the ‘Bread and Circuses’ amazes me, while the Wars at the boundaries of civilization absorb the attention of responsible leadership. The Masses become acclimated to a ‘Tempests in a Teapot’, wishing the roar of words, rather than the labor of decent policy. We may have become ruined by mass interest in the functioning of our Government and foreign policy; the masses always clamoring for the current craze. Economists would claim that the economy is little affected by the roar of the crowds, yet a good 60% of our Government expenditure annually should not have been spent. We search for a balance, but one cannot be found where everything is based upon Goals, rather than Needs.

One can find an excellent examples of dedication to Goals rather than Needs. I break down the elements of this article to explain my reasoning:
1) Corporations are the most able to afford taxation, as taxation affects only their expansion and not their maintenance;
2) Sin taxes with tax-revenue neutrality ignorant of essential need;
3) Reduce Entitlements, but raise the age of eligibility rather than a more sensible Means testing;
4) Cut inefficient Spending–allow higher Food prices and traffic congestion, forbid recovery of valuable Real Estate, cease subsidization of effective mass systems to throw the high Costs back onto the Private sector–increasing Private Sector price increases and Business loss, and stop development of areas which cannot afford the initial Cost of development.
5) Abandon areas of the World which organize to destroy Us, and break the power of Organized Labor so Subsistence wages can be re-introduced;
6) make the total commitment to Free Trade, though other nations discriminate against Us–notice the lack of commitment to restricting this discrimination against Us;
7) stop bailing out Businesses, but blame prior Government action for the cause of the losses–never mentioning the deliberate violation of acceptable Business operation which was the real cause of the losses.

I would rather a program of Needs be adopted. Congress would pass an acceptable minima and maxima of Taxation. I would suggest a half-trillion of taxes from the Corporate World, a quarter-trillion of taxes from the small Businesses, and three-quarters of a trillion from Personal Income. I would favor a Constitutional amendment stating that Congressional Spending could not exceed Tax revenues without the active support (Vote) of 30% of American Taxpayers (who have paid Taxes 3 out of the last 5 years); the Vote taken by registered Social Security numbers, and the Expenditure directed towards approved purpose. Let more knowledgeable actually set the tax rates, while Congressional Committee of Three (Two Representatives and a Senator who are precluded from ruling on Tax rates within their own districts) are directed to hold constant Hearings to respond to claims of discrimination of Tax assignment by Tax Assessors. The End-Result may be more mass confusion, but I tried! lgl

Options going forward

I applaud Greg Mankiw for giving a clear statement of his preference for his type of stimulus package. My trouble with it comes in his dedication to tax revenue-neutrality. I see no real grounds for a reduction in payroll taxes, but I personally wish a Gasoline tax substitute for a Consumption-Demand Price increase. Any matriculated diversion of Taxes to the States based upon methodology will never be rescinded, and States will never cure their own fiscal woes by proper Tax allocation. My position holds that Taxes are not onerous, Government spending is excessive, and Taxpayers need no higher revenues simply to feed Business desires for higher Pricing. I am definitely in the minority when I advocate no Stimulus package, believing that Congress and President should work on containing the ballooning Deficit.

One has to ask what is the current Crisis? Unemployment stands only marginally higher than what is traditional in most Capitalist economies dependent on Private sector creation of Jobs. Some claim that Unemployment continues to accelerate, and Retail Sales suffer because of it. One would find it hard to find Job eliminations rising faster than the Glory Days of the two recent Booms; the real loss coming in the slowing of re-Hires for new projects. Nothing that the Government can do will multiply the numbers of these project Orders; Government Spending only affecting limited sectors of the economy at too great an Expense, while project Orders are dependent upon the expenditure patterns of Consumers; who are little altered by the greater Demand of a marginally-raised Government employment. Consumer Demand stimulus will not occur by Government infrastructure programs at the rate necessary to replace the lost project Orders.

The real support for the Stimulus comes from business leadership, whose sole goal consists of the replacement of losses stemming from their poor management in the previous Boom. Most Sectors have steady and consistent Orders for approximately 80% of their Production. They really want the American Taxpayers to fund the repayment of their overcapitalization during the Boom period; said overcapitalization caused by justifying Tax deductions, neither the capitalization or the Tax Cut formulation valid under the Boom conditions. The real need is for business to write down their losses, and go on. It is a simple case of over-extension by a business leadership whose management should have been replaced far earlier. What I have written is not popular, but regrettably too true! lgl

The New Mix

I have always adored Menzie Chinn’s authorship because it invariably drifts into the unintelligible for all but the Specialist. It is always a beautiful example of macroeconomic modeling, where the Dots connect only with a few hours of study. Mark Thoma
tries to translate Menzie Chinn’s estimates, and explain them. The Result is very good, though it made him suffer from Communication problems as well. Mark failed to clarify that the older models to which Menzie Chinn refers, are based on an undersized economy in comparison to the current economy, requiring a new system of weights due to the alterations in Production practice, and does not reflect that actual utilization of fiscal policy has shown a failure to attain the expressed goals while generating Side-Effects which tend to warp the Production structure. By the time that the new models are adjusted, the Recession will hopefully be over! Robert at Angry Bear thinks to outline where Menzie Chinn’s modelism is wrong, but loops back into the confusion.

