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The Politics of Human Dignity

Posted on Tuesday, December 20, 2016 No comments

Tuesday, December 20, 2016

As much as I have been dismayed by his take on the current political scene, Michael Gerson's latest column in the Washington Post - which my local daily, the San Diego Union Tribune, headlined with "A  Politics of Dignity" - he is at least starting to think about some of the things that really matter.  Even if he is drawing all the wrong conclusions about them.

Mr. Gerson tries to define political conservatism by centering it on a defense of (among other things) human dignity.  This is good.  But it also requires we ask ourselves from where this dignity arises.  To throw out one of those $10 Latin-isms Mr. Gerson and I might have used in a seminary paper, human freedom is the sine qua non of human dignity (sine qua non meaning 'that without which').  Human dignity - especially in the public sense - then arises not from arrangements dictated by political society, but from those which arise freely and organically among civil society.  This is then to say there can be no human dignity in the public sphere to defend without human freedom.

And government is antithetical to freedom.  It always will be for the simple reason that despite our inherent dignity, we are not angels.  If we were, we would not need laws, lawyers, or government.

But since we are manifestly not angels, we need government.  But once we make such an arrangement we must fund it, so government is first and foremost the power to lay and collect taxes - to take from what is rightfully ours privately for public purposes.  Government also requires we employ people - who are, again, not angels - to implement these public purposes.  We thus arrange our government into departments and agencies, and allocate to each from those public funds.

The brokenness of our human nature quickly takes over.  Success in government service becomes a question not of how effectively those public funds have been deployed, but of whether or not your allocation of them has been increased.  Success and failure end up reduced to this: If your budget is increased, you are a success.  It is cut, you are a failure.

Mr. Gerson acknowledges that conservatism embraces limited government, but seems to forget why.  This inescapably human reduction of success and failure in government service guarantees that as the size of government multiplies, so do the disincentives to efficiency.  Capital which could otherwise be far better deployed gets sunk into the least efficient, least productive sector of the economy.

It is the ramifications of this which have brought us to a place where Mr. Gerson observes the "short supply" of a fundamental belief in human dignity and that the purpose of politics is to "honor the equal value of every life, beginning with the weakest and most vulnerable..."

I am not at all convinced this is in as short a supply as Mr. Gerson thinks.  I do believe, however, it  is struggling to dig itself out of the grave which big government has dug for it.  But to explain this, we need to back up and rescue the whole concept of 'dignity' from the political context of this election season and return it to its proper owner - the individual in whom inheres inalienable rights to life, liberty, and the pursuit of happiness.

Dignity is experiential.  It is not something we can quantify or measure outside of human experience.  So how do we experience it?  For a wide swath of our electorate, dignity is experienced in meaningful work.  'Meaningful' is, of course, a rather abstract concept which can mean different things to different people.  For some it might mean serving a satisfied customer - and finding that dignity in the interpersonal exchanges arising from that service.

But for others it is experienced in being part of taking otherwise useless raw materials and turning them into useful things.  On the smallest scale, I saw this when my son brought home a vase as a gift for his mother on Mother's Day.  He had taken a lump of clay in his high school ceramics class and turned it into that vase.  I used that as a teachable moment to help him understand wealth.  If the lump of clay commands $0.50 in price, but the vase commands $5.00, what accounts for the extra $4.50 in value?  The answer is in making the lump of clay useful.  That extra $4.50 is the very definition of 'wealth' and was created by the work of his hands.

I see this on a much larger scale every time I walk onto one of our local shipyards.  I walk past rolls of steel being forged into various pieces which will then be welded together into a ship.  I have seen massive tankers built from the ground up by a finely tuned symphony of exactly the same instrument: human hands.  And in each and every pair of those hands is the experience of dignity born of meaningful work when that ship is launched into service.

Mr. Gerson desparately needs to push himself away from his keyboard and lace up some steel toe work boots, lay a pair of safety goggles on his nose, and don a hard hat.  He needs to visit what is left of our manufacturing sector and simply let the men and women who remain tell him about the dignity they find in meaningful work.  Then he might understand what has been lost.  He might also begin to understand why belief in human dignity seems in short supply.

At a Roman Catholic altar there is a light, which when on, tells you that the 'tabernacle' has consecrated hosts in it.  To the devout that light tells them to genuflect as they pass the altar.  The conservative liturgy requires genuflecting at the altar of free markets - and Mr. Gerson at least poses as a devout conservative.  But that light has been out, quite frankly, for more than 20 years; the tabernacle of the 'free' market has been emptied by decades of big government and its perennial deficits.

No plan actually exists to pay off the $20T of resulting debt.  This is the grave dug for human dignity by big government.  The only plan is to keep refinancing this debt by rolling over its constituent bonds.  And for this reason, interest rates must continue to decline.  Who, after all, has refinanced a debt at a higher rate?

This, then, demands monetary policy which makes truly 'free' trade agreements impossible.  What is gained over years of trade negotiations can be lost within a week's worth of movements on the currency markets.  We end up forced to ship overseas the very source of human dignity for a large swath of the American electorate - meaningful work actually taking raw materials and making useful things out of them.  And Donald Trump is now President of the United States.

By writing about human dignity, Mr. Gerson has at least put himself and his readers on the right track.  If belief in human dignity seems in short supply, it is because it has been buried in a grave of public debt and otherwise shipped overseas to allow the political/financial class to absolve themselves of their crimes against that same human dignity.

'Disgusting': A Workplace Conversation

Posted on Thursday, November 17, 2016 No comments

Thursday, November 17, 2016

Like most, I usually avoid religion and politics at work.  But today a co-worker and I were waiting for a computer system to be scanned for cyber-security risks and got to talking about the economy.  He mentioned that he had watched the movie "The Big Short" (which I highly recommend) but got caught up in trying to grasp the underlying explanations - which seemed too arcane to get his head wrapped around.

As I tried to explain them, he shook his head and used the word "disgusting" - which is exactly how people feel after they see the movie.  I used that as an opportunity to explain Donald Trump's win: People held him up in front of the status quo so they could see themselves in all of their disgusting glory.

My friend said he planned to watch the movie again, but this time not worry about understanding the underlying economics.  So I tried to explain the dynamics the movie tries to expose. I'll try here as well.  And once you do understand, maybe - just maybe - you'll understand why people like me are tickled pink watching the status quo establishment retching over "President Trump."

When you buy a share of a company's stock you are buying an ownership stake in the company.  This means you will enjoy a share in the appreciation of the company's value as it competes successfully in its market.  It also means you are exposed to the company's liabilities, and can end up losing money if the company fails to compete successfully.  That success is supposed to be based on the ability to make a better product at a lower cost than its competition.  Part of those costs is the cost of money.  If money comes at a cost (interest rates), then the higher those rates are, the more important it is that the company have a genuinely better product than its competitors.

But what happens when money is free?  Or all but free?

A whole raft of companies emerge who base revenues on financial engineering rather than actually "making a better mousetrap" (as my parents would say) or by "brewing a better beer" (my preferred metaphor here in San Diego).

That financial engineering uses Big Data in much the same way as hurricane forecasters do.  Data is brought into context with other data to create 'information'.  This information is then run through statistical models validated against past data to predict the future.  With hurricanes this means the path and intensity of the center of the storm predicted out about five to seven days.  With financial engineering it means the movement of prices in things like real estate and commodities.

When the models show prices increasing, a company might sign futures contracts.  When the price rises, they sell the contract at a profit.  They are not actually interested in taking delivery of the underlying commodity and turning it into useful products.  So their revenue is based on making winning "bets" - and using Big Data for something that is essentially the same as "card counting."

Now imagine someone decides to set up a company to invest in companies whose revenue is based on winning bets like these.  That company issues stock.  Again, that stock reflects a share in revenue - but that revenue is just an aggregation of winning bets made by other companies.  Theoretically, there is no limit to the number of "links" in a "chain" like this.  So if one company makes a $10,000 bet, and a second company makes a bet on that bet, and so on and so forth, that $10,000 bet can balloon exponentially into a multi-billion dollar exposure.

When get your head wrapped around this, there really are only two options.  You either deny what is actually right in front of you because you think "that can't possibly be legal" (it is - but wasn't in the past) or "that sounds like a conspiracy theory" (this is what Wall Street wants you think).  Or you come to terms with it and are left utterly disgusted and outraged.  It is that disgust and outrage that has propelled Trump into the White House.

