Blogroll changes

I have removed "Advancing Time" and "The Angry Economist" from my blogroll because there have been no new postings there for over two years. I have also removed "Adam Smith's Lost Legacy" which although as excellent as ever I can no longer consider non-famous.

EDIT:
Some days later I have also made an addition:  Chris Floyd's "Empire Burlesque". This was a sad decision for me. Our nation, our empire, is in a terrible state of moral decay and political corruption and practically the entire general public just shrugs and goes back to its favorite entertainments. Chris Floyd is brutally frank about this. He deserves some credit.

What's a central banker to do?

I'm not the first to notice this, but I thought it worth a brief blog post anyhow: Financial markets these days react less to economic news than to anticipated central bank reactions to economic news. This often produces the "bad news is good news" paradox. An example from Bloomberg.com  today is:

The euro headed for a third monthly advance after a report showed inflation in the region quickened more this month than economists forecast, fueling bets the European Central Bank will refrain from further stimulus. 

By normal rules, quickened inflation should be bearish for a currency. It means that in terms of goods and services that the unit is losing value. This is less important to traders, evidently, than the likely reaction of the central bank which would take the form of higher than previously expected interest rates paid on the sovereign debt denominated in the unit. Meanwhile, (also from the Bloomberg report):

Sweden’s krona dropped as a report showed the economy expanded 0.1 percent in the three months through September, after contracting a revised 0.1 percent in the second quarter.

Swedish inflation has been running far below the official 2% target.

This poses an interesting dilemma for central bankers. Under current theory, raising expected inflation is supposed to stimulate recovery, (the main mechanism being allowing real wages to fall thereby stimulating employment), but if interest rates and forex rates rise as a result then, again under current theory, that would be deflationary and anti-stimulative. What's a central banker to do? The current answer seems that the central bankers have to demolish their hard earned credibility as inflation fighters and convince markets that they have become irresponsible. (No, seriously!)

How we got here and the way out

"We have a government that hasn’t been able to agree on a budget in five years; that has historically, under both Republican and Democrat presidents and Congresses, spent money and committed itself to fund long-term programs without devising revenue streams to cover current costs or fund future liabilities."  -- Richard Fisher, President of the Federal Reserve Bank of Dallas

That is most certainly the crux of the matter, and here is the rest: It is simply true that the contraction of government spending in the near term contracts the economy, broadly impacting employment and income and living standards. Fiscal stimulus would be more effective than monetary stimulus because monetary stimulus has a way of being bottled up in the financial markets feeding speculation and tending to further enrich the already wealthy without creating any new production or employment. Fiscal stimulus, especially spending on infrastructure, directly creates jobs in the domestic economy while the infrastructure improvements themselves, even allowing for some waste, improve economic prospects going forward. The big problem with fiscal stimulus is the already high level of government debt. Financing fiscal stimulus with even more debt poses risks perhaps even worse than the "uncomfortable spillover effects" of continued extreme monetary stimulus that very properly concern Mr. Fisher. By not wanting to seem alarmist, he and other officials are likely understating their concerns in public. Where this leaves us, in my view, is that we need fiscal stimulus but it should be paid for with taxes, not debt. My recommendation is for a financial transaction tax that in effect mainly taxes unproductive speculation. As for the gross size of the government and its financial burden by way of either debt or taxes, the best single way to reduce it is to face the fact that operating a global empire is just too costly. It isn't just the military spending. Many of our trade policies are economically disadvantageous to us because they are designed to buy political alliance. And, yes, we need some kind of welfare reform, but if we are smart about it, it need not be cruel or draconian. Much can be done to reduce costs of medical care through simplification rather than increasing them through complexity the way I think Obamacare does.

War and peace

Thanks to terrorism there is much less difference between war and peace than there used to be. "War" used to be a matter of governments openly declaring war and sending armies across national boundaries to fight against each other. Civilians were often casualties but, at least, it was considered to be a war crime if armies deliberately targeted non-combatants. Violent attacks in times of "peace" -- governments not officially at war -- were crimes even if commited across international boundaries. The perpetrators were criminals and police, "peace officers", not soldiers, were dispatched to deal with them. Unfortunately, governments, including ours, got into a habit of lending support, usually covert but often overt, to terrorists treating them not as criminals but as freedom fighters or defenders of the faith or some such. Now laws that used to work well based on a distinction between war and peace are no longer realistic. That is a loss. Civilization, such as it was, is set back.

A new, (for me), thought about moral sentiment

Something I've noticed as an owner over time of various cats and dogs: When you come upon them doing anything out of the ordinary they automatically act nervous or guilty. They are concerned that they may be doing something you might disapprove of and they may try to avoid contact with you no matter how affectionate they are under normal circumstances. I think it shows how they respect your moral authority. And why do you have such mighty moral authority? I think it is primarily because they know how dependent they are upon you. Who pays the piper calls the tune morally as well as economically.

