Natural causes

In case, as time goes along, you're wanting to know how many Americans are starving, freezing, or otherwise dying because of the failure of Austerian economics at the zero bounds, look for two words: "Natural causes". Those are words that coroners always put on the death certificate when someone starves to death or dies of exposure here in America. Because, y'know, telling the truth might offend someone, yo.

BTW, this is not new. This has been the code for at least 100 years. When people at the end of the 19th century couldn't find work and starved to death (no food stamps or anything like that back then, y'know), that's what was on their death certificate: "natural causes". Reminds me of those folks hawking "all-natural supplements"... arsenic and cyanide are natural too, y'know?

-- Badtux the Helpfully Snarky Penguin

And the slide to hell continues

Juan Cole has the details of the fraud in Iran. Basically the numbers don't even make superficial sense given the details of Iranian electoral politics, people who should have gotten a "hometown bounce" in their own hometowns didn't, and the most unpopular candidate of all won with the kind of landslide victory that simply doesn't happen in truly democratic elections contested by credible candidates.

Meanwhile at work for the second week in a row I got yet another wave of bad news. Look at yesterday's post about the economy and about how everybody is shoving money under (virtual) mattresses rather than spending it on investments for the future and apply it to what investors might be doing to my personal economy and you're close. I still have a job, but right now I see only a 50% chance that I will have one six months from now and I'm being optimistic. Fiddling while everything burns down happens in places other than Rome-on-the-Potomac too...

So anyhow, my response: I went thru the In-n-Out drive-thru and had a double-double animal style with pink lemonade and a chocolate milkshake for supper last night, and then went off to Fry's Electronics and bought three 1-terabyte drives and 4 gigabytes of memory for my Linux server. I verified that there was no useful data on the three 160gb drives in that server and yanked them out and replaced them with the 1 terabyte drives. While I was doing this I was downloading Ubuntu 9.04 Linux, AMD64 Server release (I have a Intel Core2 Duo 2.4ghz but this is the right one for it). I also found out that the 2-year-old Mushkin memory that I had in there had failed, the Crucial I replaced it with works fine. I paid $5 extra for the memory with the red heat spreader and LED's, I am such a nerd! So anyhow I replaced the defective memory with more Crucial today, configured the three 1tb drives as a RAID5 array, and I'm now up and going with 2.5 terabytes of storage (with the existing 500gb RAID1). That'll store quite a collection of penguin porn, yay! Or at least a few backups of my Macbook :-).

So that's that. I had dol sot bi bim bap for lunch today. It was quite tasty and not much more expensive than the burger the previous day, but hopefully that's the end of pigging out, my penguin rotundity does not need additions :-). If six months from now you see a disheveled penguin pushing a shopping cart down El Camino Real with a couple of cats hanging out around his feet, say hi...

-- Badtux the Pessimistic Penguin

TIme for economic doom and gloom post again

Flow of Funds data out yesterday.

Private borrowing still contracting at faster rate than government borrowing is expanding, and there is not yet any signs of overall upward pressure on interest rates, the much-ballyhooed rise in long-term Treasury rates was caused by China deciding to go with short-term Treasuries rather than long-term Treasuries for their borrowing (which is another sensitive subject). Treasury borrowing at the moment appears to be recycling mattress money -- i.e., money that if not lent to the Treasury, would be disappearing under (virtual) mattresses instead (i.e., into banks that are stashing the funds into the Fed's vaults rather than lending them out) and thus basically disappear as far as the economy is concerned, causing deflationary pressure beyond those currently coming from job losses and wage cuts.