I will try to translate my own version, and undoubtedly begin to sound a little weird. The old economic models never worked, at least not until they were severely tweaked by historical review of the facts; these are the famously designed ‘filters’ mentioned occasionally among economic peers of the realm. The economy has since grown, expanded in new directions, and the modus of operation has altered; all insisting as Mark points out, that new models need to be constructed, though new ‘filters’ can be designed for the Short-Run. There is the additional problem that monetary policy has fallen far short of expectations, generating a multiplex of outcomes depending on circumstances. I am not saying that Economists are as confused as the Federal Reserve was in the 1930s, but it may appear close.

The Period of Time since 1996 until the Present could itself be considered the anomaly, where artificial inputs of technology and funding produced an Employment and Production level not before seen, basically through the expansion of Risk -spread and utilizing uneven economic development to reorder Production methods. The final result has been the education of undeveloped labor forces in production technologies unsuitable for their domestic environment, and educating developed labor elements in coordination of diverse production dispersion; labor which will disappear with the development of economic development suited for domestic consumption. We are currently entering a Period of great Creative Destruction, as economies realize they don’t have to spend such vast Labor Costs on the jobs which were the highlighted Golden Child of the previous Period. Wall Street and financial sectors are simply finding no one wants to support them in the style to which they have become accustomed; the Rest of the economy and labor force uncomfortable but not suffering. lgl

Reality as Some See it

Arnold Kling has his own reasons for opposition to the Stimulus package. I am against it for the sincere belief that has as a goal the repayment of middle and upper management for the losses taken in the financial crisis. The socialism existent in the bill is present in the desired repayment of Risk-taker losses. This abandonment of Labor to endure the full blast of losses from Risk-taking remains exactly what will defeat any stimulus in the bill. Business opportunities are graded not on market performance, but a Concept of being too big to fail. Management can adopt any practice or policy based upon the fact that Government will cover if things go wrong; if you don’t believe what I say, I will sell you some of the Credit Swaps which the Fed is trying to get rid.

Sammy at Angry Bear has a cognizant account of why such Stimulus will not actually be stimulating. Right now, a great group of investors Worldwide find a lack of investment potential, and continue to subscribe US Treasuries. This condition will not sustain itself, if the stimulus actually works. No Study I have yet found has considered the operational loss of Profits from a realistic GDP outcome, for every One Percent increase in Interest cost for Treasuries. I will not even describe the pathetic model I constructed, but a 3% gain in Treasuries’ annual cost will easily defeat any Stimulus expectations. We may selling Ourselves to the Devil for iron pyrite.
(I will also explain my resistence to provision of any model because of a real doubt that any viable construct can be made).

Tariffs were not the cause of the Great Depression, so says Stephanie Flanders. I agree, as do an amazing lot of other economists. This is not my argument, though, and I take the converse in the current situation: that the fear of Protectionism may destroy the ability to stimulate in any meaningful method. We are captured by a vast intermix of economic treaty agreements which tie the hands of all policymakers. We need to expand domestic production, but cannot set limits or taxes upon foreign Goods. There is already great argument stating that stimulus funds should flow to the cheapest Competitor, who is universally the lowest-Wage Competitor; the Stimulus flows quickly overseas without amplitude controls. Economists must concentrate solely on domestic missions in stimulus planning, and hope most of the funds do not flow to foreign suppliers. Abrogation of current economic treaties and associations would generate probably be three times the stimulus as any package Congress could devise, and raise American living Costs less that the current assumption of vast debt. We may be looking at this Problem in the wrong way. lgl

Clarification on Stimulus

An Individual who is fairly equal to the task of defining good copy told me that yesterday’s Post on Stimulus was credible effort even for a Politician, and I could attempt to clarify myself. I found this statement to be rather embarrassing, so I will provide further information.

The theory to a Stimulus package is to provide a ‘Kick-start’ to the economy in a sense, where the funds spent would serve to generate further Private Sector Spending. Most evidence on Stimulus suggests that Stimulus must be granted successively to be effective in doing this, otherwise; the Private Sector will treat the Stimulus as a rapid Order, leave their staff and allocations unaltered, and simply process the Order as quickly as possible. Delays are accepted by management as normal production working order. Successive Stimulus will generate the impulse to gear up production, though the size of the Stimulus must be reduced in unit size; here presenting much less of a ‘Kick-start’ effect. In either case, the impact of the Stimulus on the economy reduces from the desired Target.

It does not help that the amount of Government Spending alters the impact of any Stimulus package. Government absorption of total GDP lessens the impact of Stimulus, because Government assumes the mantle of Consumer, rather than a strictly Opportunity Buyer who will insist on immediate satisfaction. The Concept which is lost by the Government is the potential to withdraw funding when faced with delays of provision. There is also the serial effect losing special status in the Order rank, where Private Sector management decides to meet all Orders as they come in, without special effort to increase production. It means that the ‘Kick-start’ effects of Stimulus is lost as Government becomes a more dependent Customer for the Private Sector, needing fulfillment of established Orders as well as new overlarge Orders.