But it is not enough to be disgusted and outraged because if that is all there is, then we have no idea of what to expect of what our government and economy should like after the "draining of the swamp."  This is where understanding the math of all of this is essential.

When placing bets on things like commodities or real estate, it is crucial that we understand how the cost of money affects the odds.  Imagine the chips are free at the Blackjack table.  The odds in Blackjack are well-understood.  The only question is long you can remain at the table.  The cheaper the chips, the longer you can play.  It is the same with money in the financial sector.  Cheap - or free - money allows those who understand the math and have Big Data resources to do the math to gamble more and longer.  With essentially free money it is almost impossible not to be lured in by that math - it seems you cannot possibly lose.

Until you do.

And when your bets are chained together in a hierarchy of derivatives, a $10,000 bet gone bad can collapse an entire bank.  And when an entire sector of banks are making these kinds of bets, an entire economy is at risk.

The answer is a properly restrained money supply and an eventual elimination of derivatives as a legal financial product.  What this will do is end the "financialization" of the economy where this kind of completely unproductive economic activity competes with the Main Street economy for capital which it (Main Street) could actually deploy toward brewing that better beer, creating wealth, and with it decent, middle class jobs.

Draining the swamp thus needs to start with the Federal Reserve.  Returning Wall Street to the simplicity of Glass-Steagall and making securitization of futures contracts illegal will end the gambling and allow capital to flow back to Main Street wealth creators.

Michael Gerson's Final Appeal: More Beltway Blather

Posted on Monday, November 7, 2016 No comments

Monday, November 7, 2016

I don't know Michael Gerson.  But I do know that he and I share a common educational path.  Gerson has a Master of Divnity (M.Div.) from Wheaton College.  I have the same degree from Bethel University, both established Evangelical schools.  Gerson is an especially gifted writer, and I appreciated how his gifts help President Bush steer the country after 9/11.

But over the course of this political season it has become increasingly frustrating to read what seems to be a deliberate effort on his part (as well as writers like George Will and Charles Krauthammer) to speak past the voters who will be casting their ballot for Donald Trump.  This election is a lot like a dynamic I see every day as an information technology professional - where the single most challenging problem has nothing to do with technology, but with business people and technology professionals talking past each other because neither understands the other's perspective.

Perhaps Gerson, Will, Krauthammer, et. al. have become so conversant in the ideas that circulate within the Beltway that they have completely lost touch with the ideas of those who have not participated in the financial joys of proximity to the political/financial complex.  If this is the case, it is likely because they are grasping for a Beltway rationale - a reason to support one candidate over another, or not not support a candidate.  They are confounded by the fact that the rest of us are not interested in their reasons for not supporting Donald Trump.  We are not grasping for anything, but punching back at a political/financial complex who has sentenced our children, grand children, and great grand children to a life picking the Progressive cotton on the Establishment's debt plantation.

And so the more rhetorical skill writers like Gerson devote to their Beltway rationales for not voting for Trump, the more perfect they make him for our purposes.  As I have said throughout in numerous fora, the more tawdry and disgusting the reports of Trump's past behavior become, the more perfect a candidate he becomes.

Trump is a mirror.

He is a mirror we are holding up in front of writers like Gerson, Will, and Krauthammer especially, because as supposed conservatives, we think they ought to know better.  Trump is disgusting.  So now we have the opportunity to ensure they get a 3D, high def, full color look at their utterly disgusting selves.  The more disgusting Trump becomes, the better reflection is provided by him as a mirror.  To illustrate, I'll touch on a number of things Gerson says in his "final appeal."

Gerson seems to point to Teddy Roosevelt as the embodiment of the reform that George W. Bush sought to bring to Republican ideology.  To conservatives who know their history, this is ridiculous.  TR was a Bull Moose Progressive; he was not a conservative.  Here in San Diego I chided the local Republican Party for having a banner with Roosevelt on it, with this as the quote: "We are the government.  The government is us."  This is nothing short of a Progressive manifesto designed to tear down the wall between the people and their government.  That wall is called the Constitution.

The local party also had a banner with Reagan on it.  The quote was different, but I imagined what Reagan said about the government.  If government is not the solution to our problems, but is itself the problem - and if we are the government and the government is us, then does that not mean we are the problem?  But I digress...

Gerson has completely forgotten that freedom precedes government, and our Constitution was not written to enshrine government at the center of American life, but to protect freedom from it.  Each and every decree of government is necessarily a subtraction from freedom.  We have to have some form of government because human history shows we have to subtract from freedom in order for civil society to thrive.  But the essence of Progressive political philosophy is to flip these two and place government - not human freedom - at the center of American life.  I am shocked that a writer as gifted a Gerson does not seem to understand this.

Hearkening back to the Bush (W) years, he wants us to suspend our view of the efficacy of "No Child Left Behind" and consider the intention to win a mandate for "a certain model of government."  I am left speechless hearing a supposedly conservative writer appeal to a disregard of results in favor of a celebration of good intentions.  I thought Liberals had a monopoly on that kind of sentimental laziness.

The rest of Gerson's article repeats a litany of distortions of much of what Trump has been reported as saying.  To illustrate, I'll flip sides for a moment.  The one topic on which I have always appreciated President Obama is that of race.  Each time he has spoken on it, he has called for a mutual clarification of our own perspectives rather than a suspicion towards others' motives.  And each time, after listening to him speak live, I have then been disgusted by how the conservative media reported on the speech - making him out to say things he clearly did not say.

This is an artifact of what journalism has become in this country.  Take something someone says, interpret it in the most controversial light possible, find someone on the other side to be outraged by that interpretation, report the outrage like it is 'breaking news', and then spend a week talking about something which was never said to begin with.  With Trump being completely unschooled on political rhetoric, he becomes a target-rich environment for this kind of lazy, irresponsible excuse for journalism.

Along these lines, Gerson thinks Trump's idea of government is authoritarian and says he "...never imagined that Republican leaders... would fall in line with such dangerous delusions, on the theory that anything is better than Hillary Clinton.  What Gerson has really "never imagined" is that Republican voters would utterly repudiate the interpretations of Beltway writers like himself, in favor of a mandate to overturn their status quo buffeted by a legislature which would actually do its job for once.  Personally, I am excited by the idea that a President Trump will owe nothing to the Republican Establishment - because it will mean the Republican Congress will owe nothing to Donald Trump.  Imagine! A Republican Congress whose first debt is to its oath to uphold and defend the Constitution!

Gerson cannot comprehend how voters would "normalize" the things Trump seems to stand for.  Again, Gerson has chosen to listen to Trump from within his apparently Progressive Beltway echo chamber where ink is spilled by the gallon on something that no longer even resembles journalism.  What Gerson manifestly has not done is what his M.Div. was supposed to have trained him to do - question what has become of his own traditions and listen honestly to other voices.

A Trump victory will normalize only those things the Trump voters wish to see return: A preference for civil society over political society and its big government; a return to fiscal sanity and monetary policy which actually rewards thrift, innovation, and productivity, an immigration system which faithfully executes the laws of the country - facilitating legal immigration instead of the bureaucracy's next budget demands, and a table which is set to equitably benefit both the consumer and the worker.

Democracy at Risk?

Posted on Thursday, October 20, 2016 No comments

Thursday, October 20, 2016

If our democracy is at risk, it is because drivel which would never be permitted by a professor teaching first year critical thinking now passes for competent commentary from the Washington Post.

Our local paper, the San Diego Union-Tribune, carried Catherine Rampell's column this morning.  Apparently she thinks a "particular subset of Americans [read: 'deplorables'] have had enough of experts, facts, math, data. They distrust them all."

She is apparently appalled that "more than 4 in 10 Americans somewhat or completely distrust the economic data reported by the federal government."  And if we only count the 'deplorables', 68 percent do not trust the data "at all."  She calls roll on the usual suspects: unemployment, inflation, household spending, health insurance coverage rates, gross domestic products, etc.

If she had followed up with at least an attempt at substantive discussion of how these numbers are calculated and - even more importantly - how they are used, she could have at least avoided making her college professors look bad.  But there was nothing but red herrings and ad hominem - to the point I am left wondering if she even knows what those two terms mean in the world of critical thinking.

So let's do a little of the substantive analysis she couldn't provide in no fewer than 28 Union-Tribune column inches.