There is a recipe for dealing with high debt loads upon an economy. It's called inflation. Inflation effectively decreases the value of debt as the value of currency declines. Unfortunately the wage declines over the past year are putting significant deflationary pressures upon the economy, which does exactly the opposite -- effectively increases the value of debt as the value of currency increases. The overall conclusion: The Federal Reserve is being much too cautious with its current open market operations. There is no inflationary overhang in the current economy -- the Treasury borrowing is effectively draining mattress money that could otherwise creep out of hiding during an upturn and cause unexpected inflation and the Fed could abruptly raise the reserve ratio if it wished to keep the mattress money in its vaults from leaving there -- and there is a surplus of excess / idle resources that could be put to work if there were sufficient demand in the economy to warrant it. The so-called 'stimulus' was one attempt to deal with demand but is taking much too long due to limitations of federal contracting -- I've bid on govt. contracts before and it can be six months from initial bid request to when work actually starts. Federal grants to the states, funded by selling long-term 0% interest treasuries directly to the Fed (i.e. printing money that does not necessarily ever have to be paid back since it can just be rolled over into new 0% interest t-bills at expiration), could start putting inflationary pressure into the economy while preventing deflationary pressure of all those state workers losing their jobs, and would be an effective way to do monetary inflation (i.e. start shrinking the debt in real terms) without the wait or risk of waiting for fiscal expansion via "stimulus".

One thing that is not working and will not work is the Fed giving more money to banks. Banks aren't lending because of the core solvency problems that occur with deflation, they're shoving the money under a virtual mattress (i.e. into the Fed virtual vaults) where it does nothing to create economic activity. All the Fed is accomplishing there is creating inflationary overhang when the economy does turn up and that money comes out from those virtual mattresses and re-enters the marketplace (via the wonders of fractional reserve lending and the multiplier effect as bank reserve ratios effectively plummet, yippee). Ben Bernanke must be tearing his hair out, he did exactly what all the textbooks said he was supposed to do -- print money -- and nothing happened because he forgot that banks won't lend when they have deflationary expectations (i.e. when they expect the money to be worth more to them in the future) and thus as he admitted in recent speeches, the money never actually left the Fed, it just moved from one ledger entry to another.

Yet as Rome burns, a thousand thousand Neros fiddle in a political system that has proven far too dysfunctional to deal with this crisis, and half of that thousand-thousand Neros even wish to pour gasoline upon the fire because of a religious belief in "creative destruction" that is eerily similar to Abbot Arnaud-Amaury's recipe for the redemption of the human soul, "Caedite eos! Novit enim Dominus qui sunt eius." Unfortunately Tuxology has no afterlife, thus I prefer to save the current life err economy rather than engage in wishful thinking about a wonderful hypothetical afterlife err economy that happens after the demise of the current one.

And so it goes. Six months from now I expect to be employed. A year from now... I do not think that far ahead anymore, it is too depressing.

-- Badtux the Economics Penguin

Yikes!

When Paul Krugman says Yikes!, then so should you. Minus 6.2% GDP *decline* in the 4th quarter of last year. Understand that if this goes on, 10% unemployment by the end of the second quarter 2009 is a certainty. And I'm talking the *official* (doctored) unemployment rate... the real one will be in Great Depression territory, 15%+.

-- Badtux the Depressed Penguin

More Wednesday "We are so, so fucked" Blogging

Deflation, here we come. For why that's bad news, read my two articles on deflationary spirals from my compendium of economics theory. Also read my comment on Brad Delong's posting, it explains about why the dollar remains a viable reserve currency despite U.S. economic problems and why Milton Friedman style monetarism, as done by Fed chairman Bernanke, isn't working (i.e., because we are pushing on a string).

And in other "we are so fucked" news, the economy declined further in the 4th quarter than was originally calculated. GDP declined by over 5%. To find another year where the GDP declined by such a huge amount you have to go back to 1946, when the U.S. industrial machine suddenly shut down to re-tool from making tanks and bombs to making cars and sewing machines, and that was a very special circumstance. Before then, you have to go all the way back to 1932 to find such a decline. (Statistics courtesy of the U.S. Bureau of Economic Analysis). To find a worse quarter, you have to back to the second quarter of 1980, which effectively killed Jimmy Carter's chances of re-election, and before that, the first quarter of 1958. But those were short, sharp shocks in the economy from which the economy swiftly recovered. It seems unlikely that the economy will swiftly recover from the 4th quarter's steep drop, given that the economy has been declining since December 2007.

