Decline of the Empire

The Triumph Of Ignorance

As our society deteriorates, politics intrudes on all issues. Education declines and knowledge, however well established, is rejected. Wisdom hardly exists. Eventually, after our society goes further and further downhill, the Triumph of Ignorance will be complete. On March 15th, ignorance's inevitable victory was convincingly demonstrated in the House of Representatives. Sean Bean of scienceprogress.org gives us the details—

March 16 — House Republicans on the Energy and Commerce Committee demonstrated their commitment to science denial yesterday by unanimously voting down three separate amendments offered by Democrats to reaffirm basic facts about climate science. They then unanimously voted to pass the Upton-Inhofe bill to repeal the Environmental Protection Agency’s scientific endangerment finding on greenhouse pollution.

Let’s be clear. Congress should not attempt to make scientific decisions. The role of Congress is to take the best science and use it to make the best possible policy. The three amendments rejected unanimously by committee Republicans each lays out a fairly basic statement about generally accepted climate science.

• Rep. Diana DeGette of Colorado offered an amendment that simply reaffirmed what EPA scientists stated, that “‘the scientific evidence is compelling’ that elevated concentrations of greenhouse gases resulting from anthropogenic emissions ‘are the root cause of recently observed climate change.’” That amendment was rejected in a party-line vote with all Republicans voting no...


• The last amendment, offered by Rep. Henry Waxman of southern California, asserted even more unassailable scientific findings. His amendment stated simply that “Congress accepts the scientific finding of the Environmental Protection Agency that warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level.” It was also unanimously rejected in a party-line vote with all Republicans voting no.

This is really getting ridiculous. In countries around the world, political parties on the left and right are debating how to deal with climate change. But by continuing to debate whether the world is even warming—an objective, empirical, verifiable, scientific fact—our great nation is demonstrating to the rest of the world that we are still in the Stone Age on this issue.

Sean says Congress should not attempt to make scientific decisions. That's putting it mildly. I'll be a little more precise. Nobody who is unfamiliar with the science is entitled to an opinion about the matter. This applies equally to Congressmen and the man on the street. Suppose a Congressional committee is presented with a hypothesis H with an associated probability P. After testimony which presents the evidence supporting or disconfirming H, and why P is what it is, a Congressman can either take  H seriously or not as something requiring policy action. But that Congressman has no useful opinion about H.

Note: Cartoon source.

But in the circus-like political atmosphere of our times, everybody is allowed to have an opinion about scientific matters they know absolutely nothing about. It is as if the physics of how greenhouse gases behave in the atmosphere is a partisan issue. Democrats accept the scientific findings. Republicans reject the scientific findings. As Sean said, this is really getting ridiculous. It sure is.

The only reason I have a useful opinion about global warming is that I studied the subject in-depth for about seven years, starting in about 1997. After that, I quit reading the scientific literature (in the journals Science or Nature or whatever I could get my hands on) because as far as I was concerned, the climate issue was settled. No reasonable doubt existed. Results since then have mostly re-confirmed what was known at the time. Some probable outcomes are worse.

If you want to learn the science, read the realclimate.org blog and all the archives there. Gavin Schmidt and some other climate scientists started it in late 2004. Unfortunately, this useful blog didn't exist when I was pouring over journal articles at the library. And you would be amazed how many important scientific papers can be found on the intertubes.

And now let me be blunt. I am talking to all of you who doubt that burning fossil fuels is heating up the planet. If we're discussing this "hot" topic, and you don't know the science, it's going to be a very short, one-sided conversation. If you can't tell me, at a minimum, what the difference between a climate forcing and a climate feedback is, then shut the fuck up. If you can't tell me whether higher levels of water vapor in a warming atmosphere—water vapor acts like a greenhouse gas just like carbon dioxide (CO₂) or methane (CH₄)—is a forcing or a feedback, then shut the fuck up. If you can't tell me what the Earth's carbon cycle is, or what a carbon sink is, then shut the fuck up. And so on.

If you choose to not take anthropogenic climate change seriously, that's your business. But don't tell me you don't "believe in it." Don't give me your worthless opinion. And it gets worse. Republicans voted unanimously to reject the well-established fact that the Earth is warming, regardless of whether that warming is caused by humans or not. This is the Triumph of Ignorance, and the death of learning. If you and these Republicans want to return to a pre-scientific world in which the Earth is flat and the Sun revolves around it, I suppose there's nothing I can do about that.

