On critical thinking

Quantum Ergodicity

People tend to think in dichotomous ways. For example, if you happen to question the efficacy of various sorts of "alternative medicine," people will think you are an advocate of everything that the big pharmaceutical companies advocate. Really, though, those two questions are totally separate. A treatment associated with "alternative medicine" works (or not) because of whether it works, not because it is "alternative" or "natural." A drug developed by a drug company has the effects that it has, the efficacy (or not) that is has, because of what it does, not because of its origin. A scientific theory is valid if it works and produces the predictions it has predicted, not because it is "science."

  The quote above is from Jonathan`s blog called Stupid Motivational Tricks and is an example of a particular philosophical viewpoint called Instrumentalism.

 In the philosophy of science, instrumentalism is the view that a scientific theory is a useful instrument in understanding the world. A concept or theory should be evaluated by how effectively it explains and predicts phenomena, as opposed to how accurately it describes objective reality.

Instrumentalism avoids the realism/ antirealism debate andd may be better characterised as non-realism. Instrumentalism shifts the basis of evaluation away from whether or not phenomena observed actually exist, and towards an analysis of whether the results and evaluation fit with observed phenomena. (Wikipedia)

  The problem is that eventually new data is recorded which either contradicts the theory or lie outside the boundary conditions of the hypothesis. By Jonathan`s measure, Ptolemy's geocentric model of the universe would be ``valid`` since Ptolemy`s Handy Tables could predict the positions of the Sun, Moon and planets, the rising and setting of the stars, and eclipses of the Sun and Moon. The point is not to eviscerate J.`s line of reasoning but to emphasize the consequences of wrong assumptions even though the theory appears to work during a certain period of time. Neo classical economics also relies on Instrumentalism. The former éminence grise of the current flock of economists who got us into this mess was Milton Friedman who was also an Instrumentalist.  In a 1953 paper, he stated:

Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality, and in general, the more significant the theory, the more unrealistic the assumptions. . . . The reason is simple. A hypothesis is important if it “explains” much by little, that is, it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomenon to be explained and permits valid predictions on the basis of them alone. To be important, therefore, a hypothesis must be deceptively false in its assumptions; it takes account of, and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomenon to be explained.

To put the point less paradoxically, the relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purpose at hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.

  This is a ``get out of jail`` card for such false right wing economic assumptions such as the rational expectations theory which says that people always act rationally using perfect information( i.e they`re omniscient) to maximize their utility so that an equilibrium price for the product in question is reached in which supply perfectly matches demand. This is the basis for the” Efficient market hypothesis” where the current state of the market represents the ideal situation since all information is present in the prices of the market. Spiro Latsis refers to this form of human behaviour as situational determinism where in any particular situation all people make the same choices – humans are an ergodicitic ensemble. If you partition the population into sub populations then the people in each partition will act like the people in each of the other partitions. This is closer to theology than science and definitely not the intuitive understanding of human nature but according to Friedman it doesn’t matter. This is why economists were caught flat footed in the 2008 crisis because according to their mathematical models it couldn’t happen. There was no variable for the massive fraud which was the fundamental business model for the financial sector and fraud is a type of asymmetrical information in which one party knows things that the other party doesn`t which implies imperfect information that according to the efficient market hypothesis and rational expectations theory can`t exist.

  So false assumptions can seriously screw things up eventually although at the time, they appear not to matter – you can use your alternative medicine for quite a while with the appearance of only beneficial effects but wait until your liver has an infection and can`t metabolise the active ingredient at the usual rate or your kidney has an infection and the excretion rate of the active ingredient drops. You could have a serious overdose taking the usual dosage and your alternative medicine man will not be up to the situation.

  Social scientists have a particular problem with expressing critical thoughts since chaos and transition are their equivalent of natural scientist`s controlled experiments. Like Heraclites, it`s hard to describe a moving river when it changes every time you step in it so you use fluff words like ``transgressive`` and liminality to discuss periods of change and cover up the level of perceptual ambiguity on the part of the observer. Free floating, self referential data sets like the Rosenberg self esteem scale with a variety of anchoring schemes using the opinions of experts and semi-experts are the norm. This scale was used in the infamous “debt increases student self esteem” paper which Clarissa and I discussed a while ago. I could make quite a long list of dubious assumptions in this paper which is another instance of Instrumentalism as well as ergodicity where a stochastic system of student outcomes tends in probability to a limiting form which is independent of the initial conditions. (To be continued)

Hurricane Katrina + 6

  On August 29th, 2005, Hurricane Katrina slammed into New Orleans and a few days later the dikes burst which flooded a good part of the city. Although many stories have been told about the reconstruction effort, little has been known about the Canadian participation in the recovery so I thought that coming up on the sixth anniversary of the storm I would have a few things to say with respect to the event.

