XGOP4Hillary

(http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home)

Forget the happy pabulum the daily media feed us. Welcome to reality. Our financial sector has pulled in half a trillion between the Feds and outside capital. No one can find a bottom. At the same time they are refusing to lend to each other or to consumers/small business. They are readjusting their balance sheets. This is all necessary. It is also quite painful and shows no sign of ending. The ripples from the credit crunch are working their way through the economy with no end in sight. To them must be added the inflationary pressures from the commodity explosion. Now none of this is per se inflationary. To build an inflationary cycle the higher prices must lead to higher wages as more money is used to maintain consumption. We are not doing that beyond some silly symbolic USG checks. So what will happen is obvious. If people must spend more for gas, heating oil and the groceries they will spend less for everything else. That everything else will include debt. Faced with feeding the family or letting the credit card default and the answer is obvious. They will also walk away from homes with negative equity. These are the ripples to fear, not inflation. We will go through a period of reduced expenditure, massive debt default/mortgage default and a nasty populace that will figure out that a small segment of the population in the big cities creamed up all the gains on the upside of the last two bubbles and then handed off the debts to be nationalized on the downside. The deregulation/lower taxes/markets uber alles orthodoxy as about run its course. By refusing in the name of ideological purity and naked greed to discipline the financial industry they will trigger a new round of statist populism. Now the normal response to this would be to argue for good Republican administrators who at least can run a welfare state prudently. After W selling governance as a Republican virtue is a joke. What does this mean?
1. The next four years will be worse than Carter's four regardless of who wins in November
2. They will be worse in different ways depending on whether McCain or Obama wins. If McCain the stalemate will be over the blame. If Obama wins [the more probable outcome] expect an explosion when fiscal and financial realities show that the unmet spending wishes of the traditional liberals collide with the economic mess W leaves behind. The economic mess is worse than Iraq. We can run away from Iraq. There are huge costs in doing so but we can. We cannot run away from the US. The trigger to all this is going to be health care. Obama and the national Dems are mostly running an empty slogan campaign of just saying they will change everything W did. Should work. However one of the few firm markers they have put down is on healthcare. The fantasy is that they can cover the cost by a mix of repealing the Bush tax cuts and ending the Iraq war. When that money proves to be needed just to stem the collapsing Federal deficit the war within the Democratic caucus should be nuclear.

(http://www.ibdeditorial.com/IBDArticles.aspx?id=295225814367283)

If this weren't so sad it would be pathetically funny. IBD is supposed to be part of our professional business press. This is supposed to be an intelligent analysis. It is actually what I will scoop out of my feline overlord's box in a day or two. It is feces.

Mercantilist states buying Treasury bills is NOT investment in the US. It is a place to park surplus dollars. Japan does not grow slowly because it has a trade surplus. It grew extremely rapidly in the 70's and 80's and also had a trade surplus. It created an asset bubble when it revalued the yen in 85 and created a deflationary disaster when it blew up the bubble. A mixture of structural problems, demographics and bad policy decisions have kept it in a two decade long depression.

Germany also had large surpluses with giant growth, medium growth and no growth. Germany also has structural problems. They are less severe than Japan's and the German demographic trap isn't as severe but they are also a more open market than Japan and feel the effects of structurally high wage and business operation costs more than Japan does.

Foreign investment is a GOOD thing when it is actual investement in new plant, equipment etc. It can be good when it is portfolio investemnt [there are too many variables to do a definite yes or no - this is one of those questions that require a multihanded economist and a lot of quite specific detail]. Just having foreigners pile up T-bills is a sign of weakness and is not sustainable. The economic problems of this decade stem from the US living beyond its means and from Asia Inc. practicing mercantilism.

The world has no net wish for more dollars. The world needs for the giant pool of surplus dollars to be reduced. Both need a US trade surplus. Absent this we are adding fuel to a forrest fire.

(http://www.realclearpolitics.com/articles/2008/04/the_great_shopping_spree.html)

Samuelson is understating the problem. US consumer spending was the economic motor of the world. If the US consumes less and exports more what will the motor be? We have been avoiding facing up to this one since the 70's. World may need to find a new pattern.

Now one can make arguments that there is vast unmet consumer demand in Asia, Russia, Brazil etc. All true. Issues there are distributional. Will Russia Inc share the wealth far enough down the pyramid for a consumer boom. Will there be enough live Russians to do this? Ditto Brazil and India. China like much of East Asia seems better on distributional issues but East Asia is already starting to get old fast. Their demographic issues are totally unfunded. No one knows [including them] how this will all play out. Interesting times we will all be living in.

(http://www.ft.com/cms/s/0/2ef9698e-0fbf-11dd-8871-0000779fd2ac.html)

The saddest thing that ever happened to economics [and by derivation business reporting] was teaching the idiots algebra. They fell in love with equations and lost sight of the economic realities they were supposed to convey.

US has been living beyond its means since the late 50's. A half century of a world economy has at its base US over consumption and under production. We are now reaching the end of the cycle. The various major players are trying to find a way not to accumulate mountains of dollars while still keeping the US as the consumer of last resort. It doesn't work. The dollars have to go someplace. We have had going on two decades of rolling asset bubbles as those surplus dollars try to find a home. Japanese real estate, US dot com stocks, exotic financial instruments...at core the problem is the US balance of payments. To make this flood of hot money go away US has to be allowed to run a surplus. The problem is that no one wants to take the hit on employment and production.

Now a smarter world leadership cadre could cushion the fall. Our leader cadre worldwide is orders of magnitude dumber than the 70's when the WW2 generation [who still remembered from WW2 and the Depression just how far wrong it could all go] were running things. The current Boomer Yuppies are near clueless. We are rolling REALLY big dice here folks and the fools in charge haven't a clue. I had someone explain the current commodity boom as a peak oil thing. Uh huh. It had nothing to do with National Oil Companies, NIMBY greens in the US or two decades of lack of investment. This was an intelligent person who lives in the energy biz. Clueless.

Scott

(http://www.msnbc.msn.com/id/24129957/)

We are in for a flood of 1970's rerun stories, all claiming that we are back in the stagflation game. All it proves is that they assign to the business desk people too stupid to be wine critics. The 70's stagflation was from a different universe. Strong unions kept jacking up wages. An economy dominated by big oligopic companies then jacked by prices to compensate. It was a mad hatter's race of higher wages, higher prices, higher wages. All this was agrivated by a monetary policy that simply didn't grok what happened and attempted to provide sufficient money to maintain demand with the result of too much money chasing too few goods.

Today unions outside the public sector are weak. A globalized world is awash in excess productive capacity for near anything except base commodities. [more on that below]. Wages in the First World have been stagnant for two decades and show no sign of the sort of generalized surge that made the 70's a kidney stone of a decade. Similarly the bubble in housing prices that enabled many in the First World to treat their houses as ATM machines and live beyond their means is over. We are living in the wreckage of an asset and borrowing bubble.