My advice is to ignore a Stimulus package entirely. It will seem hard to Americans, but the Private Sector should be left to itself to reorder their management style. The last decade has promoted a management policy which distorted the segmentation of Production Costs, bringing far too much Profit to Management and Stockholders, while starving the normal Production Costs through low Pay or transference of production Overseas. It disrupted the funds distribution schedule of the American economy, which must be straightened; something Government can only interfere with in Protectionist manner for Management and Stockholder. lgl

Economics of Government Spending

Hard Times in the United States can be terrible, Everyone having seen the restored film libraries of the 1930s (go to the History Channel and await if not). China is a far different matter. I believe 1952 was the last year in which over a million Chinese starved to death. Hard Times, though, is still a organically different structure in China. China does not possess the resources to provide the Social Welfare of the West, though they have finally forced reallocation to eliminate most actual Starvation (here again a misnomer: all except for the military, police, and leadership suffer from dietary deficiency). Social unrest is common even in the best of times, and China often has to fill its detention camps in Hard Times simply to squash active rebellion. I would like some knowledge of the populations of these Camps, as this can be an economic bellwether of the economic clime of China.

Here is a normal reaction of a Free Trader, but the genus is a little dubious. Restriction of federal stimulus spending to American Products is a minute element of the current context of the stimulus packaging. The Products matrix will probably be only about 17% of the Stimulus bill, though it will generate a probable 28% of the Business Products. Restriction of purchase to American producers may increase the Cost of the Products to maybe 3-6%, but could increase Investment capitalization to the industries involved by as much as 70%. It seems I would rather have that growth generated in American plant, which it might increase American competitiveness by 30%.

Tyler Cowen brings a good discussion of Keynesian effect to the discussion. I know only that long-run economic performance determines the capital investment made into the sectors, and that investment schedules are particularly immune to Keynesian spending past the immediate period of that expenditure. The market corrects for impression mistakes in rapid order, and it is likely that Keynesian spending should be compressed to have any effect. I believe the problem with Keynesian spending is that it insists on continuous provision of funds to maintain a constant performance; this means the Government must keep spending at the same levels to hold the same degree of increase which was derived. It is acceptable if resultant recovery replaces the stimulus provision, but do not expect an overall increase in production without a constant flow of cash. lgl

What to do next if failure looms?

I have been chewing on these Thoughts for some time, and came to the belief that I should discuss it with my fellow man. Stimulus is not likely to work with the American economy, there having been too great a use of the pump handle in the Past. An overwhelming element of the Recession states that Labor Costs were too high, as were Business Profits which used those expenditures to set their incredibly high Profit ratios. I can realistically assume that about 8% of Labor through the later Three years of the last Boom served no relevant production role, while some 11% of the advanced Labor units were overpriced. Now, one of the goals to a surviving Administration must be full employment, there cannot be any doubt about this Statement. The Question becomes how to accomplish full employment, and the Stimulus package stinks; too much money paid to the losers who cost Us the last Boom. An alternate Option should be advanced, just in case the Stimulus package fails of desired performance.

My alternative stands as a simple one: make Labor Costs a paying proposition for Business, but One where precision Business operation must be utilized to implement the profitability. I suggest a Tax deduction of 110% for all Labor Costs incurred on American soil for that Labor drawing less than $125,000 per year. Business operations must be efficiently run, and Profits would have to be generated to take advantage of the Tax deduction. A constraint upon usurious Labor charges is implicit, Lay-offs and Downsizing becomes expensive to management, and an additional Profit sector injected into the matrix. Business has a more developed range of viability, if actual Profits can be realized.

The first Question for debate asks if the additional 10% reservoir of potential Profits to alter the business format viability. It should be thought of as a high-paying Certificate of Deposit from a financial institution; if the amount of funds are attained, it has a rewarding rate of Return. A higher deduction level would make malfeasance sustainable with little added incentive. The law is simple in construct, even simpler in operation with only basic Accounting procedures required for either Business or Tax Agent–materials already in-place. Now comes the idea of effect: simple models scratched out by myself say an estimated 1.3 million additional Jobs within 18 months, with a potential 5 million Jobs within 5 years. An estimated 300,000 less Businesses are likely to fail with the added source of revenue. It sustains Employment under decreasing Sales for an additional 11 Weeks. (Realize that these are my Estimates, and quite capable of major error!) It is worth a Try, especially if the Stimulus fails of performance. lgl

Don't ask Me what I am saying!

Greg Mankiw stands Conservative, but rarely delves into reactionary; his equating the Pelosi measures with the Smoot-Hawley Tariff must be considered one of the reaction elements. Pelosi and Supporters wants American money to go to American labor. Greg and his Conservative friends want the cheapest materials, and the stimulus spread wherever it is most advantageous though this means underwriting foreign production. All of it remains a tornado in a Whirlpool, as the Production in Question could never equal even one percent of either GDP or Gross Government Expenditures. It is simply a Question of where formative Capital investment will be made: in an expensive, pollutant-conscious American industrial Park; or in a foul clime which sends its pollutants to the Himalayas where they can alter the Wind Currents of the entire World.