  This current hurricane Irene is giving me flashbacks to my honeymoon many years ago when my Ex and I were camping with a tent on the side of the Blue Ridge Mountains in Virginia near Richmond and a hurricane (I forget the name) came up the coast. The tent was in a slight depression on the mountain side which was dry at the time it was pitched but within an hour had three feet of water. I drove through a previously dry gully which was flooded with water to get out of the area.



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The first story is about Magnaville or Canadaville as it is called in Louisiana. Frank Stronach, founder and CEO of the $20 billion dollar Magna auto parts empire, was watching the 2005 hurricane situation in New Orleans on TV and decided to do something. While Bush was congratulating the ineffectual FEMA head with “You’re doing a great job, Brownie!``, Frank swung into action and sheltered 280 storm victims in his horse racing facility in Palm Springs. Next he decided to build a permanent housing location for displaced survivors using the 2% of pre tax net earnings which the Magna constitution requires to be spent on charitable works (twice the Canadian center for Philanthropy benchmark) as well as reaching out to other Canadian groups. Like Paul in the Bible he became all things to all men.

1 Corinthians 9:19: “For though I am free from all men, I have made myself a servant to all, that I might win the more; and to the Jews I became as a Jew, that I might win Jews; to those who are under the law, as under the law, that I might win those who are under the law;  to those who are without law, as without law, that I might win those who are without law;  to the weak I became as weak, that I might win the weak. I have become all things to all men that I might by all means save some.”

  For the captains of industry, he might say, “All the good trailer parks in Ontario are full. We must create lebensraum to the south with a new Louisiana Purchase.” To the socialist New Democratic Party and unions,” Comrades! We must infiltrate cracker America with a series of Cuban style communes. `` And so it came to past that Frank stood on the shores of the Atchafalaya River, looked over all of the land and saw that it was good.

Of course the good folks of neighbouring Simmsport did not take kindly to this Grundrisse totting Moses leading his flock of the dispossessed in an exodus from the sin tainted N.O. – destroyed like Sodom and Gomorra by the wrathful hand of God. Fifty homes were quickly built by Canadian carpenters on a thousand acres of land and the settlers could live rent free if they contributed eight hours a week to the communal needs - definitely against God and all the tenants of capitalism. Each unit had verandas and decks plus TVs, computers, furniture, appliances, cable, electricity and water supplied by Frank’s fellow travellers. The community also had a basketball court, paved roads, swimming pool and tennis courts. Simmsport’s median family income was just over fifteen thousand dollars so they didn’t appreciate these new arrivals having possessions about which they couldn’t even dream. The mayor “Boo” Fontenot didn’t want them but cooled down after Frank built a four million dollar community center for the town. According to Canadian Business magazine, the local good old boys cut down the Canadian flag after it was raised to the same level as the Stars and Stripes.

  In the documentary Welcome to Canadaville, one Simmesport resident describes sitting out at night, armed with a gun, so he can "get me one" if any Canadaville resident touches his property. But community leaders insist racism wasn't the fatal problem. "It's always an issue in the South," says a local sawmill owner who declined to be named. "My industry still has a machine part that people call the nigger, because it does a job you wouldn't want to do. But racism didn't kill Canadaville. It was Boo."

  When Magna's people first arrived on the scene in the fall of 2005, they were under strict orders to find a suitable site as soon as possible. And Fontenot recognized an opportunity to milk what he called the "Magna cow." In return for his support, he demanded new police cars, a police substation, community and sporting facilities and US$250,000. Stronach's people agreed,

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  Magnaville is now eerily reminiscent of Henry Ford’s abandoned Fordlândia, a prefabricated industrial town in the heart of the Brazilian Amazon jungle on the banks of the Rio Tapajós near the city of Santarém which was intended to produce rubber for his automobile plants in America. Here is a link to pictures of the former town which is now empty.The greatest problem for the community was the inability to bridge the cultural divide. From Wikipedia:

The mostly indigenous workers on the plantations, given unfamiliar food such as hamburgers and forced to live in American-style housing, disliked the way they were treated — they had to wear ID badges, and work midday hours under the tropical sun — and would often refuse to work. In 1930, the native workers revolted against the managers, many of whom fled into the jungle for a few days until the Brazilian Army arrived and the revolt ended.

Ford forbade alcohol and tobacco within the town, including inside the workers' own homes. The inhabitants circumvented this prohibition by paddling out to merchant riverboats moored beyond town jurisdiction and a settlement was established five miles upstream on the "Island of Innocence" with bars, nightclubs and brothels.