So what we are seeing is a commodity boom. Partly this is driven by speculative money, the same flood of excess dollars from the US one way trade with Asia that previously fueled the stock market and housing bubbles. Partly we are seeing the effects of India and China entering the outer stages of a takeoff to being First World economies with First World level of consumption. The bulk of the populations of India and China are still dirt poor but no longer starving peasant poor. Some hundred million and going up are First World middle class if you figure their purchasing power at PPP. In reverse there has been little net investment in most commodity production in the 20th century [except for oil where the last major round of investment was the North Slope and North Sea]. As late as a few years ago the problem was low rates of return and excess capacity. So demand is now outstripping production, the more so as much of the world's productive capacity is in regions [Africa, South America, Russia etc.] where the locals don't invest and political risk / nationalization makes outside investment near insane.

So there is cost push inflation of materials, food and energy. The solution is to do precisely nothing. The higher prices will lead to lower consumption and equilibrium will be reached. People in the First World will eat, drive [somewhat less and over time smaller vehicles - it takes over a decade to turn over national auto fleets] and heat their buildings. They will do this at the expense of buying 'stuff'. Retailing will decline and this will hit Asia which makes most of the 'stuff'. As the Asian 'miracles' are driven by exports this will moderate their demand. Price signals are supposed to move people to change behavior. Given stagnant incomes plus ever growing expenditures for government, medicine and social transfers this is all quite natural and inevitable.

Enter the usual idiots who propose raising interest rates to fight inflation. How do higher interest rates slow down the commodity price rises? Getting people to borrow less is fine except no one is borrowing in a major way anyway. Finance is refusing to lend, having rediscovered that risk means you may not get paid back. Most financial institutions have lost much of their capital in the implosion. The easy way out is to shrink the loans outstanding to what the remaining capital can support. Raising the price of money will accelerate this but is this what we really want? Deleveraging is tricky and has many ways to go wrong. Higher prices for credit at the same time availability is cut is the road to a real risk of a 30's type deflationary Depression. So why are the usual pundits calling for it? Because they react on tropisms. They dimly remember an undergrad lecture where they were told rising interest rates was the answer to inflation. Which it was in 1970 or even 1980 but has nothing to do with 2008. We are governed by fools. So far the Fed is ignoring them but the Fed reads the financial press as well as the election returns. Be afraid. Be VERY afraid.

(http://www.ft.com/cms/s/0/f84c9b80-057e-11dd-a9e0-0000779fd2ac.html)

Perhaps, over time, it will occur to Mr Schwartz that having equity capital well in excess of the statutory requirements would have been one very important thing that might have made a difference.

////

Read the above quote and then read my title. We have spent three decades telling people to 'wring the fat out of the system'. Everyone is supposed to maximize return on assets which means capital not used is 'wasted'. Spare parts are waste - do just in time. Put the capital burden on someone else. Leverage to the hilt. Never mention that when the wheels start to run in reverse the absence of liquidity is a killer. Never mention that 33-1 leverage means it takes next to nothing to wipe out your capital. The MBA's and masters of the universe live in the short term. The fools at the WSJ live in theoryland. They may kill us all. We are creeping to the point of nationalizing the entire banking industry to cover the systemic downsides of their bad bets. Greed is good may sound cool in a movie. However we have socialized the losses while keeping the profits private. remind me again why this is smart. And the sad part is how many otherwise smart people still don't get it, still live in theoryland.

(http://en.wikipedia.org/wiki/Community_Reinvestment_Act)

I can quibble with the wiki. As with most wiki’s it is from my POV incomplete and somewhat establishment liberal. It is good enough. The essential critique for your article is the endpoint. Some critics say…blah, blah, blah. Key things to watch for on finance industry articles from partisan sources are dates and numbers. Absence of both usually means ideological axes to grind. Your article had neither. Wiki has dates but no numbers. So let us begin.

1. CRA is passed in 1977. The big changes towards more permissive lending under it are 1995 and 2002. The 2005 change is actually a belated attempt towards stricter / saner standards. So ask yourself a simple question – if changes from 1977, 1997, 2002 are the cause of the problem why did it happen 2007-8? Why were these loans accepted into the market without major default rates until 2005-8? Why were most of these defaults fairly new loans?
2. Why were these things passed? Industry regulation is rarely a static exercise and often involves quid pro quo trades. To shorten a long involved multidecade political rap US banking industry was divided up into little boxes after 1929-34. These boxes made less and less sense by the 70’s and deregulation started. As in many such processes horse trades / political log rolls were made. CRA was one such trade.
3. Red lining and racial discrimination was real. So were credit standards geared towards middle class whites as opposed to working class minorities. This is well before credit bureau scores and the like were common and easily pulled up. For example many banks wouldn’t count payment history from small merchants [usually the only ones who operated in ghettos] or utility companies as a credit history. The actual CRA was a negotiated safe harbor for the banks. If they met CRA standards they were deemed not to be engaging in red lining or racial discrimination. There is still no consensus that credit standards were noticeably lowered in a provable manner – i.e. that more of these loans failed than under the old system. If so it was minor and this is over decades. YMMV.
4. In return banks were able to get Federal help around the state laws against multi-state and multi-unit banking. They were able to get easing [and eventual elimination] of Federal restrictions on banks getting into other types of finances. This was all done piecemeal but look at 1977 and 2008. We went from little corner banks who had passbook accounts for regulated interest rates to national chains that sell everything except insurance [and often backdoor that].
5. (http://en.wikipedia.org/wiki/Subprime_lending) - this is not a new industry. So ask yourself why is it a problem only in the last few years. There have always been merchants and credit card companies that work with bad credit people. I was offered my first new credit card within a few months of my bankruptcy finalizing. High interest and an annual fee but I had plastic again. Initial limit was near pathetic and I had to give them a balance as collateral but one has to start someplace…
6. Indeed both the CRA and subprime real estate lending existed during the last major financial implosion [S+L debacle]. Why wasn’t it a problem then?
7. The dog that didn’t bark in the night is the combination of securitization, phony ratings and absence of proper regulation / supervision. People were sold toilet paper and told by supposedly reputable investment banks, brokers and ratings agencies that it was AAA gold. THIS is the problem. The open press was full of endless ads for no document refinancings [referred to openly as ‘liar loans’]. There was a TV show on how to become a millionaire flipping houses. There is no problem with some marginal ‘social engineering’ lending. Big system can take mosquito bites. There is no way the system can cope with AAA ratings being fantasy on a massive scale. The problem was never the CRA or securitization or sub-prime lending or any of that. It was a regulatory environment which allowed Wall Street to buy high ratings for junk and peddle it as safe. When the lie became obvious the system froze because no one knew how to price the risk. If all the public information is deemed lies it is not safe to trade. No one knew what the real risks they were buying are. No one knew how deeply committed the major players were [many had complex guarantees as underwiters etc.]. Very hard to trade if you don’t have a clue as to whether the other party is solvent. It was these basic regulatory issues that were blown. The debate was public and the smoke and mirrors financial engineers were allowed to overwhelm those of us who argued that because of the catastrophic costs of letting the big boys fail we were letting people take ever wilder gambles with an implied put on the losses to be borne by the public purse.