-- Badtux the Fucked Penguin

Idiocy and ignorance

Here's some things I've seen idiots saying:

1. This crisis is created by the Federal Reserve, a PRIVATE bank
2. We should let the banks fail.
3. We don't need a banking system
4. Treasuries aren't backed by anything and are worthless
5. We should bail out ordinary people, not banks
6. The Federal Reserve is just *printing* money, and it's going to cause runaway inflation

Okay, so here's my responses:

1. The Federal Reserve does not have supervisory capacity over banks to keep them from making risky loans and bad investments and such, which is the root cause of this problem. That's the Comptroller of the Currency. The Federal Reserve is "private" in much the same way that the U.S. Postal Service is "private". I.e., only vaguely and on paper. The Federal Reserve can only buy and sell assets and lend money to banks, that's the extent of their power over the economy. Blaming such a limited institution for the current problems are ridiculous.
2. We can't let the banks fail because that would evaporate 90% of the money in the U.S. economy. Read my article on deflationary spirals (see the "Important Posts" section in the right margin).
3. A banking system allows borrowing money to create an addition to the economy, and then use the output of that addition to the economy to pay back the borrowed money. We now have 300 years of experience to show that a banking system is necessary for a modern economy. London's banks are why the United Kingdom became the British Empire upon which the sun never set -- they were the first to create a modern banking system. The Muslim world did not have a banking system because Islamic law prohibits lending money at interest, and you know how well that worked. Without a banking system, economic activity slows down drastically, both because of the borrowing/lending aspect and because all commercial transactions must take place by moving heavy bails of physical cash around rather than via electronic funds transfers in bank ledgers. To recap, we simply do not have a modern economy if we don't have a banking system -- what we have is a Dark Ages economy where we end up reduced to poking each other with sharp sticks to steal each other's meagre rations of turnips and gruel.
4. Treasuries are backed by the economy of the United States of America. As long as that economy is strong and can be taxed to pay off Treasuries, Treasuries have value. There has never, in the history of the United States of America, been a default on Treasuries -- even the Revolutionary War debt, which was ten times larger than the GDP of the United States of America at the time, eventually got paid off. The oanswer to the worth of Treasuries is that they are worth exactly what people will pay for them. Right now so many people want them that they're returning effectively 0% interest. This is not a sign of a worthless asset. As long as people want to pay for them, they have value.
5. The problem is that if the banks fail, their assets get sold at auction for pennies on the dollar. Their assets including all those mortgages. Thing is, 90% of the money just evaporated out of the economy, 90% of the money that could be used to pay off those mortgages. Which means that that pretty much every house with a mortgage on it becomes foreclosed and thus the property of a small set of very wealthy and ruthless men. Now, I do agree that ordinary people need some help, but transferring their houses to a small set of very wealthy and ruthless men does not sound like the sort of help they need.
6. The Federal Reserve is not "just printing" money. The Federal Reserve is handing out money in exchange for assets -- bonds, Treasuries, mortgages, etc. -- in an effort to prevent deflation. They have very sensitive measures of the money supply, and if their measures show inflation starting up, they can then start *selling* those assets, thereby un-printing the money. But given that tens of trillions of dollars have evaporated from the economy over the past six months due to the collapse of the mortgage industry, lockup of credit markets, collapse of housing prices, etc., the Federal Reserve's efforts are quite appropriate.

The problem is that there's all these idiotic notions out there which have some surface plausibility, but are simply ignorant. All I can figure is that these are the same sorts of people who would try to tell a heart surgeon how to do heart surgery or a rocket scientist how to design rockets. They are ignorant, they like being ignorant, and they believe that their ignorance is a strength, not a weakness, and can be used to solve all of the world's problems. And sad to say, these idiots are the ones who get elected to Congress and/or direct those who are in Congress, too... sigh.

Badtux the "We are fucking fucked big fucking time" Penguin

A Parable

Mr. Democrat and Mr. Republican were neighbors who lived an hour away from town by horse and buggy. Mr. Republican owned a horse and buggy. Mr. Democrat, rather than duplicating something Mr. Republican owned, paid Mr. Republican to drive him to town every week to buy supplies.

