Conventional Economic Thinking, Getting It Wrong

Yesterday I mentioned Paul Krugman, a NYT opinion columnist, and the tantrum he was in the midst of throwing over the result of the election. Despite his regular columns on politics, his day job is as an economist, a Nobel-winning one at that. This fact doesn’t render his views any more right, given the fact that economics is essentially a branch of Philosophy rather than a branch of the Hard Sciences.

Krugman took time out of his of his anti-Trump meltdown to post this tweet, in which me mocked ‘creative desctruction.’

(Tweet: “So creative destruction is mostly BS. Kind of suspected that  “)

Krugman has long held an antipathy to the idea of creative destruction, in particular when applied generally to an economy in the mold of Joseph Schumpeter. Consider this post he wrote a couple years ago:

The same impulse, I think, is why Schumpeter gets cited so much. If you read his stuff directly, it’s interesting, I guess, although his attempts to explain the business cycle were a waste of good paper. But it’s that glamorizing phrase “creative destruction” that did it, because it’s so flattering to the big money (and excuses a lot of suffering, too).

[…]

So here’s a revolutionary thought: maybe we need to do less disruption and put more effort into doing whatever we do well.

The post in question, as well as the recent tweet was in reference to the idea of creative destruction on a micro level in the sense of business innovation. The abstract of the paper in the tweet reads as follows:

Entrants and incumbents can create new products and displace the products of competitors. Incumbents can also improve their existing products. How much of aggregate productivity growth occurs through each of these channels? Using data from the U.S. Longitudinal Business Database on all non-farm private businesses from 1976–1986 and 2003–2013, we arrive at three main conclusions: First, most growth appears to come from incumbents. We infer this from the modest employment share of entering firms (defined as those less than 5 years old). Second, most growth seems to occur through improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvements by incumbents appear to be more important than creative destruction. We infer this because the distribution of job creation and destruction has thinner tails than implied by a model with a dominant role for creative destruction.

These conclusions are, in truth, straightforward. Following on Peter Thiel’s concept of ‘zero to one,’ it is much harder to create an entirely new product, concept or entire industry from scratch as opposed to improving an existing product, concept or industry. However, the true advances in humanity come from these ‘zero to one’ moments. Going from horse and carriage to automobile was a far more substantive and ‘ball advancing’ move than the improvement of the automobile which has taken place since.

Applied to the individual businesses, there is more ‘growth’ from the likes of Proctor and Gamble, Ford and GE than there are from the likes of Google simply because there are simply fewer Googles.

Krugman uses this to poo-pooh the idea of creative destruction generally. His fight is with the like of people such as myself, who argue that when economies as a whole enter into recession, the best thing for that economy would be for those stricken businesses to be allowed to fold, that bad debt to be liquidated, and prices find their appropriate level, in line with the incomes and economic reality.

This is where the disdain for the ‘glorification’ of creative destruction comes from, because when applied to an economy as a whole, the aforementioned recessionary symptoms lead to falling employment and lower prices in the short term. This is, of course a painful thing, and Krugman, with his pro-government  leanings, believes that the government can solve these problems by easing monetary conditions and spending money to prop up the failed businesses and restoring debt. When Krugman writes about sticking to doing ‘whatever we do well,’ he means ‘whatever economic paradigm was prevailing before the recession,’ when applied to economies as a whole.

The problem with his, and indeed the standard Keynesian approach to the world, is that existing paradigms may not be lasting. They may fail under changing conditions and thus must adapt to stay relevant to the new economic reality. As such printing trillions of dollars to revive a failing economic model founded on debt fueled spending collateralized by ever rising asset prices is a recipe for failure, in the long run. Creative destruction is thus far from being ‘BS’ but in fact the only way for economies as a whole to be structured appropriately, so as to be in line with the underlying economic realities of the time.

**********

Elsewhere in Ivy League Economics PhD News, Alan Kreuger, also of Princeton, and Lawrence Katz of Harvard recently released a study which showed that 95% of the jobs created in the Obama ‘recovery’ were part time or contractor work. This is hardly surprising to most who understood the problem with the idea that reflating asset bubbles was not a strategy for success.

The prior bubble popped because prices were sent out of wack. Businesses could not recoup the ever higher costs of production with ever higher prices for the final goods. The lack of demand at higher prices meant that prices could only fall, and with them wages, the price of labor.

Keynesian economists such as Krugman, Krueger and Katz, have no tolerance for such vagaries of the market, and seek to prop prices. In doing so, they propped the higher costs of production which meant they were forced to cut costs elsewhere. This meant workers were either laid off, replaced with robots, or had their hours reduced, or some combination of the three.

This thrust the worker into an environment in which his or her hours were cut while the prices he or she had to pay for goods and services rose. This meant that the worker had to supplement the now part-time or no-time work he or she was doing with a second or third part-time job, or becoming a contractor.

Obamacare crystallized this phenomenon, with its mandates on employers, especially service sector employers, leading to many of them reducing the hours of their staff to avoid the mandatory health care expenditures, hiring more part time workers to fill in the gaps.

This was how Obama’s ‘stellar’ job creation statistics were constructed. The most telling part of the article is the following [emphasis mine]:

Krueger, a former chairman of the White House Council of Economic Advisers, was surprised by the finding.

The disappearance of conventional full-time work, 9 a.m. to 5 p.m. work, has hit every demographic. “Workers seeking full-time, steady work have lost,” said Krueger.

Under Obama, 1 million fewer workers, overall, are working than before the beginning of the Great Recession.

That the likes of Krueger, a Keynesian through and through, would be surprised is of no surprise to me. The Keynesian understanding of the economic world has shown to be bankrupt in the long run. That it is survives as a respected school of thought is down to its ‘success’ in the short run, on a superficial basis. The fact that the Obama administration created millions of jobs, tripled the stock market and has engineered housing prices back to near pre-crisis levels is seeming evidence of the fact that these Keynesian polices have succeeded.

But as this paper notes, this was a papering over the cracks. Despite the touts of the administration, the people know that the economic recovery hasn’t been as great as it seemed, as they see it every day. They are the ones who have to go out in search of multiple part time jobs to make up the hours that were lost elsewhere. They are the ones who are paying higher and higher costs for the same standard of living.

To do this and to be continually told that the economy is improving was a slap in the face which proved one too many for the average voter, which ultimately goes some distance to explain why Trump had such a stern base of support.

Furthermore, this explains why the old media outlets who crow endlessly about how unqualified Trump’s picks are for his cabinet. Krugman, Katz and Kreuger have a combined 100 plus years of economic experience, yet for all their ‘wisdom,’ their understanding of the economy is wholly inadequate.

Trump’s Greatest Challenge

…will be restoring the American economic machine to its former glory. To the extent he is able to achieve this, a lot of ills that may crop up elsewhere may be forgiven. Trump’s economic progress will be especially important from a political sense given the fact that Trump is the ‘change’ candidate. He ran, and was elected on a promise to shift away from the status quo in all aspects. Should the Trump economic doctrine fail, it will poison the anti-status quo rhetoric which won him the presidency for decades to come. It will potentially open the door for a complete and total return to power for the ‘establishment’ forces in a way that may be more damaging than if Hillary Clinton had won instead. That underscores how important it is for Trump to get the economics right.

As I write this, we are in the midst of a post-election victory haze which has seen the stock market make new highs virtually on a daily basis. Stock in commodities and manufacturing have risen by upwards of 50%. Trump himself has lauded the reaction in stocks since November 8 as a validation of his election.

In some ways he is correct. Should he enact his policies, especially the cutting of corporate taxes and reducing regulations, the business environment in this country will improve, which will lead to greater profitability and thus higher stock valuations.

The issue is that the market correctly assigning higher stock valuations to publicly traded companies is happening in an environment in which these valuations were already in the realm of the absurd. Indeed, Trump himself lamented the fact that the stock market was in a giant bubble on the campaign trail, calling it a ‘false’ stock market. Now that he has won, and stock prices have rocketed even higher, Trump is being inconsistent in his praise for what can only be described as the bubble getting even more absurd.

What has driven this bubble to its current heights has been the torrent of debt unleashed on the economy over the last 7+ years. This debt, in turn was facilitated by the depressing of interest rates to levels not seen in the history of the developed world, for nearly a decade, without interruption. Sticking with the United States, the Federal Reserve quintupled the size of its balance sheet, which enabled the totality of credit outstanding to continue to expand, in the manner it has done for the better part of four decades.

The result has been the restoration of the 2008 bubble, the popping of which led to so much destruction. What is important to note is that this bubble, like all bubbles, will pop. The only question is the needle which pricks it. It very well might be the Federal Reserve, which is set to raise interest rates at its meeting next week. It might be the plunging of the economy into a full blown recession, which is a natural part of economic cycles, but truly devastating when a bubble has been the foundation of the preceding period of growth.

Regardless of how it starts, the fact is that one peach of a smash is inevitable. This is because of the fact that as it currently stands, the US economy employs a debt driven consumer spending model as its method for achieving economic growth. This sort of model relies on constantly expanding debt, and constantly rising prices. These are two facets which are unable to endure indefinitely, much in the same way it is impossible for a human being to naturally propel oneself through the air indefinitely without gravity asserting itself at some point. From an earlier piece I wrote on the subject:

At some point, markets can’t support prices at the high levels producers need to set, which in turn leads to prices falling, profits falling, trouble servicing debts, liquidations, and layoffs. Yet, the solution presented by mainstream economics is to guide prices higher again.

All actors in the economy, from the government, to households to business are currently over-indebted.

As a result we are getting closer to the point when there will be no one left to take on the new debt required to push prices ever higher, in order to keep the ‘growth’ going. As this become more and more apparent, prices will start to fall, loans will become bad, bankruptcies will rise, and all the rest of it. Then the political game truly begins.

