Tuesday, January 31, 2012

Bonnie Baja: The Big Banks Look Like Legacy Airlines

Bonnie Baja: The Big Banks Look Like Legacy Airlines:

"Deleveraging, though necessary, is not a business model."


The big bank stocks rallied hard to start the year off, but it looked and felt like the ultimate sucker's rally and indeed it has already begun to unwind. Other than a small position in JPMorgan and some indirect ownership through Berkshire Hathaway, I don't want anything to do with the big bank stocks. I have no idea how they'll ever get into a growth phase again.


One of the smartest things you'll read all day is this take on why the Big 6 aka the Systemic Six banks look like legacy airlines these days. It comes to us from DoubleLine corporate bond portfolio manager Bonnie Baja...



To my way of thinking, the big banks share a common problem with their old-line counterparts in the airline industry. Like the legacy air carriers, the top banks in this country have yet to find a sustainable profit-making model in a changed world.


Consider the latest round of quarterly results. Earnings quality was mixed at best. Profit "growth" at Bank of America, for example, was primarily fueled by asset sales and reserve releases – one-time events unlikely to be repeated. Even JPMorgan Chase found it necessary to refer to the banking industry’s "malaise" when discussing the decline in pre-provision profits. A bird’s-eye view of the structural issues looming on the horizon makes me feel like a white-knuckle flier. I don’t want to get on the big-bank plane.


Like the legacy carriers, the big banks have been slow to adapt to the new order. Pan Am exemplified what commercial flying used to mean: glamour, comfort and a free hot meal. Then came the 1973 oil crisis. Fleet overcapacity and embedded cost structures conspired with the new reality of oil price-fixing by OPEC to turn Pan Am into a money pit. Corporate consolidations and capacity reductions ensued, but Pan Am never returned to solid profit growth.


Keep reading:


Big Banks Lack Convincing Business Model (American Banker)


Tags: $JPM $XLF $BRK-B

Saturday, January 28, 2012

The Future of Economics

The Future of Economics:

I was approached by Bloomberg to write an 800-word feature on “The Future of Economics” for the World Economic Forum, which starts today in Davos. I haven’t heard back as to whether they actually ran it in their newsletter, but hopefully the Davos participants had the following item in their breakfast reading this morning. Click here for this post in PDF.


For its entire history, macroeconomics has been dominated by mathematical models that ignore the existence of money, debt and banking, and that perceive the economy’s movement through time as transitions from one state of equilibrium to another.


At any point in history, these would be heroic assumptions. Could it really be true that models without either money or instability are provably superior at predicting the economy’s future course than models in which money and banking exist, and in which the model economy can be out of equilibrium? If not, is it the case then that such models are simply too difficult to construct—that the best we can do is pretend that the economy doesn’t have banks or money, and that it’s always in equilibrium, even if we know these assumptions are false?


Before the crisis of 2007, few non-economists even asked those questions, because there seemed to be no need to challenge what economists did. The economy, after all, was going gangbusters. Professional economists, using the very latest mathematical models of the economy, took credit for its sterling performance, and predicted more of the same for the foreseeable future.


Robert Lucas, the father of “Rational Expectations Macroeconomics”, asserted that the “macroeconomics … has succeeded. Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”[1] Ben Bernanke lauded “improved control of inflation” as the cause of “the Great Moderation”, which he described as “this welcome change in the economy.” [2] In June 2007, the OECD, guided by its macroeconomic model, opined that “the current economic situation is in many ways better than what we have experienced in years… Our central forecast remains indeed quite benign”. [3]


Then all hell broke loose, and almost five years later, it shows no signs of abating. Now non-economists are challenging what economists do, and finally realizing what a minority of dissidents within economics have long known: these assumptions are not merely heroic, they are both false and unnecessary. Money, debt and disequilibrium dynamics play crucial roles in the actual behaviour of the economy, and it is relatively easy to develop mathematical models which include money and banks, and in which the economy is always in disequilibrium. I should know: it’s what I do, and it’s why I was one of two mathematical economists who saw this crisis coming, and warned of it publicly before it happened (the other was the late Wynne Godley). [4]


For economics to have a future, it has to abandon the obsession with equilibrium modelling, and realistically incorporate money, banking and finance into macroeconomics. Both things are, as I’ve said, not hard to do.