Mr. Republican's horse was named Economy, and Mr. Democrat noticed that Economy was looking a bit down and sick. As they sat in the buggy and rode towards town, occasionally Economy would halt and pant and lower his head in pain. Mr. Republican would then beat Economy with his stick named Tax Cut until Economy started moving again. Mr. Democrat said, "Economy looks sick. Shouldn't we find out what's wrong with him and get it fixed?" Mr. Republican said "Naw, Economy is just lazy, he just needs more Tax Cut to keep him moving."

One weekend they set out as usual, heading to town, and Economy simply collapsed. As in, dead as a doornail. Mr. Democrat got out of the buggy and verified the horse was dead, and then turned to Mr. Republican and said, "I told you that you should have taken Economy to the vet to find out what was wrong with him!" Mr. Republican shook his head and said, "there's nothing wrong with Economy that more Tax Cut won't fix."

"Uhm, this horse is dead."

"Nonsense! He's just being lazy. All he needs is more Tax Cut!" And with that, Mr. Republican set to beating the corpse of Economy with his stick named Tax Cut. Alas, no matter how much he beat Economy with Tax Cut, Economy never twitched.

As Mr. Democrat walked towards town, he looked back at Mr. Republican, who was still beating the still-deceased Economy with his stick named Tax Cut, and shook his head. Idly he wondered how much it was going to cost him to buy a new Economy to replace the one that Mr. Republican had killed by thinking that Tax Cut was the solution to all of Economy's problems. He would find out shortly, he supposed. He doubted it would be cheap.

-- Badtux the Parable Penguin

A reply to Nathan

A youngster called Nathan replied below, and I decided his points needed more attention than is in the comments section of a blog. So here we go. You may wish to read my compendium of economics articles first, I reference them widely in this article:

That said, I entirely disagree that spending for spending sake helps the economy. If it did, why don't we just pay every American one million dollars to dig a hole in their back yard?

Keynes actually addresses that one and why it will not work, and Paul Krugman and Brad DeLong have both covered that one on their blogs when addressing why the bank bailouts and last spring's tax cuts did not work. The critical factor is what Keynes called the propensity to spend. You can't just give money to people and expect it to be useful. In a down economy such as now, on a microeconomic level the propensity to spend is low -- people are instead saving their money in case they lose their job, thereby causing lost jobs due to the paradox of thrift, or they're paying down debts, both of which are good things to do when there is a shortage of investment money but with U.S. Treasuries at 0% interest right now, it's clear there's no shortage of investment money. So just giving money to people with no strings attached doesn't work. Instead, you have to give money to people in exchange for people doing something of value. There has to be strings to attached. Such as, "we will give you this money if you will build us a bridge to replace the collapsing bridge that was built in 1935 by FDR's NRA." The money then gets spent on steel for the bridge, and on steel riggers who then spend their money on beer at the local restaurants, which then hire waitresses, who then can afford to buy used cars from steel riggers who can now afford to buy new cars, etc. That is why infrastructure spending has a high multiplier rate compared to most other forms of government spending, as shown by this graph (clicky to embiggen it): Which brings up your next point:

So where does loose fiscal policy come in? Easing the tax burden.

See the above graph. The problem is that there's not much room to do anything there. The propensity to spend is not there, so any tax cuts you make right now will simply go under mattresses being saved in case people lose their jobs, rather than being used to buy stuff. And tax cuts to businesses are even worse. Businesses will not expand employment right now because they don't see enough buyers for their goods. They'll just stuff the money in their mattresses too. We've run full speed ahead into paradox of thrift territory . We have a fundamental disconnect between the amount of goods flowing in the economy, and the number of consumers willing to buy said goods. We have sufficient goods, but we don't have sufficient buyers for the goods to keep all the workers employed, and keeping workers employed is one of the fundamental roles of modern economic policy, because unemployed workers are revolting -- literally. There were food riots throughout the United States in 1932, and a real chance of a Communist revolution. Idle hands are the devils' workshop and all that.

So we've hit the end of tax cuts as a useful policy. The United States is already the least-taxed of all the OECD nations other than Mexico, and I doubt you want to see us be Mexico North. Or maybe you do, but if you do, that's the end of this conversation because then we have a fundamental conflict of values similar to the conflict of values I have with the Taliban, where there is no useful discussion possible.