But I don't have to accept our return to pre-scientific ignorance just because that's how a very large minority of the people view the situation—they happen to be well-represented in Congress and control the House. Quelle surprise! In fact, I don't give a damn what the Great Unwashed think. Sean Bean writes—

Meanwhile, a recent Gallup poll (the scientific kind with random sampling, rather than self-selecting Internet sampling) indicates more than 50 percent of the public believe global warming is happening and is mostly due to human activities. But again, opinions–even scientifically polled public opinions–don’t determine science. Just because 99.99 percent of the world public believed the sun revolved around the earth in the time of Galileo does not mean his theory of heliocentrism was wrong.

Here's Penn State paleoclimatologist Richard Alley and climate researcher Ben Santer of Lawrence Livermore explaining to Congress why we know the anthropogenic warming hypothesis has a very high probability of being correct. The good stuff begins at the 2:10 mark. If you have your "doubts" about anthropogenic warming, maybe you'll even learn something.

 

Who Will Buy Our Treasuries?

I believe zerohedge was the first to report that PIMCO's Bill Gross, the Bond King, recently dumped his U.S. treasuries holdings—all of them.

And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero...

The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion...

In his most recent newsletter, Gross describes who holds our bonds.

What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns.

Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?

Here's an alternative view of the Fed's Z1 Flow of Funds data from Global Macro Monitor's Is this Why Bill Gross Dumped Treasuries?

The chart [below] illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4. The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.

Given that a large portion of the Rest of World category are central banks recycling balance of payment [trade] surpluses, it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks.

You think this may have anything to do with what’s happening in the commodity markets? That is, the central banks’ printing presses providing the fuel for speculators?

This chart was re-formatted by Tim Iacono.

I think this situation, even if it is temporary and ends with QE II, should be taken at face value. The Federal government issues debt, and the Federal Reserve buys 70% of it. The other 30% is purchased by the central banks of the trade surplus countries. These countries are "recycling" excess dollars.

Future historians, discerning the causes of future calamities, will note that by the 4^th quarter of 2010, and during the 1^st quarter of 2011, the United States was printing money to cover its debts. I first covered these issues in The Biggest Ponzi Scheme Ever Conceived. Gross would like to know who will buy Treasuries after the latest round of quantitative easing ends. Who will it be?

I don’t know. Reserve surplus sovereigns are likely good for their standard $500 billion annually but the banks are now making loans instead of buying Treasuries, and bond funds are not receiving generous inflows like they were as late as November of 2010. Who’s left? Well, let me not go too far. Temporary voids in demand are not exactly a buyers’ strike. Someone will buy them, and we at PIMCO may even be among them. The question really is at what yield and what are the price repercussions if the adjustments are significant...

What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%. This conclusion can be validated with numerous examples: (1) 10-year Treasury yields, while volatile, typically mimic nominal GDP growth and by that standard are 150 basis points too low, (2) real 5-year Treasury interest rates over a century’s time have averaged 1½% and now rest at a negative 0.15%! (3) Fed funds policy rates for the past 40 years have averaged 75 basis points less than nominal GDP and now rest at 475 basis points under that historical waterline.

I don't know how events will unfold in the bond market over the next year or two. After the recent disaster in Japan, there was another "flight to quality" (or "flight to safety") as investors once again bought up Treasuries.

Events related to the devastating earthquake in Japan superseded all else in the capital and currency markets last week, even sectors with no discernible connection to the disaster, as investors fled anything hinting of risk for the safest harbors.

One of those was the U.S. Treasury market, where prices rallied and yields slid sharply in the classic "flight to quality" trade. Ironically, that was the reverse of the initial reaction right after the Sendai disaster on Friday, March 11, when the fear was that Japan—the second-largest overseas holder of U.S. government securities—could liquidate a significant portion of its $886 billion cache of Treasuries to pay to rebuild.

Seriously, one must ask at this point what the words "safety" and "quality" mean in the year 2011. Does it strike you that debt which is mostly covered by money printing is particularly safe? Or that it's a quality investment? As opposed, let's say, to hard assets. T-bills are safe in the very short term, which is what most people think about, but certainly not over the longer haul, as we watch the dollar turn into toilet paper.