The starting point for modelling any process in a true science is a position of disequilibrium—Newton, after all, modelled gravity by considering a falling apple, not one at rest! Economists have to abandon their fetish with “comparative statics” and instead model processes of change. Dynamics has to be the core of economic analysis, not equilibrium.


Money is also easily modelled by borrowing the basic tool of the accountant, double-entry bookkeeping. [5] Money and debt are created by bookkeeping entries, and the same paradigm can be used to derive dynamic models of the flow of money in one direction, propelling the movement of goods and financial assets in the other.


The difficulty in developing a monetary dynamic macroeconomics comes not from the tools themselves, but from the beliefs that have to be abandoned to employ them sensibly—from other assumptions that Neoclassical economists have made to “simplify” analysis that instead have made it almost impossible to understand the real world. There are enough of these to literally fill a book—to whit, my Debunking Economics [6]—but I’ll single out just three:



  • “Rational” expectations—which really means assuming that everyone can accurately predict the future (and therefore avoid any calamities like the one we are in right now);

  • Representative agents—which really means assuming that there’s only one person in the economy, who produces and consumes just one commodity; and

  • Perceiving macroeconomics as applied microeconomics


This last false belief, and not a quest for greater realism, was the driving force behind the development of macroeconomics since WWII. It was a fool’s errand, since as physicists realized decades ago, “More Is Different”—to quote the title of a famous paper from Physics Nobel Laureate Philip Anderson. [7] Biology cannot be treated as merely applied chemistry, even though the elementary building blocks of living entities are chemicals, because properties emerge from the interactions of these chemicals that can’t be explained from the chemicals alone.


We call one of these emergent properties “Life”. We know a great deal about chemistry, but no chemist has as yet created life. The attempt to reduce macroeconomics to applied microeconomics was as futile a quest.


—————————————————–


[1] Robert E. Lucas, Jr, “Macroeconomic Priorities”, his 2003 Presidential Address to the American Economic Association, January 10, 2003. http://oldweb.econ.tu.ac.th/archan/chaiyuth/New%20growth%20theory%20Review%20in%20Thai/macro%20perspectives_lucas.pdf.


[2] Bernanke, B. S. (2004). Panel discussion: What Have We Learned Since October 1979? Conference on Reflections on Monetary Policy 25 Years after October 1979, St. Louis, Missouri, Federal Reserve Bank of St. Louis. http://www.federalreserve.gov/boarddocs/speeches/2004/20041008/default.htm.


[3] Cotis, J.-P. (2007). Editorial: Achieving Further Rebalancing. OECD Economic Outlook. OECD. Paris, OECD. 2007/1: 7-10. http://www.scribd.com/doc/43756565/Oecd-Economic-Outlook-2007


[4] Fortunately Godley (http://en.wikipedia.org/wiki/Wynne_Godley), has many young followers carrying on his work. For the list of economists who warned of the crisis, see Bezemer, D. J. (2009). “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models. Groningen, The Netherlands, Faculty of Economics University of Groningen. http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf.


[5] For an example of modelling a simple 19th century paper money system, see http://www.economics-ejournal.org/economics/journalarticles/2010-31.


[6] Steve Keen (2011), Debunking Economics: the naked emperor dethroned?, Pluto Press, London. http://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926/ref=sr_1_1?s=books&ie=UTF8&qid=1326839803&sr=1-1


[7] Anderson, P. W. (1972). “More Is Different.” Science 177(4047): 393-396. http://www.andersonlocalization.com/pdf/more_is_different.pdf.


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Thursday, January 19, 2012

Michael Krieger Summarizes "The Building Tension"

Michael Krieger Summarizes "The Building Tension":

From Michael Krieger of KAM LP


As long as the systems of control, crafted carefully over centuries by the entrenched elites, were able to sustain themselves within the illusions that they had embedded within the language, the mechanisms of control were possible. Stated another way for clarity; as long as the entrenched elite had control of the illusion, the illusion of control works for them. However, the opposite is also true, and this is where we find ourselves now; that is to say, at a point in time where the entrenched elite are using the control systems so badly that they are stepping outside of the inherent limitations imposed by the use of language as their primary control mechanism. Again, stated another way for clarity....when the 'prime proponents of democracy planet-wide (e.g. usa senators)' vote to 'legalize their war on their constituent populace' they are stepping outside of the inherent common consensus understanding of 'USA democracy' at such a level as to disrupt the illusion that allows them to control. Make any sense at all? The 'herd' is smelling the 'slaughter house', both metaphorically and actually. The stench of blood work travels on the air.