Is this a principle of cultural dynamics? Perhaps. It could mean that those we understand to own or control the means of our safety and welfare automatically become moral leaders. They might be government and politicians or business and captains of industry or some combination varying with individual circumstance and perspective. In the middle ages the moral authorities were the nobility and the church which between them owned nearly everything. The point here is that conformity to the desires of the major asset owners goes beyond mere pragmatic acknowledgement of dependency, it leads to a sense appropriate social order or propriety.

Karl Marx, of course, understood the social and political order as directly derived from the ownership of the means of production but I am talking of a more psychological effect here whereby moral relationships derive from perceptions of dependency upon owners of certain assets, specifically assets not dedicated to the immediate needs and wants of their owners but employed for social or commercial purposes. To the extent that commerce and politics are concerned with acquisition specifically of just those assets they are a means of acquiring moral, and consequently political or social, authority. Also, charity can be seen as a means of buying moral authority even if that is not its intent.

If we see the state as having moral authority, (contrary to libertarian theory or to natural law which invests moral authority more or less exclusively in individuals), then it would be because of the dependency of our welfare upon it which derives, in turn, from its command of material resources devoted to collective security. It isn't really because of an imaginary "social contract". It is because the state has an army -- so might makes right after all.

I am only being descriptive here. Morally, I still believe that we possess a natural sympathy for our fellow beings which in accordance with natural law lead us as by an invisible hand to seek the common good out of self interest even when unenlightened. Enlightenment in our self interest nevertheless can be quite helpful. To this end we need to be cognizant of the extent to which government and business property may be artificial either in its qualities or its quantities and thereby conferring upon its owners moral authority which may be less than entirely legitimate. In particular, the natural sentiments that work to put stamps of moral approval upon the decisions of government and business may have been unnaturally amplified and distorted through the operation of ideology and a priori moral imperatives. In hindsight, we can see this pretty clearly in the case of the medieval church and feudal estates. One wonders what we may be failing to understand about the present moral authority of government and business.

Paul Krugman and Steve Keen had an argument

I have been going over a heated debate from early last year between economists Paul Krugman and Steve Keen and I would like to set down a few thoughts about it. Let me right off state for the record that I am one of those who believe that Mr. Krugman came off much the worst of it. That does not mean that I am entirely satisfied with either the diagnosis or prescription offered by Mr. Keen.

The issue was basically over the efficacy of central bank monetary policy in curing or preventing recessions. Mr. Krugman has high confidence that central bank monetary policies, if conducted properly, have almost unlimited power to control levels of aggregate demand and thereby prevent or terminate major deviations from full employment and stable consumer prices in the aggregate. Mr. Keen however, argues that in the modern banking system private commercial banks, not the government's central bank, are in effective control of the "endogenous money" supply, and it is their willingness to lend that is the major determinant, at least on the margin, of aggregate demand.

Mr. Keen is a follower of Hyman Minsky who authored a famous theory of financial instability, which I regard as basically a theory of financial psychology not unrelated to Keynesian "animal spirits". While Mr. Krugman invites us to seek comfort and shelter in government regulation of money and banking, Mr. Keen's alternative view would seem to leave the economy exposed to inevitable Minskian financial tempests. Actually, Mr. Keen does have an interesting proposal of "Jubilee shares" which may well have merit for preventing excess speculation and volatility in the equity markets but I do not believe it adequately solves the general financial instability problem. It could even make it more acute.

I do not see, as Minsky or Keynes did, psychology as a driving force of financial excess. It would be fair to say that on this point I share Mr. Krugman's skepticism of the "confidence fairy". Rather I think financial instability results from too much "liquidity" -- a.k.a. "credit", a.k.a. "debt". Because all debt anticipates payment in the future all debt borrows from the future. Debt effectively "consumes" future resources by committing them to present needs. The obvious danger lies in "eating the seed corn" -- short-sighted consumption of resources that leaves us poorer over time. If more credit is used than is consistent with sustainable consumption over the long term then the excess liquidity, for lack of productive alternative, must flow into waste and speculation -- the former being the untimely depletion of valuable resources, shrinking the economic pie, and the latter being a form of gambling which on balance punishes saving and production to reward rent-seeking, reallocating the economic pie. Psychology has little to do with it.

With endogenous money theory, demand for credit brings forth its creation and that does indeed suggest that investor or business or consumer psychology, being a source of normal credit, is also responsible for excessive credit. But money is also created exogenously by central banks. Central banks purposefully create enough credit to target a positive, "modest", level of consumer price inflation as a hedge against a dreaded deflationary spiral. I believe this monetary stimulus is enough to create and sustain asset bubbles which only grow in time until they must eventually burst, causing waste and speculation along the way.

Getting back to Mr. Keen's "Jubilee shares", they might well accomplish the goal of protecting equity markets from speculative liquidity inflows but the excess liquidity would simply have to go somewhere else -- likely to some place where it would be harder to notice and cause even greater economic harm. It is also over complicated. The complications are arbitrary in nature and designed to forestall some obvious problems and are, to me, a sure sign that the basic idea is fundamentally flawed.

