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Is the Fever Finally Breaking? Is This the End of 'Financialization'?

Posted on Saturday, August 22, 2015 No comments

Saturday, August 22, 2015

Anyone who has kids has been there.

You're standing by the bed with the thermometer to check on their temperature as you nurse them through a bout with the flu.  They are bundled up in blankets, shivering, yet sweating profusely. It is a moment of conflicting emotions because you have been there, too, and know how bad they feel.  But you also know - because you're the adult in the room - that these signals all say the fever is breaking.  You're thankful because you know they will soon be back to their normal self: playful at times - exasperating at others.

Yesterday (Friday) the Dow Jones Industrial dropped 530 points. And a good 100 of those points came in the final few minutes of trading.  And it happened on a Friday.  All of this is rather odd and does not portend well for Monday.  Usually on a sharp drop trading day, the markets gains back a little at the end of the day.  And this is especially true on Fridays.  But here we have the market - which we have to remember is made up of people with emotions - left to stew over the weekend.  Monday will probably not be pretty - unless the Fed does something dramatic over the weekend.

I am going to try to explain why the adults in the room - as opposed to the Fed and the government - should be thankful for the very real possibility that the 'fever' is breaking.  But before I start throwing up charts and their facts and figures, it is important to simplify the issues.

One of my favorite examples is the "better mousetrap."  I don't know if today's young people would immediately get the metaphor, but my generation (born in 1967) should easily understand it as coming up with an idea to improve something.  If you devise a "better mousetrap" you file a patent on your improvement so only you can bring it to the market.  If your mousetrap is a hit with the consumer, you might have to rent a building, buy equipment and hire workers to churn out your better mousetrap.  And to do that, you might need a loan.

Economic growth used to be about the better mousetrap, not the loan.  This is because the creation of wealth happens when things of use in the economy are improved - or made more useful.  The financial sector, on the other hand, does not create wealth.  It might help manage it and facilitate its exchange - but it does not create it.  I will show here that as the financial sector's share of Gross Domestic Product (GDP) increases, our economy gradually morphs into a wealth transfer economy instead of a wealth creating economy.

But as these charts show, profits in the financial sector as a share of  GDP has grown dramatically over the years.  Economists call this the 'financialization' of the economy.  It seems much easier, though, for the rest of us to simply call it a 'fever'.

A simple chart for this can be seen here.  The most important thing to notice is that the share of GDP for the financial sector is higher now than during the Great Recession.  In other words, we have done nothing to fix the real problem, which is an ever increasing dependence on the loan instead of the better mousetrap for economic growth.

But because loans are 'bought' at a price - the interest rate - there is a natural, mathematical limit called zero. In order to understand that, all you have to do is imagine how you would react if your bank started 'paying' you a negative interest rate.  This would be the same as charging you for the privilege of keeping your money with them (over and above all of the bogus fees they already charge).  Once that reality sets in, your 'mattress' becomes the logical place for your money.  It occurs to me that the 'mattress' is another metaphor the younger generation might not understand.  Their great-grand parents, though, would put their money 'under their mattress' during the Great Depression.

Before I finish up by getting into what the next financial crisis - which might have started this past week - will look like, another, even better chart will drive home what we have brought upon ourselves by allowing the financial sector to swallow up an ever increasing share of the economy.

This particular chart is helpful because it shows three important things all at once:

1) It shows the correlation between the share of overall income represented by those in the financial sector (the blue line) with the income share of the top 1%.  More on this in a moment.

2) It shows the share of overall income enjoyed by those in the top 1% of income earners (the black line).  This is the traditional indicator for income inequality.

3) It is fascinating to see where the lines cross.  The blue line (the share of overall income enjoyed by the financial sector) crosses ahead of the black line somewhere in the mid-1960's.  This matters because this is when we (in the United States) decided we could have "guns and butter."  As a result we were forced to take the dollar off the gold standard in 1971.

Traditionally, economists use the phrase "guns or butter" to describe the choice that an economy has to make between focusing on defense (guns) or social spending (butter). When my siblings and I buried our parents (seven months apart in 2010), we found our grandparents' food ration coupons from World War II.  Back then if we decided we needed to fight a war, commensurate sacrifices in terms of "butter" had to be made lest we saddle the next generation with an insurmountable debt.  There is a reason we call their generation the "Greatest Generation" that is about more than just the courage of those who defeated Adolf Hitler on the battlefield.