The economic carnage will be universally blamed on Trump, and it will not be a difficult story to sell. The surface level thinking will show that the economy was ‘fine’ under Obama, with rising stock prices, rising GDP, home prices and employment levels, a reduction in the deficit and so on. The fact that these metrics are superficial, and easily gamed by the cheap money which will have evaporated in the downturn will be overlooked.

It is at this point that the most pivotal moment in Trump’s presidency will arrive. He will have to choose between attempts at reflating the burst bubble, and allowing market forces to play out, and then rebuilding on the new landscape that forms thereafter.

The standard politician has always taken the former route. It is the route of political expedience, the route of slavish devotion to abstract metrics such as GDP. The last two administrations have done exactly that. In the wake of burst Internet and Housing bubbles, the Bush and Obama administrations respectively, in conjunction with the Greenspan and Bernanke Federal Reserves ‘stimulated’ the economy via a lowering of interest rates and dramatic increases of debt. The debt taken on under the Bush administration equaled that of the cumulative debt of every president prior to him. Eight years on, President Obama matched that dubious achievement.

The consequence of allowing market forces to run their course would have been catastrophic, in fairness. This is largely because the multi decade advance of asset prices was also the savings vehicle for many in the Baby Boom generation. For decades, they had not had to build real, legitimate savings because asset prices were always rising. When the time came to retire, conventional wisdom held, it was simply a matter of selling the assets and living happily ever after. That all changed when the bubbles burst, particularly in 2008. For many Boomers, their retirement nest egg had been wiped away, or at least severely diminished, just at the very moment they needed it.

The actions of world governments and central banks in attempt to reflate the bubble was in some sense a refusal by the Boomer generation to accept their mistake, demanding that economic gravity be defied indefinitely until they were made whole again.

These actions were able to ‘fix’ the problem in the short run, but are fundamentally inadequate for the long term. Indeed there has been positive talk about home prices which are nominally flirting with 2008 bubble levels. At some point there will again be ‘too much debt,’ and the whole system will be under pressure once more. The fact that asset prices have been engineered higher for the benefit of Boomers means that these very assets will be increasingly out of reach for a younger generation which itself is overburdened by student debt the Boomers never dealt with when they were young.

This will necessitate still further debt and money printing to enable the younger generation to purchase assets from Boomers at these stratospheric levels, in order for them to retire.

This paradigm is the equivalent of fixing the negative symptoms of a drug withdrawal with a higher dose of the drug. I sets in motion a cycle in which the only conclusion is either an overdose or the mother of all withdrawals.

The correct solution is to endure the withdrawals, no matter how bad they are, because they will still be better than a certain overdose. In the context of the current economic situation, that means allowing the gaggle of bad debt which hangs around the neck of the economy like an albatross, to be purged from the system.

Trump should understand this scenario well – for it mirrors the situation he was in personally during the early 1990s. Having overextended himself in the late 80s, he was in a fair bit of trouble, to put it mildly, when the market turned. This is all well documented, but Trump’s Comeback would not have been possible without a renegotiation with his creditors. This allowed Trump to survive without having to sell the assets which he had accumulated to that point, and set the stage for him to grow his empire not only to far greater heights, but with a far greater foundation which offered a substantial margin of safety.

The United States as a whole is need of something similar happening. I suspect, on some level, Trump is aware of the nastiness which might be involved. Back in May, he revealed as much when he suggested that the United States could simply renegotiate its debt to alleviate its problems. This set off a firestorm in the media, which posited that Trump would be threatening the pristine credit history of the US government, which had always honored its debts.

That is patently untrue, but the real cause for alarm comes from the fact that the bond market, and in turn all markets, rest on the fundamental idea that it is true. That is, US government debt is a 100% certainty to be paid on time and in full. As such, for Trump to suggest that the debt could be ‘renegotiated’ would upend world markets.

The premise from which this potential turmoil originates from is faulty however. The US does pay its debts on time, but owing to money printing exercises, it has not necessarily been paying them in full. Paying debts with printed money is to pay in a currency that is worth less than when it was borrowed. In theory, the interest rate should square the difference, but given that interest rates have been held artificially low by the Federal Reserve, a real case can be made that America’s creditors have already had involuntary renegotiations with America, which has been implicitly defaulting on its debt for years now.

What Trump mentioned in May was an explicit default. In that event, the tumult would be extraordinary, with interest rates rising precipitously, prices falling precipitously, and a temporary state of near depression ensuing, perhaps worldwide. Yet it would be the right thing to do.

The current game of kicking the can down the road and hoping for economic miracles has not worked. Consider that in the last two presidencies, each has had to double the national debt and keep interest rates at historic lows merely to maintain a period of growth with had nothing to show for it but stratospheric asset prices and a war torn planet. In the meantime wages have stagnated, home ownership has dropped, labor force participation has dropped, high paying manufacturing jobs have been replaced by low paying service sector jobs, and only those over the age of 55 have seen a net increase in employment.

This is the paradigm which the Keynesian academics, global central bankers and short term-ist politicians believe justifies the doubling the debt every 8 years to preserve.

In rejecting that prescription, Trump would put America in the position he himself was in in those early 1990s days, when he would tell himself repeatedly, ‘survive til 95. Survive til 95.’ It was at that point he figured that he would be able to have a proper foundation to work from, and that sustainable growth could begin.

The short term carnage which would result would no doubt be pounced on by a leftist media which will have been constantly begging for him to fail. There would be no end of horror stories describing the bankruptcies, foreclosures, layoffs, business closings and so on that would descend upon an a economy ridding itself of bad debts. These unfortunate occurrences would then be used to bolster the leftist line that Trumpism generally, with its America Fist, anti-globalist bent is a proven failure, with a view to then restoring the globalist, politically correct politics it was after all along.

Trump’s messaging  in the face of such an onslaught will have to involve the explicit illustration of our bubble-crash-new bubble cycle, and the framing of our choices as I’ve outlined.

It will be a truly Herculean task, merely because the size of the bubble is such that even the most modest worker will be involved owing to the fact he or she probably has a 401K. It will be difficult for the truism that all long term gains require short term sacrifice to gain traction when that sacrifice comes in the shape of a declining 401K or home price.

Indeed, we live in a culture which has been conditioned to crave instant gratification. The idea of saving and investing, and not seeing the fruits of that saving until years in the future is increasingly an alien concept. To impose a necessary, but painful economic downturn will be potentially suicidal to Trump’s political career, but a necessary component to a sustainable, longer term recovery.

It is because of this that there will be a strong temptation for Trump to do as his predecessors did, and to try and restart the bubble machine. However, as I’ve made clear here, it is the wrong answer. As I’ve mentioned before, I suspect that Trump does know the right answer. Indeed, his campaign was centered on having the ‘right answers’ in other areas such as immigration and foreign policy.

In these arenas his anti-status quo approach is correct. The same is true of the economy, and more specifically the debt driven consumer spending model of growth that currently drives it. That is the status quo. That has led to failure. That needs to go. Trump’s task, if he really is to go down as a great president, will be to destroy the bubble-crash-bubble paradigm and free an US economic machine, now running on savings and investment instead of cheap credit, to start once again, all the while holding the hand of a skittish public through the transition.

On the Carrier Deal

Last week, President Elect Donald Trump signaled his intent to follow through on his campaign promises when he personally intervened in a situation in which would have seen over 1000 manufacturing jobs move to Mexico from Indiana. Carrier, the business in question had planned to move those jobs and announced that the plant would be shut down in February. It became a campaign issue right after that, as Trump latched onto it, citing that specific deal as a symptom of the overall multi-decade problem of manufacturing being gutted in America.

Over the Thanksgiving festivities, Trump took to Twitter to note that a deal was being discussed:

Then a few days later, when it was completed Trump announced that he was going to visit the plant to meet the workers, as part of a ‘Thank You’ tour:

While the move clearly had a ton of political symbolism attached to it, it was a functional reminder of the Trump Doctrine, as it pertains to the economy, jobs and trade. It was a symbol that represents the Trump’s ‘America First’ outlook that he campaigned on.

The whole situation has been met with scorn from commentators on both the left and the Principled Right. From the left, the charge has been that United Technologies, the parent company of Carrier, was enticed to keep the jobs through a smattering of tax cuts and a promise of a more favorable regulatory situation. This was outlined by Bernie Sanders in a Washington Post op-ed.

The specific charge Sanders and others make is that Trump is flip flopping by giving ‘concessions’ to Carrier when he ran on being tough on corporations who send jobs overseas. In particular, Sanders says that Trump promised to levy a tax on these businesses, and here he is actually giving Carrier a tax cut.

This is yet another willful misinterpretation of something Trump does/said that has been a feature of leftist vituperations for 18 months now. During the campaign, Trump spoke of levying a ‘tax’ (tariff) on goods of companies which moved their jobs out of the country. That is a conditional statement. Carrier agreed to keep jobs in the country, and as such are not going to be subject to any additional ‘tax’ on their goods.

Furthermore, the reason for the about face isn’t cause for outrage. All reports indicate that Carrier was to receive a $7 million tax break over 10 years,or $700,000 per year. As Eric Bolling points out, the amount generated by state in taxes from the 1000 plus jobs that will remain far exceeds the amount in tax breaks for Carrier:

This is not to mention the amount of taxpayer money that won’t be spent on welfare for potentially 1000 people and their families.

During the statement Trump made at the Carrier plant, he indicated that his presidency would create a great environment for companies such that they wouldn’t want to leave:

But also, I just want to let all of the other companies know that we’re going to do great things for business. There’s no reason for them to leave anymore because your taxes are going to be at the very, very low end, and your unnecessary regulations are going to be gone.