In this fiat money world of ours, a world of abject economic and monetary policy failure, the safest bet is the Biggest Loser. Where did Keynesian counter-cyclical spending get us? Nowhere! — the Bernank merely blew some new bubbles. Big shocks are coming. Nobody in their right mind could possibly think this bond market nonsense can go on for much longer.

The Astounding World Of The Future

Futurists, sometimes called futurologists, attempt to systematically predict what the future will look like. Since the future hasn't arrived yet, these predictions always expose the biases or beliefs of the predictor. These biases or beliefs are never stated explicitly, so they reside mostly in the unconscious of the predictor or the society at large. Exposed bias makes it informative, and sometimes highly entertaining, to watch futurist films.

My own view of the future is based on my understanding of Human Nature. The future will resemble the past. Since hunter-gatherer times during the Ice Ages and the early Neolithic, a time during which many expressions of Human Nature were not yet enabled, we have always had organized warfare. This was the world after the invention and spread of agriculture and the first cities. It is thus reasonable to conclude that we will have organized warfare in the future. These new wars will be made more lethal by humankind's astonishing technological prowess.

Since hunter-gatherer times, we have always had hierarchical societies run by elites. We will therefore have such societies in the future. Truly "free" trade as described in economic textbooks has never existed. It will not exist in the future. In the past, we have always exploited the natural world to increase human populations and economies. We will continue to do so in the future, though with little success, I fear—Nature always bats last, as the recent earthquake and tsunami in Japan attest. I could enumerate such examples ad nauseam.

I have two futurological film clips today. The first, called The Near Future Of Our World (2011-2200), is interesting in the sense explained above. The second one, called The Astounding World of The Future, is simply one of the funniest things I have ever seen. I will not comment on this second one, which is so true to human life as we know it. You'll see what I mean.

The first clip presents an extraordinarily optimistic vision of the future. Indeed, it is characteristic of futurist films that they expose the optimism bias which seems to be built right into human cognition. This strong psychological tendency is also described as overconfidence bolstered by positive illusions. The filmmaker obviously believes that global warming will have disastrous effects—rising sea levels, severe droughts, etc. But even as he predicts these disasters, the March Of Progress goes on and on! For example, by 2115—

• Nomadic "floating cities" are roaming the oceans since many of the world's cities lie partially submerged due to rising sea levels.

And in the sequel, the terraforming of Mars is complete by 2500! How would we terraform Mars?

So, how would we terraform Mars? It sounds like a momentous task when you consider it. Mars has an average surface temperature of minus 60ºC, and so to make it viable for plant and human life you would need to raise that to above freezing, to roughly 5ºC. And of course you would need an atmosphere to breathe. This would require heating up the entire planet by 65ºC, and forming an atmosphere consisting of trillions of cubic metres of air. It is nothing short of an incredible task, but we plan ahead, and we've got a lot of time.

Of course, Homo sapiens will successfully terraform Mars when Hell freezes over. For example, where is the energy going to come from to heat up the entire planet to 60ºC? We're lucky we can still fill up our gas tanks—at an ever increasing cost over time.

The hidden assumption revealed here is what I have called The Assumption Of Technological Progress, which I first stated on DOTE in Technological Progress And The Oil Leak. I recommend you read that post, and the background links if you are interested in understanding this important aspect of human optimism.

I shall have to devote a separate post to this subject. An examination of Human Nature says our species is very technologically clever, but says nothing about what progress we might make along those lines. For example, where are the alternative energy technologies that will replace fossil fuels at the vast scales we require? They don't exist, regardless of what Al Gore thinks. Perhaps they never will. I think that is the likeliest outcome.

And now, without further ado, the films.

 

 

Remedy du Jour -- March 19, 2011

So much trouble in the world. I don't want to add to our worries today. First up is Don Grusin and friends doing She Could Be Mine. One of his "friends" is his brother, the great film composer and jazz pianist Dave Grusin. Nelson Rangell plays sax on this one. After that, Dave Grusin plays Punta Del Soul from his fine album Migrations.

Next Bill Evans does his wonderful rendition of A House Is Not A Home. And we'll finish up with Diana Krall doing Just The Way You Are.