- Clif High



Building Tension


Everything seems extremely slow and boring right now. After so much happened in bursts during various periods last year, we are currently in a gestation period. We are in a period of building tension. In retrospect, it seems that this period began in September/October of last year, thus it has now been building energy for almost five months. This period of building tension happened after the last major release of energy in this Fourth Turning and that was in August/September, with the debt ceiling debt debacle, markets crashing, gold soaring and the emergence on the scene for the first time of a “progressive/urban rebellion” against bankster puppet Barack Obama from within his own set of perceived supporters. Namely, the OWS movement.


Yes, everything seems extremely slow and boring right now. This is an illusion. As I said at the time, the emergence of OWS was a huge deal. Obama and his minions immediately attempted to co-opt the movement and create class warfare and that failed miserably. Once that failed, King Bloomberg and other feudal mayors from all across the country went out and cleared them out in a coordinated fashion. Let me ask you a question? If this movement had publicly supported Obama and his dishonest agenda do you really think they would have been cleared out so aggressively? I for one do not. TPTB initially saw the movement as a way to divide and conquer the nation along the traditional geographic and “cultural” lines. Once this failed, and they recognized that it actually had much in common with the angst of the tea party movement (demands for an end to crony capitalism, no bail outs or socialism for the super rich connected elites while at the same time free market capitalism and austerity for the poor) they shut it down faster than you can say 99%.


There is a reason I put “cultural” in quotations in the above paragraph. The reason is that the most powerful players in this nation that seek to control the sheep class (pretty much everyone that remains asleep, both rich and poor) through the old tried and true method of divide and conquer. While Obama talked about bringing together red states and blue states during his speech at the Democratic national convention in 2004, as is standard operating procedure for this pathological liar he actually views everything from a divide and conquer standpoint. So the story we are told is that there are “red” states and “blue” states and that we aren’t supposed to like each other and that on most of the important issues the various populations are diametrically opposed to each other. They make it seem this way by never actually really debating the issues that really matter to our freedoms and economic prosperity. They instead pick out divisive and highly emotional “social” issues, that while I understand are important to many, believe me are being used very deliberately to keep you heated and engaged in furious debate over these less consequential matters while they avoid talking about the stuff that really matters like the Federal Reserve and the counterfeit monetary system they run to bail out the richest and most connected, as well as the dissolution of your civil rights and the rule of law. So indeed this “cultural” divide is patently false but it has held sway for so long because humans are inherently tribal creatures. The good news is that Americans are now for the first time in perhaps a generation figuring out that we are indeed ONE culture and that culture is being systematically and intentionally dismantled right before our very eyes. That culture revolves around the Constitution of the United States of America and its all important Bill of Rights, without which this country would never have become what it was. TPTB are aware of the fact that we are rediscovering the common thread that binds us and they are flipping out. OWS was the final straw.


So OWS came on the scene at roughly the same time the markets were crashing and gold was soaring. These guys had seen enough. While markets have been manipulated forever, what I have noticed over the last several years is that it gets exponentially worse at certain moments. Something causes a freak out moment and they redouble their efforts to keep the populace asleep based on heavier doses of propaganda and market manipulations. That is how we turned from massive tension release into this five month period of tension build we are now in. It is winter and although OWS has been evicted, rebellion is certainly not dead, it is simply regrouping and to figure out the next best way to attack the corrupt house of cards. Similarly, investors that are cognizant of what the Central Banks of the world are doing to destroy currency did not simply decide to buy IBM and JPM after realizing the futures markets have been killed following than ransacking of MF. No, they too are regrouping and figuring out other ways to own physical assets as far away from the grubby hands of the casino operators as possible.