Is this any clearer or anyone want more detail?

(http://www.voxeu.com/index.php?q=node/989)
1. When reading of Euro reserves and Euro transactions remember that the nasty words national and international get tricky with the Euro. Euro zone and USA are give or take of similar size. Europe is a transnational entity that may becomes a new style of state. US is a nation state. So the state treasury of California is a sub-national account while the state treasury of Belgium is national. So when I pay an artist in Pennsylvania [happened recently] that is not an international transaction while when the Frogs I used to write for pay their sales agent in Germany it is an international transaction. So unless VERY careful definitional models are used the normal ones of the finance industry overstate the Euro and understate the dollar.
2. Europe used to be a rich, civilized area. US was this rich thing off on the fringes. Then Europe spent the better part of a century dealing with two suicide attempts and a slow recovery in traction. US policy was always to bring Europe back to health. Policy worked. Big bad bear is dead and Europe is again our equal. Problem is that everyone alive now only remembers two periods of quite artifical US strength [45-50; 89-95] and treats any change from that as the end of the world as we know it. The post-war collapse was quite near to the abyss. Let us all thank god we are no longer there. 89-95 was something else. The European project preoccupied Europe. Russia was in a time of troubles. China was finally shaking off a bad bunch of milleniums and India was still coming into its own about doing decades of post-independence statis. What we are seeing is the multipolar world predicted by Nixon, Kissinger, Brandt etc. It took a little longer than expected but here we are.
3. Euro will continue to grow as fraction of reserves. This was always in the cards. If you take the period 1965-2008 the Euro/DM has been a better store of value than the dollar. Deliberate on all sides. Europe is more concerned about inflation that the US is and the US is more concerned with growth. Asia is frankly mercantilist. Net effect is that the US is the consumer of last resort. The formula for getting rich / developing is to run a trade surplus with the US. The problem is that this builds up dollars. Everyone knows the dollar will devalue and everyone wants to avoid this loss without losing market share. Asia is willing to game the system more strongly than Europe so Europe takes most of the hit. First it was gold. System was stressed till US went off gold. We then had dollar 'crisis' points 70's, 85-96 and now. Dollar fluctuates wildly against the major Euro currencies. Speculative forces, interest rates, our business cycles tend to be out of sync, our central banks see the world quite differently.
4. US priviledge of issuing debt in dollars is the flip side of US being the consumer of last resort. We are one of the leading exporters. (https://www.cia.gov/library/publications/the-world-factbook/geos/us.html#Econ). We can more than afford our imports of oil and a few key minerals. We buy from others because they make cheaper and / or better but that was true during our so-called greatest period [1945]. Europe always had higher quality AND frequently cheaper goods as well. US used trade protection. Part of the price of building the coalition against Moscow was opening the US market and usually opening it a bit mroe than other markets were opened to us [shall we discuss Airbus?; shall we discuss grains?]. So if the world decides it doesn't want more dollars US will be forced to buy less. We will have a bad few years. Factories do not reopen overnight. Retailers and truckers will lay off people fast as the flood of mall trash from Asia dries up. We are probably talking a recession on the 73-74, 79-82 level. 10% unemployment, we lose a year or two's growth, we are anemic for half a decade. Parties in power are voted out and the nation goes on.
5. There was never real sympathy for US troops, US high handedness or much of US policy. Europe saw us as uncouth cowboys in 45 and still does. They merely need us less. So the remaining troops can come home. Except I don't hear Europe asking for this. There are complaints about specific bases but so far US and Europe have been content to handle the transition slowly. There are many fewer troops and many fewer bases than in 1989 but no major voice asks for everyone to leave, even France. This is even more true for Japan. SK may ask us to go but that has been coming for a decade now. What they fear from the north is reunification more than another war. SK and US interests have diverged. Overall US will never be as strong relatively in military affairs as it was in 1992 but this again was inevitable. We didn't wish to be an empire and the rest of the world does not wish to be ruled by us. What has changed is not the ineviatble quarrels or long term trends but rather that with modern media the old breakdown between internal and external discourse is gone. Each nation now knows what other nations say speaking internally and most find it insulting. It is no longer a matter of editors and diplomats at the NYT, the Times of London and Le Monde sending coded messages. It is now streaming video and babble fish translations. More noise and more ranting but little real change.
6. The Louvre agreement was not a dollar bailout. (http://en.wikipedia.org/wiki/Louvre_Accord). The world had reacted to a too strong dollar [and a surging US trade deficit with resultant protectionist pressures] by pushing the dollar down. The Central Banks lost control and tried to reverse it. They mostly failed.
7. To 'save the dollar' first requires an agreement as to what exchange rate we are 'saving'. At PPP US imports too much and Asia exports too much. The giant Asian growth rates are in part low hanging fruit [playing catch up to the developed world is easier than continued growth once equality is reached - Europe and Japan both proved this]but mostly it is mercantilism. Let us presume that Asia won't change on this. They haven't since 1945. Their concepts of capitalism, governance, representative government and social harmony are simply far more different from either Atlantic model than Europe and the US are from each other [and we are quite different in many things]. So first you must adjust the exchange rates so the US no longer imports $3 for every $2 it exports. This will probably take a Euro of $2 [perhaps $2.25] and take Europe and the old white commonwealth giving up their markets to US and Asian goods. Note that this just stops the problem from getting worse. To 'solve' the problem you need the US to be allowed to run surpluses sufficent to bring the trillions of dollars of prior deficits home. Failing that they will slosh around the world as hot money [and we are living with the latest financial disaster this flood tide of homeless money has caused]. Forget all the silly equations they give up as supposed economics - the reality is that either the world takes IOU's from the US or we buy less. We have spent 50 years constructed this world and realigning it will mean many disruptions worldwide. Jobs will be lost. Businesses will fail. Properties will fall in value. Career paths will close. Yes new ones will arise. However the new winners do not know who they are and so don't vote for this. The losers see what they have to lose and expect their elected 'leaders' [who in economic matters they treat as fisher kings - bring propserity or we will sacrifice you to bring back the spring of plenty]. Needless to say those leaders, who mostly know little of business and less of practical economics, work to kick the can down the road.
8. Now one of the ways to paper over is with interest rates. If you keep US interest rates well above European rates [the Reagan-Volker years which led to the over valued dollar and the Plaza Accords [http://en.wikipedia.org/wiki/Plaza_Accord]]. However the ECB cares more about inflation and less about growth than the Fed does. Europe and the US are not the same and our central banks respond to different cues and have different institutional memories. 1923 means much more in Europe and 1929 means much more here.