But in the sixties we decided not to make those sacrifices.  We were fighting the Vietnam War and building the Great Society at the same time: guns and butter.  The Greatest Generation refused to do this because they knew what it would produce - over 18 trillion dollars in debt, and with it a banking and monetary system that would come to depend on the value of that debt. That reliance on the value of debt then requires endless rounds of money printing for ever more frequent bailouts.

And the chart shows us that the people closest to all of that new money enjoy its rewards disproportionately to everyone else.  Ever since the sixties, financial sector salaries have been pulling up income inequality with them.  This makes it very easy to understand: Income inequality is salary inflation.  But only those in either the financial sector (by way of lending) and the political sector (by way of borrowing) are enjoying this salary inflation.  Everyone else (the 99%?) are being left behind...

...Until interest rates hit zero and there is nothing more central banks can do. And so here we are.

There are credible voices who believe the coming week will see a little rally starting Tuesday, after which the bottom will completely fall out.  The few whispers of Dow 5,000 are starting to increase in numbers, but are still just whispers.  Whether or not last week was the start of the next financial crisis, another crisis is mathematically inevitable - and soon. Here is why and what will then happen:

1) The more money is pushed into the system, the cheaper money itself becomes.  That 'price' is expressed in interest rates. But once you hit zero percent, there is no reason to keep money in the bank.  (In fact, even if inflation is 2% - which is nonsense and the product of gimmicked stats - then once interest rates go below inflation the rationale for keeping money in bank disappears.)  When people start taking money out of the banks, the banks will lose the 'capital' needed to offset their 'liabilities' and start getting into serious trouble.

2) The financial sector will then cry for another bailout and say they are 'deficient' in 'capital'.  This is also nonsense. They are looking for 'capital' to offset their 'liabilities'.  There are two ways of describing this problem: a lack of capital or an excess of bad debt.  It is this excess of bad debt (dot com investments using borrowed money is Exhibit A, sub-prime mortgages are Exhibit B, and now 'junk bonds' - which are just the corporate version of sub-prime mortgages - will be Exhibit C) that started us down this road of money printing bailouts.  It is the classic case of the drug addict going through withdrawal. Provide him drugs to alleviate the withdrawal (i.e. crisis) and all you have done is intensified the addiction - and the inevitable pain of subsequent withdrawal.

The question, though, is how the rest of us will respond. And by the 'rest of us' I expressly mean the adults in the room rather than the financial sector, the Federal Reserve, or our political so-called leaders.

If we are to wish the best for our kids, seeing the fever break is a relief, even though we know they will suffer a bit.  So, too, is it with the economy.  If we wish a prosperous future for our kids and grand-children, it is then on us to take the hit now as the fever breaks.  We actually do have the opportunity to change places with our kids.  We need to be adults and not let that opportunity pass us by.

Emails, State Secrets & the Integrity of the Law

Posted on Friday, August 14, 2015 No comments

Friday, August 14, 2015

As an information technology/cyber-security professional, if I ran an email server on what the National Security community calls the "Non-secure Internet Protocol Routed Network" (or NIPRNet - national security-speak for the Internet) and had emails containing Top Secret/Secure Compartmented Information (SCI) information, the very least that would happen is I would lose my security clearance, and thus my job or business.  I would also face the very real risk of jail time.

What is so staggering about the Clinton email scandal is how the former Secretary of State conducted her affairs in a way that even a junior programmer fresh out of school with an 'interim' security clearance would (or should) know to be way beyond the pale.

In order to understand why this is such a big story, we have to start with a simple observation.  And again, this is about as basic as it comes: There is no such thing as a 'classified email'

Email is a means of transmitting information.  It is the information, not the email, that is the subject of classification.  As such, it makes no difference whether the emails had any classification 'markings'.  Email systems that are used in the military and other government departments that deal with potentially classified information are configured to prompt the user to attach a classification marking (or label) on each email before sending. (Those labels would be UNCLASSIFIED, SECRET, and TOP SECRET/SCI)  This is designed to force the sender to make a judgment as to the nature of the information being transmitted.

Thus the dissembling from the Clinton camp is amazing, and actually threatens national security.  (And this from someone running for President!)  The claim that the 'emails' were not classified when they were sent is ridiculous on its face.  The information in the emails was classified before the email was even typed, thus the emails should have been properly marked by the sender.  And if some of the more sensitive emails were properly marked when sent, and those markings were removed, a serious felony has been committed both by the sender and even more so by whomever removed the markings.

But what makes this story even more egregious is the 'spillage' of information down multiple levels of classification.  Email communications within the national security community traverse different networks. It is bad enough that information classified SECRET would 'spill' from a secret network to the NIPRNet.  This does happen from time to time, but it is the responsibility of every person who comes into possession or contact with that email to recognize the spillage and report it.  But to have TOP SECRET/SCI information 'spill' all the way down to the NIPRNet is almost unimaginable.