Tension Release


The reason I don’t write about markets so much anymore is because I don’t believe there are markets any longer. Sure there are flashing prices on the screens for various assets and those can be addicting to look at on a daily basis, but I think these “markets” are now merely a mechanism for government propaganda and a method to ultimately fleece more money from the uniformed masses that play in it by the casino operators and their puppets in government. It’s basically a hologram. I have alluded to this in recent interviews, but I myself feel extremely uncomfortable being involved at this point in a way I have never felt before. For now, I am still willing to play the game with some of my own capital but I fear I may regret this decision and that the smart thing would be to pull out completely and go entirely into hard assets as well as real estate abroad. This game is not safe.

By definition, the longer the period of tension building the more explosive the release will be when it ultimately happens. This period has already been going on for almost five months with only minor releases so I think we are already staring down the barrel of something horrific. Should they actually succeed and delaying the release until after the election I expect the release scenario to be downright cataclysmic. Should they succeed to delay it that far I hope I am wise enough to pull the remainder of my assets out of this casino beforehand and get entirely physical.


Never Another Recession


The final thought I want to leave you with is perhaps the most important one. While watching the criminals that run the nation manipulate, scheme and systematically dismantle our inherent rights as human beings is bewildering and frustrating, I believe their actions are representative of nothing more than rats scurrying around. The much more important thing is that humanity is waking up and beginning to rise to the occasion. These moves by them are last ditch attempts to preserve their system of control and their positions in society. Unfortunately for them, we are in the midst of a mega cycle of structural change and everything they are fighting to save will end regardless of what they do.


Here’s a personal story. I was having drinks with three other people recently here in Boulder. Every single person at the table thought the official 9/11 story was a total bunch of bull (building 7 anyone?). I didn't even bring it up. It was remarkable. That never would have happened three years ago. So my point is, every day that passes results in more people waking up to who the criminals are. This has now backed them into a corner where they feel like they need to always avoid another downturn at all costs. Historically, they always have used the downturns to manipulate public opinion and consolidate control further but we have turned their playbook around on them. We are now waiting for the downturn to pounce on them because we know who they are and what they are up to. They are totally cornered.


To conclude, I recently taped another interview with Max Kesier on RT and it can be seen here. I come in halfway, but the whole show is really hilarious and worth a watch. Please take a look.


http://www.youtube.com/watch?v=vVECwKRmhx8&feature=player_embedded


Oh and here is a little cartoon to lighten up your day!



Peace and wisdom,
Mike

It's 2007.2, and Our Next "Lehman Moment' Is Coming Fast - Money Morning

It's 2007.2, and Our Next "Lehman Moment' Is Coming Fast - Money Morning

GMO: Something's Fishy in China

GMO: Something's Fishy in China

Not Fade Away | Robert Kagan | New Republic | 11 January 2012

Not Fade Away | Robert Kagan | New Republic | 11 January 2012:



"Is the United States in decline, as so many seem to believe these days? Or are Americans in danger of committing pre-emptive superpower suicide out of a misplaced fear of their own declining power?" The second, says Kagan




More about this article


Monday, January 16, 2012

Everything Americans Think Is Complete Crap -- Why Occupy Wall Street May Be Our Last Best Hope

Everything Americans Think Is Complete Crap -- Why Occupy Wall Street May Be Our Last Best Hope:

by Evert Cilliers aka Adam Ash


OccupyDCcold075_1325709540I grew up in apartheid South Africa, and America today is beginning to smell worse.


Why? Because even though South Africa stunk headier than an elephant's poo after a rainy day, its black majority knew what they wanted and knew the country would be theirs one day. In America, it's by no means certain that the country will ever belong to its majority (or that its majority even knows what it wants).


We're not a country anymore, we're a racket run by the likes of a corrupt and immoral Wall Street. We have miserably failed at the single most basic organizing principle of any civilized society: how do you prevent the elite from stealing everything?


We haven't. They've done it. They've stolen everything. Our elite have stolen our money, our government, our legal system and our power from we, the people.


They've got it all, and we've got crumbs.


The difference between the 1% and the 99% is not simply economic. Not simply, for example, that we pay 35% taxes and big corporations either pay nothing -- GE -- or less than 2% -- Goldman Sachs. The difference is moral and legal: folks at the top can torture and cheat and steal and lie and endanger the livelihoods of everyone else around them, and get away with it.