I see about four levers that the government has in combating a recession:

1. monetary policy
2. fiscal policy
3. tax policy
4. leadership

We have arrived at the limits of monetary policy. With monetary policy we are pushing on a string, pushing money into the system, but not addressing the fundamental disconnect between supply and demand that is causing employment to decline. We have arrived at the end of the usefulness of tax policy, as shown by the graph above -- because of the paradox of thrift, tax policy is also no longer capable of addressing the fundamental disconnect between supply and demand that is causing employment to decline, because any tax refunds are going towards savings, not towards demand. That leaves leadership and fiscal policy on your list. The fundamental task must be to employ the unemployed via whatever means are most effective. Infrastructure spending to employ the hundreds of thousands of people who lost jobs in the construction industry last year would be a gigantic boost. Aid to the poor -- who spend what they get, thus any money sent to them goes directly to spending rather than to paying off debts or savings -- would also be a major boost to demand. Anything targeted at the middle and upper classes simply will have no effect in this current scenario, as far as fiscal policy is concerned.

But personally, I think you are being far, far too conservative on the leadership thing. Our banking system has failed. We need to do a Year Zero on our banking system -- admit that our five largest banks that collectively control over 80% of our banking system are all bankrupt and create a new "Bank of the United States" to take over all their assets. As part of Year Zero, all personal credit card debt would be wiped out, fini, done, and this new "Bank of the United States" would immediately write all mortgages that it took over as part of that transaction down to a reasonable percentage of family income so that people could afford to stay in their homes and would have money left over to spend, rather than sending all their money to the banks in a futile attempt to pay off unpayable debts. This would create an immediate and gigantic boost to spending, because money currently going to paying unpayable debts would then be going towards both consumption *and* savings. Consumer debt would not be easily obtainable in the future after a Year Zero, and mortgages would be harder to get too, with a return to traditional lending standards of 20% down and a maximum of 33% of family income going to your mortgage, but would that be a bad thing?

A leader who proposed something bold like the above would be providing leadership. Our current so-called leaders... meh. So #4 on your list is currently getting a big fat zero from Washington D.C...

So anyhow, that's my response to your economics items. Note that I'm referring to postings that I made some time ago, that often refer to postings that I made some time before them, that address some small but important little pockets of modern economics theory. Next up, we talk health care...

- Badtux the Economics Penguin

A compendium of economics theory

I've written a *lot* of good economics articles over the past two years amongst all the snark and cat photos. Here is a collection of what I believe are my best economics posts, roughly in reverse order. Enjoy!

1. Why the "Liquidationists" are full of it about the current crisis.
2. Unemployment is NOT caused by wage levels but, rather, by a shortage of sufficient demand to justify hiring additional workers.
3. Unemployment is NOT caused by taxes, but, rather, by a shortage of sufficient demand to justify hiring additional workers.
4. Deficits don't matter during deflation
5. The Cross of Gold -- more explication of why the gold standard was/is a bad idea.
6. Rent-seeking behavior on the part of our elites is destroying our economy. Low top marginal rates reward asset stripping and remove the incentive to think long-term and results in bubbles rather than productive use of capital, or, why our foreign competition is whipping our butts.
7. The reason conservatives fear democracy -- the fear that the productive worker majority (us) that create the wealth, might vote to take wealth away from the leech investor class that merely manages wealth rather than producing it.
8. Inflation math -- how to do it correctly as vs. right-wingly. Fiscal stimulus is not a zero-sum game, or, that marvelous invention, the PRINTING PRESS.
9. Why do we need the Federal Reserve? And: a debunk of many of the conspiracy theories about the Federal Reserve.
10. Why do we need banks, anyhow?
11. Why (some) inflation is good
12. The economics of Herbert Hoover. Or: The idiocy of modern-day "liquidationists" who seem incapable of learning from history.
13. What's the endgame? In which I make a case for (some) socialism.
14. Attack of the Zombies
15. The Paradox of Thrift
16. That marvelous invention, the Printing Press
17. How bankruptcy "reform" contributes to the current crisis (and why tax cuts aren't working)
18. Universal healthcare increases propensity to spend and thus economic activity
19. Why neither pure capitalism nor Communism are the answer and Libertarianism isn't the answer either.
20. Why the economy is sick, as explained to us by the Chinese.
21. Why we need a middle class with a propensity to spend
22. We have now reached the limits of monetary policy (or, the Final Death of Milton Friedman)
23. Will a job creation subsidy put Americans back to work?
24. Pushing on a string -- why more money in the banks isn't helping the economy.
25. On invisible hands and the Big Three. Or: Deflationary spirals are bad.
26. How to do a stimulus plan that will work. (Hint: It's not the USA doing it).
27. Who should get tax cuts?
28. The only -ism we should be concerned about is pragmatism.
29. Warm up the helicopters! We are in uncharted territory.
30. Thomas Jefferson was a great political theorist, but a terrible economist
31. Deflationary spirals, and the need for government intervention
32. A side excursion on money.
33. More on why deflationary spirals are bad
34. You can't eat gold. And, gold scams and the gold standard.
35. Why a minimum wage hike would be a good thing right about now...
36. Classic American Liberalism, Part II and, why classic American Liberalism, being based on pragmatism, always wins in the end.
37. Power dynamics, the free market, and inflation. Or, the guy at the bottom of the power tower always loses.
38. Bear Stearns, fiat money, and regulation
39. Is government a "drag" on the economy?
40. Why modern technological civilization is worth saving