Comments on the Eye please.

(http://www.latimes.com/news/opinion/la-oe-schiff31mar31,0,2496155.story)

This is a supposedly sane opinion piece in a supposedly establishment liberal major newspaper. ROFLMAO.

1. Housing isn't wheat or coal. Every house is unique as is every house purchase / sale decision. So market prices will always be murkier in housing.
2. There is a social disruption feature to mass foreclosures. Overall capitalism works better than any other system that has been found. Much of how it works is from the popular POV counterintutitive [invisible hand], unfair and fairly immoral [a lot of who wins and loses is nothing more than luck and inside information]. There is an implied social bargain whereby the mass of the public buys into capitalism's quirks [when Wall Street wins the gains are private; when Wall Street loses the big boys get protected to prevent systemic implosion - etc.] in return for various forms of safety net. We watched the current mess get created in steps through two Bush terms [liar loans was a common term in the financial press for years, etc.]. Without some measure of sane relief expect the public to vote for insane relief.
3. Yes prices have to come down but they do not have to come down 100% right now and all at once. Doing so frequently produces overshoots [the see the FX market for the poster child]. If we save the more deserving of the individual owners and ease the pain of losing their houses for the unsaveable ones we can still get market clearing prices for the 'flip this house' speculators. Clear those houses off the market at rock bottom prices first. This gives us time to see if a bottom can be found and if not to let the people who simply have more house than they can handle [i.e. they cannot meet payments even refinanced to proepr 30 year rates] liquidate over further time in an orderly market.
4. Mass foreclosures take down property values, tax rolls etc. for whole communities, counties and states. We give Federal money in huge quantities to fools who build in flood plains, on coasts with known storm dangers etc. We give drought relief to farmers. We are rebuilding a city that needs levees to keep out the river. Please tell me how this is different?

The collapse of lending standards to serve as a quicksand foundation for an endless superstructure of debt instruments and financial engineering devices did not happen in the dead of night with no public knowledge. Thsoe of us who said the so-called Bush recovery was all smoke and mirrors off a housing bubble were laughed at for half a decade. Many people and institutions profited from this and none are being asked to give anything back. Let them pay a bit more in taxes to clean up their mess. A super-rate on financial services income and a tax on houses / condos worth more than a million come readilly to mind as revenue sources.

Port Call
© Final Sword Productions 2004

The traffic control staff noted the new arrival as it triggered the sensors on the system buoys. They instantly issued an alert to station and habitat defense, swiftly downgraded to a caution when the IFF squeal claimed the new ship as the Lady Tara, a trade vessel known in their port. After a few minutes when visual and other sensors confirmed a positive match to the supposed IFF ID, the alert was cancelled. Lady Tara had a configuration that did not suit a major raider. So anything of that approximate size was probably reasonably safe.

However it pays to be cautious. A Scooby Gang was dispatched to the berth where the Lady Tara was scheduled to dock. The people had no Slayer. Although the end of Season Seven of the Holy Series had clearly activated all Potentials, apparently none had been part of their migration in the Diaspora. The Watcher’s Council kept reshuffling their available DNA for new births, but, so far, none had been Chosen.

Lacking Chosen Ones, the Watchers trained Scoobies and Wiccas. The Scoobies were augmented humans but had no superpowers. The Wiccas lacked the True Craft of a Willow or Tara, but were good empaths a bit outside the human norm. Still, none of the inhabited places in the system had a Hellmouth and Demonic Evil seemed not to be present. They were enough for normal human encounters or so the people of the system comforted themselves.

Lady Tara moved in-system on the assigned lane at the assigned speed. The probability of it being a raider kept shrinking. However nearer visuals showed clear signs of battle damage. Traffic control passed this datum to station management who in turn began discussions with the comm. people on the Lady Tara over what level of repair work they would require.

The Scoobies and Wiccas ignored the economic discussions that flowed past them at light speed lag. Others could see to such mundane things. They kept the faith. As the ship made dock, they prepared the Test for those who would debark. They were a small station far out in the Diaspora. They had no need for customs or other such formalities. But jihadis were an ever present threat. Hence the Test. Everyone who debarked had to drink of the alcohol and eat of the roasted pig flesh. No jihadi could do either and keep their bizarre faith. The Scoobies administered the Test and would righteously do battle with all who refused or failed. Behind safety glass the Wiccas observed, looking for trickery and deception. As always the folk of this ship passed the Test. They understood its meaning and had never had kind word for jihadis. Indeed they seemed to have a special dread for one subcult among them, the Jihad of the Prophet’s Last Wife.

Lady Tara sent two dozen of her people down the tube onto station. Most were garbed in the more normal ship suits and went to confer with their opposite numbers in repair, commerce, ship’s supply or whatever. Four wore robes of office. This was unusual. The robed senior officers did not always debark. Never before had four with robes, hoods and veils done so. The Scoobies escorted these to the office of the Chief Watcher, while relays of Wiccas observed, looking for trickeries.

The Scoobies left the party at the final doorway. No Scooby passed that door without a request from a Watcher and no such request had ever been given. The four robed officers entered, after which the door slid shut. Seated at a desk were the Chief Watcher and the Senior Wicca. The four robed officers took chairs across from them and then removed their veils and hoods. The hoods were an affectation. The veils were a necessity at most port calls. They hid the vampire fangs.

“Good thing you ran late. We’ve had a Fleet visitor or at least one claiming to be so. Was asking about you ladies.”

The chief among the ‘officers’, Mother Superior Mary K answered for her side, “And what did you tell them?”

“That we knew of no such group as the Holy Order of our Lady Mary the Destroyer, or indeed of any Catholic Order looking to bring the Apocalypse. We gave ID on your ship as peaceful post-Wicca trading folk, which is what the rest of our people know you as. Indeed many seem to think you can be converted to our Cult of Buffy.”

“As if we would take demented media fandom and elevate it to a religion.”

This was an old set of verbal volleys and the Watcher would not be baited, “Think what you will of our beliefs. We have not taken a syncretic Hindu-Christian Chaos Cult to the point where both religions have excommunicated us. Moreover, you’ve gone one step further. Fleet has now taken an interest. You’ve been officially labeled Wreckers.” He paused while the Senior Wicca passed across a sheaf of data sticks. “It seems they finally noticed what your theology plainly states beneath the verbiage. You want a Year Zero for the universe. They seem to have gotten some old Marxist idiocy into the evaluation. Someone named Pol Pot…”

The Mother Superior chuckled, “An offshoot of ours. Managed to mate our theology with two Marxist atheist cults. Khemer Rouge and Shining Path. Want us to do a data dump to the Watcher’s files before undock?”