Paul Krugman expresses another Point upon the economic spectrum, one only having to downsize some of his language; I would certainly like to know what is a deflationary trap, when he has ever been in such a thing, and why it so difficult to escape one. I do know such things never occur much, and they seem to burst like Quail from a Covey, scattering in all directions. No one seems to advocate my desired option for monetary policy; namely, a "Pox on all their Houses!" Those who say I should calm down, I reply: There Once was a Time, in the heralded hedge of History, where and wence Government did not interfere in Business except to collect Taxes, and the Business did survive upon their own small pittance. Now, Governments seek to grant more in Aid than the Populace can grant as Tax, with the Government always acquiring Debt. Taxpayers cannot support their own Expenditure pattern now under current Tax, yet complete Fools feel that future Taxes can pay for their own Expenditures and Ours.

Read this Post from Mark Thoma to acquire a taste of Trade balances. Economists far too often assert an ‘All or Nothing’ element to financial discussions. How do you explain to Students the simple, yet complex, Trade notions. It must be reduced to magnitudes, I guess, and it will still seems woefully incomplete. Trade Factors: About 41% of American Trade cannot be altered–simply because We cannot produce those Materials and Goods here–about 80% of those Materials and Goods are mandatory–the American economy will start to crumple through their lack. This Trade would be maintained, even if We passed Smoot-Hawley verbatim once more. Another 30% of American Trade is annotable–which means it can be plotted on a standard economic model curve–with axis of Quantity and Tax amounts; the element here is that only extreme Tariff costs will noticeably constrict Trade quantities. The remaining Trade levels, about 30% of total Trade, should never have been produced in the first place, and production should be transferred to domestic products of greater benefit to All-foreign and domestic. Let not the Gods of War distract you, especially over a nonentity like Trade–which will never Start or Stop any economy. lgl

Placebos--the value of Bullsh**

All Americans, especially Politicians, should be forced to read and reread this article. The ‘Crowding Out’ Effect of overlarge borrowing is a basic fallacy, if the funds are deposited in the banking system in the interim; the borrowing simply creating new artificial Reserves. Don’t believe me, but it is true! There is a Problem with the artificiality of the Reserves, though, when they are based upon assumed debt; think of using Stock as collateral to purchase more Stock. Actual Growth based upon Debt is actually very reduced when there is a Second Mortgage. It reminds of Credit Swaps, the dangers of repayment loss multiplies drastically as the repayment is closer to the original debt. Steps 2-6 are intrinsically destroyed if Step 1 has proven a failure. The trouble with Debt is that it is equally unsecured in all its parts.

Understanding of the current economic difficulties can be seen in this article, which is a basic discussion of the Step 1 arena of Debt repayment. Every Economist will protest that Statement, but later Debt repayments are keyed to fulfillment of the original Debt obligations in these sectors. Orders for Durable Goods have been falling for 5 months, a 5.7% decrease in the year’s progression. The loss of business resilience because of lost Profitability impacts Debt repayments–where there are delays, or the accumulation of greater Debt levels. The Unemployment rate reaching 7.2% is also great hazard, in that manageable debt becomes a functional drain of Consumer Demand under the condition of Job loss.

One can find fault with Monetary policy under almost every condition, and this article helps to explain Why this is the case. Placebo options only generates long-term doubt in the efficacy of official policies. The sham of placebo politics can always be critiqued, and knowledge of the placebo placement will always become universally known; the reaction will be to limit and contain any reaction to the placebo. I like Tyler Cowen’s comment that there has been real economic shocks, and such activity will not be contained by imagery. Consumer Spending need to reduce, but also switch to Quality of Product–i.e., longevity of Product. lgl

A lot of Junk

For want of a Nail, the Battle was lost! Are We in a like Scenario? Blackwater gets the Contracts solely because they do what it takes to protect the Package, even if it means spreading Blood over civilian streets. No one wants to work in Iraq if Terrorists are allowed to get close to themselves as they operate. Blackwater has even been known to threaten Iraqi soldiers if they bring weaponry in range; of course, Iraqi soldiers have also been known to be Terrorists who desire to kill Westerners. Now, a lack of Security precautions can only mean an increase of Terrorist incidents, and a reciprocal refusal of Westerners to place themselves at risk. Gone is Westerner aid to Iraq.

Wall Street wants to save the Bonuses, though the Profits upon which those Bonuses are supposed to be based are not there. There is great emphasis on retaining Employees, and how their Salaries are actually low. First, One has to ask the majority of American Labor if financial employees have low Salaries. Second, after the Mess which they created, One has to ask if the retention of these financial employees is so beneficial. As a Boss type, I would believe that it is time to cut Labor Costs overall under the current pattern of Losses, and that Dismissals should be based on the lack of performance among the Employees themselves. Why do Wall Street Bosses get to ignore the Downsize formula they so traditionally insist that other Businessmen adopt?

How does One establish a Corner on a monopoly? I would start a Courier Jet service if the Corporate Jets are really being sold. One could charge about $2300 per air hour ferrying Corporate executives around, with a probable air time Cost of around $1300 per hour. The trouble resides in the fact that Corporations are not really changing practice, and will not until Executives are thrown from office. Their replacement, though, would not likely alter current Corporate practice. Corporate position stands as the Product of Politics rather than Performance, and the perks of the Top include luxury Travel, expensive Tickets to popular events, and Meals which rival White House cuisine; no one concerned with performance–Losses only entailing the loss of lower class Employees. There will not be change in Corporate structure until Corporations are legally entailed by law to maintain competitive slates of Corporate Board members; none designated to hold any position within the Company after Victory–said decisions to be make by the Board itself by Secret Ballot during each monthly Board meeting–Performance must be achieved or there is an immediate loss of superior position. lgl

Here is where We are at.