 

We need regulations for safety and environment and things. But most of the regulations are nonsense — become a major industry, the writing of regulations. And that these companies aren’t going to be leaving anymore. They’re not going to be taking people’s hearts out. They’re not going to be announcing, like they did at Carrier, that they’re closing up and they’re moving to Mexico — over 1,100 jobs.

He cited the fact that during his travels campaigning, the one thing he kept hearing from businesses was that the poor regulatory state was their number one concern. Indeed, the average cost of regulations for a manufacturers was about $20,000 per employee. The Carrier plant specifically was under the burden of 53 new regulations in the last few years, which ultimately had made doing business in America unprofitable. This is why businesses are leaving America, and Trump has vowed to change that, by lowering taxes and massively scaling back regulations.

Many are failing to understand that this Carrier deal is a symbol of what will happen across the business community in a Trump presidency. It is not that Trump will get on the phone with every CEO in America and cut individual deals – of course that is unfeasible. It is that the basics of the deal – the government allowing a business to keep more of the money it earns while not being burdened by onerous regulations – is a generous enough ‘offer’ from the government to business in America such that they will want to keep their operations in the country on their own. That is the point.

Justin Wolfers, a leftist economist, also missed the point when he described this deal as Trump interfering with the natural churn of the economy, in that it creates and destroys jobs on a regular basis:

But the Carrier case also illustrates a larger point about how the economy works. In Mr. Trump’s telling, the economy is a fixed set of jobs getting shifted around a global chess board. Mexico’s loss is our gain and vice versa.

But you should think of the economy as being in a state of constant churn. The economist Joseph Schumpeter used the now-famous phrase “creative destruction” to describe this process by which new firms push out the old. The result can be cruel, but an extraordinarily fluid labor market, many economists argue, is the secret of American dynamism.

For a start, this deal was not about destroying jobs. These jobs were not being destroyed, but moved to another country. These jobs are not obsolete in the context of a modern economy. They were moving because they could have been done more efficiently elsewhere. The key is that the relative inefficiencies of staying in Indiana were totally self-wrought as opposed to being fundamental in nature. Removing those inefficiencies should really be no big deal, but for government it has been.

Furthermore, it is really rich to see an economist like Wolfers cite Schumpeter’s creative destruction. Economists of his ilk decry the phenomenon when it is correctly applied to our bubble economy as a whole. Many, such as myself have called for the American economy to shed its reliance on unstable bubbles and to move towards a more robust economy infused by the dynamism Schumpeter’s of creative destruction concept.

This involves the ‘destruction’ of the bubbles of yore, and thus necessary declines in asset prices, and debt levels, along with substantial increases in interest rates. That is beyond the pale for economists such as Wolfers who think that falling prices are the worst possible thing to happen to an economy.

Back to Carrier, many of the Principled Conservatives on the right are having big problems with the image of a specific company dealing with the government on a one on one basis in this manner. This group of critics (also some leftists, with a sudden reverence for Adam Smith) have slammed Trump for being anti-free market, dictating to individual businesses how to run their companies.

The first response is that in reducing taxes and regulations, Trump is actually moving towards a free market, not away from one. The ‘deal’ Trump is offering is not ‘Stay here, and be subject to high taxes and high regulations or face huge tariff,’ but ‘Stay here, we’re going to lower your taxes and regulatory burdens, but if you want to go anyway, you’ll be subject to a tariff.’

The latter option is a far superior one, despite its protectionist bent. I’m not a hardcore protectionist per se, I do recognize that tariffs are an effective tax, and they are not necessarily a free market construct. But tariffs are superior to a higher income tax, corporate tax and higher regulatory burden. Income and corporate taxes accrue to the government, while a tariff accrues to a protected class of business. The tariff influences behavior, but to a much lesser degree than do income taxes. In my view, the trade off for isolated tariffs for lower income taxes and regulation is a net positive.

Secondly, this specific deal has an element which hasn’t been discussed much – the Military Industrial complex. It has been speculated that Trump threatened the lucrative government contracts that United Technology has with the US government. These sort of contracts, and the existence of the MIC generally are a negative to anyone who of a free market mindset. Over the past 5 or 6 decades these sort of webs have been slowly built and expanded upon to the extent that corporate welfare is a very big problem.

The length of time over which this situation has developed means that untangling them isn’t going to be a quick thing. We aren’t going from a Corporatist attempt at Social Democracy to a free wheeling free market overnight. In (possibly) threatening United Technologies in this manner, Trump has done a very pro-market thing. He (possibly) used a feature of the corporatist landscape as leverage to benefit ordinary Americans.

That same dynamic applies to the arguments over the tariff question. The Principled Conservative argument of free trade listens well, but the reality is that multinational trade agreements such as NAFTA and TPP are not examples of free trade. Republicans and Principled Conservatives always argue against tariffs in that they are ‘regulated’ trade, yet thousand page bills written by politicians and special interests are apparently ‘free trade.’ Real free trade requires no agreements, no legislation, nothing. What we already have is far from free trade. So let’s mold it in our favor. Ideally this landscape would not exist, but when life gives you lemons, make lemonade.

 

The Great Unmasking

Last month, Donald Trump caused a stir in the economic world, with his analysis of the Federal Reserve and its monetary policy during an interview he did with CNBC.

In it, he was adamant that the zero interest rate policy of the Federal Reserve had created a ‘false stock market.’ This was after last week, in which he had said that the interest rate policy had created a ‘false economy.’ His reasoning for both was that the decisions were political in nature.

According to Trump, Janet Yellen, the Federal Reserve Chair, was embarking on these policies in order to help President Obama, in order to make sure he ends his term with a positive economy.

Politics aside, the administration, and most left leaning economists have quick to point to the job numbers as a sign of the recovering health of the economy. The fact that the stock market has made fresh all time highs in 2016 has been used to tout the strength of the business community and commerce. Indeed, at a campaign rally last month, President Obama vociferously patted himself on the back for an economic job well done:

Janet Yellen, during her remarks explaining the Federal Reserve’s interest rate decision on September 21, painted a rosy picture of the economy, repeatedly citing the employment figures along with household income increases as evidence.

It is my view that these data points – mainly the employment data, and the performance of the broad stock markets – are merely masks which give the perception of strength and improvement, while concealing a deteriorating reality underneath.

The Labor Market Mask

Let’s look at the employment data.

While it is true that the unemployment rate has come down to 5%, from about 10%:

Part of that is because the labor force participation rate has declined throughout President Obama’s tenure and is at multi-decade lows:

labor-force-participation-rate

With a ‘normal’ labor force participation,  the unemployment rate would be much higher, at least 10%.

The problem isn’t just with the totality of the workforce and the employment rate, but with the types of jobs which are being created in this economy, and who is filling them. Even a cursory look at the below surface trend reveals some problems.

The following is a breakdown of the labor force participation rate by age group: (Credit to the excellent Doug Short, who is a tremendous resource with his charting)

labor-force-participation-by-age

The following chart shows the breakdown in cumulative job gains for prime age workers versus those over 55, from 2007 through August 2016:

jobs-old-vs-young

The following chart shows the cumulative gains in the food and hospitality industry versus manufacturing:

water-bartender-mfg-workers

These charts show that the labor force is getting older, and the jobs that are being created are mostly of lower quality, in terms of goods producing. The bartenders vs manufacturing chart is somewhat tongue in cheek, but it does highlight the fact that most of the jobs that are being created are in the service sector, which are less paying jobs. The jobs that are being lost are the higher paying goods producing jobs.

Also concerning is he fact that the jobs data for September 2016 showed an increase in part time jobs of 430,000, compared to a loss in full time jobs of 5,000. In addition, there was a spike in the amount of individuals who hold multiple jobs of roughly 300,000, from 7.5 million to 7.8 million. The following two charts highlight these developments:

part-vs-full multiple-oct

Put it all together, and what we have is an economy which appears to be creating low paying jobs, which are being filled by people who may already have jobs, but need second and third jobs. Or, individuals who were laid off from a full time job, and are replacing it with multiple part time jobs, at lower pay.

Regardless, these are not signs of a robust economy, and those who point to headlines touting ‘X million jobs created since the recovery’ are being duped by an attractive mask that hides a horror show.

The Asset Price Mask

But what about the stock market? Isn’t it at all time highs?

It is, but masks are present here as well. Namely, the Federal Reserve. For nearly 8 years, the Federal Reserve has been engaged in unprecedented levels of monetary accommodation, with the Federal Funds rate resting at 0% until the most modest of raises in December 2015.

That raise was supposed to be the start of an easing cycle, which many experts predicted would result in four rate hikes for 2016. However, the stock market subsequently began 2016 with the worst start in the history of the stock market. This prompted an abrupt about face from the Fed, and then the ‘experts,’ with respect to the rate hiking schedule. Four rate hikes became two, and two became one, and as of this writing there is talk that there will be none at all.

That 12% stock market sell off in the first three weeks of 2016, on the back of the Fed raising rates for the first time in 7 years, from 0% to a negligible 0.25%, is indicative of the whole story: This market lives by the Fed and dies by the Fed. Some, myself among them, would call that a bubble.

The Fed’s persistence in keeping interest rates as low as possible is ultimately rooted in its flawed belief that elevated asset prices are the key to prosperity. Consider Ben Bernanke’s 2010 explanation of accommodative monetary policy and its intended result, the ignition of the ‘wealth effect.’

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

This is a description of an economic growth model that starts with the Fed lowering interest rates, pumping money into the economy, continues with various actors in the economy increasing their borrowing, and ends in them buying assets, which increase their prices, emboldening the owners of those assets to further spend or take on more debt as a result of their increased ‘collateral.’

The hope Bernanke and all Keynesian influenced central bankers had, and still have, is that this process continues and feeds on itself, a phenomenon known as the ‘virtuous cycle.’