“Only if it is gratis. We made it clear to your order two migrations ago that we had no interest in your theology or your wars. We’ll fence your booty and do your repairs. We’ll keep your secrets. Have you brought any of what we seek?”

The Mother Superior allowed herself a small sigh. These twit unbelievers were quite useful but utterly mad, “For the thousandth time in the last three hundred years we haven’t a clue as to what genes make a Slayer or a Willow Class Wicca. We bring you new genetic material. We bring you new herbs. We make no claim as to the efficacy of any of this. However we do have new Buffy lore since last time…”

The Watcher and Wicca were well trained. They did not rise to the obvious baiting. Instead they waited while the three attendants to the Mother Superior showed the new treasure trove of anime fan fic from the Second Diaspora, codexes to the commentaries on the never made Season Eight, the lifetape of a lady who claimed to be a reincarnation of the great but evil Darla, and a purported first draft script for the precursor movie, the one without the True Buffy. After much dickering, all were purchased for new nav data the Watchers had assembled from ships that had made this port since last the Lady Tara had called.

“How many have you for us this time?”

“Eight girls for your order as postulants and four boys for your Lay Brotherhood of the Silken Cord. They are all eager for anything beyond the life with us. None has a clue as to what they have volunteered for. I’m sure a few will work out and as for the rest…”

Some things need not be said. The newbies would adapt or die. Once one left the latest of the many Sunnydale’s in space, life could be both cruel and capricious.

The Watcher saved the best for last. “I’ve got a new version. Late 21st century so it needs antiquated equipment to play or copy.”

All four Sisters came instantly to full attention. “How?”

“Somebody from so far out he hadn’t a clue as to what he was selling. His ship barely survived jump and essentially limped into dock on good vibes. He was selling anything he could to meet dock charges and repairs. It is still in its original packaging or so it appears.”

“Which version?”

The Watcher slid it across the counter. The DVD was still in Old Earth plastic. It was the eight hour snuff version of the porno entertainment, ‘”The Last Wife of the Prophet”. Essentially it was an endless rape torture fantasy of Mohamud with his last child bride. A mere rumor of the existence of a copy could bring jihadis swarming like hyenas to a fresh kill.

“Your price?”

The Watcher slid a shopping list on a data stick across the desk. Eager hands snatched up the stick and DVD. While each side regarded the other’s beliefs as demented drivel, they honored their bargains with each other.

Lady Tara spent three weeks in port. Two other ships made station calls in the interval but there were no incidents between ship’s companies. It was a small station in a thinly populated system a good hundred lights beyond where even the fringes of the Diaspora would call the frontier. None who were welcome here made trouble on station or in-system except Fleet. Fleet went where they would and people adjusted as best they could. At least for now. The Sisterhood in fact had no schism. They all worked for the Year Zero when all the human infested galaxy would be slagged down and start over. The Jihadis of Prophet’s Last Wife would attack any system where there was a rumor any might have seen any of the many versions of the kiddie porn epic.

The Sisterhood regarded them as flatline ragheads but still a useful weapon to be aimed at systems and polities that stood in the way of the Mary Yurga. After undock they called holy service to announce the great acquisition. To show their gratitude to Kali, avatar of Mary the Destroyer in her chaos guise, they sacrificed one each of newbies, male and female. All ate of the body and blood, then the skulls were sent to the artifact shop for polishing. As they neared jump, they switched off the Lady Tara IFF ID squeal. The ship had over twenty registries. Only two would stand up at real ports. One day it would be their undoing but such was as the Mother of God in her dance of death willed it. Until then, under whatever false name they were in fact Mary’s Doom Upon Mankind, a bringer of the Year Zero that would end the world as others knew it and usher in the Age of Mary the Destroyer, the Mary Yurga. The Mother did not like what Creation had become. So slag it all down and start again. Kali was the Mother Goddess who ate her children. So the senior officers put on their necklace of skulls to go with their vampire fangs and prepped for jump. Her Will Be Done to the end and out the other side. Chaos and mother night called to them.

(http://www.ft.com/cms/s/0/eb560b4a-f1ed-11dc-9b45-0000779fd2ac.html)
Read it and weep. In less than a year we have gone from a danger of a recession to repeated cases of market freeze-up to one of the great bailouts of all time and serious people in reputable financial media discussing modes of nationalization of the industry. And even nationalization may not end the crisis.

This is what happens when you deregualte finance capitalism. Finance is simply different from making widgets or running a chain of stores. It is VERY hard to let major players go broke without brining down whole economies. That part is obvious but we act as if it is not. The players will game the system and push the envelope. Heads they win and tails we bail them out. And yet I talk with idiot libertarians and free market absolutists who act as if none of this were real. They give me analogies suitable for a corner drug store. The level of economic and financial illiteracy among even supposedly educated business and professional people is both frightening and in its own way laughable. Memorizing a few slogans from Milton Friedman does not an intelligent discussion make. Ann Rand was a novelist with pretensions not an econoomic theorist.

We are dancing on the edge of a volcano folks. The US has lived beyond its means and must now restore its national balance sheet. That means real economic pain and our political system does not do pain and sacrifice very well. Time to relearn some old lessons. Leverage is fun on the way up and a stone bitch on the way down. Trade flows have to balance over the medium term. Nations must actually make things someone else wants. Being dependant on not especially friendly outsiders for key goods such as gasoline has real risks.

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Cannot start this one with a URL as I don't have one for the piece I have been asked / volunteered to Fisk and it is probably subscription anyway.

Stratfor is good in many ways but the need to say something every day sometimes produces erudite drivel. This is one such case.