 
    If you read the book Fordlandia: The Rise and Fall of Henry Ford's Forgotten Jungle City by Greg Grandin then you’ll notice a lot of similarities to Magnaville. Both projects had a wealthy Industrial leader in the auto business who tried to impose their dream of a utopian modern community on a culture that was totally at odds with their concept and used their money to bulldoze any local opposition but ultimately failed due their refusal to incorporate the local culture and customs into their vision. Today Fordlandia is overgrown by the jungle with the red fire hydrants covered by the vines while the town of Simmesport has refused to take over Magnaville which in response has been also been abandoned and trashed by the locals. Fordandia has long been upheld as an example of the inability of South America to enter the modern age due to cultural dysfunction with respect to work for the local populations. Will Magnaville be a case study in Harvard Business School for Lousiana's incapacity to economically develop? Below is a video about the book and a look at Fordlandia in 1944 by Walt Disney.



 The other story is about Mike Holmes and his ninth ward housing project. Mike is the producer and star of the Canadian TV show Holmes on Homes. To save time typing, I embedded an explanation of  his project to build a hurricane resistant home in the ninth ward of New Orleans for an elderly woman and her many grandchildren after they were made homeless by the storm.

I am a webcam

  I was trying to think of a title for this post when the idea of an updated version of a quote from the 1939 book of interconnected short stories, Goodbye to Berlin by Christopher Isherwood, "I am a camera with its shutter open, quite passive, recording, not thinking" occurred to me. Writing a blog, I feel like a passive observer of a period in time which has the ambience of 1934 Berlin where the glitter and decadence of the city is about to be transformed by the up thrust of right wing undemocratic forces in society. Isherwood’s list of characters, their relationships and surrounding events as described in his semiautobiographical book are counterpoints to the current situation. In the book, The Weimar Republic by Torsen Palmer and Hendrick Neubauer, there is a passage in the chapter entitled “The System is collapsing” which says:

Long before Hitler’s political breakthrough, there was a readiness among the industrial elite to sacrifice parliamentary democracy in favour of an authoritarian solution which would rigorously curtail the welfare state and make it possible to develop the ailing economy on the backs of the working classes.

  If we transform the industrial elite of 1934 Germany during the Great Depression into the bankers of 2011 America during our Great Recession, we see the same processes at work.

  The video above is a very articulate rant on the metaphor of bankers as the scum of the earth. I wouldn’t go that far and think that banking as a utility for the assignment of credit in society for the more efficient distribution of capital in the economy is alright but the rapacious looting of Main Street by banks in the form of economic rent is wrong. From this, I would like to segue to something that has been puzzling me for a while. Facts from a story in the Alternet website by Danny Mayer:

 Since 2002, the bank (J P Morgan) has turned its attention to another easy revenue source: city, state and national government debt. Along with other large banks like Goldman Sachs, it began selling a new type of complicated loan to countries like Greece, states like Connecticut and Mississippi, and cities as far-flung as Birmingham, Alabama, and Milan, Italy. Even the Delaware Port Authority and the Pennsylvania school system have gotten caught in the JP trap.

These derivative packages, named “swaps” to ensure they do not get officially counted as debt on government balance sheets, essentially act as second and third and fourth-mortgages on public infrastructure projects like airports and highways. Loaded with adjustable rates and a slew of fees and “trigger points” that ensure rapid debt growth, the swaps essentially ensure the privatization of public government assets. In the case of Birmingham, Alabama, for example, Rolling Stone journalist Matt Taibbi has reported how a city sewer project initially estimated to cost $250 million generated “a total of $1.28 billion just in interest and fees on the debt,” most of which went into the private coffers of J.P. Morgan. The result for Birmingham? “Between 2008 and 2009,” Taibbi notes, “the annual payment on Jefferson County’s debt jumped from $53 million to a whopping $636 million.” The debt now stands at $4800 per resident.

  On July 7^th, 2011 J P Morgan took over all of Kentucky State’s financials including payroll, deposits and the disbursement of federal money from the Farmer’s bank which has held the position continuously since 1928 in a competitive bid process that the bank won. The federal money portion is really important because it makes up for the estimated short fall in sub national government revenue since 2008 of between 30 and 40 percent. Property tax revenue for municipalities is only 28% of their total income with senior level government disbursements to local government being 40 percent.