Should WE prepare for Inflation or Deflation. This article basically suggests that Inflationary factors are relatively constant within the financial crisis, while Deflationary threat reflects only modeling chaos rather than a shortage of funds. It is a sentiment with which I agree. Almost all economic models are devoted to the detail of performance, in order to attain accuracy. Skewed patterns of illiquidity will always present extreme results; it is a question of containing magnitudes in proper forum. Inflationary factors are always based upon maintaining Profitability within Business enterprise, and quick to rise under threat (businessman and employee like to maintain consistency of Dietary programs). Flushing the system with Cash will have predicable economic consequences down the Road, though Short-term values of extra Cash does little to stimulate in the absence of Consumer Demand.

William Shughart explains the Situation rather effectively. Nothing substitutes equitably for Consumer Demand, and Public expenditures does not generate sizable Consumer Demand (I estimate only about 7 Cents for every Public dollar spent on infrastructure, and I will be slaughtered for that assessment). The only effective Consumer Demand stimulus remains outright Welfare payments, and this program holds great danger for proper economic signaling within the economy. Any Economist has to remember that the Public Sector is a lousy Purchase Consumer in comparison to almost any element of the Private Sector; this due to the lack of sustained Sales, and thereby the established economic system Profits distribution system (the Public Sector always assuming the ability to organize such a distribution system effectively).

D.W. MacKenzie takes the traditional Conservative route of promoting Tax Cuts in a very effective Read. I do not agree with this Consensus, though, for a number of reasons. The last Boom was based upon extreme Profit ratios for Business, with an oversupply of low-Cost Labor to generate Consumer Demand. The Business structure failed in that there was an oversupply of Labor, inducing an excess Labor Cost throughout the Private Sector; the whole inflating Resource Costs without proper Product Price reduction. The truism exists that Business Profits should have been halved, while Labor Costs had been reduced by around my estimate of 13%. The Labor Costs actually absorbed the natural Business Profits, while the Product consumption generating the Business economic Profits was actually unfunded; consider the rapid increase in Consumer Debt. Normal economic constraints will have to be reestablished for the Decline to reverse. lgl

I'm Back

The World is not ready for digital. Analog signals will be sent for a while rather than face the wrath of Households, what with the federal program being short of the Cash necessary to subsidize the Changeover. The issue has been long in development–and will be longer. I still wonder at the quality of TV service, as my own personal format seems overly defective under severe Weather conditions. Millions of Households will likely have to listen to the sirens again for serious Weather dangers, in that digital will be off the Air under the impact of Storms. This may be another Great Leap Backwards for Mankind.

I also find this Story a little hard to swallow. I was in Mesa as the Cardinals secured their position for the Super Bowl, and watched a TV station show multiple Jets setting on an airfield within a mile of the Stadium–with onboard systems running without Police supervision. The TV station wanted to criticize the lack of Security. I, on the other hand, thought of the hundreds of gallons of Avigas being burned, simply to grant the High Rollers a quick exit from Town. That situation leads Me to believe that the great loss of Revenue is overrated, especially as all the $3 million TV Time-spots have been sold. The Pro teams will probably be the next industry asking for Bailouts from the federal government.

I did enjoy my Vacation, and stayed away from the Papers and News channels. It is likely that I will have to play Catch-Up to hear what great disasters have befallen the Country; it singularly gratifying that no one can make it much worse than it already is of the economic front. Obama and Congress seem set to double the current year Spending of the federal government, simply to repay the Plungers who lost their shirts; a marked difference from true Capitalism where losers are left to live like Everyone else. lgl

Vacation

I will be leaving my domicile on Sunday--Dec. 21--for a long-awaited, if not deserved, Vacation. It will be a long one, and Conditions are fluid; but I may not be back online until after January 25, 2009. It is a Run for the Sun, and I am searching only for Heat. lgl

Bureaucratic Reality

Can a Tax drive an Economy? That remains the essential Question, and the Answer must be Yes. Taxes, unlike almost all other economic stimuli, affect the economic participation of the entirety of the Population; simply due to the operational effect upon the manner of doing business. There remains a definite flow to Investment development, and Tax policy changes the direction of that Investment flow; ofttimes in an undesirable manner. This article helps indicate that alteration which was caused to the Housing sector since 1997.

China acts as a prime example of the above criteria, where Tax policy after 1978 was specifically directed to the development of Export trade. Huge Investment, domestic and foreign, was focused on Export manufacture due to Tax breaks and other political measures. Vast Wealth poured into the Country, but domestic markets were ignored. The Chinese Consumer developed a dependence on foreign Goods, the Chinese manufacturer became slave to Export sales. Foreign Investment became addicted to the Tax advantages, and started to flee even at suggestion of their elimination for other underdeveloped nations promising Tax and Political advantages. China now still lacks development of domestic markets, especially the distribution networks already developed by foreign Products; who are about to abandon China because of retreating Sales as China Workers face unemployment due to the retardation of purchase of Chinese Goods in the World Market. China must evolve, but economic circumstances retard that movement even worse than their initial position in the late 1970s, as they now possess a trained labor force which lacks Work.