Inflation is easily the most important, and least understood, of the economic series reported by the government.  It is the most important because it provides the foundation for the 'deflator' which is used to calculate Gross Domestic Product.  The most important result of that relationship is this: If you understate inflation, you necessarily overstate economic growth.  Inflation is also what determines interest rates.  Here when you realize that the U.S. Government does not take in enough revenue month-to-month to even pay the interest on its debt, you also realize that keeping interest rates low is 1) a way of staving off the inevitable fiscal - and therefore political - reckoning; and 2) that this reckoning is, in fact, mathematically inevitable.  To understand why, just try to find someone who has refinanced their mortgage at a higher rate.

Rampell derisively refers to "shadow stats."  This can only mean one of two things: 1) She is aware of John Williams' shadowstats.com and has thus failed to offer anything even approaching substantive interaction with his work; or 2) she has 'heard' about his work and is just parroting a second-hand narrative of 'conspiracy theories'.  Either way, she and her college profs (and we'll add her editors to the list) don't come out looking very good for her effort.

But leaving Shadow Stats aside, let's look at actual 2015 data from the Bureau of Labor Statistics.  The weighting of various prices in the Consumer Price Index is shown in complete detail.  The most glaring anomaly is rent.  The 'housing' component is 42 percent, which seems about right.  But within that component, only a little under eight percent is 'rent of primary residence' while a category called 'owners equivalent of rent of residences' is no less than 24 percent.  Let's explore that one for a moment: The 'owners equivalent' figure is notional.  This is not what owners are getting in rent; it is what the BLS guesses they could get in rent on their primary residence were they to rent it out.  But 'rent of primary residence' is an actual number - the rent being paid by the average renter of an apartment.  Can Rampell take a crack at explaining why someone would weight a notional number far more heavily than an actual number?

Another example is education.  CNBC writer John W. Schoen shows how tuition inflation has dramatically outpaced broader inflation measurements.  The BLS data shows us that college tuition is weighted at 1.8 percent.  And books and supplies at 0.16 percent (!!!).  Parents of college age students like me and my wife are painfully aware that the BLS formula ought to be labeled as the BLS formula - just remove the 'L'.

I'll round out the examples with health care.  The BLS data shows a weighting of 8.4 percent.  But when looking at various estimates of the percentage of income Americans devote to health care, 9.6 percent is the lowest number out there.  For those making $35-47K, the percentage is 14.5.  And with massive premium increases on the horizon, this picture is only going to get worse.

The long and short? The BLS data significantly under-weights the prices ordinary people (as opposed to the 'experts') know are the main drivers of price inflation.

Inflation - if we go by the 'textbook' - is the difference between the growth of the money supply and the growth of the economy.  Some will differentiate between this definition (monetary inflation) and the growth or decline in consumer prices (price inflation).  If, for example, the money supply has grown by 20 percent, but the economy only by two percent, the rate of monetary inflation is 18 percent.  One would expect - by the textbook theory - that price inflation will follow monetary inflation.  The claim is, of course, that price inflation is about two percent, so those who have been ringing the inflation fire alarm are ridiculed by writers like Rampell.

But if we look at all of the various paths money takes in the economy, and look at three in particular: the stock market; the bond market; and real estate, the answer is right in front of us.  And, no, Ms. Rampell, we don't need 'experts' to see it.

Stocks, bonds, and real estate are 'inflation sinks'.  Just like a 'heat sink' dissipates heat, these three markets are dissipating the inflation of the money supply.  But the only way to hide this effect in real estate, for example, is to underweight actual rents (which are soaring) and overweight notional rents - like what I might get were I to rent the house I live in.  It's as if we are to believe that notional rents have greater influence on consumer spending choices than actual rents.

And by not counting the stock or bond markets (they are not 'consumer prices', after all), we are hiding the real threat to our democracy: wealth inequality.  If Ms. Rampell was actually familiar with the writing of 'deplorables' like myself and others who challenge the 'data', she would see that between us and the Left, we agree that income inequality is a problem.  Where we disagree is on the origins of - and therefore the solutions to - the problem.

Income inequality is a function of public debt; here is how the cycle works: Each time the U.S. Treasury issues a 'bond', it is bought by a 'primary dealer'.  It then gets sold on the 'secondary market'.  When the Federal Reserve was engaging in Quantitative Easing (QE), they were literally creating money out of thin air (digitally) to buy these bonds on the secondary market. Each time a bond changes hands, fees and commissions are booked.  These bonds are issued, of course, to pay for deficit spending. Wall Street loves the arrangement - they are the ones booking the fees and commissions, after all.  And so just as the public debt soars, so does political spending.  Where does political campaign cash come from?  Primarily Wall Street - from the fees and commissions they book trading in government debt.

It is essential, then, both for the political and the financial halves of the 'political/financial' complex that this borrowing continue.  What threatens it?  Rising interest rates... again, who refinances a mortgage at a higher rate?  How do you keep interest rates artificially low?  By keeping the rate of inflation artificially low.

When we look at the multiplier between the salary of an average worker and that of a CEO, the 'norm' used to be about 20 (the CEO would make 20X the salary of the average worker.  When we look at the multiplier in companies 'closest' to all the new money that has been created (the 'political/financial' complex) the multiplier runs as high as 300.  If increases in income can be tied to increases in productivity and other forms of wealth creation, people should be free to make as much money as they please.  But when these increases are derived from proximity to banks and government, and funded by the banks lending to government, something is very wrong. And campaign finance reform will not fix it. And end to borrow-and-spend government will.

Inflation, then, works it way into so many other numbers.  With an honest reporting of inflation - by accounting for actual rather than notional prices for things like rent, properly weighting education and health care, and by taking into account stocks, bonds, and real estate - inflation would be significantly higher. And that would mean GDP would be significantly lower.  That, then, would expose the Big Lie - that we have been 'recovering' since the last financial crisis.  The fact that we have likely been in recession throughout the entirety of Obama's two terms is a very inconvenient truth.  But even worse - for both political parties - a true accounting of inflation would cause interest rates to surge, putting an immediate end to the debate over the debt ceiling.  That debate would be over because when no one is willing to lend us money at a rate we can afford, it will not make one whit of difference what the 'debt ceiling' is.

The cooperation and compromise everyone says they want will not happen until we start doing something very simple: Tell the truth about the economy.

Memo to the Fed: "Not Spending" and "Saving" are not the same!

Posted on Friday, October 14, 2016 No comments

Friday, October 14, 2016

Janet Yellen today:
We need to know more about the manner in which inflation expectations are formed and how monetary policy influences them.
OK, good start because it suggests they might be aware that there are things out there they don't know.  Her whole speech today actually hints that this is beginning to dawn on them.

Good news. So, let me offer a little help:

By 'inflation expectations', Yellen means ordinary people start believing that prices will go up soon.  The idea is that if you think that box of something is going to be more expensive tomorrow, you'll buy it today.

Now, as to how they are formed, and how monetary policy influences them: 'Saving' and 'not spending' are NOT THE SAME.  If I am 'not spending' it may be because I think prices are going to drop.  This is the opposite of the observation above: If that box of something is going to be cheaper tomorrow than today, why would I buy today?

'Saving' is different.  If I am 'saving' it could be because I am 'buying' peace of mind in case of a rainy day.  And if my savings earn me less and less (by way of interest rates), it only means that 'peace of mind' becomes more expensive.  I have to save more to 'buy' the same peace of mind I could have gotten for less if my savings earned a decent rate of interest.

I could also be saving for a couple similar reasons: If I want to save to help a child pay for college, again, I am 'buying' the ability to discharge what I might think is a parental responsibility.  The less I get on my savings, the more 'expensive' that ability becomes - because I have to make up for what I am not getting in interest by adding to my savings.  And in a sector of the economy without any 'normal' price discovery (for tuition and books), that 'ability' is outrageously more expensive than it should be.

I could be saving for retirement.  Here I'll let you in on the somewhat colorful sense of humor between me and my oldest son, who is 18.  We were talking about why paying off our mortgage is so important to me and his mom.  I buried my parents in 2010, so I have seen the care needed for a dying parent.  I was starting to explain why I wanted the house paid off as early as possible and said: "So you and your brother..."

My oldest interrupted. "...don't have to change your diaper instead of the other way around!"

We got a very good laugh out of that. (The way he actually put it was a bit more colorful.) And he was spot on the money!

So by paying off our mortgage, I am saving for my old age. I am 'buying' the peace of mind that I will not end up relying on my boys to 'change my diaper' as my time on this earth draws to a close.

This is all entirely different than 'not spending' and therefore has nothing to do with inflation expectations (save perhaps the matter of saving for college).  And it is appalling that I find myself - a charter member of the Basket of Deplorables - having to explain these things to the Chair of the Federal Reserve, for Pete's sake!

