{"id":8686,"date":"2010-03-12T18:17:54","date_gmt":"2010-03-12T07:17:54","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=8686"},"modified":"2010-03-12T18:17:54","modified_gmt":"2010-03-12T07:17:54","slug":"iworry-about-the-conservatives","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=8686","title":{"rendered":"iWorry about the conservatives"},"content":{"rendered":"

\t\t\t\tI can now safely call my blog – ibilly blog or billy iblog thanks to a court ruling<\/a> preventing Apple from monopolising the i<\/strong> construction. But then I would have to change the logo and I don’t have time to do that so I won’t take advantage of the court ruling just yet. But on more substantive matters, today I have been thinking about how much momentum the conservative lobby has at present and that history is being continually re-written to give these characters the oxygen they need to warp public opinion. We are now in danger of an even greater shift to the right in the coming years than was represented by the “neo-liberal” era. It is an ugly thought. But the macroeconomics is clear – if these ideas really take over the policy making process – then we will be facing a lengthy period of economic malaise.
\n
\nThere was an interesting article by Wall Street Journal writer Thomas Frank on Wednesday (March 10, 2010) entitled –
\nThe Rise of the Reactionary Right Conservatism as a revolt against civilization itself<\/a>.<\/p>\n

The main argument is that:<\/p>\n

\nConservative philosophies of government have brought us to the brink of economic disaster. So how do conservatives respond? By pondering anew the imagined crimes of the progressive and New Deal eras. By rededicating themselves to an even purer version of their tainted faith. The halfhearted liberals in the White House dream of bringing health-care costs under control, and conservatives demand in response a more thorough antiliberalism than ever before. Tear out the welfare state root and branch, and abolish the Fed, too! That will show the meddlers of the past 120 years.\n<\/p><\/blockquote>\n

Frank uses the keynote speech by Glenn Beck’s speech at the Conservative Political Action Conference in Washington a few week’s ago to motivate his argument.<\/p>\n

As an aside, I was sent the link to the Glen Beck speech at CPAC the day it was presented. Upon watching it I concluded that, given his popularity, there is a major failing in the US education system. Something went very wrong in his childhood and those of his followers. I note he is fixated on scrawling one line statements on his blackboard that make no sense at all and usually include Socialism = Government or something along those lines. Something happened to him in primary school and development stopped.<\/p>\n

But the point Frank makes is that the popularism preached by Beck doesn’t even stack up with the facts. His nemesis Woodrow Wilson didn’t do what Beck claimed he did and Beck’s hero Coolidge did do what Beck claimed Wilson did! That sort of distortion and worse riddles the Beck rhetoric.<\/p>\n

On this new conservatism, Frank notes that the “sort of people who watch Glenn Beck” express “more ‘visceral’ sentiments” than the Republican conservatives and are motivated by:<\/p>\n

\n“Fear” and “Extreme negative feelings toward existing Administration.” These donors are, in the language of the presentation, “Reactionary.”\n<\/p><\/blockquote>\n

The presentation he is referring too came from the “Republican National Committee … presentation given to party fund-raisers in Florida last month”.<\/p>\n

The reactionary nature of the conservatives according to Frank is a:<\/p>\n

\n… romantic attachment to a vanished medieval hierarchy of the kind we never had in America. The great dream here has always been an economic state of nature, where humans live in harmony with an untainted market.<\/p>\n

… the revolt against big government stripped down to its essentials. Civilization itself is the bunk, its taxes and regulations as artificial and as unhealthy as its diet of booze and candy. For today’s cavemen conservatives, the correct model is simplicity itself: It’s every man for himself. And if you want a piece of the mammoth, you’d better get to work.\n<\/p><\/blockquote>\n

I agree with the sentiment of Frank’s article. His case can be made more emphatically by showing that these conservatives actually would not be able to achieve their desired outcomes should they be put in charge.<\/p>\n

They believe that they will be able to produce wealth without government fiscal support of their saving desire. As I explain below, if the private sector desires to save, then unless you are running large external surpluses, the plan will fail without on-going fiscal deficits. That understanding is lost on all the conservatives.<\/p>\n

But the nuances of the monetary system are always going to be lost on the general public who seem to respond, as Frank says, in a visceral manner.<\/p>\n