  

   The total official sub national municipal bond market in America as described by the mass media and other sources is about 2.8 trillion dollars.  Most mass media commentators state that 28 percent of American households are “underwater” or to put it more explicitly the owners currently owe more on their mortgages than the house is worth. The unspoken caveat is the 28 percent only represents the first mortgage and not second mortgages or household lines of credit. If all of the financial instruments claimed against homes were included, the actual rate of folks who are “underwater” would be 40 percent. Let’s assume for the moment that an equivalent percentage of the total claims on “muni” bond are off ledger including these debt swaps and other financial transactions mediated by the banks. This would imply an additional 1.2 trillion dollars of sub national debt off ledger which is an enormous amount of money. If the rate of increase in debt interest and transaction fees was the same as the Birmingham sewer deal about which Matt Taibbi discussed in my quote, then we’re looking at a potential “muni” hidden exposure of 6 trillion dollars that isn’t even being discussed in any media forum, online or any other place. Of course, we don’t know since it’s not on record so let’s be very conservative in our calculations and say that the true value of the hidden debt is really 16% of my conclusion. That’s still a trillion dollars and enough to bankrupt many sub national governments in the States especially when you consider that the federal government aid to local government ends next year and won’t be renewed. If you think that it isn’t possible to miss such a large amount of debt in the American economy then read the media reports (esp. its credit rating) about the Greek financial position before its economy imploded. Most “muni” bonds in America are triple A in spite of the acknowledged state and local financial woes and the argument is that municipalities are traditionally low risk. This revealed truth is from the same people who said in 2007 that home prices would always rise since the empirical evidence is that home prices have always increased for the last fifty years. The fallout from this false supposition was the Great Recession. What will be the fallout from the circular argument that “muni” bonds are low risk because of empirical evidence? I can assure you that at the time the shit hits the fan the senior levels of government will not bail them out regardless of the outcome of the super committee deliberations. In theory, the American federal government with a sovereign fiat currency can print as much money as it wants to save sub national governments but will it do under President for Life Perry who wants a “government that is inconsequential in your life” or Capitulator in Chief Obama?

   You may think that I have no basis for my speculation about a vast unreported off ledger debt liability by American sub national governments but there is another avenue of analysis. The banks may deny knowledge of this debt but since they are the enablers and recipients of the financial shenanigans, they will also want to protect themselves against the inevitable catastrophic failure of the “muni” debt. The means by which they do this is the infamous CDS or credit default swaps that are, in essence, insurance against financial loss. From Wikipedia:

A credit default swap (CDS) is a form of insurance that protects the buyer of the CDS in the case of a loan default . If the borrower defaults (fails to repay the loan), the lender who has bought traditional insurance can exchange or "swap" the defaulted loan instrument (and with it the right to recover the default at some later time) for money - usually the face value of the loan.

The significant difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who do not hold the loan instrument and may have no direct "insurable interest" in the loan. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan or any credit instrument named in the contract (typically a bond or loan) defaults, creating a credit event. 

Credit default swaps are not traded on an exchange and there is no required reporting of transactions to a government agency.  During the 2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the trillion dollar size of the market, which could pose a systemic risk to the economy. 

  In the case of just one state, California, a few major banks have over $14 billion in CDS betting that California will default on its debt obligations in spite of a history of zero default. From Reuters:

Data reported in the news media and other sources show that the prices, or spreads, on California CDS wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan, Croatia, Bulgaria and Thailand.

The banks disclosed the trades to California Treasurer Bill Lockyer last month (July, 2011) in response to his request that all 86 of the state’s bond underwriters detail the volume of credit default swaps they traded on the state’s roughly $80 billion of general obligation bonds in the three months ending Jan. 31(2011).

    Here are the amounts per bank of credit fault swaps reported to California Treasurer Lockyer:

   Goldman Sachs – $4.3 billion                                  Morgan Stanley – $2.5 billion

    Barclays – $2.5 billion                                             Citigroup – $1.9 billion

    JP Morgan – $1.5 billion                                         Bank of America Merrill Lynch – $1.9 billion

    Remember that the total general revenues of California is $88 billion and the total CDS which is much greater than the $14 billion of the banks (only six of the 86 California bond underwriters which had their bets revealed) indicates that the underwriters are worried about the possible loss of an enormous amount of money in just this one state and this is only at the state level and not the local level of government debt which was not included in this analysis. California’s credit rate may currently be AA but in 2008, Greece’s credit rating was ‘A’, upper medium investment grade according to S & P even though some of the major US banks in conjunction with the Greek government had been using interest rate swaps to hide the true extent of Greek sovereign debt for years.  