 

 

 

 

As Good As It Gets

Have you had enough yet? Everyday we wake up to a world which seems to be falling apart. A few days ago Calculated Risk posted Crisis Fatigue? Make A List. CR's list included—

• Risks from the earthquake in Japan
• Higher oil prices and a possible supply shock
• The U.S. Housing Crisis
• The European financial crisis
• State and local government cutbacks
• Possible Federal government cutbacks (even shutdown)
• Inflation (a two sided coin)

With the exception of the earthquake, each of these crises is either 1) a consequence of the Great Recession, the collapse of the Housing Bubble and the financial meltdown or 2) a consequence of the policies adapted by the Federal Reserve to counter those events or 3) a consequence of the failure of Federal policy to reform our society's rules and jump-start the economy.

For example, the soaring cost of food played a major role in instigating the revolt in Egypt, which itself spurred a bloodier uprising in Libya. Crop failures, which are bound to be more frequent as the Earth warms, did play a role in creating food shortages, but the Fed's accommodative loose money policy flooded overseas markets with dollars, which fueled speculation in commodities across the board.

Welcome to the post-meltdown world. The shit has hit the fan, and the world will never be the same ever again. Things may appear to settle down for a while, but here in the United States, we are closer to the end than to the beginning of a long decline which began in the early 1980s. Add this to CR's list—

• America's transformation into a Banana Republic accelerates

As above, this last item is a direct consequence of events that transpired during the Bubble Era (1995-2007), and the misguided or corrupt policy responses to those events.

If you've got crisis fatigue now, just wait—it gets better! In ten years, you will wish for the halcyon days of 2011. For example, the oil supply situation is about as good as it's ever going to be. The housing market will never be what it was in the years before the bubble. Government social programs which preserve the difference between being merely poor and being completely destitute are as generous as they are ever going to get. And so on.

This is why I have urged people to seek out other avenues, to seek out other modes of living. The Leave It To Beaver Dreamworld some still pay lip service to is as extinct as the dinosaurs. The American Dream has been a nightmare for most people for many years now. For these Americans, the economic opportunities that supported the Dreamworld aren't there, and they won't be coming back. You can't climb the ladder of conventional economic success because somebody stole the ladder. There will always be a lucky few, but you can't count on luck. You didn't ask to be born into this mess, but here you are.

I'm sorry to tell you this, but the world in 2011 is As Good As It Gets. Watch this film clip; maybe it will make you feel better. You have to make do with what there is, not with what you wish there were.

 

Is The United States Broke?

Writing casually on this blog, I've said more than once that the United States is broke. As with all other issues, the question of whether we are broke has now become political. Upon opening the opinion pages of the Pittsburgh Post-Gazette yesterday, I was greeted by two columns on the subject of our bankruptcy. Dan Simpson, a former U.S. ambassador who is now an associate editor with the newspaper, gave his view that The U.S. Can't Fix Libya. The other column was a reprint of Washington Post writer E.J. Dionne's What If We're Not Broke?

Just for the record, here are the dictionary synonyms for the adjective broke, which means "bankrupt" or "lacking funds"—

bankrupt, beggared, bust, cleaned out, destitute, dirt poor, flat broke, impoverished, in Chapter 11, in debt, indebted, indigent, insolvent, needy, penniless, penurious, poor, ruined, stone broke, strapped, tapped out

The situation in Libya is heartbreaking. The crazy Colonel has regained the initiative, the rebels are in retreat. Yet, Dan Simpson's approach to the intervention problem is simple. He has no political axe to grind. Why can't we fix Libya?

America's problem in devising foreign policy at this stage is two-fold.

The first is that we are strapped financially, even though the American military-industrial complex continues to get away with asking for more and more money as budget cutters slice muscle and bone in education and infrastructure, pretending they are trimming fat. Just look at how much it would take to fix the mess in Wisconsin, or in Pennsylvania, or even Detroit, as opposed to the $2 billion per week that we spend on the war in Afghanistan.

The second is that there seems to be a frightful lack of coordination within the Obama administration regarding the Middle East and North Africa, and the Libya affair has cast a harsh spotlight on the problem...