Our American elite is now as shitty as the Gaddafis and the Mubaraks and the Mugabes, and just about as crazy in their entitled bubble of runaway greed. Worst of all, they operate beyond the reach of the law. Too big to fail and too big to jail.



Steal a couple of grand and go to jail; steal a couple of billion and the government will give you tax breaks and bail-outs on top of it, or at worst fine you a few million without you having to admit any guilt.


If the best and the brightest out of our Ivy Leagues who go to work on Wall Street went straight to prison instead, America would be vastly improved. 20% of Harvard grads are recruited by Wall Street; it would be better for America if those 20% of Harvard grads went to jail, along with their professors. Our best universities breed our entitled criminal elite -- who holds their entitled tenured professors accountable? (And what happened to the humanist tradition that a university is supposed to foster?)


1. OCCUPY WALL ST EXISTS BECAUSE OBAMA FAILED


But now the graduates who haven't gone to work on Wall Street -- those who can't find jobs and are laden with over a trillion dollars in student debt (more than US credit card debt) -- well, they upped and went to Wall Street to camp out there instead, and now they're occupying public spaces all over the country because of their deep disgust with us. Furthermore, they're attempting to build alternative communities to the crappy one they live in -- and building them right under the snotnoses of our noxious elite.


When a Pew poll recently asked the question if the US is still the world's greatest country, 73% of young folks under 30 said, nope, it isn't -- it's just one of several.


What does this portend: the stark fact that our young have lost faith in our supposed greatness? That they just don't believe in America like their parents did?


Before we get to the real meaning of Occupy Wall Street (which few seem to grasp), let's not forget that these are the same fired-up youths who rallied behind candidate Obama as a harbinger of new hope for America. They worked to make him president, and now they're camping out everywhere in protest.


But then, of course, Obama didn't deliver hope. In fact, he delivered America further into the arms of Wall Street and the 1% who bought our government and bought him. Plus, he did a politically brain-dead thing: our idiot president tried to play bipartisan kumbaya with the GOP instead of, as the leader of the Democratic Party, doing his duty by his party and burying the GOP, which he could have done quite easily because they were down far enough to be kicked to death. He not only let the country down, but let his party down, by coddling the GOP instead of destroying them when he got into office (a question, dear reader: would President Hillary have coddled the GOP instead of demolishing them?).


It's easy to see what Obama is now: the president as poodle for the 1%. In fact, he's the #1 poodle for them. He's no different from Ronald Reagan, the two Bushes or Bill Clinton -- all #1 poodles for the 1%. The worst of all was Bill Clinton, under whom financial derivatives were completely deregulated and the firewall of the Glass-Steagall Act between commercial and investment banks (between lending money productively and gambling it unproductively) was trashed. Bill Clinton laid the foundation for the Great Recession. Only the fact that Bush went and killed innocent Iraqi women and children by the hundred thousands makes him the worst president ever, next to Bill Clinton, the second worst president ever.


Yet Clinton is a beloved figure in our politics.


He is probably the foremost example of the fact that everything Americans think is complete crap. No one has ever held Clinton accountable for the fact that two laws he signed (the Gramm–Leach–Bliley Act aka the Financial Services Modernization Act of 1999 and the Commodities Future Modernization Act of 2000), pushed by that corrupt little weasel Robert Rubin, and aided and abetted by economic war criminals Larry Summers, Alan Greenspan and Phil Gramm, sunk our economy ten years later. Americans have long stopped thinking for themselves.


2. SHIFTING TAXES FROM BIG BUSINESS TO LITTLE YOU AND ME


For example, we think our country is in such deep doodoo because of our debt. Because the government spends too much. Fiddlesticks. Complete crap. We have too much debt because we're not paying enough taxes to keep ourselves going. And the middle class, or shall we say, the working class, is personally in so much debt because for the last 30 years they never got paid enough by their business employers to live a decent American Dream, so they borrowed to get by.


Forget about all the scary statistics about horrible income inequality (I'll run a few of them soon, though). Here are the stats about taxes that every American should know:


At the end of WW2, for every buck in taxes collected on individuals, Washington collected $1.50 on business profits. Today, for every buck collected on individuals, Washington gets 25 cents from business profits.