Indeed, the Federal Reserve has accomplished this, expanding its balance sheet from roughly $800 billion in 2008 to roughly $4.5 trillion today:

fredgraph-2

Which has led to skyrocketing corporate debt:

fredgraph-3

Which has, in part, led to a substantial rise in the S&P 500, which I will use as a proxy for ‘asset prices’:

fredgraph-4

The problem with this, the Fed’s preferred model for growth, is that continued asset price increases rely on ever expanding debt, to provide the impetus to buy. It is a simple fact that debt cannot expand in perpetuity. It is limited by the ability to service that debt, which is in turn limited by the productive capacity of the borrower in question.

With respect to corporate borrowers, that productive capacity is seen in earnings. If corporates can produce increasing earnings, they can sustain larger debt loads, which justifies the higher debt-induced prices. The following chart, of the S&P 500 index compared with earnings of the companies in that index, tells an interesting tale:

spx-earnings-vs-stock-index-price-1

In short, the continued rise in stock prices are not justified based on the diminishing productive capacity of the companies themselves. A reason for this diminished capacity is general weakness in the economy itself, evidenced by the labor market situation which was discussed earlier.

An economy in which more and more people are working multiple lower paying part time service jobs instead of higher paying full time goods producing jobs is going to be an economy in which fewer and fewer people have incomes which allow them to spend freely. These household budgets are further constricted when taking into account the fact that the Fed is trying to engineer prices higher, so as to kick start the ‘virtuous cycle’ of the ‘wealth effect.’

The math just doesn’t work. Rigid incomes lead to constrained household budgets, which do not lend themselves to increased spending at higher price points, nor do they lend themselves to increasing borrowing to spend at higher price points.

Despite this roadblock, share prices continue to remain elevated, because the continued low interest rate environment established by the Fed enables corporates to take up the burden of spending. They can borrow at record low rates, and buy back stock. Or, other investors, banks, foreign central banks and others can borrow at low rates, in order to buy elevated stock prices. The rationale here is less a belief in a prospective restoration of business fundamentals, and more in a belief that buyers will buy for the sake of buying, rendering elevated prices becoming even more elevated.

Even the Fed is worried about the developments they have created:

In the minutes of the Fed’s September meeting, released this week,some officials “expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector.”

 

Despite these worries, investors continue to demand corporate debt, helping fuel a years-long rip-roaring rally in corporate credit that shows few signs of stopping. Corporate bond issuance this year is set to total $1.5 trillion, nudging past last year’s tally, according to the credit strategists at HSBC, led by Edward Marrinan. Issuance of high-grade debt is expect hit [sic] another record high this year.

 

It’s all a sign that, in the words of the bank’s strategists, “Market participants seem to be downplaying—or looking past—the risks associated with the steady deterioration in the credit fundamentals of the US corporate sector,” such as rising leverage, contracting earnings, and stressed revenues.

 

After the financial crisis, many companies focused on rebuilding their balance sheets to withstand another shock. But as the prolonged period of low interest rates continued, cheap borrowing costs prompted, well, more borrowing. Much of that went to fund shareholder-friendly activities like dividend increases and share buybacks. It also funded big mergers and acqusitions.

Emphasis mine. The preponderance of ‘shareholder-friendly activities,’ not least of which being the explosion of asset prices themselves, looks very good on the surface. Indeed, many law makers, academics, and market cheerleaders (such as President Obama) have been in a celebratory mood over the last few years, boldly declaring that the Federal Reserve’s actions had worked.

However, the divergence described by the WSJ – that the Fed itself worries about – between elevated asset prices and the fundamental deterioration of those prices is real, and cannot persist in perpetuity.

Removing the Mask

Deteriorating fundamentals cannot support the further debt burdens that are required to keep asset prices rising even further beyond these levels. And the Fed knows it. This is why they abandoned the original plan for multiple rate hikes in 2016, as that would have slowed down borrowing and thus slowed down the impetus for asset price increases.

In this manner, the market going from four expected rate hikes to now one or zero rate hikes is an effective rate cut. This is what the Fed has been relegated to, sitting on its hands and hoping a miracle happens. If they are proactive in doing anything more accommodative, such as another round of QE, they will put themselves in an untenable position. They can’t on one hand tout the robustness of the economy  yet embark on further emergency policies, such as QE would be. The situation would be exposed for all but the most die-hard believers in the Fed.

Regardless of their games, or ‘forward guidance’ as they would call it, reality will assert itself at some stage. The mask will eventually come off. How exactly it will happen is uncertain. But this situation has happened several times before in financial history. There is no escaping a scenario in which too much debt has been taken on relative to the ability to service it. All the Federal Reserve (and central banking in general) can accomplish is to push the date of reckoning out into the future. But even that does damage.

The current boom/bust episode is merely the latest in a 40 plus year credit binge following the ending of the gold standard in 1971. This has eventually led to constantly rising asset prices, which fooled the majority of the public into eschewing the idea of accumulating real savings.

Most used their home or 401k as their savings account. This was fine as long as the stock and housing markets kept rising, which they did, temporary bear market corrections notwithstanding. That all changed in 2008, when the bubble burst in earnest, and asset prices crashed.

This resulted in mass layoffs, but more importantly, many who had counted on elevated real estate and stock prices for retirement were now out in the cold, just at the moment they were ready to retire. This meant they were forced to return to the labor market, because they had built up no real savings over the preceding decades. This explains the surge in labor force participation for the over 55 segment, discussed earlier.

The under 55s have struggled to regain a foothold during this latest ‘recovery,’ still being several million jobs underwater from where they began the Great Recession. Some of this is down to competition from the over 55 workers, who flooded the market. Many of them, closed off from their former occupations, went into parts of the market usually populated by younger workers. Hence the proverbial ‘Wal-Mart Greeter.’

That position really should be filled by a 16 year old kid, working his first job and acquiring the basic skills involved with employment. Instead, the position is filled by a 60 year old who is working one of his last jobs because he didn’t accumulate savings during most of his productive years.

This phenomenon doesn’t bode well for the economy as a whole going forward. When you have an economy which is severely under-employing those who are in their peak earning years, not only is the economy not going to be moving as robustly as it should, but in the future, as those workers persist with decades of under-employment, they too will have to encroach on future younger generations as they try to get their careers off the ground. Multiple generations impaired at once.

And therein lies one of the ultimate problems with central banking, played out over decades. It, like most of government, prioritizes political expedience over longer term sustainability, papering over the cracks instead of repairing them, thus consigning the ultimate costs to be dealt with in the future.

In this greater sense, reality will assert itself here as well. The exponential increase in debt and increases in money supply papering over business cycle after business cycle can only end in a currency crisis, as it has done many times in the past. One can only hope we correct course before such an event occurs.

Reality Doesn’t Care About Feelings, Vol. 5 – P***y Riot

Yesterday we got a couple leaks, one concerning Donald Trump, and the other concerning Hillary Clinton. Both links confirmed we already knew about each candidate, but I’ll go through them in turn.

First, Wikileaks dumped a pile of emails from John Podesta on us. Podesta is a Clinton operative, currently as the Chair of Hillary’s campaign, and in the past as Chief of Staff to President Bill Clinton. The biggest concentration of dirt is contained in the emails which compile excerpts from paid speeches Hillary Clinton gave to donors, big business interests and others (see here and here), for which she got paid tens of millions in speaking fees. Some of the more choice quotes are as follows:

Clinton explicitly says it is important to be two faced as a politician to better deal with the competing interest of the public and insiders:

CLINTON: You just have to sort of figure out how to — getting back to that word, “balance” — how to balance the public and the private efforts that are necessary to be successful, politically, and that’s not just a comment about today. That, I think, has probably been true for all of our history, and if you saw the Spielberg movie, Lincoln, and how he was maneuvering and working to get the 13th Amendment passed, and he called one of my favorite predecessors, Secretary Seward, who had been the governor and senator from New York, ran against Lincoln for president, and he told Seward, I need your help to get this done. And Seward called some of his lobbyist friends who knew how to make a deal, and they just kept going at it. I mean, politics is like sausage being made. It is unsavory, and it always has been that way, but we usually end up where we need to be. But if everybody’s watching, you know, all of the back room discussions and the deals, you know, then people get a little nervous, to say the least. So, you need both a public and a private position. [Clinton Speech For National Multi-Housing Council, 4/24/13]

Clinton, speaking to Goldman Sachs, opines about how the blame for the financial crisis could have been handled better, from a political point of view:

“That was one of the reasons that I started traveling in February of ’09, so people could, you know, literally yell at me for the United States and our banking system causing this everywhere.  Now, that’s an oversimplification we know, but it was the conventional wisdom. And I think that there’s a lot that could have been avoided in terms of both misunderstanding and really politicizing what happened with greater transparency, with greater openness on all sides, you know, what happened, how did it happen, how do we prevent it from happening?  You guys help us figure it out and let’s make sure that we do it right this time. And I think that everybody was desperately trying to fend off the worst effects institutionally, governmentally, and there just wasn’t that opportunity to try to sort this out, and that came later.” [Goldman Sachs AIMS Alternative Investments Symposium, 10/24/13]

Clinton admits that the passage of Dodd-Frank was largely a political maneuver, so the politicians could have been seen to be ‘doing something’ outwardly. Inwardly though, different story:

Clinton Said Dodd-Frank Was Something That Needed To Pass “For Political Reasons.”
“And with political people, again, I would say the same thing, you know, there was a lot of complaining about Dodd-Frank, but there was also a need to do something because for political reasons, if you were an elected member of Congress and people in your constituency were losing jobs and shutting businesses and everybody in the press is saying it’s all the fault of Wall Street, you can’t sit idly by and do nothing, but what you do is really important. And I think the jury is still out on that because it was very difficult to sort of sort through it all.” [Goldman Sachs AIMS Alternative Investments Symposium, 10/24/13]
Clinton expressing her very globalist ‘dream’ of a Unihemisphere setup in North America, essentially dissolving the individual identities of America, Mexico and Canada:
Hillary Clinton Said Her Dream Is A Hemispheric Common Market, With Open Trade And Open Markets. “My dream is a hemispheric common market, with open trade and open borders, some time in the future with energy that is as green and sustainable as we can get it, powering growth and opportunity for every person in the hemisphere.”  [05162013 Remarks to Banco Itau.doc, p. 28]
In terms of foreign affairs, in particular the goings on in the Middle East, sounds Trumpian in discussing refugees:

“So I think you’re right to have gone to the places that you visited because there’s a discussion going on now across the region to try to see where there might be common ground to deal with the threat posed by extremism and particularly with Syria which has everyone quite worried, Jordan because it’s on their border and they have hundreds of thousands of refugees and they can’t possibly vet all those refugees so they don’t know if, you know, jihadists are coming in along with legitimate refugees. Turkey for the same reason.”