What makes this a threat to national security is the message that is sent. The 'Bradley Manning' affair (leaking a massive trove of classified information to WikiLeaks) prompted rules pertaining to 'burning' CDs when classified information is involved.  Then came Edward Snowden.  If Clinton can get away with such an absolutely egregious disregard for the law when it comes to classified information, on what basis would the government then suppose to try Snowden if he were to return?  On what basis would the government enforce these laws at all?

Hillary Clinton is a Progressive, for whom the ends justify the means and the laws apply to everyone else but her. 

Deflation is the Monster in Little Janet's Closet

Posted on Monday, August 10, 2015 No comments

Monday, August 10, 2015

Anyone who's had kids knows that the closet at the foot of the bed is the source of much nighttime dread. (I think I might be channeling Dr. Seuss here.)

And we know as well that the solution is actually pretty simple: Open the closet and show little Janet that there is nothing to fear. (Oh well, I tried.)

We are on the cusp of what some believe will be the first of many drawn out interest rate hikes, starting in mid-September.  But each time the news suggests this is coming, the stock market takes a prolonged hit. It's like it is bedtime and 'deflation' (or at least 'disinflation' - more on these terms in a moment) is the monster in little Janet's closet.  So someone has to come out and say something like:
The interesting situation in which we are is that employment has been rising pretty fast relative to previous performance and yet inflation is very low. And the concern about the situation is not to move before we see inflation as well as employment returning to more normal levels.
Imagine you were to try to pull off something like this with little Janet who cannot sleep because she fears the monster in her closet.  Federal Reserve Vice Chair Stanley Fischer - who made the comment above to Bloomberg - is thought to be trying to walk back the sense that the interest rate hike is 'baked in'.  This doesn't quite amount to opening the closet to show little Janet that there is nothing to fear.

So I'll try to tuck little Janet into bed.

But before I do that, let's get our heads wrapped around this thing called 'deflation'. When we believe prices are going down, we naturally hold on to our money.  Why buy today when you can buy for less tomorrow? The problem is that those who make consumer goods then have extras on hand, and in order to move the product, they lower their price. (See discount stores' and Amazon's "Black Friday" in July for a recent example.)

"Aha!" we say. "I knew it! If I hold on a little longer, prices might go down some more."

And so we end up in an economic death spiral.  Our esteemed central bankers will tell us this is what caused the Great Depression.  There is some debate among economists about that, but that debate is not what really matters here.  What matters is the complete absence of two forms of expertise and experience among the Board of Governors of the Federal Reserve.  The first of these is actual 'supply chain management'.  The second is information technology.

As an information technology professional, I will start there.  The most glaring difference between today and the Great Depression - one that is so glaring it flabbergasts me that the people who are making monetary decisions do not see this - is the computer.  The two things the computer does for us that matter in this discussion are: 1) the computer gives us a far more accurate sense of the actual money supply; and 2) the computer gives us a tool for 'supply chain management'. So that brings us to the second lack at the Fed: experience in supply chain management.

The two companies which are legendary in my field of information technology are WalMart (in the brick-and-mortar space) and Amazon (in the online space).  Among information technology professionals, they are legendary for how they employ the IT field know as 'knowledge management' to manage their supply chain.  In the case of Amazon, they are now offering same-day delivery in select markets (including my hometown of San Diego, California).  They can do this because they have studied the market so thoroughly (using 'knowledge management') that they can predict what will be ordered, have those products pre-staged in town, and then deliver them in one day.  It is a spectacular example of using the computer to manage a supply chain.  Where Amazon sets itself apart with same-day delivery, WalMart sets itself apart with low prices - by employing the exact same technologies.

(If you are about to fall asleep right now with all this gobbly-gook about knowledge management, that's because this is my bedtime story as I try to tuck little Janet into bed.)

If the Fed were to have actual experience in supply chain management - or to put this another way, if they had anyone who has actually run a large business - it just might alleviate some of their overblown fears about deflation.  If we go back and look at what that is - my decision to hold on to my money and the resulting excess of supply - we see that deflation is essentially a supply chain management problem - not a monetary problem.

But when all you have is a hammer, every problem looks like a nail.

And in the Great Depression, to a large extent all they had was a hammer.  But this is not the case today.  We have computers and we have companies like Amazon and WalMart who know how to use them to calibrate supply to demand as it increases and decreases.