But it isn't really that surprising after all.  I look at money and see a way of measuring the output of my time and skills.  I then see it as a means by which I discharge what I believe to be responsibilities to my children.  Ms. Yellen, the Federal Open Market Committee (FOMC), and their coterie of academic economists apparently do not see money this way, but rather as a tool of the State to be used to dictate the social order.

Of course we have seen this before in King Charles I, before he triggered the English Civil Wars with his monetary impunity.  It has a lot to do with why do not have a Monarch in this country...

Or do we?

To Big to Fail, v2.0 - Deutsche Bank

Posted on Wednesday, October 5, 2016 No comments

Wednesday, October 5, 2016

Yup, here we go again...

Recently the Department of Justice levied a $14B fine against Germany's Deutsche Bank (DB) for its role in the last financial crisis - which was mainly a matter of selling securities based on mortgages they knew were bad.

DB, however, is on the brink of becoming the next "Lehman Brothers" (LB).  If that name isn't familiar, LB was the "systemically important" bank which went bankrupt, triggering the last financial crisis.  The way LB triggered the crisis was actually best explained in "The Big Short" - by Selena Gomez of all people! (Seriously, folks, please watch the video - you may well be about to see a re-run in DB.)

After you've watch this clip, read here.  This is the Reuters story on the quiet talks going on between German and U.S. officials about the fine.  There are so many angles to this, it is hard to know which ones to pursue and in which order.  I'll pick a few, to wit:

1) This is going to blow up the 'myth' that is the European Union and the fraud that is its money (the Euro) in a way that the Brexiteers couldn't have dreamed of;

2) This is going to prove that Central Bank intervention not only did nothing to end 'too big to fail', but actually made it exponentially worse; and;

3) This is going to demonstrate, once and for all, that we were lied to the first time around (the last financial crisis).

Taking these three up in reverse order: We are about to hear the term "under-capitzalized" again.  This was the reason we were given for the bailouts in the last financial crisis.  If we pay attention this time, we will discover there is actually another way of describing the same situation: Too much bad debt.

The difference is between looking at bank through the 'lens' of the asset side of the accounts instead of through the 'liabilities' side.  All we have to do - and no, you do not need a degree in anything to understand this - is ask ourselves how banks are supposed to be doing business.  Its actually pretty simple: they lend out money against collateral.  If you own a home, you understand this.  The bank lent you money to buy the home, and home itself is the collateral.  If you stop making payments, they take it from you and sell it to offset the loss.  A debt that is backed by good collateral - like your house - is considered a 'good' debt even if the borrower stops paying, because there is recourse.  Debts, however, that are not being paid back and have no such recourse are given all kinds of wonderful names like "non-performing loans" (NPLs), or "impaired" loans.  Its all euphemisms for 'bad debts.'

Banks are supposed to maintain a certain percentage of 'good' collateral against their outstanding loans to make sure they have recourse to survive when a certain percentages of those loans go bad.  The problem with DB is no one knows how to value their outstanding debts which were used for 'derivatives'. (Replay the Selena Gomez clip.  A 'derivative' is a bet on a bet on a bet on a bet on a player's Blackjack hand.)  Having good collateral is useless if you do not know what your liabilities exposure is.

We have seen this movie before.  When mortgages started going into default, no one could value the liabilities of banks like LB who had played at this Blackjack table (sub-prime mortgage backed securities).  If you cannot calculate your liabilities, you have no way of balancing the books, and therefore no way of knowing what each share of stock is worth.  When the market concludes they cannot know what a share should be priced at, everyone sells.  When everyone is selling something, and no one is buying it, that something is - by definition - worthless.  This is where DB is right now - even without the DoJ fine.  The only thing the DoJ fine may do is accelerate the day of reckoning.

We are learning that "government officials in Berlin, speaking on condition of anonymity,... hoped to facilitate a quick deal that would buy Deutsche Bank time to regain its footing."

What we are not told is how they propose DB "regain its footing."  Their "feet" are supposed to be planted on good collateral.  Either you have enough of it or you don't - and DB doesn't.  There are only two options: 1) Discharge the 'bad debt' in a bankruptcy; or 2) Raise more capital.  The raising of capital would require DB to offer more shares of stock.  There are two problems with this: First, it dilutes the value of the shares currently outstanding, making them unattractive to investors.  Second, it means investors are asked to buy shares in a company which cannot reliably state its liabilities.  You have to be smoking some choice herbs to make such an investment.

So then what?  A Central Bank - or a consortium of Central Banks - buy up the bad debt on DB's balance sheet to make it possible for DB to have a reliable print on the liabilities side of the books, so it can then raise more capital.  And in some cases, the CBs themselves buy that new stock.  When you address this problem from the 'assests' side of the sheet like this, you leave completely unaddressed the underlying cause - the excess of bad debt.

Sound vaguely familiar?  It should... again, we have seen this movie before.

On to my second point.  We have to go back to the 'dot com' bubble of 2000 to understand how we got here.  Easy money created massive speculation in 'dot com' companies because the Internet was so new and its promise so great.  When that bubble popped, 'geniuses' like Paul Krugman (single handedly responsible for the destruction of Japan's economy) called for a housing bubble to replace the dot com bubble.  We all know how that ended.

Central Bank intervention on the 'asset' side the sheet has done nothing to curb the appetite for bad debt.  In fact, by pushing interest rates ever lower, they have forced banks to 'reach for yield' in ever riskier ways.  Money and the economy is like nature and a vacuum.  The money has to go somewhere, so when all of the otherwise sound, productive uses have been funded, if money is left sloshing about the system, it will ALWAYS end up as chips on a Blackjack table.

So where are we now?  On the top of an 'everything bubble' led by junk bonds.  And a junk bond is nothing but the corporate version of a sub-prime mortgage!  DB, in particular, is the king of junk-bond-backed derivatives.  Again, replay Serena Gomez above to see what DB has been doing - only now it is in corporate bonds across the entire economy rather than mortgages.

Lastly, I have to honest about being a good German ('Horst' is actually a common German first name); I like my Schadenfreud paired with a stein of San Diego craft beer!

The entire European project has been built on a house of cards of debt denominated in Euros.  The idea is that Europe's people act in the interests of all Europeans - until they don't.  Listen to what is being said about DB:
The resolution of the crisis through a reduced settlement is crucial for Chancellor Angela Merkel, who faces a federal election next year. It could be political poison for her government to rescue a bank that got into trouble through speculating. At the same time, officials recognise that Germany's biggest bank, which employs around 100,000 people, cannot be allowed to fail.
Why?

'We are not Austria. We are the biggest economy in the European Union, one of the world's leading exporters. We need a big bank with a European and international presence but which is anchored here in Germany.' The official added that merging Deutsche with a European rival was fine in principle but only if Germans controlled the combined entity.
But wait! What happened to Europe?

A Tour de Force of Sophistry: Janet Yellen Needs to Resign

Posted on Wednesday, September 21, 2016 No comments

Wednesday, September 21, 2016

The statement from the Federal Reserve released this afternoon is a tour de force of sophistry, trying to explain exactly how doing the same thing over and over again is not insane.  Here is a blow by blow commentary:
Although the unemployment rate is little changed in recent months, job gains have been solid, on average.
Which jobs? The phantom 'jobs' derived statistically by the use of an out-of-date business birth/death ratio?  Do they mean the the service sector jobs which are being taken disproportionately by those 55 and older, for whom retirement has been exposed as a cruel joke?  If Ms. Yellen actually thinks the jobs report is 'solid', she should resign.
Household spending has been growing strongly but business fixed investment has remained soft.
Why bother with "fixed investment" when you have a much more certain return buying back your company's own stock? (Not to mention that nice executive bonus which is tied to the stock price!)  The data on corporate debt is available to anyone willing to look.  Corporations are further into debt than before the last crisis, and the bulk of those funds have gone to stock buybacks.  If Ms. Yellen cannot recognize this mathematically obvious reason for the 'softness' in fixed investment, she should resign.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
Apply a stable calculation methodology to employment data from 1977 (when the 'maximum employment' mandate was added) until today, and it will become painfully obvious that the Federal Reserve has failed at this part of its mandate.  But this is more the fault of Congress than the Fed, for the Fed has never had the necessary tools.  They still don't, and they never will.  Full employment is a function of fiscal policy that prevents government from unduly competing with the private sector for capital.  If Ms. Yellen does not have the backbone to slam this ball back into Congress' court - where it belongs - she should resign.
The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace. 
Exactly why do they believe this?  After eight years of such monetary policy, we have not yet seen any 'moderate' expansion.  Why will a ninth year be any different?  If Ms. Yellen cannot explain to us why we should keep doing the same thing over and over again, expecting a different result, she should resign.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.
Has it occurred to the Fed that they have cause and effect reversed?  Energy prices are low because there is a massive glut of supply and decreasing demand.  Why do they believe the effects of declining energy prices are 'transitory'?  The only way they rise is if the economy places greater demand on current supplies.  Exactly how does the Fed see that happening in a ZIRP and potentially NIRP environment where stock buybacks and derivatives speculation compete with productive uses of captial (which requires energy)?  Oh, wait, we've never been in a ZIRP/NIRP environment, so they can't possibly predict what will happen.  If Ms. Yellen does not appreciate how much about the current situation she cannot possibly know, she should resign.
The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.
Where do I start? After eight years of "wait[ing] for further evidence" we have every right to ask why they 'judge' that a ninth year will make a difference.  And if Ms. Yellen cannot explain that, she should resign.