[Jewish United Fund Of Metropolitan Chicago Vanguard Luncheon, 10/28/13]
Despite knowing this full well, she wants to bring more of these sort of refugees into the country, and decries those who oppose this as bigoted racists.
Clinton admits that Saudi Arabia is the one of the largest purveyors of Radical Islam. These comments are particularly jarring given the fact that believing this, she has no problems referring to them as allies, and taking in their millions to the Clinton Foundation:
“And they are getting a lot of help from the Saudis to the Emiratisto go back to our original discussionbecause the Saudis and the Emiratis see the Muslim Brotherhood as threatening to them, which is kind of ironic since the Saudis have exported more extreme ideology than any other place on earth over the course of the last 30 years.” [2014 Jewish United Fund Advance & Major Gifts Dinner, 10/28/13]
There are other choice email threads, like this one in which it is indicated that HRC would have qualms using an executive order to impose gun control and liability on gun manufacturers. And this one, in which the multitude of problems with the Iran deal are outlined, not least of which being the transfer of ‘billions’ to Iran to ‘enhance its funding for terrorism and its efforts to gain hegemony in the region,’ thereby making it, as per Trump, one of the worst deals ever signed indeed.
As I said earlier, most of this merely confirms a lot of what we already knew about Clinton. She’s a stereotype of a power hungry politician who will sell herself to the highest bidder as long as she is installed in a position of power. The end results of her actions are of little consequence.
The other leak which dropped yesterday, by the Washington Post, was of a video of Donald Trump talking on a hot mic with Billy Bush before an Access Hollywood appearance, all the way back in 2005. This is making waves because in it, Trump is describing an encounter he had with a married woman, in a crude manner. Here is a transcript of what was said:

“I moved on her, and I failed. I’ll admit it,”

 

“Whoa,” another voice said.

 

“I did try and f— her. She was married,” Trump says.

 

Trump continues: “And I moved on her very heavily. In fact, I took her out furniture shopping. She wanted to get some furniture. I said, ‘I’ll show you where they have some nice furniture.’”

 

“I moved on her like a bitch, but I couldn’t get there. And she was married,” Trump says. “Then all of a sudden I see her, she’s now got the big phony tits and everything. She’s totally changed her look.”

 

At that point in the audio, Trump and Bush appear to notice Arianne Zucker, the actress who is waiting to escort them into the soap-opera set.

 

“Your girl’s hot as s—, in the purple,” says Bush, who’s now a co-host of NBC’s “Today” show.

 

“Whoa!” Trump says. “Whoa!”

 

“I’ve got to use some Tic Tacs, just in case I start kissing her,” Trump says. “You know I’m automatically attracted to beautiful — I just start kissing them. It’s like a magnet. Just kiss. I don’t even wait.”

 

“And when you’re a star, they let you do it,” Trump says. “You can do anything.”

 

“Whatever you want,” says another voice, apparently Bush’s.

 

“Grab them by the pussy,” Trump says. “You can do anything.”

This led to outrage in the media. Various Republicans followed Paul Ryans lead in decrying Trump’s comments as the worst thing to ever have happened to mankind:

Paul Ryan statement

The media giddily suggested that the GOP camp was internally turning on Trump to the point where his withdrawal from the race was imminent. #NeverTrump acolytes celebrated on Twitter and other social media, sensing their finest hour might be upon them.

All because Trump confirmed to the world, in a rather blunt manner that he is indeed a heterosexual man who desires beautiful women.

Trump’s comments were indeed crude. They were not comments one would make in front of female relatives, or perhaps any female at all. They are, however, comments which are similar to those that have been made in that sort of context (amongst the fellas) by 99.9% of all heterosexual men over the age of 15 or so, in all of human history.

The outrage over this is thus disingenuous at the very least, on multiple levels.

For a start, the outrage flame is being fanned by those on the left, women of the feminist bent, and the weak willed men of the GOP establishment persuasion. This coalition outright promotes (in the case of leftists and feminists) or meekly allows(in the case of the GOPe) acceptance of any and all forms sexual deviancy, right up to and potentially including pedophilia. They’ve never heard of an ‘open marriage’ or ‘modern family’ arrangement they didn’t like.

Yet when Donald Trump speaks crudely of pursuing a woman, in a private conversation, all of a sudden these people reach into their trash cans, rummaging through the waste to find their Bibles and crosses, brush off the slime and start waving them around madly. Spare me.

Furthermore, these are the same people who praise female pornography series like 50 Shades of Grey, and made it one of the highest selling books of all time and a commercial success. This is mostly because of, and not in spite of its depictions of Christian Grey as a dominant billionaire who imposes his will on women sexually. These books are rife with intricate descriptions of rough sex and male dominance in the bedroom.

Given what we know about Trump already, and in light of this new release, what is Trump, if not an aged, real life version of Christian Grey? Despite their protestations, some women will take very well to this confirmation that Trump behaves as Grey does. There is evidence they already do, if this smattering of tweets is anything to go by:

trump fantasies

This saga has only shown what we already knew to be true about playboys, beautiful women, and fame. So again, spare me.

The legions of people in the media and politics attempting to position themselves as holier-than-thou paragons of virtue over this is, to use Paul Ryan’s terminology, sickening. In shaming what is essentially normal heterosexual male behavior in which they themselves have likely engaged in at some point in their lives, they are further cementing themselves as nothing more than weak virtue-signallers.

And in that context, the wider scope of the Trump Tape outrage is juxtaposed with the findings in the Podesta emails released by Wikileaks.

We have become a society which has devolved into being obsessed with being on The Right Side of History, with this ‘right side’ defined solely by Cultural Marxists and their ideals. Even supposed ‘conservatives’ strain themselves to adhere to this ‘right side.’

This desire to be seen as a Good Person, in the context of this election, means that one must ignore the fact that Hillary Clinton is perhaps the most corrupt individual ever to seek the Presidency, to ignore the fact that her tenure as Secretary of State was replete with failure, criminal mishandling of state secrets, and unending war in the Middle East. One must ignore the fact that her agenda explicitly seeks to erase the identity of the United States through her antagony toward the Second Amendment, literal erasure of its borders and introduction of immigrants she knows to be potentially dangerous. One must ignore that she is firmly in the camp that wants WW3 with Russia, which indeed is depressingly close, and would be all but confirmed with her election.

We must ignore this all, confirming ourselves as Good People, because Donald Trump made some off color remarks about a beautiful woman he tried to bed 11 years ago. We must ignore it all because Donald Trump may or may not have called a woman ‘Miss Piggy’ nearly 20 years ago. We must ignore it all because Donald Trump took a $900 million loss in 1995 and may have not have had to pay taxes in the years after, because the law says you don’t have to pay taxes on a loss until you make it back all the way.

This, from a ‘modern’ culture which fancies itself to be the most progressive, tolerant, and intelligent people who have ever lived.

One of the reasons I think this is the most important election of our time is the fact that it is essentially a Referendum on Virtue-Signalling, amongst other things. If the United States willingly chooses war, soulless globalism and the eradication of its traditional culture simply because Donald Trump is a bit boorish, we’ll have all the confirmation we need of the abject stupidity of crowds, and their susceptibility to succumbing to the contemptible ‘gotcha!’ and smear politics which has dominated campaigns for decades. This highlights the ultimate failure of pure one citizen, one vote democracies.

Of course, Franklin warned us about keeping the Republic centuries ago, but it’s the Current Year now. Nothing those BadPeople of yesteryear thought or said is of any consequence. Our generation’s current stance in history is that of the proverbial 20 year old kid who knows everything, until he reaches 25 and realizes he doesn’t.

I suppose that means we’ll reach this stage of true enlightenment at some point, just further in the future. It’s just a shame that we’ll have to incur unnecessary damage, hardship and wasted time to get there. (You can strike all of this, maybe, if Trump manages to pull himself out of this).

The Trump Tax ‘Bombshell’

Last night, the New York Times continued its attack on Donald Trump by dropping this ‘bombshell,’ publishing a leaked copy of part of Trump’s 1995 tax returns.

Here’s the bottom line: Trump declared a loss of over $900 million in 1995. By law, one is allowed to carry forward losses in one year to future years, which reflects the simple fact that the life cycle of a business doesn’t necessarily line up perfectly with the date.

In other words, if a business has a $5 million loss in one year, and a $6 million profit in the next, during the year with the losses, no taxes were paid. In the year in which the profit was made, the profits from the prior year is ‘carried forward,’ to reflect the fact that the business made a $1 million profit across two years. The IRS allows one to apply losses for up to 18 years, as long as it exceeds income made over that time.