1. They completely misunderstand what made 1929 different than the various recessions, crashes etc. that happened since. The postwar busts until the S+L crisis were essentially functions of inventory management. Inventories would rise relative to sales [doesn't matter why - slowup in demand, overproduction, changes in consumer tastes - it all gets to the same place in a macro-econ sense]. Factories would lay people off. A lot of businesses would go bankrupt. The overhang of goods would be sold off at huge discounts or trashed. Life would return to normal. It could be devestating for factory towns, individual finances or particular industries but in the end there was a market clearing price at which growth would be resumed. Nothing ever seriously threatened the triad of Big Business, Big Government and Big Labor. From 1939-1973 this was how the US ran. It was a managed economy in a managed democracy. We had a 1.5 party government. Republicans could win executive offices but essentially had no chance to run Congress, the regulatory agencies, the courts or the permanent government. And the Republicans who won were Dewey-Ike-Rockefeller types - people who said they would manage the post-New Deal state and economy a bit more effeciently than Democrats did. Until LBJ blew up the Dem Party this was America.
2. The Stratfor analysis of 1929 is jejune and simply wrong. Yes we were going to slide into a recession. Agriculture was already in one. The Mississippi floods and end of the Florida land boom both created a demand slowdown. Industry had created cyclical overcapacity in key industries. None of this is what created the disaster called the Depression. A financial bubble blew up and took the whole jury rigged structure of world finance with it. [It is hard at anything shorter than book length to go into the interlocked mess that was war debt, reparations, international capital movement and the Wall Street bubble - each part in theory could have been solved but the players were mostly economic illiterates focused on the politics of the thing and the bankers who should have known better simply refused to grok just HOW fragile the whole structure was]. The implosion created a massive deflation, destroyed savings and credit came near to destroying both liberal capitalism and representative democracy].
3. The fear of a 1929 was just that - fear, naked terror to be honest. People and nations put up with a clunky regulatory state and suboptimal income and GDP growth after WW2 because they were terrified about going back to 1929-38. JFK won in 1960 in good part because he propsoed that we could have somewhat higher growth [4-6% / year instead of the 2-3% straightjacket Ike had kept us in].
4. The world economy worked post-WW2 because everyone except the US/Canada had been bombed flat. So Europe and East Asia focused on 'recovery'. US pushed for trade and collective defense. The others went along to get under the nuke umbrella, to get US reconstruction aid and to get some access to the US market.
5. This was starting to run its course by the end of the 50's [there was a semiperpetual crisis from US balance of payments deficits 1958-73 when Nixon solved it by nuking the system and going off gold]. Essentially the US got used to being the Big Boy on the block and objected to that status starting to cost more. The other major players started objecting to having to pile up dollars and to the US throwing its weight around but did not regard the US proclivities for free trade and free capital movements as a good thing. Europe wanted to manage these more than we did while East Asia was frankly mercantilist and state capitalist.
6. GI bill, interstate highways etc. were all good things. They helped ward off a postwar depression. They helped the mass of the GI generation achieve lower middle class living standards. What changed in the early 70's is that the GI generation reached middle age. They changed the rules. They stopped favoring programs for young people and started favoring things for middle aged people who ahd figured out they were going to get old. Benefits were shifted towards the old [vast expansion of Social Security from an income supplement to a national pension program; Medicare etc.]. Infrastructure programs got NIMBY'd to protect the property values of people who already owned houses. Minimum wage was allowed to attrophy. Trade policy changed from protecting US jobs to getting cheap goods from Asia. I could go on but you see the pattern. This was the greatest generational rip-off in history. And as long as new Boomers kept entering the labor market at the bottom it worked.
7. 70's was a world economic implosion for several reasons none of which stratfor really deals with. First is that with reconstruction definitely over the world economy needed a locomotive. Dollar crisis took the US offline and the world discovered that they disliked not having the US as consumer of last resort worse than they disliked piling up dollars. World also completely mismanaged the two oil crisis years. The world had seen commodity price deflation throughout the 20th century [the exceptions were the two world wars and Korea]. Instead of this being seen as a cycle that had run its course it was taken by policy makers as a law of nature. No one invested in major new production. Commodity producing nations nationalized their industries and beyond a few ritual bleats the world shrugged. So was born OPEC [originally a Venezuelan idea with Iran under the Shah as a strong second; Saudis were lukewarm at best]. Instead of letting the prices cause consumption changes everyone tried to do the politically expedient thing and manage the situation. The management was based on short term politics and faulty economics. It failed spectacuarly. THIS is what caused the Reagan/Thatcher revolutions [actually begun under Carter with some help from Ted Kennedy of all people]. The disasters convinced the political class, K Street and Wall Street that the old regualtory state could not be run because the political class simply wouldn't take the short term political hit of allowing pain to happen when necessary. This is now fading because a new generation simply doesn't remember the 70's and the older ones have allowed themselves to forget.
8. The 80's worked because the world went back to taking surplus dollars and because the immediate effeciencies from taking off decades of regulatory barnacles generated quick gains. It is like a diet, the first 10 pounds are always the easiest. The Gordon Gekkos were leeches on the process but provided a glittering tableau of fast buck excess for people to tut tut about.
9. The 80's tanked because taking off some of the financial regulations produced a near disaster with the S+L's [long story - short one is that the finest Congress money could buy converted a small loss into a catastrophe one short term idiot decision at a time - key moron was a Texas Democrat named Jim Wright].
10. 90's are remembered as a boom because the last few years saw real gains. For most of the decade it was like this decade - the macro numbers did great but real people [the bottom 90% saw little income gain, a continuing squeeze on things like housing and health care costs, and ever less job security]. The world did well because Greenspan handled the financial blowups [many of which he helped cause] off screen as far as 98% of the people were concerned and because the growth of Asia allowed someplace for everyone to spend those surplus dollars.
11. We are now back to the 70's in several ways. Commodities are in a cyclical surge. The world is tiring of eating the surplus dollars but has not invented a new way to structure a world with excess production chasing insufficient demand. And Iraq is Vietnam in the sense of reminding the world that there are real costs in humoring US dillusions of hegemony simply to keep the US market open to one-way trade.
12. What is not like the 70's is that with the Evil Empire gone the other power centers really don't need the US in a geopolitical sense. They tolerated our anti-Communist fanatsies [as they saw them] because as a Great Power the SU was more of a danger to them than to us - they were close to all those tanks. We were not. They simply do not see 911 as the start of a war of civilizations. They see it as a police matter. Forget who is right. Also without any real international or domestic regulation [and both are needed] the financial engineers have been allowed to run so hog wild that even they do not understand the ever mutating Frankenstein they have created. It probably won't blow into a 1929. However Europe went through one crisis after another from Fashoda to 1914. Only one brought down the house. One perfect storm is all its takes. There is also the demographic wall the developed world is facing. We whine endlessly about our social security mess and our immigration mess. Both are disasters and the rest of the First World is in worse shape [exception for Japan].
13. The deflationary danger is real. See Japan for the last two decades.
14. The mania for a services economy ignores the fact that other nations want to upscale their economies as well. They will produce movies and music and software etc. Ultimately a society that wishes to import must be able to export as well. The world is run by people who regard having a trade surplus with the US as a god given right because it has been that way all their lives. Party may be about over.

I could go on but fear I will bore folks.

I did this here so that only the few people who are interested can read it without cluttering up everyone else's mailboxes.

(http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article3465220.ece)

When I look at US trade figures and the bottomless deficit in virtually every category the one bright spot is usually commercial aviation. Well Boeing has again proven that there is no commanding height a US management team cannot surrender for short term profit coupled with brain dead arrogance.