And what does 'for the time being' mean?  With corporate debt, especially junk bonds (high yield) - which are just the corporate version of the sub-prime mortgage - higher now than before the last crisis, exactly when does she think will be 'a good time' to cut off the ability of over indebted corporations to to serially refinance their bonds?  Rising rates will force what are basically zombie companies into bankruptcy - and the longer they wait, the more of them will go down in flames all at once.  If Ms. Yellen cannot explain why some undefined time in the future will be 'better' than today for this reckoning, she should resign.

'For the time being'?  With the stock market propped up by corporate debt-funded stock buybacks, exactly when do they think will be 'a good time' to raise rates and cut off this support for stock prices?  With real estate all but back at pre-crisis inflated levels, and rising rates precluding refinancing of mortgages, exactly when does she think will be 'a good time' to raise these rates?  If Ms. Yellen cannot explain, she should resign.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
How?  In 5,000 years of monetary history we have never had debt instruments yielding less than 0%.  Yet today, almost 1/3 of bonds outstanding - worldwide - are yielding negative rates.  Exactly what models are they using to inform their 'expected economic conditions'?  In the absence of any historical examples of the current monetary environment, exactly how have they validated those models?  If Ms. Yellen cannot explain, she should resign.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Again, what models inform 'indicators of inflation pressures and inflation expectations'?  How are those models validated?  And what the hell does "readings on financial and international developments" mean?  Is Ms. Yellen now admitting that the Fed is effectively the world's Central Bank?  Is she now admitting that the stock market is now the only 'data' that really matters?  Since they cannot have validated models without having historical patterns to validate against, it would seem there is nothing into which to plug their 'data' - so they end up with nothing but stock market indices.  If Ms. Yellen cannot explain why this is not the case, she should resign.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
What a complete crock of sophistry.  Monitor 'expected progress'?  Absent validated models, how?  They "expect that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."  Why do they expect this?  They have expected this for eight years now.  Why do they expect a ninth will change anything?  The economic outlook will be 'informed by incoming data'?  With which they will do exactly what?  Plug the data into exactly which models?  Which have been validated in the absence of historical patterns exactly how?
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Oh my... They are going to maintain a massive balance sheet - preventing all of that capital from obtaining to actually productive uses - "until normalization of the level of the federal funds rate is well under way."  Which will be when again?  Sometime in the ninth year, after eight years of doing the same thing over and over again and expecting a different result?  And they expect to see that day when normalizing interest rates is 'well under way'?  Why do they expect to see that day, seeing as they have no validated models into which to plug their data so as to inform those expectations.

If Ms. Yellen cannot explain this in a way the orindary saver can understand, she should resign immediately.

Just When You Thought You'd Seen It All, Central Banks Begin 'Kiting' their 'Checks'

Posted on Friday, September 2, 2016 No comments

Friday, September 2, 2016

 It's a term from when credit cards were a rarity and 'Web Bill Pay' hadn't even been imagined.

Someone would open a checking account at two or more banks.  They would write a check from their account in Bank A to their account in Bank B.  There the funds would be available to allow other checks written against the account at Bank B to clear.  Once the checks written against Bank B clear, the person writes a check against the account in Bank B to his account in Bank A to allow the original Bank A check to clear.

The actual check would go from the bank at which it was deposited to an 'item processing' facility where the check would be scanned.  The numbers on the bottom of a check are printed with a special ink called MICR (Magnetic Ink Character Recongnition).  On a typical consumer checking account, the first set of numbers at the bottom (the 'ABA number') identify the bank.  The second set is the check number, and the third set is the account number.  After scanning these numbers, along with the amount they are sent to the bank for the settling of the check.

This scheme of using alternate accounts as a 'float' for the other account - basically turning each account into a form of interest-free 'payday loans' - depends on the time interval between when the check is deposited at a branch to when it is scanned at the item processing facility.  That time interval can be expanded by adding accounts at other banks to a circle around which a 'float' is passed from bank to bank.

The term for it is 'Check Kiting'.  The original check from Bank A to establish a 'float' in Bank B is called the 'kite' check.  It is and always has been illegal.

Apparently, though, not for Central Banks.

The underlying motive for check kiting is essentially the need for personal 'liquidity' - a purposefully opaque central banker's term for having money to spend.  For central banks, the desire is to provide 'liquidity' to 'markets' in the hope of increasing 'aggregate demand', therefore provoking inflation - so as to make today's staggering debt loads cheaper to pay.  That last part - making debt cheaper - is probably the hardest part for ordinary people to understand.  But for this post, it is not really that important.  What matters here is that central banks are engaged in a grand 'check kiting' scheme - one which can only end badly.

Let's say Spain's Banco de España buys bonds issued by the Spanish government.  To simplify, Banco de España writes a check to buy these bonds.  But to cover that check, they sell from their 'inventory' of bonds to Germany's Bundesbank, which writes a check.  The Germans now have Spanish bonds in their inventory, so they sell German government bonds to cover their check to Spain. Portugal writes a check to the Bundesbank for these German bonds.  The Portuguese central bank now has German government bonds in their inventory, in addition to their own government's bonds, so they sell some of their sovereign debt to Banco de España to cover their check to the Bundesbank.  Spain writes a check to Portugal's central bank for that debt, and then sells their debt to the Bundesbank to cover the check.  The Bundesbank then writes a check....

And around we go.  The 'kite check' is simply being passed along from central bank to central bank. (Yes, this is where you start banging your head on the desk...)

Remember, if an individual does this, it is all about the need for personal 'liquidity' so they have money to spend on something needed or wanted.  Central banks are kiting their checks in the hope of providing liquidity to their markets - hoping that it will be spent.  Throughout this whole charade, which is clearly not working, our esteemed central bankers remain oblivious to one stupendously simple observation: If you want people to buy products, you might want to try making products people want to buy.  IT WORKS EVERY TIME!

There is a point at which money becomes so cheap that the odds at the Blackjack table of derivatives speculation are actually better than lending to Main Street businesses, which might actually be able to use the capital to improve products and processes, or even to create entirely new markets.  (This is what made Steve Jobs the legend that he is.)  At that same point of cheap money, a publicly traded company can actually return the illusion of greater share value by buying back its own stock, rather than creating a nominally lower - but real - return by upgrading plant and equipment or doing R&D on a new product (otherwise known as capital expenditures, or 'capex', which then require them to actually hire people).

We can call this a Ponzi scheme or a Check Kiting scheme.  Either way, in any other part of our economy other than the Wizard of Oz world of central banking, this would be entirely illegal and would result in people going to jail.  (At least Iceland, of all places, gets this and actually jails bankers for stuff like this.)

The very best advice was actually given by Steve Jobs to the graduates of Stanford University, to whom he spoke at their 2005 commencement:  He said: "Don't be bound by dogma, which is living with the results of other people's thinking."

That advice can be no better applied than to today's central bankers, our esteemed Federal Reserve Chair Janet Yellen most certainly included.

Can Russia and America Both Be Great Again?