Further, I don’t see these arch-conservatives as being the entire problem. Even the progressives who want to play what they think of as clever politics are a major problem. That group concede validity in the public debate to the manic fringe perspective – and modify their ambitions and use terminology (like exit plans etc) to try to assuage the nutters (to get their votes). In this way the debate shifts further to the right and civilisation is further endangered.<\/p>\n

You see this type of manic conservatism in the rantings of popular American conservative Doug Casey<\/a>, who because he has made a few bucks in the financial markets thinks he knows everything about the way the monetary system operates.<\/p>\n

I think if I was able to get a true dataset I would find a strongly statistically significant inverse relationship between those who had made money in the financial markets and those who demonstrated a correct understanding of how the monetary system operates.<\/p>\n

But the problem is that the “big money success” seems to bestow authority on otherwise dullard level understanding of macroeconomics.<\/p>\n

Anyway, Casey was interviewed by a financial publication recently. I will not link to the interview because you have to sign up for his newsletter to read it in full. Luckily someone sent me the full text.<\/p>\n

Here is a sample of the stuff Casey in sending to his readers:<\/p>\n

\nAs the world political situation continues to deteriorate towards something I think will vaguely resemble World War III, the chances are excellent that a U.S. government at the end of its financial rope will default … This is big trouble. It’s not just another economic downturn when scores of millions find their life savings go “poof.” What we’re looking at is a cataclysm at some point soon. I hate to sound inflammatory, but I think the situation is much, much more explosive than it appears on the surface, much worse than you see on the TV news … <\/p>\n

There’s a titanic battle right now between the forces of inflation and deflation … … [an apocalypse is inevitable because] … It is simply not a politically acceptable option to step back and let the market correct the gross misallocations and distortions the government has imposed on the economy. They must “do something” – even if they know full well it’s the wrong thing … <\/p>\n

There are only two ways to pay for that. They can borrow, which they can only do if they raise interest rates enough to make their bonds attractive, and that, too, would pull the plug on what you so colorfully called the “iron lung economy.” And they can print money, which they can do with some impunity, hoping the bill won’t come due until some other poor fool is in office – but that destroys the dollar sooner or later … it’s very close to being totally out of control.\n<\/p><\/blockquote>\n

As I said big money success but an otherwise dullard level understanding of macroeconomics.<\/p>\n

He knows the US economy is deflating but in the interview continually talks about Zimbabwe and 1920s Germany so he has to cast the situation as a “titanic battle between inflation and deflation”.<\/p>\n

Anyway, to all my American readers – bad luck – your dollar is kaput, there are going to be invasions as all those “nice foreigners” (in his terminology) get angry for losing out (because they are funding your excesses) and everything will be pretty grim.<\/p>\n

As a billy blog public service to my American readers – here is the WWW site for the Australian Department of Immigration and Citizenship<\/a>. The weather is better here and we don’t have as many loonies. Further, the conservatives here rave on continually about skill shortages so you should all get lots of points on the entrance test. But then I did conclude there was something fundamentally wrong with the US education system didn’t I! (-:<\/p>\n

Moving on, the softer conservatism noted by Franks is demonstrated by the following nonsense.<\/p>\n

In today’s Wall Street Journal (March 12, 2010), a US Republican senator from Oklahoma suggests that the US government freezes its spending at 2008 levels. This crazy fellow, one Jim Inhofe, seriously understands macroeconomics that is for sure.<\/p>\n

He says:<\/p>\n

\nAmerican families and state governments across the country are cutting spending and making hard decisions about their budgets. It is time the federal government did the same.\n<\/p><\/blockquote>\n

This is all very folksy and what you might expect from a conservative Okie but not very smart. There is no valid analogy between American families and state governments which use the US currency and the US federal government which is the monopoly issuer of that currency.<\/p>\n

The former are always financially constrained (although the states have more revenue-raising capacity and a greater ability to borrow) and must manage their budgets to ensure they remain financially<\/strong> solvent.<\/p>\n

The latter is never financially constrained and can purchase at any time whatever there is for sale in its own currency. The latter can never go bankrupt – unless for political reasons it chose to. But in financial terms the US federal government never has a solvency risk.<\/p>\n