If the rebels have the will and firepower to get rid of Mr. Gadhafi, so be it. If he is able to hold on, lamentable as it would be to see him join the ranks of President Robert G. Mugabe in Zimbabwe, President Alexander Lukashenko in Belarus, Thein Sein in Myanmar and other distasteful leaders who maintain power by force of arms, it's a mean world out there and Americans are by no means obliged to try to fix all of its injustices, particularly when we are broke.

We can skip the "frightful lack of coordination" part, that being exactly what we would expect. We can't fix Libya because we're broke. We can't afford another military adventure, no matter how noble the cause. This conclusion is straightforward—there's no confusion here! Thus do great Empires decline.

Simpson's view echoes Niall Ferguson's assessment and my own. But now we are going to enter the political world, a world of complexity, obfuscation and confusion. I am going to ignore Dionne's opinion piece because it is actually based on David J. Lynch's Bond Market Shows Why Boehner Saying We’re Broke Is Only Figure of Speech, published by Bloomberg on March 6. Here is the bone of contention—

House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville...

“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.

At this juncture, I am going to ask the almost impossible from you, the reader: ignore Boehner's hidden political agenda, which mostly involves impoverishing you and bulldozing money toward the rich. After all, that's what wealthy interests pay him to do. But ignore all that. Just consider Steel's assertion that if a family is spending more money than it's taking in year after year, that family is broke.

It is impossible to disagree with Steel's statement. This family is in a debt trap. In terms of income, debt and expenditures, it is easy to see that if credit were no longer available, or only available at exorbitant rates of interest, this family would eventually not be able to pay its bills. There would be no choice other than to decrease expenditures if income could not be increased, the impossibility of which was presumably the reason the family borrowed money in the first place. If expenditures—on essentials like food, fuel, shelter—can not be lowered, including interest payments on the current debt, this family can only be viewed as effectively bankrupt.

Yet, many contend that what applies to our hypothetical family does not apply to the United States.

“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”

The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.

A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change...

“I think it’s very misleading to call a country ‘broke,’” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”

“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.

Here we encounter one of the greatest confusions of our times: credit equals income. As with our hypothetical family, the United States is in a debt trap. But that's really not the case according to the muddled reasoning of Edward Altman as quoted above. As long as credit is available at any reasonable any rate of interest, the United States is not broke.

Thus according to Altman, being broke is a relative thing. As long as the bond market is not treating us as if we're broke, we're not broke. We could only be considered bankrupt if there is an exogenous shock in the debt market. That's what happened to Greece. Until then, there is no debt trap.

Or as David J. Lynch said, a person, company or nation would defined as “broke” if it couldn’t pay its bills. You see, it doesn't matter how you pay your bills as long as you can pay them. Credit equals income. Of course, this line of reasoning, if followed to its logical conclusion, goes right off the deep end—

George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.

“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”

Talk about confusion! Here, printing money equals income.

Is the United States broke? Of course it is! One confusion lies in the assumption that current credit conditions will always obtain. This is typical human shortsightedness. It then follows that the current Ponzi Scheme arrangement is sustainable, at least for several years to come.

In short, it's like the old joke about the man who jumps off a 100-story building. He's in free fall, and upon passing the 50^th floor on his way down, is asked how things are going. His response?

So far, so good!

Good luck.

John Hulsman, Straight Shooter

A friend sent me a link to a C-SPAN video featuring John Hulsman. I had never heard of him. Here's his bio as it appears at C-SPAN.

John Hulsman is a senior research fellow at the Hague Centre For Strategic Studies, and president and co-founder or John C. Hulsman Enterprises, an international relations consulting firm. He advises both public and private groups on what he calls the decline of the West, and the rise of the Indian Ocean Rim and China. His books include Ethical Realism, the Godfather Doctrine, and a biography of Lawrence of Arabia entitled, To Begin The World Over Again.

I learned three things about Hulsman as I watched the video. First, he is a fiscal conservative in the sense that Dwight Eisenhower was a fiscal conservative. This political species is on the verge of extinction today. No doubt the John Boehners or Rush Limbaughs of this world would label Hulsman a socialist who believes in big government or some such nonsense. That's how far gone these Republican wackos are. Hulsman has a political philosophy, but is not political in the contemporary sense—politics makes you stupid. Thus, Hulsman is a throwback to the world of the 1950s and 1960s.