I am not complaining that Airbus won [Northrop as I read it provides a US front and does some screw driver assembly in Alabama]. While I don't find Airbus planes fun to fly on - the seats are too small and the planes too uncomfortable even by the standards of 21st cattle class air travel - in truth they are no worse than Boeing. I object to the blatant subsidies but as my government has neither brains nor balls I have learned to live with an unfair playing field.

However Boeing blew this one all on their own.
1. First they get caught in a blatant fraud on the original bill sufficient to result in criminal charges.
2. Next they show insufficient contrition given the political climate.
3. Finally they offer up a plane for the tanker contract that on the published specs is a worse aircraft at a higher price. If they had to eat a break even to make amends, preserving the USAF market would seem the thing to do. You can always get some profit back on the back end as the military can be counted on to change the specs over and over during the production life. I claim no inside info but I do follow this stuff a bit and it appears Boeing just decided that politically there was no way they would be allowed to lose.

Now Congress will have a cow and can always mandate a rebid but as far as I am concerned the correct answer is to tell Boeing the price of the rebid is firing the entire top management, dumping the new Chicago HQ and moving back to Seattle or [still better] to St. Louis. Get the top people back to where aircraft are made. None of this will happen and another major US industry will take one step further to slide down the tubes. We cannot make nothing here except movies and music. At some point there is a day of reckoning coming and it won't be pretty.

(http://research.stlouisfed.org/fred2/series/TWEX

If one read realclearmarkets.com one is bombarded almost daily with blather about how every possible economic ill is from the collapse of the dollar. Read the chart and read the source. Dollar has quite a ways to go merely to get back to 1995.

The problem of course is that as usual East Asia is not taking the hit so Canada and Europe are taking the entire load which in turn throws the balances between the Euro and dollar as international trade and investment vehicles off. However let us take the most likely reaction to this, which is that more of the petro block follows Iran and Russia to pricing in Euros. This in turn runs up the exchange value of the Euro relative to the dollar. Europe is already slowing up from a relatively good 2007 [one of the few years in modern memory they beat the US. The Club Med countries [Spain and Italy especially] are holding the Euro zone back. Spain and UK [which is not Euro currency but is EU] are both facing property bubble implosions worse than that of the US. Absent some major change the Euro could rise to $2 if all oil trade is switched to Euros which in turn could put the continent as a whole [and all the economies except a few little giants such as Denmark and Eire]into a fairly severe recession.

The core issue is that the ability of the planet to all get rich by running a trade surplus with the US has about run its course. World is choking on unwanted dollars but no one wants to give up exports. World needs an alternative economic model to the Washington Consensus and there is none in sight. Should be an interesting year. Government bonds look better all the time. LOL.

(http://www.ft.com/cms/s/0/4d19518c-df0d-11dc-91d4-0000779fd2ac.html)

The above is FT's idea of the ultimate credit nightmare. $1 trillion in direct losses and $6 trillion in loss of household wealth. Two years of recession. Compared to 1996-2008 it is 'the end of the world as we know it'. The Washington Consensus would be overthrown and we would return to regulatory liberalism [social democracy in a mild form which is where we were trending in the 70's before Carter blew up the economy]. This is so not the worst case I do not know whether to laugh or cry.

Fact is we have not a clue as to how bad worst case is. We really don't know the total dollar value of the pyramid schemes that financial engineering has created. We don't know what a run on the dollar in the manner that there were runs on the lire or pound or that would look like. We haven't a clue as to what the legal ramifications of major financial institutions defaulting on the daisy chain of engineered exotics out there. We simply don't have the architecture of what a 29-33 level seize up of the credit markets would look like or even where the trip points are.

So what do we know? We know that even predicted crisis situations [Thailand, Argentina, subprime mortgages] actually go bad faster than anyone allows for. We know that the ripples spread faster than anyone allows for. We know that no one is charting the interconnections and stress points in the system. We know the system is mutating faster than we can track it. We are fated to live in interesting times. That cannot be helped. The technological, demographic and strategic changes to the old Order [the world of 1945-89] are built into the system at this point. We know that the so-called American Hegemony, the 90's End of History, was a brief interlude between the end of an old world [the three round struggle over Europe that began in 1914] is over and that the new world will see the rise of Asia. It is not built into the system that we run our economy our polity to maximize the gains for a small class of financial buccaneers and leave the risks to an apathetic electorate that finds the details too boring until it slams into them with hurricane force.

We saw this movie happen 911. There were a small band of people saying there was a worldwide systemic problem. But it was messy and icky and had few good options. Everything had major downsides, major immediate costs and no promise of easy victory without pain or bother. So we rationalized it all. It was happening over there. It was just about Israel/Palestine. It was age old conflicts on the other side of the world. We laughed off the Kahane assassination as NYC tribal politics. We laughed off the first WTC and the conspiracy trials that followed as Keystone Kops by ethnics in NYC which really isn't America. And after three decades of assassinations, embassy bombings etc. the war came home. And most Americans sat in shock and said they never saw it coming. Uh huh.

We are dancing on the edge of a financial volcano. The volcano rumbles every so often. More rarely there is ash and a bit of lava flow. But the whole thing is complex and boring. Better to watch Dancing With the Stars. Now it may never blow. I have been called Cassandra before. My batting average is much less than 1000%. However the volcano is rumbling again. We have been warned.

(http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html)

So the new Fed facility has been used for $50 billion in credits against assets that weren't good enough for the discount window. The US isn't at Northern Rock (http://www.northernrock.co.uk/) level yet but we are tip toeing down that road. The good news is that the Fed has enough basic market sense to keep liquidity from imploding [which is what killed us 29-33]. The bad news is that there is no bottom in sight. No one knows how bad the pyramid schemes were, how many of these so-called securities have any real assets behind them etc. We are in uncharted territory here and neither party is proposing a serious regulatory regime to force adaquate audits or disclosure. We may well skate through this time but we are dancing on the lip of a rumbling volcano. To avoid relatively minor short term pain we are yet again papering over and hoping the entire system doesn't implode so fast that no one can cope. Remind me agains whereby a system that says heads Wall Street wins and tails Main Street loses is such a good idea. Yet none of the so-called populists running this year is dealing with the nightmare beyond ritual condemnations. Then again it has taken 30 years to get one party finally willing to pretend to say that free trade with Asia is a bad notion so maybe by the time my quasi-niece Sarah has her children we will be ready to deal with financial engineering. Let us all pray it doesn't kill us all off first. GAH!!!!

(http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/02/16/the_perils_of_a_weak_dollar/)

If you ever wonder why even educated Americans go into MEGO when asked to discuss economics and exchange rates read this article. It could more aptly be entitled a herd of cliches and half-truths seeking a clue.