       The final objection to my conclusion is that the counterparties (i.e. the state and local governments) would know and the information about the hidden debt would be revealed to the   public. This didn’t happen in the Jefferson county situation until they faced bankruptcy which now seems inevitable and won’t happen until the same debt crisis happens on a national scale. Why would sub national governments seek Chapter 9 remediation of their debt problems? There are some advantages – political cover by blaming the bankruptcy receiver, tearing up contracts with their staffs under chapter 9 as well as removing pension benefits already incurred which is happening in the current situation in Central Falls, Rhode Island.

   The really big reason is the ability of the bankruptcy receiver to sell off and privatize public assets at will in non competitive bids for any price. Both the banks and local entrepreneurs would make huge amounts of profit from this divestiture of public assets at fire sale prices. This is what occurred in South America during the last century in their liquidity crisis as described by Naomi Klein in her book, Shock Doctrine.   What would be left is a toll gate society where every activity by the citizenry would be individually charged by private enterprises.

  The final point is that I believe this would lead to a repetition of the 1933 business plot. This historical event has been suppressed by most observers but it did happen.  The story was denounced by the New York Times (of course) as a hoax but later in 1934 confirmed by Congressional committee who redacted the names of the business leaders involved. From Wikipedia is the Business plot and from another blog:

In 1933 Major General Smedley Darlington Butler reported to Congress a coup d'etat plot against President Franklin Roosevelt, sponsored by corporate interests. Alarmed by Roosevelt's Democratic "New Deal" which would redistribute wealth from the rich to the poor, Irenee Du Pont, Grayson Murphy, William Doyle, John Davis and other representatives of J.P. Morgan banks, Du Pont, Goodyear and Bethlehem Steel sought to overthrow the U.S. government with a military coup and replace it with a fascist state, based on the recent success of Mussolini and Hitler in Italy and Germany.

Deconstructing a NYT article

   Last Sunday, I read an article in the New York Times by Catherine Rampell entitled “A Way to Overcome Debt” in which the solution to America’s federal debt problem was the judicious use of spending cuts using Canada in the 1990’s as an exemplar. I decided to deconstruct the article to see if the body of the piece supported the conclusions.

  The first thing that I do is look at the background of the reporter, not as an ad hominem attack but to get a sense if possible of their stance on the issue. Her formal bio at NYT is:

Catherine Rampell writes about economics for The New York Times, where she served as the founding editor of the Economix blog. Under her stewardship the blog was honored with an award from the Society of American Business Editors and Writers. She has also received the Weidenbaum Center Award for Evidence-Based Journalism and is a Gerald Loeb Award finalist. A lifelong theater nerd, she regularly contributes to The Times's arts coverage, too.

Before joining The Times, Catherine wrote for the Washington Post editorial pages and financial section and for The Chronicle of Higher Education. She grew up in South Florida (the New York part) and graduated from Princeton.

   From other sources at Princeton, she graduated majoring in Anthropology and was a legacy student whose mother graduated from the same alma mater in 1975. In a piece that she wrote for the Princeton newspaper:

In my time at Princeton, I remember a student body that seemed hyperaware of socioeconomic distinctions — and in many cases the need to show off, and pursue, wealth. Some of it had to do with the clubs, but a lot of it had to do with clothes and shopping and career choices. Signifiers like popped shirt collars, a brand logo, or a pair of men’s pastel pants were cues of some form of superior breeding (until many such signals, like the popped collar, were adopted by “the riff raff,” of course).

  I conclude that she arrived at the economic desk as an preppy ingénue without preconceptions from previous encounters with economics but having a certain naiveté about her sources.

   In the first paragraphs of her article she lays out her basic premise that the painless solution to the debt woes is economic growth and quotes Dean Maki, chief US economist at Barclays Capital:

The most obvious choices (to the debt crisis) are a painful reduction in spending, unpalatable tax increases, higher inflation or default. None of that would be necessary if we could indeed restore economic growth. Citizens would become richer and pay more taxes. Et voila! – a painless way out of debt.

  Unfortunately during the Bush years the American debt doubled during a period of strong economic growth due to two wars, tax decreases for the rich and the drug payment supplements for seniors. If you look at the graph below from Mother Jones, you’ll see that most of the increases in income during both low growth and high growth periods of the last thirty years went to the most affluent portion of society who have numerous avenues for tax avoidance if not tax evasion. The highest marginal rate for the wealthy in the sixties was 90% while today the highest marginal rate is about 27%. From the USAtoday:

source: Mother Jones

Not the best day to report this, but the IRS says 1,470 millionaires paid no federal income taxes in 2009.