This, then, brings us to the reality we face today.  The idea of 'free money' is an oxymoron: If you make money free, then as more money sloshes about the economy prices will eventually rise. But if prices rise, the 'purchasing power' of your money goes down.  In order to protect from this loss of purchasing power, a lender has to charge interest - and money isn't free anymore.  If interest rates do not rise from what economists call the 'zero-level boundary' (or ZLB), the whole idea of money - and banking - begins to lose its very meaning and purpose.  So if money is 'free', it will eventually destroy itself and take the banking industry with it.

But, because 'deflation' is the monster in little Janet's closet, the Fed want to hold off on ending the days of free money. So how do we open the closet to show little Janet that monsters aren't real?  Or at least that deflation isn't quite the monster she thinks it is? First, we have to acquire a healthy skepticism for some of what is being passed off as 'data'.

The Fed gets its 'inflation' data from the Department of Labor's Bureau of Labor Statistics.  During the Gingrich/Clinton years these stats were gimmicked to suppress the growth of entitlement spending, producing the much-vaunted 'budget surplusses' of 1998-2001.  The gimmicks continue by removing 'volatile' prices like food and energy, and substituting cheaper equivalents from more expensive ones, in the Consumer Price Index.

Before getting into that a little deeper, this exposes the fiction of an independent Federal Reserve.  The Fed cannot possibly be independent when it tells us that its decisions are 'data-driven', and it then gets that data from the Executive branch - whose political interests in how the Consumer Price Index is calculated are obvious to anyone who has been paying attention. (This holds true across administrations and the major political parties.)

The underlying idea of 'inflation' is that when you have more money sloshing about in the economy (or when you 'ease' the restrictions on the 'quantity' of money - Quantitative Easing) a rise in prices will follow.  But the Fed is wondering why, with all this free money, 'inflation' has not risen.

It has. We have already seen this numerous times in the stock market and real estate: These are the first two places this easy money goes, so stocks are at historic highs and real estate is almost back where it was before the last financial crisis. In the context of the minimum wage debate we are constantly reminded of how the price of milk and eggs has risen.  But none of these things are counted in the CPI.

It is ridiculous, then, to hear Fischer complain that 'inflation' is not where the Fed would like to see it.  All one has to do is look at the Shiller PE Ratio to see that stocks are historically inflated.  A similar picture can be seen in real estate. And anyone who has made dinner lately knows the truth - which is hitting minimum wage employees the hardest.

Probably the most pressing question - from a policy-making standpoint - is whether Ms. Yellen, Mr. Fischer, and their colleagues at the Fed actually believe the inflation numbers they are fed by the Executive branch.  And if they do, why do they believe them?

If inflation is actually more along the lines of four to five percent (as would be seen using the pre-Gingrich/Clinton calculation methods) then there really isn't a monster in the closet after all.  And if the Fed had people who actually understand how information technology is used in supply chain management, the inevitable deflation which has to follow the end of free money will not be quite the monster that keeps little Janet up at night quaking under her blankie.

Is What is Happening at Planned Parenthood "Above our Paygrade?"

Posted on Tuesday, August 4, 2015 No comments

Tuesday, August 4, 2015

It was almost about this time seven years ago that President Obama was asked when he thought a baby had human rights.  His answer was criticized for being a bit flippant:
"...whether you’re looking at it from a theological perspective or a scientific perspective, answering that question  with specificity … is above my pay grade."
The videos now coming out of Planned Parenthood officials and affiliated persons discussing the matter of collecting tissue from aborted fetuses should force this question again to the forefront.  But before addressing the question further, the response from Planned Parenthood is a farce on its face.  The unedited videos are available for anyone who wishes to consider the context. There is simply no credible explanation for what we are seeing other than the "culture of death" so assiduously nurtured by Planned Parenthood.

More than Just Moral Abstractions

But this issue, honestly, is of a piece with what has become of sexuality in gender among us as social conservatives. Instead of refusing to divorce the issue from the real lives of people, we seem to want to make this yet another argument to be won, another wedge issue to drive a political agenda, or more kindling to stoke emotional passions ahead of the next direct mail campaign for donations.

Lest anyone accuse me of trying to have it both ways or to strike a middle ground merely for the lazy sake of being in the middle, let me disabuse the reader of that up front.  I believe life begins at the point of conception and I believe the unborn child is fully human in every sense that the word "human" means anything at all.