This is a supposedly intelligent article that a good web site [realclear markets.com] directed me to. And it is gibberish.

Let us try reality: the so-called booms of the late 90's and this decade are built on the mercantilist logic that running a trade surplus with the US equals prosperity. In the short run it does. We are living in the medium run of that short run. The world is awash in dollars from those surpluses. No nation really wants more dollar reserves. However no nation wants fewer exports as they have no way to replace the US market. So while everyone agrees that a US trade imbalance of $3 of exports to $2 of imports is not sustainable no nation or block wants to take the hit.

The commodity exporters [mainly oil but the commodity block in general] are the first to bail out of dollars. This is not a full dump but for reasons of political risk [when the US is pissed at a nation we freeze dollar balances where ever we can] it is simply safer to hold Euros [or quasi-Euros such as Sterling or Swissies]. As they dump their dollars for Euros they run up the price of the Euro to the dollar. The East Asians use various cheats to keep this from hitting their exchange rates much. They have managed to do this since the 70's [the exceptions being Japan at the Plaza and Louvre - as Japan has yet to recover from that debacle it is scarcely shocking that no one in Asia is particularly keen on a replay].

So absent someone getting off the amusement park ride through the fun house we are to balance the US current account solely on the backs of Europe [and to a much lesser extent Canada]. This is what is happening but the question is can an aging Europe stand the strain?

The system is broken. Everyone knows it. No one wants to be the one to say unpleasant truths in public. Does this remind anyone of subprime mortgages, dot com stocks or Bangkok real estate?

This blog was supposed to be a chronicle of my migration from a safe Republican presidential vote to someone who was going to reregister and vote for Hillary out of tactics and rage. It was a protest against Amnesty, the ingratitude of the country club and establishment Republicans leadership and globalized postmodern finance capitalism. It was also supposed to have been started in the summer of 07.

Life intervened. I am now a registered Democrat. I stood up in the Iowa caucus for the Ice Bitch whose campaign implosion began there because she is now too conservative for the new era. Instead of her inevitable coronation we are now on track to elect a President whose only noticeable accomplishment of his adult life was to decide he was no longer named Barry but really wanted to be a Barrack Hussein and worship at a church that seems to hate white people.

So I will leave the pure politics for my other blog. (http://senilecow2345.blogspot.com/). Will make my partners happy as my politics are quite my own and NOT those of the other partners or of the company. So this is going to be a place where I largely talk to myself / rant at the sky about political economics.

My rants other places about financial engineering and transnational finance capitalism seemed quaint and somewhat weird even to my fellow political junkies on LidlessEye and elsewhere. Then came the subprime meltdown and suddenly my threads were a trifle more interesting.

We have tens of millions of people worked up about hypothetical human caused global warming. Yet only a few people notice that the financial structure that undergrid our 21st century world have been mutating faster than atmospheric carbon levels and with far less thought or study. As the subprime crisis showed, the supposed masters of the universe on Wall Street and elsewhere had thought absolutely nothing through beyond how to squeeze the biggest annual bonus check out of their company. Everyone saw this one coming same as Thailand and Argentina had been predicted for two years before they happened. But yet again the markets were caught short and left like a deer in the headlights when the actual tidal wave began.

With that in mind read Samuelson's article [http://www.newsweek.com/id/109610]and then look for what is missing. This is a typical pundit's appeal for civic virtue. Civic virtue does not exist in media driven democracies. The same way the financial masters of the universe didn't look beyond today's profit and the year end bonus, politicians and political parties live on two news cycles, one of 24 hours and the other of 7 days [Sunday talk show to Sunday talk show]. It used to be they lived from one election cycle to the next but we are now in the age of the permanent campaign [the 2008 Presidential election cycle started as the polls were closing in 2004] and a mostly disengaged electorate who treat political news as either entertainment or a bother. The voters live in a world of magical thinking where government and institutional money is somehow 'free'. Beyond work and family they have little idea of how the actual world works and no desire to learn. It is all too complex and they have been taught that things that aren't entertaining to them can be ignored or left to specialists.

Given these pressures to spend on every democratic first world state how have we mostly avoided implosion from overspending on bread and circuses? By what I have postulated every democracy should end quickly in some version of Weber's Dolist Haven. What prevents this is countervailing pressures from people who do know how the economy works and spend a lot of effort and money lobbying the politicians on the consequences of their behavior. Politicians that ignore this to pander for votes see their polity implode. NYC in the 70's is a classic example. It came back from the dead under Koch and then [after the inept Dinkins interregnum] under Guliani and Bloomberg. The cities that defy this [Camden, Newark etc.] serve as reminders to the rest of the perils of pushing the envelope too far too fast.

The same thing happens on a national scale. Argentina and Thailand each lost a decade of growth to reckless economic policy. Japan lost more than a decade to a succession of policy errors. So the question is why the US seems able to violate the rules. And this brings us to the 800 pound gorilla in the room. In a normal nation the bond market acts as the angry parental voice of reason restraining the political class pandering to voter stupidity, laziness and childishness. The US hit a spot of this under Carter but in the main we have essentially been allowed to coin money. Why?

Meet the 800 pound gorilla: the world runs on having a permanent trade surplus with the US. The US imports $3 for every $2 it exports. The rest of the world treats these dollars as if they were money and then has to do something with them. This creates a giant pool of funds that invest in US financial instruments. This keeps the US bond market from providing any sort of fiscal discipline to our political class. The last time the world did a serious bailout on the dollar was after the Plaza accords. Dollar went way down and so did the trade deficit. Clinton found himself constrained to actually take the budget seriously. Congress actually exercised a bit of fiscal discipline. World found the pain of living with a US that lived within its means too high and stopped pushing. (http://www.census.gov/foreign-trade/statistics/historical/gands.pdf). Until we tackle the trade and exchange rate side of the puzzle the budget battles are hopeless. The pundits are arguing logic to people who only see that they are being asked to swallow bitter medicine. There will ALWAYS be some in politics and the media to claim the pain can be avoided. So without the countervailing pressures virtue does not happen.

The core problem is a world of excess production chasing finite consumption. The myth constructed to avoid this is that first world currency equals real money. As in most 'the emperor's new clothes' fairy tales it works only as long as everyone keeps to the myth. You now see all the major players looking to get out from under their piles of dollars without giving up their trade surpluses with the US. They each want someone else to take the hit. And into this witches's brew we have allowed the finance industry to create new products with essentially zero regulation and no accounting rules that have any teeth. The entire derivatives house of cards may not fall but the sad fact is we haven't a clue as to how many of these bizzare creations have any real value or indeed whether any of the creators and sellers are actually able to pay their hypothetical obligations. Welcome to the Fun House.