Where did the money go? Tax "expenditures" (otherwise known as deductions, write-offs, subsidies or loopholes), charities, municipal bonds and tax payments to foreign governments, according to a recent IRS report …The nonpartisan Tax Policy Center reported last month that 46% of American households (known as "units") actually will not pay federal income taxes for this year nor will receive refunds. That's because of low incomes, credits for children or other dependents, or exemptions.

  Besides ignoring the expenditure side of the balance sheet, note that the economist, Dean Maki, says nothing about increasing corporate taxes considering that GE which had profits of $13 billion paid no taxes but instead received a tax credit of $3.2 billion. One of the major shifts in government revenues since the fifties has been the shift from corporate to personal taxes so the approximately two trillion in corporate profits which  the companies are currently sitting on has had no effect on reducing the public debt.

  The next part of the story is about Ireland. From the NYT article:

Before its economy crashed, Ireland was a star of this sort of debt reduction…largely because the economy was very strong.

  This story is really about shifting public debt to private debt and particularly to the mortgage debt of citizens. Ireland has the lowest corporate tax rate in Europe (15%) and a very well educated population due to a low cost, high quality school system so many corporations flock to Ireland which of course is an EU country with open access to the rest of Europe so it was a kind of tax arbitrage. The government decreased its debt by taxing the citizens who had increased their wealth through one of the largest housing bubbles in the world. In effect public debt was transferred to private debt and would ultimately fail as the real estate boom came to its inevitable end. She quoted Carmen Reinhart who is a senior fellow at the Peterson Institute for International Economics on Ireland. This is where you have to be careful about your sources. From the Naked capitalism website:

In the US, the brass-knuckle leader of the effort to convert the tattered remnants of the left to the conservative cause is the long standing entitlement foe, billionaire Blackstone Group co-founder Pete Peterson. His Peterson Foundation provides funding for a large array of organizations, including initiatives at his think tank, the Peterson Institute. We’ve discussed various Peterson efforts on this blog: the Peterson Foundation’s “America Speaks” program, which used a series of faux town hall meetings with openly manipulative facilitators to try to deliver focus group type results depicting broad-based willingness to cut entitlements to reduce the budget deficit. That plan backfired, not only failing to deliver the desired Potemkin consensus, but also generating bad press for its ham-handedness.

  The next part of the NYT piece is a glowing account of Canada’s debt reduction policies starting in 1994.

The paragon of thoughtful, growth minded fiscal consolidation is Canada … Policy makers subsequently pared down Canada’s debt level from one of the highest in the Group of Seven to the lowest. Since Canada cut federal fat judiciously, it reduced its debt without much harm to growth.

  Sounds good and the Canadian government did reduce some of its expenditures but this wasn’t the reason for the decrease in debt. A lot of the federal debt was consciously accepted in order to keep the country united after the Quebec secessionist movement where the Quebec provincial government demanded its “loot” as the price for not separating and since the other provinces wanted their fair share, there was an increase in federal revenue sharing which had a causal effect on the run up in debt. Also the interest rates were very high in the early nineties due to a deliberate policy by the department of finance to end the inflationary bubble culminating in 1989 by monetary policy so the government was paying a high rate of interest on its debt and this kept rolling over. At the same time that the budgetary cuts went into effect the interest rates declined drastically due to government policy and America which was our largest trading partner went into a boom cycle because of the tech bubble and a decrease in post cold war defence spending. To say that expenditure reduction led to a federal debt decrease is being disingenuous.

  The next paragraph claims that America between 1945 and 1985 had its debt drop from 142% to 33% and the same decrease in the 1990’s because it became richer – “most economists attribute it primarily to rapid growth.” The facts are correct but it leaves out a lot of contributory events such as the massive investment in infrastructure during the fifties such as the interstate highway system, the massive increase in population caused by the baby boom and the tech bubble in the 1990s. Then we get “Companies can worry less about being surprised by, say, higher taxes, and proceed to hire new workers.” Companies aren’t hiring because they’re worried about more taxes but because there isn’t any demand and this is caused by a lack of liquidity in the economy. As I said in an earlier post, small business owners are pawning their personal items because they can’t get lines of credit from the banks and they have to increase their cash reserves as collateral and to pay their current employees. Most of the federal cash to the major banks in the two Quantitative easement episodes went to the bank’s counter parties in other countries or straight back to the treasury when the banks got paid a guaranteed profit by borrowing from the fed at zero interest and loaning it back by buying treasury bonds at 3%.

  Next in the NYT article we read:

More manageable debt also helps to keep interest rates low, which is generally good for growth. What’s good for growth is generally good for the debt.