Nothing about this is illegal, or even uncontroversial. The guy who owns a dry cleaner at your local strip mall faces these issues.

Yet the NYT used intentionally misleading language for the sole purpose of duping a misinformed electorate into thinking Trump has somehow gamed the system at the expense of the little guy.

The title of the piece itself is ‘Trump Tax Records Obtained by The Times Reveal He Could Have Avoided Paying Taxes for Nearly Two Decades.’ The use of the word ‘avoided’ is intentional, suggesting Trump did something sneaky. The bottom line is you don’t pay taxes on a loss, so Trump didn’t ‘avoid’ anything.

The piece spends a great deal of time talking about how the loss represented a devastation and heartbreak for those affected, while Trump was able to skate through unscathed because of extraordinary tax privileges apparently only he was privy to.

The truth is that the real estate industry was decimated in the late 1980s and early 1990s. Plenty of developers were devastated in a similar fashion to Trump. The difference was that Trump was the most high profile of the developers at the time, and as such his business trials and tribulations were in the public domain. To the extent he was fortunate lies in the fact that most developers would have been totally wiped out by a near $1 billion loss. Trump wasn’t, because he convinced the banks to work with him, so he didn’t have to liquidate all of the holdings he had already built up. Call it luck, or great negotiating, but that’s what happened. Nothing nefarious.

Yet, it will play that way to the average voter, for whom these sort of dealings are completely foreign. The concept of carrying forward a loss won’t resonate with them, and therefore they’ll be amenable to the Clinton spin that Trump is bilked the public for years.

It also represents an opportunity for Trump if indeed Clinton/the media keeps playing this line. It will almost surely come up in the next debate, at which time Trump needs to point blank state that there was nothing controversial, let alone illegal about what happened. The fact that the Clinton campaign and the media are portraying it that way can only mean one of two things.

One possibility is they do not understand even the most basic of tax law, accounting, and general business, and therefore cannot be expected to understand anything about creating jobs. Why would Clinton or the media understand anything about business or the economy, given Clinton has only worked in the public sector and the NYT’s support of failed neoliberal Keynesian economics?

The other possibility is brazen dishonesty, in knowing the average voter takes much better to a simple ‘Trump avoided taxes!’ one liner than the far lengthier, legal and accounting arguments such as what I’ve put forth here.

Furthering the dishonesty angle, there is a potential legal issue here involving the NYT releasing the leaked tax information. The Washington Post discusses it here.

So in a twist of irony, the NYT may have broken the law…to show that Donald Trump followed the law in his tax dealings. And people wonder why the mainstream media is failing.

They’re even bragging about the whole thing. The author of the piece has just written this article, breaking down the events leading to the piece. The way she describes it one could think she had solved the Jimmy Hoffa mystery rather than a data point corroborating an old saga that we already knew. Trump literally wrote a book about this period in his life, The Art of the Comeback.

The fact the leak came from Trump Tower itself is also rather intriguing. Did Trump himself leak the documents, so as to control the narrative, which he is known to do? The next few days should answer that.

Trump could use this saga to his advantage rather easily. It has been public information for decades that Trump had losses in the billions in the early 90s. Yet he is here, richer than ever. Losses happen, especially in business. But to be down on the mat, and then get up and triumph, is America in a nutshell. And this is precisely what Trump is trying to do with the country as a whole. The country is down, and trying to get back on its feet, and then some. Trump has been there, done that.

The indignation over Trump’s honest failures, compared with the silent acceptance of the dishonest enrichment of the Clintons stands as one of the clearest examples of what this election is all about. Because Clinton is on the ‘right side of history’ in terms of social justice nonsense that plagues the nation, her sins are forgiven, while Trump credits are manufactured into sins because of his resistance to the march of social justice.

Weekend Reading, Plus Debate Preview

First, the debate:

Pat Buchanan thinks Trump can win the debate if he merely exceeds the very low bar which has been set for him:

With only a year in national politics, he does not have to show a mastery of foreign and domestic policy details. Rather, he has to do what John F. Kennedy did in 1960, and what Ronald Reagan did in 1980.

 

He has to meet and exceed expectations, which are not terribly high. He has to convince a plurality of voters, who seem prepared to vote for him, that he’s not a terrible risk, and that he will be a president of whom they can be proud.

 

He has to show the country a Trump that contradicts the caricature created by those who dominate our politics, culture and press.

I tend to agree. This debate is almost entirely about Trump. He is the reason behind all the hype, he is the reason why there will be potentially a Super Bowl level audience. At the same time, he has a higher burden of proof. Right now, the substantial portion of the electorate that is on the fence with him has concerns over his ‘temperament.’ He has been made out to be a loose cannon that will go off at the slightest provocation. Some have intimated that the next major global conflict may arise because of a Tweet.

Trump is also made out to be totally clueless when it comes to policy, in particular foreign policy. These narratives have more or less stuck to Trump, and his success has come in spite of them. The debate offers Trump the opportunity to show the nation that he is taking the office of the presidency seriously. He has to show some basic awareness of the global situation around the world, avoiding a Gary Johnson Aleppo situation.

Stylistically, Trump would do well to avoid the bombast that was a feature of his Republican debates. This is not because it is a negative in and of itself, but because it is overkill. It feeds into the narrative that he is a loose cannon. If Clinton tries to play it tough, in an attempt to show she isn’t afraid to back down to ‘bullies,’ Trump turning the tables and being the smiling charmer that he can be would be devastating.

If Clinton reverts to her natural Typical Politician demeanor, Trump might have to be a bit tougher. He will have to be careful though, due to his reputation and because of the fact that Clinton is a woman. Despite the feminist Strong Independent Woman rhetoric which underpins her candidacy, there’s no doubt in my mind that the ‘sexism’ card will be used if Trump is seen in any way as bullying. Indeed, Obama intimated that it was sexism that was the only reason the election is close.

A word on the moderator, Lester Holt. Due to the fact that the media is in opposition to Trump, I expect the debates to be a Hillary + moderator tag team versus Trump. Undoubtedly, Hillary Clinton, along with Holt, will attempt to play on the loose cannon narrative in an attempt to create some sort of memorable moment of Trump exploding. Trump will score a major blow if he explicitly points this out in real time. There will surely be a moment when the moderator tries to go out of bounds to get Trump. It may be some sort of obscure historical fact, or digging up an old tweet or Trump quote in an interview. If Trump is able to get through this moment, and even reframe it to his advantage,  it’ll be a win.

As for the substance, Hillary Clinton will obviously be more ‘informed,’ in the sense that she is far more skilled at delivering memorized, focus group tested, inane political talking points than Trump is. In comparison, Trump will sound less scholarly.

This won’t matter as long as Trump sticks to his main messaging, perhaps reminding the public that all of the knowledge Clinton and those of her ilk possess has had disastrous real world results in the Middle East, the economy and elsewhere. All talk no action.

Personally, I believe the mainstream media will declare Clinton the winner, no matter what happens, apart from a health issue on her part.

Other Things to Read this Weekend:

An accurate take on the recent goings on in the Syria Conflict:

What happened in Syria is painfully obvious: the Pentagon sabotaged the deal made between Kerry and Lavrov and when the Pentagon was accused of being responsible, it mounted a rather crude false flag attack and tried to blame it on the Russians.

 

All this simply goes to show that the Obama Administration is in a state of confused agony.  The White House apparently is so freaked out at the prospects of a Trump victory in November that it has basically lost control of its foreign policy in general and, especially, in Syria.  The Russians are quite literally right: the Obama Administration is truly “not-agreement-capable”.

 

Of course, the fact that the Americans are acting like clueless frustrated children does not mean that Russia will reciprocate in kind.  We have already seen Lavrov go back and further negotiate with Kerry.  Not because the Russians are naive, but precisely because, unlike their US colleagues, the Russians are professionals who know that negotiations and open lines of communications are always, and by definition, preferable to a walk-away, especially when dealing with a superpower.  Those observers who criticize Russia for being “weak” or “naive” simply project their own, mostly American, “reaction set” on the Russians and fail to realize the simply truth that Russians are not Americans, they think differently and they act differently.

Staying in the vein of American interventions, some Libyans are starting to regret the backing of the US in getting rid of Gaddafi:

As stated by Libyan medical student, Salem:

 

“We thought things would be better after the revolution, but they just keep getting worse and worse.

 

“Far more people have been killed since 2011 than during the revolution or under 42 years of Gaddafi’s rule combined.

 

“We never had these problems under Gaddafi.

 

“There was always money and electricity and, although people did not have large salaries, everything was cheap, so life was simple.

 

“Some of my friends have even taken the boat to Europe with the migrants because they feel there is no future for them here.

 

“I would like to escape this mess and study abroad but I have been waiting a year for a new passport and, even when I do get one, it will be hard to get a visa because all the embassies left in 2014.

 

“So now I feel like a prisoner in my own country. And I have started to hate my own country.”

From the consistently good Jefferey Snider at Alhambra: Like Everything Else, History Repeats (Almost Exactly) Because Power Truly Corrupts:

As with almost everything with regard to global monetary policies, the Fed merely copied the Bank of Japan with about a decade lag (give or take a few years). The idea of “lower for longer” wasn’t made in the USA, it was designed and first implemented overseas by the Japanese. Every policy statement since the FOMC’s December rate decision could have easily just reprinted what I quoted above.

 

And US monetary officials are making the same mistake the Japanese made; they would only get as far as a second rate hike in early 2007 because of it. The reason is the same as now – they mistook the absence of contraction as if it were the start of stable, renewed growth. Not paying any attention to actual monetary conditions, it didn’t matter how narrow the data was in furtherance of that interpretation; BoJ policymakers saw what they wanted to see and used that as if the appropriate standard. In their case it was the CPI back on the plus side (but only temporarily), while in the US since 2014 it has been the official unemployment rate that excludes far too many.