Posted on Monday, August 1, 2016 No comments

Monday, August 1, 2016

In his observations of Democracy in America, Alexis de Tocqueville was prescient in a way few writers have been throughout history.  Of Russia and America, back in 1835, he said this:
There are now two great nations in the world which, starting from different points, seem to be advancing toward the same goal: the Russians and the Anglo-Americans. Both have grown in obscurity, and while the world’s attention was occupied elsewhere, they have suddenly taken their place among the leading nations, making the world take note of their birth and of their greatness almost at the same instant. All other peoples seem to have nearly reached their natural limits and to need nothing but to preserve them; but these two are growing...  The American fights against natural obstacles; the Russian is at grips with men. The former combats the wilderness and barbarism; the latter, civilization with all its arms. America’s conquests are made with the plowshare, Russia’s with the sword. To attain their aims, the former relies on personal interest and gives free scope to the unguided strength and common sense of individuals. The latter in a sense concentrates the whole power of society in one man. One has freedom as the principal means of action; the other has servitude. Their point of departure is different and their paths diverse; nevertheless, each seems called by some secret desire of Providence one day to hold in its hands the destinies of half the world.
A new effort is needed to review and reconsider old observations.  The political season in which we find ourselves, with Donald Trump's vow to "Make America Great Again," is paired with what appears to be a geopolitical strategy to 'weaponize' refugees fleeing Syria's civil war so as to fragment the North Atlantic Treaty Organization (NATO) and then re-establish the Soviet 'sphere of influence'.  There is a sense in which Russian President Vladimir Putin seems to be working towards his own version of Trump's goals: to "Make Russia Great Again."

It seems this has us hurtling toward war. This need not be.  But to avoid this we must ask ourselves what a world looks like when both Russia and America are great again.


To Comprehend the Incomprehensible

Americans must understand what they cannot possibly comprehend.  As strange as that might sound, we ought to be grateful that we do not have memories of losing 25 million fellow Americans to war.  This memory, more than anything, animates the Russian world view which sees NATO expansion along the Russian border as an existential threat.  We have to realize that the Russians learned a seminal lesson - the hard way: You do not defend your people and your way of life with pieces of paper.  The international order we take for granted is the byproduct of the Treaty of Westphalia (1498), which ended decades of religious conflict and created the modern 'nation-state'.  Treaties serve us well as a form of contract: they encode our intentions toward, and obligations to, each other and provide a framework for resolving disputes peacefully.  But what they do not do is defend our way of life.  That is done by soldiers with weapons, and leaders who are willing to call upon them.

This seems to bother those on our 'Left'.  President Obama, particularly, seems more put off by seeing his vision of the 21st century literally reduced to rubble across the Middle East and the Ukraine than by the loss of lives left in its wake.  Russia's memories simply do not permit them this self-centered luxury of making decisions based on a fantasy about what the world should be like.  The world has not been very kind to them; not in the 18th century, not in the 19th, and certainly not in the 20th.  They have no reason to believe the 21st century will be any different.

And so the Russians will never again seek to secure their nation with a piece of paper like their non-aggression pact with Hitler's Germany.  For this reason the elimination of nuclear weapons is a fantasy - a figment of self-absorbed imaginations willfully ignorant of the lessons of history.  Even if a treaty were to be signed committing to the elimination of nuclear weapons by the U.S. and Russia, it is almost certain neither party would honor it.  This would not be because either side is evil.  It is because Russia's searing memories simply forbid them from relying on such an arrangement.  And there are enough of us here in the U.S. who know this well, and who would insist that we maintain our deterrent.

None of this means we should abandon our American principles.  But it does mean that our strategic objectives should begin with understanding the inner logic behind the beliefs and behaviors of the Russian people and their government.  Because we cannot possibly share - and thankfully so - the kind of memories shared among the Russians, there will always be more about this inner logic that we do not understand than there is that we do. A strategic humility in this respect is essential.


The False Choice of Vassals or Enemies

It has been observed that this inner logic compels Russia to believe it must be surrounded by vassal states.  American diplomat George Kennan is believed to have said that Russia can only have vassals or enemies at her borders.  Russians must understand that forcing this choice is a choice for war.  For exactly the same reason we struggle to understand them, we should hope their memories would compel them to recognize this.  Russians seem driven by an ethnic and linguistic solidarity.  As de Tocqueville noted, their national identity is one forged by conflict with others.  Russia must realize that our 'national conflict' was initially religious.  We spring from a stream of the Reformation which taught that one did not become a Christian by being born and baptized into the church of the community, but by hearing, understanding, and responding to the Gospel as an individual.

These Swiss Reformers came to be known as the 'Anabaptists' - those who were 'baptized again'.  And if one became a Christian by choosing Christianity for themselves, it followed by necessity that one could not be forced to become a Christian - or to follow any religion at all.  These 'Anabaptists' were persecuted bitterly for their beliefs - by Protestants, Anglicans, Catholics, and Orthodox alike.  The only place where they found freedom to live according to their conscience was in the New World.

And in that New World they fought with the wilderness, not with other peoples settling age-old ethnic scores.  And so we Americans have a wholly different set of national memories and are bound by an identity of ideas rather than of ethnicity, language, or religion.  It seems the most significant unit of society for Russians is the Russian State, as protector of a people whose identity is bound up to their ethnicity, language, and religion.  Yet for us as Americans, the most significant unit of society is the individual.  Rather than the individual existing for the State, the State exists for the individual - to secure his or her right to speak whichever language they choose, practice whichever religion they choose (or none at all), and otherwise be left alone to freely associate with others for whatever lawful purpose gives meaning to their lives.  Thus it is when we see others who wish the same freedom that we find ourselves in solidarity with them - with any people who seek to forge a national identity of ideas rather than of ethnicity, language, or religion.


A Way Forward: A Swiss Neutral Alliance

In the framework of international law as it stands today, Switzerland is the oldest country to be formally recognized as a 'neutral' state.  Seeing as it is situated between France and Germany and the Franco/Germanic ethnic and religious rivalries have been the source of past wars, their geographic situation has lent itself naturally to this role.  The states which lend themselves to a similar status are, from north to south, the Baltic states of Estonia, Latvia, Lithuania, Belarus and Ukraine.  Georgia and Azerbaijan border Russia north of Iran and east of Turkey.

Rather than pursuing a return to Cold War 'spheres of influence', Russia and the United States should make a joint request to the Swiss to initiate a formal treaty alliance of neutrality to which each of these states would be invited to belong.  Of greatest importance to this evolution of the international order would be an explicit guarantee of the right to intervene militarily in defense of this neutrality without having to gain prior approval from the United Nations Security Council.  This would allow Russia to expressly guarantee its security through its military capabilities.  Their searing memories require them to agree to nothing less.  This would also allow NATO to guarantee the neutrality of those Baltic states already in NATO, as well as the Ukraine, Georgia and Azerbaijan.

Such an arrangement would suffice to answer the American commitment to solidarity with those who simply want to be free to speak as they wish in the language they wish, to practice the religion of their choosing or none at all, and to otherwise be left alone.  This arrangement would also allow Russia to honor the memories of those they lost in war by securing their borders against a repeat of memories none of us (perhaps except the Polish) can fully understand.  Lastly, this arrangement would free the people of Europe, the neutral states, and of Russia to invest their energies into the creation of new wealth by charting out innovative and prosperous paths into the 21st century.


We Will Some Day Be Remembered in Photos

Russian president Putin recently memorialized those lost in World War II together with ordinary Russians, holding a picture of his father.  In a world where America and Russia are great again, the time will come when our children and grandchildren will treasure pictures of us after we are long gone.  In a world where America and Russia are great again, they will be smiling and laughing, not grieving over memories of the ravages of war.

Where the Government Fears the People...

Posted on Wednesday, July 13, 2016 No comments

Wednesday, July 13, 2016

It was John Basil Barnhill, in a debate about socialism in 1914 in St. Louis, who said something which has come to be ascribed to a number of our Founding Fathers.
Where the people fear the government you have tyranny. Where the government fears the people you have liberty.
I have waited until now to reflect on the recent police shootings, the retribution in Dallas, and the ongoing protests out of a desire to allow the grieving families the opportunity to bury their loved ones before diving into the inescapably political debate.  What I'll say here will likely be controversial, but at some point certain topics have to be broached, and it is better if we as conservatives start by looking in the mirror before addressing the shortcomings of others.  The pastor of the church I grew up in was fond of saying: "Whenever you point a finger, your other three fingers are pointing back at you."

Politics Before Community is Tearing Us Apart

If you have not read Rules for Radicals by Saul Alinsky, I strongly recommend it.  Not because I agree with what he says, but because once you read it you will understand exactly how we got where we are today.  By the time Alinsky wrote (1971), big government had metastasized into a Byzantine labyrinth of bureaucracies.  If you sought to have a problem in your community addressed, you got the 'run around' with various forms of "you get that at the other window."  Alinksky organized communities around unaddressed grievances, taught them to "freeze" the issue with a particular bureaucracy, "personalize" the issue, and "polarize" the options.  He also taught that ridicule was the most potent weapon in the arsenal of a community organizer. And that was before social media, YouTube and cable television.