  I'm glad that she said generally because the interest rate for institutions is effectively zero and growth is lousy. I’m sure you’ve also noticed that your credit card interest rate hasn’t declined from its usurious heights and the fees haven’t been circumscribed. Just because the interest rates at the heights of the economy are low doesn’t mean that main street gets a better deal. She ends with a caveat that “countries that undertake fiscal consolidation in the midst of a crisis can end up paying even more later.” True and that’s why Canada that wasn’t in a crisis but in a debt problem caused by its own political expediency came out on top. The last sentence in the piece was “American policy makers might learn a thing or two from Canada’s patient, hysteria-free pruning.” Ok. Here’ a quote from chapter 12 of Naomi Klein’s, The Shock Doctrine ( I found this book stuffed between C.N. Banwell’s, Fundamentals of Molecular Spectroscopy and Pablo Neruda’s, “Twenty Love Poems and a Song of Despair.” I’m going to have to sort out my book collection one of these days but it does give an indication of my eclectic mind.) :

The phase “debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody’s and Standard and Poor’s would downgrade our national credit rating from its perfect Triple A status to something much lower. When that happened, hypermobile investors, would simple pull their money from Canada and take it somewhere else safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care.

  Sound familiar? And after the cuts were made, the current Canadian federal spending on these items is still far above the current American spending on these items before the future proscribed cuts. In conclusion, the article's issue's solution as espoused by the writer systemically eliminates any other possible approaches to decreasing the debt as being outside the boundaries of discourse and maintains the current center right policy position of the NYT. I’ll end with a quote from Naked Capitalism about a Ferguson/Johnston article:

Now just ask the obvious question that a citizen or politician who had any choice would before embarking on the austerity route to budgetary consolidation: What are the chances that the policy will work? That is, actually reduce the deficit while also stimulating growth?

The striking fact that emerges from their [Alberto Alesina's and Silvia Ardagna's] tables is the meager number of successes. They indentify 107 separate cases of major fiscal contraction in the OECD between 1970 and 2007. Only 26 of these 107 qualify by even their Rube Goldberg definition as leading to “growth.” Now also set aside all qualms about definitions and whether countries were booming or in recession when they started cutting the budget. Just focus on the overarching pattern: Only nine of those “growth” cases actually achieved major reductions in debt to GDP ratios. That shouts out a demoralizing result: that 92% of the time countries tried fiscal contraction; it did not lead to growth with big reductions in debt to GDP ratios. We are not surprised that even a recent IMF study has now repudiated Alesina and Ardagna’s core argument. As Ireland is now discovering, the royal road to reducing debt to GDP ratios runs elsewhere. Arguments that current levels of debt to GDP profoundly threaten future U.S. economic growth are mere assertions crying out for empirical evidence. They should carry no weight in national policy debates.

  Don’t expect anything from the Obama team. From the Brad DeLong blog:

Stock market down 17% in two and half weeks while the bond market has reduced the yield on the Ten-Year Treasury from 3% to 2.35%, and break-even five-year inflation has fallen from 2.1% to 1.7%. I think that is a very loud wake-up call for Mr. Obama--that it is long past time for him to stop talking about how surrendering to Republicans on long-run spending priorities will bring the confidence fairy who will then gift us with a strong recovery and start actually doing his job…when I (Brad DeLong) talk to their (Obama’s) staffs, the message I hear is not "we were wrong about how the world works, and are rethinking the issues from the ground up to figure out what to do" but instead "we were unlucky: our policies were good".

  And don’t expect much from the Republicans. On Paul Krugman’s website today which shows that NYT can at least have one token lefty who is reasonable:

I have to say that there is a mystery associated with Pawlenty — but not about the candidate. Instead, the question is why pundits continue to represent him as a smart, qualified guy. On economics, he has been awesomely clueless — making gross factual errors, demonstrating on repeated occasions that he doesn’t understand anything about monetary economics, etc.. (My favorite was the rant against “fiat money“). Maybe there are some subjects on which he isn’t an embarrassing ignoramus, but I’ve yet to see them.

Stock Market downturn

   You’ve probably watched a lot of news on TV and in the mass media about the recent decline in the last week of the stock market (the Dow Jones Index chart for the last six months is at the top of the post) but as usual the liberal media elite and their left wing, Obama loving lackeys have been pulling the wool over your eyes and hiding the true reasons for this disaster. In this post, I’ll reveal the true reason for the downturn. Papa Smurf, Smurfette (subversive, feminist, lesbian Hispanics professor at east coast liberal college) and Clumsy Smurf (non TT adjunct), costumed characters from this summer's talked about family comedy The Smurfs, visited the NYSE to celebrate the film's July 29^th, 2011 theatre release. In honor of the occasion, The Smurfs rang The Opening Bell as you can see in the video below.