Speaking history repeating, Fannie and Freddie are reverting to housing boom tactics to spur on home buying:

Stop me if you’ve heard this one before, but Fannie Mae and Freddie Mac are lowering mortgage standards.  On Monday, the two government-backed housing giants revealed a new program designed to boost mortgage origination among first time buyers and those with low to medium incomes. The new program, which will initially be limited two non-bank lenders, will allow borrowers to include the income of residents that aren’t actually on the mortgage, as well as make it easier for borrowers to include income from second jobs.

 

While these changes may strike some as sensible, anyone who has seen The Big Short would have valid concerns in the oversight of these looser lending standards – especially when you consider that the companies responsible for mortgage origination will not be the ones holding the mortgages, Fannie Mae and Freddie Mac will. It’s always easier to make loans when you know the taxpayers are the ones that will be holding the ris

 

 

Where did the Inflation Came From?

Matthew Klein at the FT asks this question in a blog post he did earlier this week. The obvious answer is ‘The Federal Reserve,’ with their stated goal to make sure that the increase in prices is always a positive number. Klein writes:

Central bankers think steady price increases are a good thing. After all, inflation makes it easier for employers to cut real labour costs and helps monetary policy boost the economy without having to lower (nominal) interest rates below zero.

As an aside, Klein is correct about the intentions of central bankers. In times of recession, pressure is generally put on all prices to fall, including wages. Keynesian inspired central banking seeks to substitute a nominal fall in wages for a real fall in wages, by increasing inflation so that prices rise. The price of goods rises faster than the rise in wages, creating a real fall in wages. This policy sounds fine on paper, but leads to many problems, as I’ve outlined in the past.

Whether or not you agree, we thought it would be interesting to look at which products explain the rise of American consumer prices since 1990. As it turns out, just as the bulk of the growth in employment can be attributed to a few sectors where productivity is either low or unmeasurable, a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy:

us-pce-inflation-decomposition-since-19902

The accompanying chart shows that these sectors, healthcare, housing, education, and prescription drugs have accounted for the bulk of the rise in consumer prices. Klein then goes on to list several areas in which the price level has declined over the last 25 years or so.

By contrast, thanks to astounding technological innovation, television prices have plunged at an average rate of 12 per cent each year since 1990 and computer prices have fallen more than 18 per cent per year:

Price stability in goods can’t be attributed solely to higher screen resolutions and faster chipsets, because plenty of other physical objects resisted the inflationary trend. The prices of new motor vehicles only just surpassed the highs set in the mid-1990s. “Recreational books”, as distinct from “educational books”, cost the same now as in the late 1990s. Musical instrument prices peaked in the early 1990s and have since drifted lower. Watch prices are the same now as in 1990, and that’s only because of a recent upward spike earlier this year.

 

Luggage — luggage! — prices have plunged about 44 per cent since the mid-1990s. The prices of “dishes and flatware” have fallen 49 per cent since the peak in 1998 and the prices of “household linens” have dropped 60 per cent from their peak in 1992:

(We suspect the emergence of Asian manufacturing and the admittance of China into the World Trade Organisation were more important to these developments than dramatic spurts of innovation, but we could be persuaded otherwise.)

 

Less surprisingly, “telephone and fascimile equipment” is 78 per cent cheaper than the peak in 1997, in a remarkable reversal of the previous bout of price increases:

In general, the prices of durable goods are about a third lower now than in 1990, while the prices of nondurable goods excluding commodity products (food, drinks, and fuel, which tend to rise at the same rate as the broader price level over time) and excluding prescription drugs, have also fallen, albeit not by as much. Inflation outside of healthcare and education has generally been modest, with the notable exception of a few small professional services such as tax preparation, lawyers, and funeral homes.

The sectors in which prices have exploded (healthcare, housing, education, drugs) all have one thing in common: heavy government involvement over the period of time in question. The housing bubble, Federal Student loans, and increasing healthcare regulations have taken their toll on customers in the shape of rising prices.

The areas in which prices have fallen the most, such as technology and other areas, are relatively devoid of regulation. This is how a freer economy works – increased innovation leads to more efficient production and better products, which drives prices down. This enables more and more people to consume these products, spreading the innovation to as many people as possible. It is precisely the lower prices, which central bankers fight against, which allow this to happen.

Note also the fact that the sectors in which prices have risen are all necessities. This represents the height of the failure of central planning. Regulations and middling by central banks produces inefficiency and rising costs for the consumer, while freer markets produce continued lower costs and improving products. It is really that simple.

On #Brexit

At the end of last year, I was struck by the following quote from this article in the FT, which tried to set the table for the coming political year in the West.

Countries such as France, the UK and the US are already multicultural and multifaith societies. Attempting to reverse those social changes is both unrealistic and a recipe for conflict. It is legitimate, however, to insist all citizens subscribe to certain values, to make multicultural societies work.

To me, it was emblematic of the fundamental problem with progressivism in all forms – it is completely focused on maintaining short term comfort above all else, and it has the seeds of its own destruction within its tenets. And here was the FT brazenly putting forth that line of thinking.

This sort of religious adherence to maintaining the Status Quo, regardless of its effectiveness,  is often justified by an appeal to one’s aversion to the unknown. The biggest banks and corporations, for example, simply had to be bailed out by taxpayers and central banks in the aftermath of the Financial Crisis, because the alternative would have been unknown, and therefore worse. Thus, the system and all its machinations, which had brought about the one of the worst panics in the history of the modern economy, had to be maintained at all costs.

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23rd June 2016 has the potential to go down in history as a date in which those costs finally proved to be too much for the average citizen to bear. In voting to leave the European Union, Britons sent a message to the globalist elites – We’ve Had Enough.

The nature of the EU itself made it a foregone conclusion that a portion of its membership would eventually reach the conclusion the Brits did. The EU, in short, is a soft fascist dictatorship. Before I get accused of hyperbole, here is the dictionary definition of fascism:

A system of government marked by centralization of authority under a dictator, a capitalist economy subject to stringent governmental controls, violent suppression of the opposition, and typically a policy of belligerent nationalism and racism.

While there is no singular face of EU dictatorship in the vein of a Hitler or Mussolini, the collection of ‘Eurocrats’ in Brussels, all with their unwavering promotion of ‘The European Dream,’ does suffice. Indeed, even the most ardent proponent of the EU admits, through gritted teeth, the existence of the euphemistic term ‘democratic deficit.’

The endless regulations emanating from Brussels satisfies that condition of fascism relating to government control of the capitalist setup. In terms of suppressing the opposition, the means the EU favors is a combination of outright ignoring certain democratic decisions made by voters, and a perverse level of political correctness which shames people into submission. To date, the EU doesn’t point guns at its subjects per se; rather it points the threat of being labeled racist, xenophobic, or Islamophobic.

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Consider the fact that the St. Georges cross is increasingly being redefined as a racist symbol of hate, such that English people who proudly display their national flag are deemed racist by extension. The aim is to suppress pride in English culture and heritage, so as to replace it with the amalgamation of ‘European.’ As such belligerent nationalism is merely replaced by belligerent pan-Europeanism.

Even of one still refuses to agree with my assessment, one cannot deny that the EU at the very least saddles its citizens with yet another layer of bureaucracy which must be waded through. It’s of little surprise that, with stagnating growth and a slow and steady decline in industry over the past four decades, Britons decided to have a rethink as to the virtues of EU diktat, and the ‘open market.’

Then, of course there is immigration. David Frum, writing in the Atlantic, had this to say about the immigration issue as it pertained to the UK.

The force that turned Britain away from the European Union was the greatest mass migration since perhaps the Anglo-Saxon invasion. 630,000 foreign nationals settled in Britain in the single year 2015. Britain’s population has grown from 57 million in 1990 to 65 million in 2015, despite a native birth rate that’s now below replacement. On Britain’s present course, the population would top 70 million within another decade, half of that growth immigration-driven.

 

British population growth is not generally perceived to benefit British-born people. Migration stresses schools, hospitals, and above all, housing. The median house price in London already amounts to 12 times the median local salary. Rich migrants outbid British buyers for the best properties; poor migrants are willing to crowd more densely into a dwelling than British-born people are accustomed to tolerating.

….

Is it possible that leaders and elites had it all wrong? If they’re to save the open global economy, maybe they need to protect their populations better against globalization’s most unwelcome consequences—of which mass migration is the very least welcome of them all?

 

If any one person drove the United Kingdom out of the European Union, it was Angela Merkel, and her impulsive solo decision in the summer of 2015 to throw open Germany—and then all Europe—to 1.1 million Middle Eastern and North African migrants, with uncountable millions more to come.

 

David Brooks, another mainstream writer, voiced similar concerns during an appearance on PBS Newshour following the vote. In it, he expressed sadness at the result of the referendum, but his real regret seemed to be that the elites merely pushed too hard in their actions. In other words, they had essentially dumped too many immigrants too soon on populations like the British.

This sort of mass migration set about a culture clash which had been bubbling under the surface for years, but is rapidly coming to the fore. The mainstream progressive narrative of the joyous nature of multiculturalism is becoming exposed as less than truthful on almost a daily basis. In the quote I opened this piece with, the FT insisted that because multiculturalism was already here, it must persist, albeit with a base level of values everyone must adhere to.

This sort of thinking goes out the window when you have to start handing out pamphlets to which explicitly detail that things like hitting women and children, fondling or groping women, and urinating in swimming pools, among other things, are frowned upon.

This is further exacerbated by the existence of a generous benefits system. The truth, which is becoming more apparent by the day, is that open borders and generous welfare states cannot coexist. One must pick one or the other. A failure to do so will lead to a situation in which new entrants to the country don’t even have to learn the language in order to be taken care of. And from there, the host culture is on the path to a slow, but sure destruction.