When a person begins by making these false comparisons you always know they have no understanding of the way the monetary system operates and that the rest of the argument will be deeply flawed as a consequence.<\/p>\n

The fact that a representative of the people in a position of power and influence makes these erroneous statements indicates that the political system in the US is deeply flawed and rewards incompetence.<\/p>\n

It is this tendency to reward incompetence that is the real danger for the American future rather than a few numbers on a piece of paper that someone has called the budget deficit (for example).<\/p>\n

The senator continued:<\/p>\n

\nI’ve introduced legislation called the Honest Expenditure Limitation Program (HELP) Act … my plan reduces nonsecurity discretionary spending over a five-year period. Once it reaches the 2008 spending level, my bill then freezes spending there for an additional five years.<\/p>\n

Real fiscal restraint requires cutting budgets, not locking in an artificially high spending level and then allowing spending to explode again after three years as the president’s proposal does.\n<\/p><\/blockquote>\n

Can someone out there who lives near to the senator please go around and calm him down then direct him to the nearest HELP line? <\/p>\n

Let’s imagine what would have happened if the senator had his way last year.<\/p>\n

If we make the assumption that government spending in 2009 had no impact on private spending (when it probably boosted private spending somewhat) then the following graph shows annual growth in real GDP for the period 2006 to 2009 (blue columns) and then simulates the 2009 growth if US government spending had remained in real terms at its 2008 level (green column). You can get US National Accounts data from the US Bureau of Economic Analysis<\/a>.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The point is that you cannot make fiscal rules like this in isolation from what is happening in the rest of the economy. We have been down this road before. A macroeconomic system is the interplay of government and non-government aggregates.<\/p>\n

The private component of the economy is highly significant and influences real economy activity via its spending decisions. But even within the private sector – there are separable sectors (firms, households, banks etc) which make decisions that, presumably, best suit themselves – although the concept of herd behaviour suggests that ultimately irrationality rules rather than optimality.<\/p>\n

The point is that there are a multitude of separate decision-making processes going on which aggregate into the major spending components we measure in the National Accounts.<\/p>\n

The classical economists believed that free market movements in wage and prices (including interest rates) would ensure that all these decisions were coordinated to ensure that aggregate spending exactly coincides at each point in time with aggregate output (some of the more reasonable of this fold admitted that might be imbalances in certain markets which would quickly adjust to maintain macroequilibrium).<\/p>\n

The conservatives of today also take this position without the same intellectual grounding. Either way, the Great Depression cast the Classical paradigm into the rubbish bin and any subsequent revivals share the same lack of credibility.<\/p>\n

There is no guarantee that the private spending decisions will mesh to ensure that full-capacity output is demanded. Typically, that will not be the case and so there is a prima facie<\/em> case for government net spending to fill the gap to ensure that the economy does not plummet into recession.<\/p>\n

That understanding was reached categorically during the Great Depression after all the mad-cap mainstream remedies (wage cuts, public spending cuts etc) were tried and failed (they made the downturn deeper).<\/p>\n

Nothing since has changed that understanding although in the last 35 years macroeconomics has been taken over by the conservatives again who rely on the discredited classical tool box (with some modern nuances) for their models and conclusions. The resurgence in the orthodox paradigm (around the mid-1970s) never<\/strong> was justifiable on the basis of evidence or logic.<\/p>\n

It was just a power grab by the conservative elite who had been rendered less vocal and influential during the full employment era that followed the 1939-45 War. If you understand the literature you will see that during the 1950s and 1960s they were relentless in trying to regain the authority that was lost by there failings during the 1930s.<\/p>\n

But whichever way you look at it, the mainstream macroeconomics that is now dominant has no credibility at all. In the current crisis, the policy makers ditched it and resorted to the prior dominant reliance on fiscal policy that had rescued the World (finally) from the Great Depression.<\/p>\n

While the policy makers have demonstrated that they don’t really get it – as evidenced by all the talk about “freezes” and “exit plans” etc – the crisis has demonstrated that the mainstream approach to macroeconomics embodied in the senator’s argument is bereft of all credibility.<\/p>\n