  Ever since their arrival at the NYSE, the stock market has plunged and the top 1% have lost billions in a dramatic redistribution of the wealth which has impaired their ability to capture the government and the regulatory agencies in a plutocratic coup d’état.  This is due to left wing conspiracy lead by the Smurfs who are really communists. Don’t believe me? Watch the documentary below by a true patriot who is being subsidized by the Koch brothers’ American Enterprise think tank. This was prepared under an American Enterprise grant to the University of Florida’s Economic department as supplementary material for the ECO 101 introductory gateway course with possible future use in the Texas school system. Slavoj Žižek, film critic and socialist intellectual, after seeing a preview of the Smurf movie said, “Cinema is the ultimate pervert art. It doesn't give you what you desire - it tells you how to desire."

Foreclosures

   It has been estimated that there will be over a million foreclosures in America during 2012. So what do you do when your home is gone? For most people it will be rental accommodation or sleeping at the local vagrant’s drop-in and for the most unfortunate ending up in a tent, a car or on the street; however, some creative people have discovered other means of housing. The person in the video turned a garbage truck into his own personal living space.

 According to About.com:

With 1 million homes in the "shadow inventory," housing prices will remain depressed --- and so will homeowners! For some reason, the Federal government seems oblivious to this threat. Freddie Mac's Mid-Year Housing Report said that homes sales should increase, along with GDP and the economy.

Instead, just the opposite is happening. The shadow inventory is keeping home sales down, which is dragging down the rest of the economy. The Federal government needs to stop focusing on the made-up debt ceiling crisis, and do something constructive about the real crises - housing and jobs.

  Unfortunately the recent debt ceiling agreement has taken away many of the tools which the American federal government needs to address this problem. Obama may be talking about jobs but the emphasis of the agreement is on cutting spending. Those millions of people who are already on unemployment insurance will not get an extension. From Huffpo:

White House officials confirmed that there would not be an extension of unemployment benefits as part of the final package. The administration had insisted that an extension be part of the grand bargain it was negotiating with Boehner. But when those discussions fell apart, so too did efforts to ensure that unemployment insurance was part of a final package. A senior administration aide added that the president would push for an extension in the months, if not weeks, ahead.

 

   Small business employs the majority of the workers in America and it’s on the ropes. As CNN reported, many small business owners are pawning personal items to pay their suppliers and employees.

"We have lost a trillion in credit card lines. We have lost a trillion in home equity lines. And those are -- or were -- the two primary sources of financing," said Bob Coleman, editor of the small business lending industry publication, "Coleman Report." "There are different things that are filling that void until banks ramp up."

 

   There is still a credit squeeze for small business since the banks are requiring higher collateral for lines of credit and also expect a higher interest rate to be paid. This hurts businesses which have a fundamental structural imbalance since their expenses are current but their revenues are received over time. This used to be addressed by companies that specialized in bridge financing but many of these firms went bankrupt during the recession and the large banks that are left want to maximize their financial rent by taking it out of small business. This doesn’t bode well for the immediate future.

The last thing is that the homeowner’s mortgage tax deduction which is a huge financial gift from the federal government is on the chopping block and this alone will put tremendous downward pressure on home prices in the US. In the Kansas city newspaper:

First of all, the revenue the government forgoes because of the deduction is huge; more than twice the entire budget of the Department of Housing and Urban Development. And there are better, more cost-efficient ways for the tax code to encourage homeownership, economists argue. Plus, the benefits of the deduction go disproportionately to the upper middle class, whose bigger homes and mortgages bring bigger tax write-offs.

In fact, the average value of the deduction increases with income, from $91 for those who make less than $40,000 a year to $5,459 for those who earn more than $250,000, according to a 2010 report by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, two center-left research centers.

For most homeowners who take the deduction, the tax savings it provides doesn't make the difference between owning and renting. It simply helps them afford more expensive homes.

   Finally, most of the mass media are playing number games. The usually quoted figure is that 28% of homeowners in the States are “underwater” i.e. the debt on the house is greater than the current market value of the home but most sources don’t add the caveat that this is only the first mortgage and if you included second mortgages and home lines of credit the percentage of homeowners “underwater” is closer to 40%. This freezes up the housing market since most folks don’t want to sell their homes at less than their debt and lock in their losses. This stops people from selling down to a home that they can really afford. Also most families’ finances are one job loss or health issue away from a cash flow crisis which leads to a cascading series of financial events (overdraft fees, non payment of mortgages on time with overdue penalties etc.) leading to foreclosure.

Dancing with PIGS

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A little song from the Guardian Newspaper for all you doomsday watchers.