I will let Dean Baker explain the entire argument better than I can without a whole lot of effort, though his concentration was on asset bubbles. What Dean does not do is enter the Suggestion that the basic rationale for the asset bubbles was that Taxes were too low. Business and Politician insisted that Government Spending must not decrease, but that Tax revenues had to drop. Business insisted that the Tax revenues canceled must favor Investment, so People could not get the Tax advantages without Investment; creating the necessary environment for asset bubbles. It was great for Business, until Everyone realized that Returns could never match the inflated level of Capitalization (inflated due to the massive resource demand). Could the Economists have forestalled this Condition by Warnings, some did but were completely ignored. Spokesmen for any economic policy last only if those policies are Popular; Treasury and Fed officials obtain their positions through providing no disturbance to the popular Status Quo, Whistle-Blowers never survive though they are typically Right. lgl

Microfinance for Americans

Tim Harford gives Us a good article on Microfinance, but leads me to assorted questions. The paramount question asks Why microfinance does not reach into American society. It would be equally relevant, with only a change in the Numbers. I study the Issue, wondering how the basic matrix of microfinance accounting could be brought to American society. This brings on the idea of a altered format of microfinance, a relative new revision of the Credit Union format. The basic rationale would be that Subscribers would contribute Weekly or bi-Weekly with possible initial lump-sum Payment (the largesse of the lump-sum could be $300-$1000, with other payments to be $10-$50 apiece). The basic format would be that the initial lump-sum must be reached, thereafter loans up to the lump-sum limit could be taken out at anytime. The Interest on the Loan would be around 50% per year compounded bi-Weekly, but half of the Interest would be shared with the Subscriber/Depositor upon complete payment of the loan. It would likely become a valuable tool for Americans to Save, while initial Deposits would be helped by the federal and State Tax Rebate systems.

The genus behind the system consists of the ease by which the Deposits can initially be made, the normalcy of Payment size in comparison with Credit Cards, the alternative to Splurge spending upon receipt of lump-sum payments, the high Interest rate inveighing for quick payment of the loan, and a method of Saving in sharing half the Interest on the loan upon payment. The size of the Account, under proper handling from the loan institution, would practically increase automatically (aided by a base 4% Interest rate on unloaned amounts), while providing a rewarding rate of Saving through the simple repayment of all loans. The loan institution would have to be a Dept. of a larger Bank to be initially viable, but the Accounting methodology would be simple and straightforward, with attendant benefits for both bank and Depositor.

A major bank will have to be found to fund and establish the necessary networking, but compliance with the terms of the loan payments would be both lucrative and simple of construction. The bank would find itself absorbing Tax Rebates from many levels of Income, utilizing simple Math to determine monthly payments on loans for relatively rapid repayment of all loans, the ability to show Depositors definite Gains through normal loan reduction, and make a good Profit from the exchange. Bankers will claim there is not sufficient demand for such small loans, though I imagine that the investing Bank will find Depositors from all Income levels up to $150k, simply to have a small loan avenue without hassle which pays high benefit from early reduction of the loan; loan availability again renewed with a pleasant Return for loan repayment. lgl

I await Brain birth.

I have read these two paragraphs several times, and am still trying to define the gist of the material. John Quiggin evidently wants to write a dirge for hedge funds and money market funds in general. I am somewhat like dsquared, who would have a proper response to the development of credit derivatives since 2002. The big element in all of this might be research into the managed holdings of Corporate funds, which seems to stay out of market activity up to this Point. We all await the turn of the Year, to determine the Marketing strategies of the Majors who have lost Sale Weight over the last Year due to their association with Entities which have tanked. January will bring clarity, if only by the slashing of distractions from the financial crisis.

I first thought that this Post was a great addition to my Piece, because it would say something in defense of Peer Steinbrueck; I tending to side with the German view. Nick Rowe, though, quickly turns the arguments to assumed Equations; all of which have to be defined as accurate and fair in determinate solution. Then the ‘assumed’ part of the Equations take hold, and nothing is gained until actual Values are plugged into the Equations. I will make it worse, and state that capital mobility is sonic wave, and some half of all values will give Readings equivalent to perfect capital mobility. My mind is not working this morning, as I cannot define the sense of the Rowe argument, but a better explanation may come along.

Arnold Kling also has some difficulty with Modeling this morning, mentioning that de-leveraging has practically no association with standard finance models. Arnold would like the Parrot to fly away, but still thinks the bird is dead. There are too many liabilities associated with financial instruments, and the downward bow of mortgage securities will not straighten anytime soon. Arnold’s finite Recession will not replace the Great Depression II very soon. Mark Thoma brings on a set of data which gets me to inquire why Everyone descends to basic introduction Economics terminology which is as confusing as when first issued to me some decades ago. Do I want to go back to widgit finance? I barely have time to integrate compound Oil products. lgl

Old and Cranky

Japanese business begins to disintegrate the remaining Employee/Employee relationship which was so admired back in the days of my youth. Brand loyalty cannot seem to suffer in any part of the business matrix under the impact of rising Populations. A great part of this is the demanded high level of Profits from Investors, though it is a lesser part than Most would Think. Stock Dividends have been marginalized over the decades as a component. Most of the new Corporate fear resides in loss of Product demand to new entrants into the Consumption markets. Corporate leadership insists on maintaining the capital to finance an introduction of a new Product line to compete in an already over-filled Market. The Recession only heightens that fear.