**********

These realities made the EU an unworkable construct, and the Leave vote an inevitable one. Given the Remain coalition was made up of the vast majority of government officials, in the UK across Europe, and worldwide; academia, mainstream media, and multinational business interests, it is clear that the referendum was also in part a referendum on the viability of the elites and their globalist agenda.

In rejecting the bid to stay in the EU, the voters made their thoughts clear. In response, so did the elites, as it were. The night of the referendum, I watched the BBC broadcast of the results trickling in. As the Leave vote looked more and more certain, the mood of the panelists and the hosts continued to sour. The grave mood was befitting the death of an important head of state, or an act of terror, rather than a democratic vote to determine the level of self-determination the country would have going forward.

In the days following the referendum, the media have played up the ‘buyer’s remorse’ angle, using the movements in global financial markets to buttress their arguments. All of a sudden, the fact that the Leave campaigners may have exaggerated some of their claims is evidence of callous treachery, despite the fact that politicians have never been strangers to such discrepancies between rhetoric and action. In most cases, however, the discrepancies favor the dominant narrative, and as such are swept aside.

More cynically, they have attempted to paint a picture of the average Leave voter being an uneducated white racist from a rural part of the country, while prominently featuring anecdotes of anti-immigration abuse both on and offline.

That these sorts of tactics have been generally well received, and even amplified on social media reinforces the fact that the progressive, globalist view of the world is still the most dominant, if not the most loudly proclaimed. On Twitter, sentiments such as the following were put forth as the new reality for the future of Britain in the context of Europe as a whole.

CltNvdcWgAAevsU

This picture, posted on twitter, was supposed to represent the ‘cost’ of Leave, in that the fine wines, pastries, fruit and waffles of the continent were to be lost, with only the drabness of baked beans left for the British to enjoy.

A shockingly high number of people don’t see the inanity of that attempt to crystallize the Brexit consequences. It isn’t as though the UK is going to start floating off into the Atlantic Ocean, away from the continent. The goods and services the continent does well are still going to be accessible in the UK, and vice versa.

More importantly, those delicacies are only made possible thanks to the differentiation in cultures that exist. In prioritizing this push to a ‘European’ culture, you lose Italian Culture, French Culture, German Culture, Spanish Culture, and so forth. The attributes unique to each culture and group of people which are responsible for the products known and loved the world over are lost in the transition to an amorphous blob of dedifferentiation that is pan-Europeanism.

For those who purport to champion the superiority of diversity, it is strange that they can’t seem to understand that such diversity is only possible if, at some level, peoples are permitted to do things their own way. In this regard, the negative stigma applied to nationalism is unwarranted.

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One of the more curious aspects of the vote and the subsequent fallout is the complete lack of foresight shown by those in the media, financial and political class. It was all but assumed that the Remain vote would win the day, and as such the stock markets around the globe moved higher in celebration.

A huge part of the reason for the optimism came from the fact that the most recent polling had shown a clean victory for the Remain side. That actual voting resulted in a firm victory for the Leave side pointed to the fact that there was a significant ‘hidden’ Leave contingent.

The explanation for this is that the Remain position was touted as the view which ‘respectable’ and ‘tolerant’ members of society held. Thus, it is natural that anyone who dared to see some logical points in the Leave argument would want to keep it to themselves so as to not subject themselves to the emotional shaming tactics which are part and parcel of the progressive/globalist toolkit of debate.

In other words, normal, hardworking, respectful people who are not by any means racist or xenophobic were kept silent in public simply because they dared to disagree with the Remain argument. In the privacy of the ballot box, where the threat of ostracism was voided, they were able to make their voices known. This dynamic is the antithesis of a free society.

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As such, the result of this referendum is only the beginning, or as per Churchill, the end of the beginning. Fascist dictatorships just hand their power away once it has been attained. Ideologies which depend on bullying those for the crime of disagreeing don’t admit defeat when outclassed in logical debates. It is vitally important that Leave voters make the result stuck by establishing a government that will follow through on the referendum’s aim.

David Cameron has volunteered to step down as Prime Minister; he must be replaced with a PM who was an ardent Leave campaigner and has no qualms about going the full distance. Half measures will only make things worse.

As I mentioned earlier, the subsequent financial tumult is being used as evidence that a mistake was made. S&P, a ratings agency which should have no credibility owing to their shenanigans leading up to the last Financial Crisis, has cut the credit rating of the UK. Any further fall in markets, or slowdown in the economy will be blamed on Brexit. As will any future terrorist attack which takes place anywhere in Europe.

These claims would be unwarranted. For a start, the global markets have been on a knife edge for nearly two years, making minimal gains in that time, on aggregate. The ‘recovery’ of the post Financial Crisis in developed economies has been tepid at best, with policy makers attempting to blow a bubble to replace the last bubble which popped in 2007.

It is only a matter of time before the post Financial Crisis bubble pops, and it is true that Brexit may be the straw that broke the camel’s back. But that is only because of the existence of the other straws.

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If Brexit is to be truly successful, it will be because it rids itself of the EU morass completely. That means replacing the rules and regulations which hampered British industry with…nothing at all. It must totally eliminate the extra layer of bureaucracy instead of merely replacing it with another, more British flavor. During the campaign, many Leave proponents pointed to the success of Switzerland as a model for the UK post EU. What was less mentioned was the fact that Swiss success owes largely to their greater degree of liberty and lesser degree of regulation and government control, in comparison to their continental neighbors.

Unless Britain goes down the same path as the Swiss in all aspects, the Brexit vote will not be a blow to globalism. Rather it will be a loud scream from a tied up victim which can easily be rectified by a strategically placed piece of duct tape.

In terms of this larger context, as a person who favors less government, less regulation, and a higher level of liberty for individuals, I am enthusiastic about what happened on the 23rd of June. Even if it turns out to be a false alarm for the globalists, the cat will be out of the bag. Through events such as this and the US election, the public is becoming more and more aware of the fact that their disillusionment is not without merit and the policies of progressivism and globalist thinking are mostly to blame.

The media, big business and political establishment which have got this wrong, and have been getting it wrong will start to lose their influence. The proliferation of the internet has meant that information can no longer be controlled and shape to fit the ‘approved’ narrative. Ideas and narratives must now stand on their own two feet, which can only bode well for the values of liberty and freedom.

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The stakes are high. Even before the Brexit vote, there were growing sentiments across Europe that the EU project is disagreeable. Anti-EU sentiment was already much greater in many countries around Europe, which suggests that multiple referendums along the lines of Brexit are on the way. Should more countries leave, the financial, political, and cultural burdens will be that much greater on the remaining countries, which will further increase the discontent. This downward spiral could essentially be the way the EU ends.

It will be the breakdown of the post-WWII order, a paradigm which was 60 plus years in the making. If elements of it have proven to be a failure, it is right that these elements are dismantled and replaced with something better. That will not come without pain, or discomfort. It is not unlike the pain the body most endure when going through chemotherapy. However, if the end result is a cancer free life, the temporary loss of hair, weight and general sickness and discomfort will have been worth it.

That point, perhaps more than any I’ve made, is the most important one to get across, for we live in a world which has a hyperfocus on short term comfort above all else. If the very culture that affords us the many comforts we enjoy is to be maintained, the opposite focus must be attained. Historically, only a major crisis has forced people to change their thinking. Much of the promise in the Brexit vote lies in the fact that the emergence of longer term thinking at the expense of the short term has happened before the point of existential crisis.

It is a sign that there is hope for those who value Western Civilization and want to see it preserved and propagated.

To The Surprise of None, Janet Yellen Does Not See a Bubble in the Economy

Last night, Janet Yellen was accompanied by her three predecessors as Fed Chairmen, Ben Bernanke, Alan Greenspan and Paul Volcker at a forum in New York discussing various issues.

In the wake of Donald Trump declaring that the economy was a bubble, and that a large recession was on the cards, moderator Fareed Zakaria asked Yellen if we really were in a situation ‘as perilous as some on the campaign trail have been suggesting.’ This was Yellen’s response in full:

So I would say the US economy has made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the labor market is healing. For well over a year we’ve averaged about  225,000 jobs a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment.

 

Inflation which, my colleagues here Paul and Allen, spent much of their time as chair, bringing inflation down from unacceptably high levels. For a number of years now inflation has been running under our 2% goal and we’re focused on moving it up to 2%.

 

But we think that it’s partly transitory influences, namely declining oil prices, and the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well, and this is an economy on a solid course, um, not a bubble economy.

 

We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that, clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that could encourage reach for yield behavior, I wouldn’t describe this as a bubble economy.

More specifically, her reasoning as to why this can’t be described as a bubble economy:

We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that,

such as

clearly overvalued asset prices,

MW-EB006_overva_20151210143625_ZH

(‘Now’ was December of 2015)

high leverage, rising leverage,

-1x11-1

-1x-1-1x-1NYSE-margin-debt-SPX-since-1995

and rapid credit growth.

fredgraph

 

We certainly don’t see those imbalances.

Ordinarily, one would suggest that she look a little harder, but in this case the suggestion would be futile. The famous Upton Sinclair quote about a man (or in this case woman) not being capable of understanding something when he or she is paid not to understand it is apropos.

Central bankers will never, ever see a bubble ahead of time because that would mean admitting some sort of fault. Central banks attempt to guide and steer the economy through the business cycle, and thus if a bubble arises, it is almost completely of their doing. Thus, they can never admit to it before the fact.

After it bursts, however, all sorts of gnashing of teeth occurs as to why the inevitable crisis was unforeseeable, thanks to some insidious development out of their control. The go-to excuse the last time around was a savings glut in Asia. Who knows what they’ll say this time.