One of the basic understandings that you will gain from Modern Monetary Theory (MMT) is that the budget balance is endogenous – that is, dependent, ultimately on the spending decisions of the non-government sector.<\/p>\n

There is clearly a discretionary component that has to be exercised when required but the deficit will fall when private spending recovers. Trying to engineer a reduction in the deficit via austerity programs (or freezes or whatever else you might like to call them) at a time when private spending is still not sufficient to maintain adequate real GDP growth is a recipe for disaster.<\/p>\n

It is highly likely that if the senator was in charge (and thank the xxxx he is not) then the budget deficit would increase even further as the economy fell further into recession and tax revenue collapsed even more than it has.<\/p>\n

The problem with the conservatives and so-called progressives who talk about the budget position as if it is a standalone entity is that they ignore the macroeconomic linkages which ensure the budget balance is endogenous.<\/p>\n

What should the discretionary component be? At all times, the government should ensure that is net spending (independent of the cyclical components driven by the automatic stabilisers) should be sufficient to ensure full employment and sustainable real GDP growth. Nothing more nor less than that is the only viable and responsible behaviour of a government committed to pursuing public purpose.<\/p>\n

To understand these points more fully I suggest you read the following blogs – Fiscal sustainability 101 – Part 1<\/a> – Fiscal sustainability 101 – Part 2<\/a> – Fiscal sustainability 101 – Part 3<\/a><\/p>\n

Then you might like to read A modern monetary theory lullaby<\/a>.<\/p>\n

Attenzion! Goosestep in strict time! Repeat: No bailouts<\/strong> <\/p>\n

Meanwhile in the EMU, the BuBa boss<\/a> claims that the idea of an European Monetary Fund is:<\/p>\n

\ncounterproductive … [and any] … institution that provided aid to financially troubled eurozone states would penalise those with sound finances … [and] … was in conflict with the “no bail-out” principle that was at the heart of the EU framework … Greece has to concentrate on implementing its budget reform plans.\n<\/p><\/blockquote>\n

So Greece goes broke sooner or later and defaults … this spreads to Spain, Portugal … even Belgium is being mooted as a contender for the “market squeeze” on its spreads. What then for the Eurozone? The sort of budget reforms this guy has in mind will decimate living standards and, under current arrangements (that is, the EMU) will take several years to achieve – and it is not clear to me they are achievable without serious civil unrest and the most disadvantaged citizens dying from lack of nutrition, health care, heating whatever.<\/p>\n

Further, the bond markets will not wait that long and the bureaucrats in Brussels and Frankfurt know that and will bail Greece out anyway.<\/p>\n

Finally, as I have noted often, the arrangements are also totally unnecessary under alternative arrangements which would see Greece and the other nations walk across the EMU line out of penury and into sovereignty.<\/p>\n

As an aside: I noted some veiled criticism on another WWW page of MMT in the context of not developing or not having demonstrated a thorough understanding of the financial and accounting arrangements underpinning the EMU given how important the region is now appearing in the crisis.<\/p>\n

The monetary arrangements between the ECB and the national central banks and the treasuries in the member states are fairly straightforward in fact. I haven’t written about them because I didn’t see a need and I doubted anyone would be very interested anyway. But if there is a burning need for these arrangements to be explained and a groundswell of E-mails or comments identifies that need then I will devote a blog to the task of explaining how the accounting between the components of the EMU works and what opportunities and constraints exist. Over to you on that one!<\/p>\n

Repo 105 aka lying through your teeth<\/strong><\/p>\n

Its very long – 2,200 pages in total – it has thousands of footnotes, each one of which (as far as I have read) leads to a trail of other documents and interesting issues – and it implicates the top management; the auditing firm (Ernst & Young); the New York Fed (which at the time was run by no other than current Obama Treasury Secretary, one Timothy Geithner); and it implicates – again – the slack financial regulation that exist in the UK.<\/p>\n

The court-appointed US bankruptcy Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report<\/a> is now public and compelling reading for those interested in the detail.<\/p>\n

It documents in detail how crooked the company was in using “accounting gimmicks” which are referred to as Repo 105 and Repo 108 – to hide their true leverage positions and maintain higher ratings that they deserved.<\/p>\n