I agree with this blog entry totally, and not at all. It is a prime period to renovate State Tax codes, if the objective is greater rationality–not Tax Cutting. We need to eliminate Tax preferments, special allowances, and complicated Tax payments dependent on the amount of Tax which is paid to the federal government. The Task would be helped by getting rid of the idea that the entire burden should be thrown on the Consumer, a common advocacy among business personnel, but a delusional attitude which ignores the real retardant to Consumption. Business is better placed both to Account and Pay for taxes, and to organize to suppress excessive taxation. Consumers are already overburdened with paying Bills and federal taxation, and don’t need large-chunk tax extractions for State revenues. Business should accept their own Share of Property taxes, a minimal taxation on their own Profits, and undertake payment of major Sales Tax imposts; charging the entire load off as normal Operating Costs. The Concept of throwing Tax payment off onto a disorganized Consumption market will only distort already erratic Consumption patterns.

I sort of like this Teaser from Tyler Cowen, though he gives only enough to tantalize. I decided to explore, and found the authors as reticent of expression as Tyler; neither Abstract or Introduction presenting much delineation of the three scenarios under discussion. I was most interested in learning of the long-term consequences of the scenarios, but was left wanting. It is my idea that long-term deficit financing of fiscal policy will inevitably lead to loss of normal economic incentives, and therefore produce a reduction of actual economic performance. I will have to break down and read the Paper, as the authors desire, or be left with my preconceptions; a circumstance not unfavorable as I dislike being contradicted, but not truly of good academic performance (Hint to Those Readers who are econ students). lgl

We Need to Get Creative

There is no way that this is wrong, but why in a Capitalist economy does the federal Government always represent the Guarantor of last resort? Bad Investment Counsel, Poor Investor, Bad Investment–no matter–the Government will cut your taxes for the total of the loss. Individual responsibility can be avoided at all Costs, and I await the Tax regulation where Those who are fired can deduct loss of future Income from their Taxes. It wants for Viability in a time where Jobs are scarce, and the urge is to blame the Government for all things. I would run a Test Case for the Return of back taxes because of future losses from loss of Job, if I had a Job Then or Now.

Frederic Mishkin may be stirring the waves of that famous ‘Tempest in a Teapot". He holds that the Federal Reserve still has multiple means to induce Market behavior, even though Most of Us cannot see it. Mishkin uses the undefeated Concept of comparing Fed action against a lack of action on the part of the Fed. I ask myself always when this reasoning is employed: What would have actually happened if the Fed had not interfered? Would the Situation have been that much worse, or would a quickly-operating Market have already placed this glitch behind Us? All I witness is a bunch of Managers whining about what they have lost, in order to get in line for Fed Cash, rather than Everyone moving on.

I might utilize Mark Perry’s line of argument to discuss the whole of the current American economy. It would be interesting to hear what Joseph Schumpeter would think of current federal economic policy. The Federal Reserve was originally founded to aid the cyclic flow of funds from the Cities to the rural areas where needed in Times of Harvest and Planting. The entire Concept was the adequate flow of funds in the proper direction when needed. That Need has disappeared over the Years, and the Regional Federal Banks have lost some validity. A central economic coordinating committee seems necessary, but is it important that it be composed solely of Bankers? My entire Point must be that We are afflicted with a wide assortments of outdated federal mechanisms to assault the economy, and it might be Time for Creative Destruction. lgl

Monetary Policy Error

James Hamilton presents some doubt to John Taylor’s assertions that fed policy actually aggravated the current Crisis, blaming the difficulty on a lack of regulation of the various financial institutions involved. I would forward a third thesis: that the Bush Tax Cuts actually provided inordinate levels of liquidity, straited that liquidity almost solely to Investment capital, and increased the Income generation of that liquidity. The increased volume of funds excited a laxity of loan policy in financial institutions, which grew with practice under the constraints of bonuses paid to Venders of the largest volume of loans and Investments. The intrinsic theory in my thesis states that low Taxes are not only a promotion of economic performance, but if too low, can over-fuel the economy; leading to excessive Resource Costs and multiple duplications of Investment capitalization. Economics need explore the regulatory empowerment of Taxation, also the dangers of Tax freedom.

The Above commentary holds real relevance in view of the Chinese plan to print Money to maintain liquidity. China already possesses an over-capacity in practically every production sector, and the input of extra funds can only have adverse consequences, unless those funds are directly distributed to Chinese Consumers. Any other program will lead only to a prolongation of the over-capacity of production with reduced incentive to develop Consumption for their Product. The worst aspect will be continued duplication of capacity in sectors already saturated under the current pattern of Consumption. Such monetary policy will only make an already bad situation much worse!