Second, I learned that Hulsman is a former Washington insider who fled that world to do international consulting. He describes his consulting business at the beginning of the video.

Third, and most importantly, I learned that Hulsman is a straight shooter. Listening to him talk about the corrupt elites in the Imperial Capital is like a breath of fresh air.

The discussion gets very interesting when Hulsman says—

January 13th there was an event at Cato... Another thing I learned in Washington is that it is almost impossible to lose your job. It's not the real world. I worked hard at it, but ...

Starts at the 11:15 mark

Here's another quote to pique your interest—

coupla reasons... one, and you know this about Washington, it's hard to explain to viewers, but it's a bit like high school. You want to be seen with the cool kids...

Starts at the 38:41 mark

If more people understood this, we'd all be in better shape. Disclaimer: I don't agree with all of Hulsman's views. For example, he went to high school during the Reagan years, and doesn't yet grasp that the Empire's decline got underway when he was in the 10^th grade. Being a foreign policy wonk who is now living in Europe, perhaps Hulsman isn't familiar with the economic data (e.g. in wealth & income inequality) that convincingly demonstrates our decline.

Start the video, and then use your mouse to move the progress slider forward to very shortly after the 11:00 minute mark. Simply release it if you want to start watching at the "impossible to lose your job" mark. I recommend you watch the whole thing if you've got an hour to spare.

Economists Examine The Disaster In Japan

The death toll in the Japan disaster has now risen above 2000, but the final tally will very likely amount to 10,000 people or more. The threat of a dangerous radioactive cloud at Fukushima Dai-ichi remains in play. Tens of thousands of people are homeless. The 8.9 earthquake has caused the worst humanitarian crisis in Japan since World War II, when the United States dropped not one but two ... uh ... never mind. 

For the Western press, the initial shock of the disaster has now worn off, and it's time to talk about the really important stuff. And what is the really important stuff? Japan's economy, dummy! And how it affects our economy. Here's the New York Times' Disruptions of Power and Water Threaten Japan’s Economy—

While the nation’s industrial clusters in the south and west seemed to be spared the worst, the crisis at damaged nuclear plants north of Tokyo was threatening to cause an energy squeeze that could set back all sectors of Japan’s economy.

To help bring electricity back to the devastated areas, utilities across Japan are cutting back and sharing power, imposing rolling blackouts that will affect factories, stores and homes throughout the nation. The emergency effort is expected to last up to two weeks, but could take longer.

“The big question is whether this will seriously affect Japan’s ability to produce goods for any extended period of time,” said Edward Yardeni, an independent economist and investment strategist.

Yes, siree! That's the big question, for sure. As opposed to finding, identifying, burying and mourning the dead, or providing a lifeline to the homeless. But never mind all that. Those efforts will be made, and will be accounted for as increased economic activity. So we must ask: what is the general economic outlook in Japan and elsewhere? The Times can always count on the soulless zombie Mark Zandi to give us the big picture.

Japan’s economic outlook, already problematic, is now even more uncertain, economists and analysts say, because the dimensions of the disaster remain unclear, especially at the damaged nuclear plants.

“The Japanese economy threatens to suffer another bout of recession,” said Mark Zandi, chief economist of Moody's Analytics.

Economic activity in Japan contracted in the fourth quarter of 2010, and the country was overtaken by China as the world’s second-largest economy, after the United States. Activity may well shrink for the first half of this year, Mr. Zandi said, though he predicted that the rebuilding efforts in the aftermath of the quake would help provide a rebound in the second half.

Rebuilding costs that could run in the tens of billions of dollars may require Japan to make tough decisions about government spending, economists say. Its ratio of government debt to the economy’s annual output is already at 200 percent, the highest among industrialized nations and far higher than in the United States, for example. So reconstruction, economists say, may make cuts in government spending elsewhere a necessity.

Oh, no! There may be another recession in Japan. But not to worry. Mark Zandi predicts that economic activity there will rebound in the second half of the year due to the rebuilding efforts. All will be well after the economic stimulus provided by cleaning up from the disaster. Whew, I thought things weren't looking so good there for minute. This could be a win-win.