They were able to treat what were essentially repurchase agreements as sales rather than inventory changes to make their balance sheet look better by more than $US50 billion just before key reporting dates. They were then able to borrow more because their leverage ratio was wrongly represented to the markets.<\/p>\n

The Report says that:<\/p>\n

\nUnbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption …<\/p>\n

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008.2847<\/p>\n

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet.2850 Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt … Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios\n<\/p><\/blockquote>\n

The auditors (Ernst and Young) were warned that this was going on but the report says they “took virtually no action to investigate” and signed off on the books as being lawful.<\/p>\n

Further, it seems that the New York Federal Reserve Bank (FRBNY) allowed Lehmans to trade when it was insolvent – a criminal act if true.<\/p>\n

On the role played by the FRBNY, the Report said:<\/p>\n

\nAfter March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress-testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light” … Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed … However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.\n<\/p><\/blockquote>\n

See Yves Smith’s blog<\/a> for more details on Geithner’s role. While she is calling for the unemployment queue to increase by one as a result, others are suggesting that the prison population should increase by one. As an aside, the US does not count the prison population as part of the Labour Force and so understate the true unemployment problem.<\/p>\n

Finally, the UK is implicated because the Repo scheme relied on cooperation of British legal firms for its success. There is also evidence of high level political dealings after the crash which finally saw Barclays bank “taking assets it was not entitled to, including office equipment and client records belonging to a Lehman affiliate”.<\/p>\n

This is another area where the swing to the right that is now occurring will prevent policy makers from making any substantive reforms.<\/p>\n

Conclusion<\/strong><\/p>\n

So a ramble through the manic world of the conservatives who far from saving us are framing a policy agenda that will ensure high levels of unemployment, reductions in material standards of living on average, increased civil unrest and heightened international tensions.<\/p>\n

Perhaps I better retire immediately, convert my superannuation into gold and start building a steel-reinforced bunker up the coast equipped with enough weapons to ward off the riff-raff. At least that is what the gold-bug who told me to delete my entire site (see below) recommended I do.<\/p>\n

Digression – just ransack their offices and …<\/strong><\/p>\n

… put them out on the street. While the British people are now facing up to a non-choice in the May national election given the appalling state of both major parties in terms of their policy positions on how to deal with the current crisis … there is one choice that is very clear.<\/p>\n

The ABC News reported today that the British expense scandal MPs invoke 320-year-old law<\/a>.<\/p>\n

Apparentely four Members of Parliament:<\/p>\n

\n… have told a judge they will use a 320-year-old law as a defence against prosecution over allegations they dishonestly claimed parliamentary expenses.<\/p>\n

In their first court appearance since being charged in a scandal that has rocked the British political establishment, the parliamentarians said they would argue that their cases should not be tried by a jury.<\/p>\n

Instead, they will insist they should be dealt with by authorities in the House of Commons, arguing they are protected by parliamentary privilege.\n<\/p><\/blockquote>\n

They claim they are not seeking to be treated above the law because “(p)arliamentary privilege is part of the law, and it is for parliament to apply the law in their cases.” Yeh, right!<\/p>\n

So the voting public should make sure these alleged criminals no longer enjoy the parliamentary privilege.<\/p>\n

Admin Note:<\/strong><\/p>\n

I have received lots of requests for a FAQs page, a glossary, a key post page, and other things – including a request from an US gold bug to go to my server, select Ctrl-A on the blog directory and press delete. I particularly liked the ingenuity of that last request. The guy (it was a male) clearly knows his way around computer, which is about all I could conclude from his voluminous rant.<\/p>\n

But I have been considering writing a blog which would become a dedicated page – which might be entitled a First-time readers guide to billy blog<\/em> or something like that. So a travel guide through the pages.<\/p>\n

You will also note I have been adding new categories (to ultimately replace the catch-all “economics” category) and I have been slowly re-organising specific blogs into the new sub-divisions to provide more ease of traverse.<\/p>\n

I welcome any suggestions though and any help on the first-time reader’s guide.<\/p>\n

Saturday Quiz<\/strong><\/p>\n

As usual – the deceptively easy Saturday Quiz will appear sometime tomorrow and answers and discussion will appear on Sunday.<\/p>\n

That is enough for today!\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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