Simpler and more promising, I believe, is a general financial transaction tax -- a generalization of a tax on currency trading recommended in 1972 by economics Nobel Laureate James Tobin specifically as a means to reduce volatility and speculation in that market. However, while such a tax would make a more complete dam and levy system to wall off more of the financial sector from inflows of excess liquidity it still fails to prevent the excess liquidity in the first place. Maybe it would be enough to save the real economy from Too Big to Extinguish Debt, (the real problem behind Too Big to Fail Banks), but I am not sure.

Debt based money and the Great Recession

The Christian Science Monitor has a "Cover Story" feature, 5 lessons of the Great Recession, which unfortunately does not include a reader comments section, so I am posting my comment on it here:

The key paragraph of this analysis:


"This ethos [of credit] got pushed to its limit in the housing market in the early 2000s. Credit was extended far beyond prudent standards, resulting in a boom-and-bust cycle that, in turn, helped trigger a wider crisis. In the process, the credit bubble symbolized a broader lesson that history teaches again and again: The very financial system that helps to fuel growth in good times is also a source of big risk to the wider economy."

It is the burden of household debt that retards economic recovery. Although it is really more a political issue than a fiscal one, government debt is also preventing helpful fiscal stimulus. The debt of banks, other financial institutions and some industrial companies with major financial exposure has been less of a further problem than it might have been only because of the bailouts.

How did there get to be so much troublesome debt? Was it just "ethos" -- a kind of social madness? Perhaps to some extent but I think most of it is traceable to the nature of our money. The public is vaguely aware that we some time ago abandoned the gold standard -- the last link to gold being cut during the Nixon Administration. The public noticed little change, continuing to use green colored pieces of paper for money just as before. Few understand just how fundamentally different, for better or worse, the new money is from what it once was. It isn't really only since the 2008 crash that we have been "in uncharted territory".

Under the old gold, (actually "bi-metal"), exchange standard the government would acquire gold or silver through taxes or purchases and issue paper certificates redeemable in the precious metal so acquired. The way the Federal Reserve today issues new money, primarily as bank account credits, is through buying government debt. Debt is the asset that backs our money essentially as it used to be backed by precious metal. The new money appears in the reserve accounts of "primary dealer" banks who use it as fractional reserves against which to write loans, including loans to other banks, creating even more money. It is debt backed by debt. In fact, by lending reserves around, banks create as much money as there is loan demand which they care to supply. The Federal Reserve does not control the amount of this debt backed money. It does not even try. It instead tries to control interest rates as a means of preventing rapid price inflation and also as a means of monetary stimulus -- stimulus which has only a weak "pushing on a string" effect when demand for credit is very low as it is at present.

Making debt, a.k.a., credit, rather than metal the base of our money and permitting the demand for money to control its supply, our current monetary system causes credit "bubbles" from which recovery is difficult. Banks do not make profits simply on the margin between the interest rates they charge and the interest rates they pay. They use leverage, the use of debt to finance much more debt, to greatly magnify their profits. If the debt based money system is to be sustainable leverage must be much more constrained than it has been. Banks naturally oppose this. I have practically no confidence that government regulators are able to achieve this aim by successfully resisting banker pressure and preventing creative use of loopholes.

Syrian sarin gas attack is a possible "false flag" deception

Without conclusive evidence, what the intelligence agencies would call "confirmation" rather than "high confidence", we are left to speculate over alternative explanations. The main scenario that troubles me is that one of the more extreme Islamist rebel factions did it in order to trick Western powers into attacking the Assad regime. This rests mainly upon analysis of motives. The Assad regime lacks a clear motive. For it to have perpetrated the 21 August gas attack would seem to be taking much too great a strategic risk for much too little tactical advantage -- especially as the war has already been going its way. However, some extreme Islamist rebel factions, especially the Jabhat al-Nusra, are foreign led Al Qaeda operations that might not be at all upset over a chemical attack on positions held by rival, primarily Syrian nationalist, rebel factions. Indeed, for them that might be seen as all to the good.

With respect to means, rather than motive, there are reports that seem credible, although largely ignored by most mainstream Western media, that Al Qaeda cells busted in Iraq and in Turkey were producing or in possession of sarin. The "lack of flight activity or missile launches" and rockets being used instead could be interpreted as actually pointing more towards the rebels, who have such rockets, than the Assad regime which might have preferred to use the more accurate means of delivery so close to their own positions.

We should consider what the effect would be if there is a US attack upon the Assad forces as a result of the 21 August gas attack if it is actually a successful Al Qaeda engineered hoax. Not only does it not deter the Assad regime from chemical attacks it isn't responsible for but it would positively encourage additional chemical attacks by the actual culprits. Shouldn't we have more than "high confidence" that we would not be making such a terrible blunder?