But those are nice abstractions.  Here is real life:

The point in a pregnancy probably more fraught with expectation than that initial test and then the birth itself is the first sonogram.  When our first child came, we just wanted a healthy baby; we really had nothing emotionally invested in a boy or girl.  But me being practical, the second time around 18 months later I was rooting for another boy.  Slap the bunk beds together, hand down the clothes and we'd be set!  So going into the sonogram for our second child, we were all keyed up to find out.

And then came the 'look'.

Every parent who has seen it knows what I am talking about.  The tech doing the sonogram sees something unexpected.  But they are just a technician; they cannot make any medical diagnoses or otherwise say anything at all.  So my wife and I look at each other, wondering what we will hear when the doctor comes in and looks.

At that point the doctor could only rule it down to two possibilities.  Either part of the baby's lungs were connected to the esophagus instead of the tubes going to the lungs (both come from the same 'foregut' tissue in fetal development) or a cyst was growing next to the baby's heart.  If it turned out to be a cyst, there was the danger it would push the heart out of its place and kill the baby in the womb.  That, of course, is tragic all by itself.  But if the fetus were to start decomposing in the womb, my wife's life would be threatened by sepsis.  As such the doctor felt medical ethics required that he broach the possibility of having to terminate the pregnancy.  We were not at the point of having to make that decision, but let's just say the next two days were easily the worst of our lives.

In our Evangelical social circles we have a sense of what it means personally to be 'spiritual'.  I would love for others to think of me in those terms, but I would be lying if I did not admit that we talked about 'what if'.  Those conversations included funeral arrangements, so they were very much rooted in the belief that we were talking about the life of a unique individual.  But the abortion debate - as a matter of morality and decision-making - looks very different from that perspective than it does as a political topic for debate.

We were blessed.  Two days later a birth defect specialist repeated the tests and concluded with a fair degree of certainty that it was lung tissue hooked up to the esophagus (bronchopulmonary sequestration).  Our son - Jeffrey - had surgery at three months to correct the problem.  He is 15 now, a great athlete and in terrific shape.

But there are people who end up faced with tragic choices.  As a matter of politics, the first abstract question is whether we want the government involved in these choices.  The problem is we want to segregate our political questions from their underlying moral questions.  This, basically, is what Obama sought to do by claiming the whole thing was above his pay grade (more on that in a moment).  The underlying moral question is, of course, whether or not the fetus in the womb is a human being.  It would be nice if morality and politics never intersect, but the simple fact of life is they do.

Things We Cannot Say We Do Not Know

The fight to abolish slavery is an example.  If the humanity of the black man or woman can be questioned, then the matter of 'owning' a black man or woman as property can be legitimately debated.  But if the humanity of a black man or woman is "written on our hearts" the matter must stand above any argument.  Or in other words, there are things we cannot say we do not know - the humanity of our black neighbor being one.

And the humanity of the unborn child is another.  A sonogram can show an unborn child sucking its thumb.  Not its mom's thumb, mind you - the child is sucking his or her own thumb.  The child may not be biologically or physiologically autonomous, but its moral autonomy is right there on the screen in front of us.  And with today's 3D sonograms, this is only becoming more obvious.  You can no more look at a sonogram and then claim you do not know you have looked at a fellow human being than you can talk to your black neighbor and then claim not to know you have spoken with a fellow human being.  There are, again, some things we cannot say we do not know.

So we come back to what is and what is not within our "pay grade."  Was the humanity of black men and women above the pay grade of those who brought their Evangelical Christian convictions into public policy debates to argue for the abolition of slavery?  Were civil rights for African-Americans above the pay grade of Dr. King and all the others who marched with him?  At the end of the day these issues all drilled down to the essential humanity of black men and women.

And so as we are faced with the vile, despicable perspective of Planned Parenthood - and no, you cannot explain these things away by questioning the motives of those who surreptitiously recorded the videos - there simply is no escaping these inconvenient questions. Morality itself is meaningless if these things are above our pay grade.  And culture itself is impossible without at least some foundational, common sense of morality.  It does not have to have all of the particulars of my Judeo-Christian morality, nor does my neighbor need to sit next to me in church on Sunday nor agree with me politically on election day.  But we have to be both willing and able to judge right from wrong at some level.  These videos present to us the perfect example.

As a conservative I will never be comfortable with the idea that the government could have inserted itself if the decisions my wife and I feared we would have to make - and that other friends of mine have actually had to make and grieved bitterly for having had to make them.  Keeping the government out of our lives is the very hallmark of conservative political philosophy, so we ought to be a lot less eager to blindly insert government into these kinds of things.  But we are still dealing with a fellow human being in the womb.  This is not an argument to be won in the abstract - it is a truth already written on the human heart.

And it is most certainly not above our pay grade.
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