Remember that one. Sear it into your brain. Staple it on your cerebellum. Since Reagan, the tax burden has been neatly shifted from business to individual people, from GE (who never seems to pay ANY taxes in any given year) to you and me.


Then add this: the marginal tax rate on the richest individuals went from 91% after WW2 to 35% today, and is actually, for hedge fund billionaires, 15%, and for the second richest American, Warren Buffett, 17% (as he never tires from pointing out, "my secretary pays a higher tax rate than me"). This is the rate paid by the 400 most affluent earners in 2007, who earned an average of more than $340 million each that year. The top 25 hedge fund managers earn a billion dollars a year each. Making these 25 people pay taxes at the level that middle-class people paid taxes under Bill Clinton would cut $5 billion a year off the deficit. And that's just making a mere 25 people pay taxes like the rest of us.


You pay a higher tax rate than Warren Buffett, GE or Goldman Sachs (who typically pay between 1% and 2% taxes a year). Plus thousands of rich Americans park their money in Switzerland to avoid paying taxes.


That's why we're in the crapper. Both rich corporations and rich people aren't paying their fair share of taxes, as they used to, when we had an actual middle class. (We should really stop using the term middle class -- the American middle class doesn't exist anymore: it's just the 1% and the 99%. You and me, we're not the middle class, we're the working class.)


3. THE MORAL REASON WHY BUSINESSES SHOULD PAY MORE TAX


There's a moral reason why business should pay more taxes than individuals. Businesses wouldn't exist without the infrastructure built by the government, or the workers trained by the government, or the legal, contractual, and police protection provided by the government. Business owes government big-time. Business makes money because the government laid out everything on a silver platter for them to make money. Heck, the government gave them the Internet. Without the government-provided Internet, Google and Amazon and Apple and Facebook wouldn't exist. That's why business should be paying the government back big money for making their businesses possible in the first place. For them to complain about government regulations -- which simply mean that businesses should comply with laws just like people have to -- is the most brattish behavior since Prince Harry wore a Nazi uniform to a party and thought his British subjects shouldn't be upset. People are executed in America for murder, yet businesses think they need to be free to pollute the environment so it makes people sick and kills them, or need to be free to speculate with securitized mortgages to the point that millions of people lose their homes and their jobs, or need to be free to spread our soil with pesticides that make bee colonies collapse and threaten our food supply. Business people in America are lucky: in China business executives get routinely executed for corruption or for doing things that harm or kill people.


But hey, here in America, the 1% are free to steal and cheat and torture and kill.


And what were we doing about it until Occupy Wall St happened? Nothing. Everything we Americans thought was complete crap. There was the Tea Party, yes. They got started because older, richer Republicans who paid for their homes got furious that the government was talking about helping homeowners who got screwed by Wall Street fraudsters on their mortgages. These Tea Party folks weren't angry with Wall Street, they were angry with Wall Street's victims -- the poor mofos who got inter alia gypped into home loans that suddenly ballooned after an initial low-interest sucker period, and are now being foreclosed upon to the tune of a guestimate of eight million homes, with a quarter to more than half of ALL homes worth less than their mortgages. Poor bastards: they thought owning your own home was their American Dream fulfilled, instead of being just another sucker's bet.


Another prize example of the complete crap that Americans habitually think.


4. IT'S THE MORALITY OF THE ECONOMY, STUPID


Now Occupy Wall St happened and suddenly the national conversation has changed. We're not totally bamboozled by GOP deficit fear-mongering anymore (just another flim-flam cover for the GOP to try and take down Social Security and Medicare, and give bigger tax breaks to the rich on the backs of the working class -- a game that the stupid Democrats fall for as they join one special Committee after another and offer up as bargaining chips to the Greedy Old Party our supposed "entitlements" -- like Social Security, which is not an "entitlement," but a goddam benefit earned over a lifetime of paying for it).


Occupy Wall St has switched the national conversation right around. There are new items on the agenda, which will have a massive influence on the 2012 election.


Income equality is on the table (even some Republicans are incorporating it into their otherwise crappy talking points).