And so here we are: We have an entire industry of non-profit organizations merchandising our grievances.  They herd us into narrow political corners where we live vicariously through political media personalities.  Make no mistake - "makers and takers" is just as much a grievance meme as "the war on women."

Then, having herded us into these narrow corners, they train us to out-ridicule each other on social media.  Alinsky claimed there was no way to defend against this tactic.  Interestingly enough, Donald Trump has shown that their is - he simply doesn't care.  This, more than anything else, helps explain his appeal.  He is immune to the social media ridicule machine.

And once they have us on social media working overtime to out-ridicule each other, the fundraising letters come out.  It is then that we should begin to awaken to what is really going on here.  There is no way to live any semblance of a life as a community and not have grievances arise.  Politics is supposed to provide a mechanism for the 'redress of grievance'.  This goes to the very heart of the Magna Carta and the U.S. Constitution after it.  But instead of working toward 'redress' of grievances, we have given government and politics over to those who merely want to monetize them.

And as conservatives the most we have been able to come up with is how to turn the tactics of Alinsky against the Left.  Instead we ought to be doubling down on our community engagement, working to wrest grievances away from distant bureaucracies so we can actually get to work solving the underlying problems. We suffer from what philosophers call the 'tragedy of the commons': When something is broken and nobody owns it, fixing it is always someone else's job.  Instead of taking a problem and freezing it, personalizing it, and polarizing it, we ought to simply be owning it.  And once the problem-solving work at hand is done and the beer has been poured, then we can debate the bigger political questions of the day.

Or more simply: We should put our community ahead of our politics, and then let our political debates emerge from that context.

The Relationship Between Law Enforcement and the Community has Changed

In the light of the Baton Rouge and St. Paul shootings, the first inclination from those of us who are troubled by the breakdown of relationships between police and their communities is to say "let's wait for the facts to be discovered."  The problem is 'facts' do not stop bullets.  We also race to trot out the latest statistics about black-on-black crime, the ratio of black people killed by police vice whites, etc.  The same applies: 'statistics' do not stop bullets.  They will neither bring back to life the two black men killed by police officers nor the five white officers killed by a black man,

Advances in technology have, in far too many instances, proved black men innocent after serving decades in prison for a crime they did not commit.  This seems to be - in the eyes of our black neighbors - what the 'system' produces in their communities.  This is the same system we expect them to trust to 'finds the facts', Each life wasted in jail for a crime not committed is a bell which cannot be un-rung; it is the source of a deficiency in trust which we as conservatives seek to repair.  But we cannot even begin that work until we are engaged with our local communities in a way that convinces black (and other minority) communities that our politics actually can be a viable way to seek redress for grievances.  Our deployment of statistics to gain the upper hand in the social media ridicule game is completely at odds with the political life we otherwise say we seek.

Because of these advances in technology, along with social media and today's smart phones, law enforcement needs to change as well.  On the broader subject of race, we often hear past incidents of racial abuse by police explained away by saying that police departments are a reflection of the community in its time and today's police officers should not be judged by the actions of officers in past generations.  At best, this is foolish.  At worst, it deepens the deficiency in trust because it simply fails to listen.  We just saw on social media an encouraging clip of 'Black Lives Matter' protesters joining a counter-protest and building relationships.  This shows us that we are writing new stories - which is good.  But we fool ourselves if we think our new stories overwrite the old ones like empty space on a computer disk.  When a police officer puts on the uniform, he or she puts on the history - the good and the bad, the beautiful and the ugly.  We need a willingness on the part of law enforcement today to own the misconduct of the past, call it for the evil it was and is, and reject it outright.  The last of those three, by itself, is simply not good enough.

We Deserve Better from Our Colleges and Universities

I have an academic background, and to a great extent my thinking on race has been enriched by some excellent professors.  But if asked to find a 'grievance merchant', my first stop would nonetheless be the faculty lounge.  Hiding behind tenure and dressing up sophistry in the garb of academic freedom, our kids are fed a diet of circular thinking on race by our colleges and universities.

We are told that racism is 'prejudice plus power'.  We are told (and on this I agree) that 'prejudice' is simply the natural tendency to generalize about people who are different based on a necessarily limited set of experiences.  But because - the claim goes - white people (males in particular) have historically wielded political power, this prejudice plus power creates racism.  Therefore if you are white, you are - by definition - racist.

In order to arrive at this kind of conclusion people have to be seen and judged as members of a race instead of as individuals. The faculty lounge will say this is necessary to address the history of racism - defined, of course, as prejudice plus power.  The reasoning for their definition presumes the validity of their definition.

What makes matters worse - and this goes directly to the call for dialogue put out by the trauma surgeon who treated those injured in the Dallas shooting - this definition is the intellectual price of admission to the conversation, led as it is by 'academics'. Today's college and university campuses - with their cultural speech codes, 'micro-aggressions' and overall de-legitimizing of dissent - foment dangerous mutual suspicion rather than equipping our communities for the dialogue we so badly need.

The Task Ahead

I have family in law enforcement and I do not want them or any other police officer to have to patrol in fear for their lives.  But it bears repeating: "Where the people fear the government you have tyranny. Where the government fears the people you have liberty."  The police are the most immediate agent of government most of us will interact with.

Our black neighbors have an inalienable right given to them by their Creator to life, liberty and the pursuit of happiness - without fear of what the next interaction with a police officer might bring. The fear felt among law enforcement should provoke a willingness to 'wear' the history of the uniform - again, good and bad, beautiful and ugly.  An end needs to be put to attempting to explain away the evil of past misconduct and replace that with a commitment to redeem the evil of the past with the good police work of today.  Our communities are willing and eager to draw upon memories of past good police work as our part in this redemption.  More than anything else, this is what a new and honest look at the culture of law enforcement requires.

We have a lot of work to do.  We as conservatives are heirs to the legacy of Abraham Lincoln and to the ideas of human freedom which our Founding Fathers fought to establish.  We will only live up to this history and this moment if we challenge ourselves before we square off politically against those with different views.

It's Time to Rise Up Against the Ignorant Masses!

Posted on Wednesday, June 29, 2016 3 comments

Wednesday, June 29, 2016

And so it’s on…

James Traub, at Foreign Policy.com, has called for the “elites to rise up against the ignorant masses.”  In a spectacular display of the very ignorance against which he issues his call to arms, Traub shows how thoroughly infected the establishment is with their group-think.  God forbid the ‘fist shaking’ rabble would actually think for themselves and effect an “utter repudiation of the bankers and economists and Western heads of state who warned voters against the dangers of a split with the European Union.”  If there was a miscalculation on the part of David Cameron, it was “how utterly he misjudged his own people[‘s ability to think for themselves].”

Rise up against the ignorant masses? Be careful what you wish for, Mr. Traub… Your intellectual nakedness just might end up on full, public display.

The Foundational Issue: The Most Significant Unit of Society

Traub shows himself ignorant of both British and American history when he concludes: “[M]aybe we have become so inclined to celebrate the authenticity of all personal conviction that it is now elitist to believe in reason, expertise, and the lessons of history.”

Philosophically, ‘Scottish Common Sense Realism’ provides a framework for understanding how someone’s thinking would begin with ‘personal conviction’.  This framework lies at the heart of the thinking of authors like John Locke, on whom Thomas Jefferson depended heavily when writing the Declaration of Independence.

Locke’s philosophy of government and economics expresses this framework and stands in stark contrast to that of Thomas Hobbes. Between the two of them we can drive the difference down to a single question: What is the most significant unit of society?  The answer for those who would follow Hobbes is the State.  For those who would follow Locke it would be the individual.

Money and Monetary Policy: The Scaffolding of Society

At the heart of debates over economics, then, lies the matter of money.  If you are inclined to build on Hobbes’ premises, money is a tool of the State for ordering the affairs of society.  If you build on Locke’s foundation, money is a utility contrived first by individuals to facilitate commerce.  If we revisit the debate between Keynesian and Austrian economics, these two presumptions about the nature of money animate each philosophy.  Keynes presumed an essentially Progressive, statist understanding of human government.  His prescriptions for monetary policy follow quite logically.