This is obviously the wrong path to take no matter whether my thesis is correct:

The author claims the RMB to be undervalued by 30% or more. How would he know? The only way to find out for sure would be if China freely floated its currency. I think the RMB would more likely crash than rise 30% if China floated it at this point. Furthermore, currencies have little to do with the inability of American manufacturers to compete against China. Wage differentials are 12-1 to 30-1 or higher and it is impossible to make that difference up with a RMB revaluation alone. Nonetheless, it is clear that China is playing a game of Beggar Thy Neighbor, "competitive devaluation". Then again, the US seems hell bent on destroying the dollar to boost exports and/or to get consumers spending again, and Japan has threatened to get in on the act by selling Yen and buying dollars. Brown is certainly hellbent on destroying the British Pound. With everyone in on the act, or threatening to get there, the dollar is far more likely to enter a trading range than to crash. lgl

Changing Times

I have long been fascinated by the reactions of different Generations to the same stimuli. An Economist must utilize such information to estimate changing Consumption patterns, especially under the constraint that Consumer buying patterns alter with the Age of the Generation. It may be a factor which will vitally impact the World Auto industry. Older Generations of Americans grew up accustomed to wide-open empty Spaces; I, as a Baby-Boomer, still enjoy travel on the two-lane Highways, and the solitude of an empty Car, while traveling great distance across the landscape. Succeeding Generations are far more attuned to crowded restaurants, packed Malls, and Raves. They break the isolation of the Automobile with the constant cellphone, and a committee-style decision process where you use the cellphone to contact the designated friend with expertise in the area of decision. Baby-Boomers such as myself have been known to even shut off such Instruments under the pressure of achieving Privacy. We are of that Generation where the Car gives Us peace in the midst of traffic jams. Our Children are used to a constant buffeting of larger crowds, and have an intrinsic ability to reduce their Privacy to their person with seeming ease. This characteristic may be the downfall of the Auto industry, as Sales decline because the Automobile loses its sanctity as a House of Privacy on the move; drive-in windows may even lose their appeal, as Consumers find the idling automobile too expensive to maintain with future fuel prices.

Here is the article Readers should read when considering Investment. Almost no portfolio manager made the right decisions before the last downturn, which has did much to crate the crisis conditions of today. Risk is not like a business loss where the losses can be accounted as a percentage loss of equity. Risk has the property of ‘all or nothing’ in that the Profits will be realized, or only a fraction of the equity may be returned; often only after there has been an expensive utilization of legal fees. An Investor must be attuned to the concept of dissolving assets, where Value disappears without initiate action. Risk insists that Participants must be ready to accept complete loss of equity in a process in which the Participant has little contribution beyond the initial investment. Those who think that the repayment process is automatic and always operates as planned, must learn or lose!

Retail Sales are still doing a Dance, with the imaginary Steps of Gasoline price declines hiding a respectable maintenance of Sales. The problem remains that it is the Christmas Season, and Consumers still hope for a joyous holiday; but they also may have already scheduled for a much reduced Consumption pattern with the New Year. Hard Times may be coming if this is the case, but We can always hope for the Best. lgl

Getting Serious about Politics

Congress did something sensible last night, when a resolute group of Senators insisted that the automakers work out their own problems or go through bankruptcy; it matters little that the Republicans did it for the wrong reasons–attempted attack on the UAW and retirement pensions. They showed their true heart with the fast track passage of the Pension Remission Act. The trouble here corrodes the viability of the Pensions, allowing Companies to avoid their responsibility under the 2006 Pension Act. This Act, by the way, was enacted to ensure to secure Pension benefits for the Retirees who will need those funds. Congress will eventually realize that they make a huge mistake in increasing the taxes on American labor (allowing Companies to renege on their Pension agreements is also a form of very high Personal Income taxation). Americans are getting tired of Congress taxing Labor and Consumer simply to give bankroll Cash to mismanaged Business.

Bernard Madoff may have established one fact: Hedge funds can only thrive in Boom cycles. Bust cycles make wrapping the Risk too expensive to make a Profit. The urge to cheat becomes huge when Investors expect high Earnings to stay in, and shredding of principle assets is the outcome as long as the books can be hidden. Bust cycles generate intensified draft of assets by Investors, and a lack of new Investors. Madoff was already in trouble in good Times, and crashed and burned because of the Downturn. Selling off assets is too simple and can be camouflaged, and therefore that Day of Reckoning can be delayed even if it makes things worse. Those Salaries and Bonuses of Wall Street are too lucrative to propel the necessary Honesty.

This missive drives an additional Spike into the unholy alliance of Politics and Business in this Country, where slush fund captures for Politicians allow for massive over-billings in Disaster relief. Only in America can natural catastrophe create a feeding frenzy. I talk with ordinary Citizens and they tell me how they can’t understand why Government costs so much. The Rich and Crooked make far more off Natural Events, than the Poor and Destitute ever will. Current American law places minimal Penalties on White Collar Crime. I would almost urge the passage of a Corruption law not outlining Prison Terms never Served (at least in full) or nominal stated financial penalties. The new Law would by Court Judgement detail the IRS to confiscate all financial and fixed assets of the Individual or Company convicted of illegal conquest of Government funds by Percentage formula established by the presiding Judge, within a range of between 25 and 75% of total assets held at time of the commission of the Crime. lgl