But hang on. Didn't I read that the rebuilding costs could run into tens of billions of dollars? And doesn't Japan have a huge amount of debt already? That might require cuts in other government spending. What if the economic stimulus provided by the clean-up doesn't cover its costs? This is getting complicated! And it gets worse.

The yen is expected to strengthen against the dollar, as Japanese investors bring money back from overseas to shore up their savings and provide money for the rebuilding campaign. Those financial flows back into Japan will drive up demand for the yen, increasing its value. After the Kobe earthquake in 1995, the yen rose about 20 percent against the dollar over a few months.

One ripple effect could be a reduction in demand for United States Treasury bonds, adding pressure to American interest rates, according to Byron R. Wien, vice chairman of Blackstone Advisory Partners. The Japanese have been large buyers of United States bonds, but, Mr. Wien said, “they are going to be using their money to rebuild, so they will be smaller buyers of our debt securities.”

This damn earthquake will probably drive up interest rates on our T-bills. Talk about disastrous outcomes! But wait, there's even more bad news—

Japan is also a crucial global supplier of electronic goods and parts used in an array of industrial and consumer goods. The country produces an estimated 40 percent of the lightweight chips used to store data in smartphones and tablet computers, and it is also a leading maker of liquid crystal displays used in consumer electronics products...

The daily spot market for certain kinds of semiconductor chips will most likely feel the impact soonest. “There will be a lot of nervousness,” said Jim Handy, an analyst at Objective Analysis, a semiconductor research firm. “This may cause phenomenal shortages in the spot market...

Klaus Rinnen, managing vice president at Gartner, a technology research company, said a colleague in Japan, near Tokyo, told him that he was scheduled for rolling blackouts twice a day. However, shutting off power to chip manufacturers twice a day would be impossible to manage, he said, because fluctuations in power create defects and high losses.

Now here is a real tragedy—"consumers" may have to pay more for their iPads and other iBullshit.

OK, I'll be serious for a moment, I'll remove tongue from cheek. I don't know whether to laugh or cry. We live in a world in which human tragedies—even the ones not caused by other humans—don't matter so much, but economic growth is the Holy Grail. It's a world where we know the cost & benefit of everything, and the true value of nothing. Here in the United States, it just doesn't matter if 43 million people are on food stamps if the nation's GDP (Gross Domestic Product) is growing. Why would we view Japan any differently?

Earthquakes come and go, people live and die. Who cares? But if GDP is shrinking, well, that's something to worry about.

Our Outrageous Bubble Economy

Last week's Federal Reserve’s Z1 Flow of Funds data deserves our attention. Tim Iacono took a close look at the Balance Sheet of Households and Nonprofit Organizations.

Due in no small part to record money printing by the central bank, the value of households’ assets rose by $2.1 trillion in the fourth quarter of last year year while debt increased by a paltry $26 billion...

Historians will no doubt look back on this data – collected and reported right there at the Fed – and wonder how it could be that monetary policy in the late-20th and early-21st century was aimed squarely at inflating one asset bubble after another – inflating a new one after the previous one burst.

As tangible assets decline in value, financial assets inflate. Look especially at equities (stocks) and mutual funds versus real estate. Growth in financial assets has inflated pension fund reserves. Fed money printing has boosted credit instruments.

The Bernank is dead set on getting us back to the elevated levels of 2007. Once he gets us there, he will call it a recovery. But what will he have achieved? For the vast majority of working Americans, life will continue to feel like it did in 2009 during the post-meltdown lows. Look at this table from G. William Domhoff's Wealth, Income, and Power—

Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

Table 2: Wealth distribution by type of asset, 2007

	Investment Assets
	Top 1 percent	Next 9 percent	Bottom 90 percent
Business equity	62.4%	30.9%	6.7%
Financial securities	60.6%	37.9%	1.5%
Trusts	38.9%	40.5%	20.6%
Stocks and mutual funds	38.3%	42.9%	18.8%
Non-home real estate	28.3%	48.6%	23.1%
TOTAL investment assets	49.7%	38.1%	12.2%

You can easily see who owns all the investment (financial) assets in this country. 83% of stocks and mutual funds are owned by the wealthiest 10% of Americans.

Not only is it outrageous that 10% of Americans own the place, but it's even more outrageous that the central bank (with the connivance of the Federal government) is inflating another bubble which enriches those same Americans. And what will the rest of us do when the new bubble bursts? We'll be left holding the bag.