Corporate greed, corruption and welfare are on the table. Heck, Newt Gingrich and Rick Perry have been going all Occupy Wall St on Romney's ass, calling him a vulture capitalist and a cold-hearted corporate raider. Listen to Perry talk the OWS talk about Romney's erstwhile Bain Capital outfit, where he made his millions as CEO: “Allowing these companies to come in and loot the, loot people’s jobs, loot their pensions, loot their ability to take care of their families and I will suggest they’re just vultures. They’re vultures that are sitting out there on the tree limb waiting for the company to get sick and then they swoop in, they eat the carcass. They leave with that and they leave the skeleton.” Perry wouldn't be talking like that if Occupy Wall St hadn't made such talk respectable, even for Republicans.


Yes, dear reader, at last Martin Luther King's final crusade, the campaign for economic justice, is back on the table.


Jeepers, even our pesky unemployment problem is back on the table, after having been overshadowed by deficit-cutting discussions. Come to think of it, Occupy Wall St was started by unemployed youth, just like the Arab Spring was started by unemployed youth, and the Spanish indignados ARE unemployed youth (40% of Spain's youth are unemployed).


Perhaps the agenda of Occupy Wall St can best be summed up as follows:


It's the morality of the economy, stupid.


5. THE IMMORALITY OF INEQUALITY


Funny word that, morality. It's on the table because our elite are suddenly seen as illegitimate, illegal, and immoral.


A big change, because we've always been pretty OK with our elite and their success. After all, getting rich is the most American thing that any American can do: heck, it's your constitutional duty. So yes, let people get rich, that's totally American. But lately we've become aware of one stinking truth: our current elite is not rich because they work hard or have great ideas.


They're rich because they cheat. Wall Street is now simply one big fat scam from top to bottom (extractive capitalism, not productive). And the rich stay rich because they bought our government.


An Oct 25 2011 CBS/NYT survey asked a blunt question: “Do you feel that the distribution of money and wealth in this country is fair, or do you feel that the money and wealth in this country should be more evenly divided among more people?” 26% of the respondents thought that the current pattern is fair, versus 66% who thought the distribution should be more even.


In fact, it's now a proven fact that because of our income inequality, our very prized social mobility -- anybody can become middle class if they work hard -- is now worse than it is in most countries in class-bound Europe. That's why inequality is wrong: it destroys opportunity.


And someone in Occupy Wall St -- some say it's anthropologist/anarchist David Graeber, some say it's the Amped Status website guy David DeGraw -- brilliantly summed it all up in one little slogan: "We are the 99%."


We're the screwed, and the 1% have screwed us, and will continue to screw us if we don't take matters into our own hands and do something about it.


6. HOW UNEQUAL ARE WE?


OK, let's run a few numbers to see how screwed we are.


Between 1947 and 1979, productivity in the US rose by 119%, while the income of the bottom fifth of the population rose by 122%. But between 1979 and 2009, productivity rose by 80% , while the income of the bottom fifth fell by 4%. In roughly the same period, the income of the top 1% rose by 270%.


The 1% at the top now own roughly half of the nation’s investment capital -- more wealth than the entire bottom half of society taken together. It's positively feudal. In 2008, there were 3.1 million households in the US worth more than $1m (discounting the worth of their primary residence), less than 1% of the population. Yet millionaires make up about 47% of the House of Representatives and 56% of senators (and has been recently revealed, insider trading laws don't apply to Congress, so folks like Nancy Pelosi and John Kerry have been able to turn a quick $100,000 buck here-there-and-everywhere from business information privy only to them as committee chair people; corruption is rife in Congress itself).


A new study by Stanford University reveals that many major American cities are being re-segregated, this time by wealth rather than by race. The richest citizens are moving out and away from the 99%.


Economic injustice is also changing young people's views of capitalism. The latest Pew poll found that among Americans between 18 and 29, 46% view capitalism favorably and 47% view capitalism negatively, while 49% view socialism positively and 43% view socialism negatively.


Yep, our young people are all for the European-style socialism that the GOP rages against.


Well, then, what can we do about economic injustice? What can you yourself do, you poor learned-helplessness vote-once-every-four-years powerless peon of a dwindling wage feudal slave?


7. WHAT YOU CAN DO IF YOU CAN'T GO SLEEP IN AN OCCUPIED PARK


Well, for a start, you can take your money out of the Big Banks -- Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley -- and move it to a credit union. You can do it today, if you didn't do it already on Bank Transfer Day of November 5 last year.