-- Badtux the Economics Penguin

A little history of how we enter a Great Depression

I see a depressing amount of the same stuff happening today, minus the Federal Reserve raising interest rates. This is a tutorial written by economist Brad DeLong in February 1997 for one of his Economics classes...

-- Badtux the Depression Penguin

Holy fucking crap...

I just had a chance to read Friday's Bureau of Labor Statistics release of January's employment stats. Highlights:

1. The economy lost 598,000 jobs in January -- worse than expected.
2. At that rate, the economy will lose 7.2 million jobs by the end of the year.
3. 11.6 million Americans "officially" unemployed.
4. 2.1 million Americans disappeared as "Not In Labor Force", but actually unemployed
5. 7.8 million Americans looking for a full time job, but not counted as "unemployed" because they worked as little as 1 hour a week at odd jobs to make ends meet while looking for work.
6. "Official" unemployment up to 7.6%.
7. U-6 unemployment at 13.9%.
8. Another 4.6 million Americans disappeared via "labor force participation", but actually unemployed, raising the *real* number of unemployed Americans to 16.5%.
9. Another 7.2 million jobs lost by the end of the year will raise the "official" unemployment rate to 11.7% and the real unemployment rate to 20.6%.

These last numbers are Great Depression numbers, folks. One thing to remember, when you look at the Great Depression, is that the employment statistics then were collected in an entirely different manner. It was assumed that men were the wage earners in homes. The Census Bureau went to a home and asked the man of the house, "Are you employed?". If the answer was yes, they marked him employed. Otherwise they marked him unemployed. They didn't try to figure out whether he was "marginally attached" or "not in work force" or any of the other myriad of ways they now try to kick people out of the statistics to prettify them up. They just counted employed or not employed and let the chips fall as they lay. So the correct number to compare to the numbers we have from the Great Depression is my last number above, which includes working-age men who are not employed but are currently being counted as "not in labor force". By that number, we are in 1931, when unemployment hit 15.9%, and by the end of this year, closing in on 1932, when unemployment hit 23.6%.

In short, we are in a new Great Depression, a Depression which started in December 2007, whether anybody wants to admit it or not. And stopping the full-bore slide to the disaster of 1932 will require immediate and drastic action -- action which, alas, does not appear to be forthcoming because the Villagers, the insular media superstars who control what we see and hear in our media, are still stuck on conventional wisdom, which is that tax cuts solve all economic problems (yeah right, so why are we in this mess with eight tax cuts over the last 8 years?) and government spending is evil (except when spent on handouts to rich people, apparently). Neither of which has any relevance to handling a depression.

-- Badtux the Apocalyptic Penguin