At least the Housing Bubble (and even the Tech/Nasdaq Bubble) had the "virtue" of temporarily pumping up the balance sheets of many ordinary Americans if they owned a home (or tech stocks). Moreover, working Americans made money building houses or building the internet. This latest financial asset inflation is pure in the sense that it is backed by nothing of tangible value, and ordinary Americans have not been invited to the party.

It is no wonder my inbox is flooded daily with editorials outlining dollar (or other) collapse scenarios, or how to prepare for the coming hyperinflation, or messages telling me to buy gold or other non-paper assets, or lessons on how to grow my own food, and so forth. Looking at that first graph above, I can certainly see why panic and fear are so widespread in our times. A reader sent me a rant by Gerald Celente which, at first blush, sounds crazy. But upon reflection, you can hear the frustration of a man who realizes that the whole world has become a casino run by con artists for the benefit of a wealthy few.

 

Laughing At The Fed

Today we've got some Good News for a change. Fed President William "Bill" Dudley was conveying the rationale for U.S. monetary policy to an audience of "business leaders" in Queens, New York.

New York Fed President William Dudley told business leaders in Queens, New York, that the economic outlook has improved in the past six months...

Dudley, who was a core advocate for the Fed's easy money policy, is seen as one of the more "dovish" members of the Fed's policy-setting Federal Open Market Committee. The committee meets next week and is not expected to alter its policy. Last November, the Fed said it would buy $600 billion in Treasury bonds to further support the recovery, with benchmark interest rates already near zero.

Dudley said the February jobs report, which showed the economy added 192,000 jobs that month, has made him more confident about the job outlook. The unemployment rate fell to 8.9 percent...

[My note: Gallup put the end-February unemployment rate at 10.3%. See 1 In 5 Americans Are Underemployed.]

Dudley faced persistent questions from the audience on food inflation. The president of the Federal Reserve Bank of New York said people forget that even as the price of food is rising, other prices are falling. He mentioned the price of the iPad 2, prompting guffaws from the audience.

In his speech, Dudley said some of the commodity price rises are likely to be temporary and unlikely to feed through into a sustained rise in inflation. "While rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate," Dudley said.

Laughing at the Fed's stance on inflation—this a sign of genuine progress. Dudley uses the price of the Ipad 2, which is presumably lower than it would be under "normal" circumstances, to illustrate the Fed's fear of deflation. Dudley is perturbed that you might be able to pay a lower price for an Ipad 2. If its price is falling, there is no incentive to buy it now. On the other hand, if the Ipad 2 is rising in price, and you want one, you have an incentive to buy it now before its price goes up in the future, even if you must borrow money at usurious interest rates to do so.

This is called the Paradox of Thrift. God forbid people should save some of their money.

Welcome to the world of Keynesian economics as it is standardly interpreted today. The theory almost sounds reasonable until you look beneath the surface. An example: what about the usefulness of "core" inflation as an important economic indicator versus ephemeral, highly volatile food and energy costs? I shall quote from Irwin Kellner's Rotten to the core—

One of the biggest canards ever to be foisted on the American people is the notion that removing food and energy from the price indexes provides a clearer picture of inflation.

In reality, it’s just the opposite.

The so-called “core” rate of inflation (the headline price indexes minus food and energy) is grossly misleading. It was designed in the 1970s to take our eyes off what’s really happening to prices so the Federal Reserve could maintain an ultra-easy monetary policy.

Guess what? This is exactly what the Fed is using it for today.

Taking food and energy out of the price indexes was the brainstorm of the then-Fed chairman, Arthur Burns. He was looking for a rationale to keep policy easy in order to help Richard Nixon’s bid to be re-elected president, back in 1972.

Burns reasoned that no amount of money created by the Fed could produce one bushel of wheat or one barrel of oil. Their prices related mainly to such exogenous factors as the weather and geopolitics. As such, they have nothing to do with the state of the economy.

The professorial Burns managed to convince the Congress, the Bureau of Labor Statistics, which issues these indexes, the press and his fellow economists that this was the right way to look at prices. Not surprisingly, “core” inflation took hold and is widely used to this day.

And that's how "core" inflation became enshrined as part of today's standard economic theory.

Bonus Video