The problem with Keynesian economics at this point in history (which Traub at least recognizes to be singular) is he could not have foreseen either the computer or how it has changed banking on the one hand and supply-chain management on the other.  Neither could he have entertained the deployment of massive amounts of capital to essentially speculative financial products – most of which would have been illegal in his time.  These two things have conspired to elevate what Keynes called the “Zero Level Boundary” to a point above zero where money has been made so cheap that the actual creation of new wealth (by improving things) cannot compete with speculation and stock buy-backs for available capital.  Or in other words: when the chips are free, who wouldn't gamble?

But putting that otherwise necessary debate aside, Traub believes the elites are on the side of Madame History, so let’s consult with her.

The First and Second Bishops Wars (late 1630s - early 1640s) revolved around church order and leadership.  Today it is hard to appreciate the degree to which social order broadly speaking depended on church order in this time.  Charles I tried to enforce ecclesiastical uniformity throughout his kingdom, but the Scots were not having it.  Charles assembled an army to impose his order despite difficulty raising the needed money.  The First Bishops War resulted in further negotiations.  The resulting repudiation of Anglican order resulted in the calling of a Parliament, which subsequently demanded redress for both ecclesiastical and economic (tax) grievances.

Charles responded by dissolving Parliament.  This time, to raise the needed funds to pay his soldiers, he confiscated the gold held in the Royal Mint as a forced loan.  This gold did not belong to the Crown but to English merchants.  While the loans were paid back, as a result of this monetary impunity merchants began depositing their gold with trusted goldsmiths.  They received a receipt in return.

These receipts then began to circulate in place of the gold as a medium of exchange for goods and services.  The goldsmiths also realized that not all receipts would be presented for redemption at once and began issuing ‘extra’ receipts, lending them out at interest.  ‘Fractional reserve banking’ was born and these receipts became a forerunner to paper money (e.g. the Federal Reserve Note).

There are two things about this history which are instructive for us today: The first is the confiscation of the money supply by a ‘sovereign’ to enforce his preferred order on society.  Those who understand Hobbes’ philosophy also understand that a ‘sovereign’ need not be a monarch.  A bureaucracy, or an assemblage of them such as the European Union, can wield the power of a sovereign just as can a monarch and its palace. And that bureaucratic sovereign can rule with the same impunity which eventually drove matters to the English Civil Wars. But that impunity is not possible without control of the money supply. Second, this history clearly validates the premise that money is (and always will be) first a utility contrived by individuals to engage in everyday commerce.

It also exposes the underlying problem of monetary policy we face today: It should be clear that those (Traub and his elites) who espouse a Hobbesian philosophy of government would view money as a tool of the State.  Too bad history is not on their side.  And those Traub so artfully calls ignorant ‘fist shakers’ – well, they just want their money back.

Money and ‘Globalization’

Traub believes ‘globalization’ to be the root of the problem and caricatures the ‘fist shakers’ as older, xenophobic rabble pining for the cultural homogeneity of the past. This is a convenient straw man, as it does not account for the underlying stream of Scottish Common Sense Realism that continues to animate the thinking of ordinary people and, rather inconveniently, undermines the superiority complex of the elites.

The arguments for globalization generally claim a net economic gain for ‘free trade’ agreements.  But let’s look at the underlying data: First, these claims require that we treat all jobs alike.  For those who work in close proximity to the money supply – controlled as it is by what I will call (deliberately evoking echoes of Dwight Eisenhower) the ‘political/financial complex’ – a service-sector job and a manufacturing job are counted the same.  But when counted separately we see a dramatic shift away from manufacturing jobs toward lower paying, service-sector jobs.  The problems with this are both social and economic.

Economically, we become further and further removed from the creation of wealth.  A manufacturing job is, by definition, a job in which raw materials – which by themselves would be useless – are turned into useful things.  The difference between the value of that useful thing and the value of the underlying raw materials is what wealth is.  A service sector job, on the other hand, merely provides a needed or desired service to a consumer and does not directly contribute to the creation of wealth.

As a result, socially, we become an economy of mansions, butlers and maids.  What is especially maddening about this is it reflects the very income inequality we constantly hear about from the elites.  But if equality were really what the elites were after, they would insist we bring the regular population back into closer proximity to the creation of wealth.

But this is not what is being demanded; the rabble is required to assent to the redistributionist wisdom of the elites who view government, and as a result money, in a way that is fundamentally opposite to the traditions of individual freedom which form the foundation of what it means to be American.  The elites are fundamentally demanding sovereign control over the social order.  Just as did King Charles I.

And the ‘fist shakers’ are saying no.  Just as did the Scots and the English merchants after them.

Money and the ‘Fabrication of Reality’

Traub’s claim that the ‘nativist’ forces on the right – both on the matter of Brexit and here in the United States – are ‘fabricating reality’ is especially rich.  The British population was apparently subject to lies about the dangers of immigration.  Yet in Germany, a citizens’ group is using Google Maps to tag by location the instances of sexual crimes reported as being committed by migrants from the Middle East.  With other parts of the ‘elite’ telling us that women claiming sexual abuse should be believed, Traub and his tribe have some explaining to do: Who, it might be asked, is doing the ‘fabricating’?

And that question only gets more pressing when we look at economic series here in the U.S..  Starting with unemployment: In the late 1970s the U.S. Congress was faced with the hot potato of high unemployment.  Instead of making tough fiscal choices to keep the government from consuming resources which would have been more efficiently deployed by the private sector, they tossed the hot potato over to the Federal Reserve.  The Humphrey-Hawkins Act of 1977 added “full employment” to the Federal Reserve’s original mandate of consumer price stability.

Now if we were to return to the calculation methodology for unemployment prior to the passage of Humphrey-Hawkins, and then plug in the data available from then until now, the utter failure of the Fed to foster full employment would become painfully obvious.  But this would also mean Congress would have to come to terms with a simple fact: the Federal Reserve does not have – and has never had – the necessary tools to foster full employment.  This has always been about Congress hiding from its fiscal responsibilities.  And the ‘reality’ of employment in America has been ‘fabricated’ ever since by changing the calculation methodologies to hide the truth.  Again, it must be asked, who is doing to fabricating?

Then we move to inflation. In the early 1990s the Clinton administration and the Republican Congress led by Newt Gingrich were faced – again – with having to make tough fiscal choices principally to keep Social Security solvent.  And, again, they copped out.  This time they decided to change the manner in which the Consumer Price Index was calculated in order to suppress the growth of government benefits and the costs of borrowing.  It is important here to understand that interest rates are a function of the rate of inflation, which is reported as the Consumer Price Index.  While that might seem arcane, the following is not: No one refinances a debt at a higher interest rate.

So, having copped out on making tough fiscal choices, Clinton-Gingrich sent us down an unsustainable path of borrowing to the point where the United States Treasury, after paying for government programs, does not have enough money to even make the ‘coupon payments’ (also known as interest) on its bonds, to say nothing of redeeming the maturing bonds – the very textbook definition of ‘bankrupt’.  As a result, the reported rate of inflation has to be ‘fabricated’ to support ever-lower interest rates and the ‘debt ceiling’ constantly raised to enable serial refinancing of the national debt.

Thus something as fundamental to consumer prices as rent – which is rising at around eight percent a year – is not counted in the CPI.  Prices such as food and energy – as if the consumer is not impacted by these either – are also not counted.  The ‘experts’ Traub thinks so highly of tell us this is because of the ‘volatility’ of these prices.  Yet even a rudimentary understanding of economics is enough to know that this same volatility is exactly the data which should be warning us of a problem with monetary policy.  But Congress does not want to hear the truth, and so the elites must ‘fabricate reality’.

Be Careful What You Wish For

Traub’s call is for the ‘elites’ to rise up against the ‘ignorant masses’.  Yes, indeed, please do.  But be careful what you wish for.  You just might discover that we are having the very same argument had between Thomas Jefferson and Alexander Hamilton at the beginning of the Republic.  Consider the following comment from Jefferson, especially in light of the last financial crisis and its wave of foreclosures:
If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.
What is happening today has been brewing for a long time.  The elites will be exposed for their fabrication of reality and the Scottish Common Sense Realism that forms the philosophical foundation of the American idea of self-government will be vindicated.  The British have struck the first blow in an epic battle that will return us to sound money and the creation of vast amounts of new wealth – and eventually to freedom itself over debt slavery.

And it will be this return to creating wealth measured by sound money that will return us to an economy where that wealth is broadly and justly enjoyed by a thriving and growing middle class who are actually making things again.
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