Then you can join the group New Bottom Line in agitating with your municipality and state government to move their money (which is your tax money) out of the Big Banks to local banks (you can also ask for a state bank to be established in your state, like North Dakota has, which is one reason why North Dakota is running a surplus while all the other states are running deficits).


You can agitate in the company you work for, if you're lucky enough to have a job, for them to move their account from a Big Bank to a local bank or credit union.


If we could've disinvested from apartheid South Africa way back then, we can defund Wall Street now.


It's something we the people have it in our hands to do. We don't have to beg our government to do it for us. It's within your power. Main Street, take your money out of Wall Street. Defund Wall Street. Make Wall Street a Small Street.


8. FORCE POLITICAL CANDIDATES TO SIGN A PLEDGE TO THE 99%


Then we can demand that the representatives we vote for sign a pledge to do a few specific things for us when they're in Congress. Call it the progressive version of the no-more-taxes pledge that Grover Norquist gets Republican Congress members to sign. This pledge says we won't vote for them unless they sign this "Pledge to the 99%":


i. Tax financial transactions -- the so-called Tobin tax, now often called the Robin Hood tax -- to curb casino capitalism, or at least make some money for us off Wall Street's gambling. They're going to do the Robin Hood tax in Europe -- Sarkozy says he'll do it even if others don't -- so why not in the US, too?


ii. Cancel the Supreme Court's decision that made corporations people, free to anonymously buy elections. Make all elections publicly financed, so our legislators can spend their time serving the country -- the 99% -- instead of sucking up to rich people -- the 1% -- for campaign funds.


iii. Bind all financial institutions to a leverage of no more than 1:12, the way it used to be. Borrowing money to bet on all manner of stupid shit is no way to run a financial system, and certainly has nothing to do with directing capital to productive ends. For the Fed to hand out free gambling money to bankrupt zombie banks is an economic war crime (Bloomberg News recently revealed that the Fed gave the big banks $7.7 trillion in cheap money in 2008; in other words, Wall Street just printed more gambling money for themselves when they ran out of it -- wouldn't it be nice if you and I could do the same?).


iv. Strengthen unions two ways: card check for union membership, and a law that makes union representation on company boards mandatory, like they do in Germany.


v. Remove all loopholes that enable GE to pay no taxes and Goldman Sachs to pay less than 2% taxes. Tax all our US companies on their earnings abroad, too, like we do with individuals. Prosecute our rich who stash their money in Swiss banks to avoid taxes. Let the Bush tax expire so we get back to Clinton-era taxes. Bring back a progressive tax rate of 40% to 60% on personal earnings over a million bucks a year. Paul Krugman has estimated that high-income taxation could shave $1 trillion off our deficit in the next 10 years. Tax asset income the same as labor income. Why should people who make money from money pay less taxes than people who make money from actually working? Put a one-time tax levy of 14.25% on individuals and trusts worth more than $10m. According to Donald Trump (yes, him) that would raise $5.7 trillion and wipe out our debt in one fine fell swoop.


You have the power to restrict your vote to those candidates who pledge themselves to do this for you. So use it. Insist on "The Pledge to the 99%."


Come on, folks: let's defund Wall Street, tax financial transactions, take money out of politics, strengthen unions, and make the rich and big corporations pay their fair share of taxes.


You can do it, dear reader. Yes, you can. If you don't, you'll stay screwed. You will be the 99% forever. Is that what you want?


9. OCCUPY WALL ST -- WTF ARE THEY?


Now let's look to Occupy Wall Street for a shining example to us all.


Many Americans are still asking themselves: Occupy Wall St, WTF!?


Is OWS a new paradigm? the first best hope of the progressive left since FDR? an alternative to politics? a sign of America's collapse -- or rebirth? Obama's nemesis? a better MoveOn.org? the primal scream of loan-burdened jobless students? the return of bong-passing bonking-in-public hippies? sub-human animals who openly urinate and defecate on police vehicles?


What are their demands? What are they about?


Let's take a quick stab. For OWS, it's all about fairness. The morality of the economy, stupid. Is the economy there to serve everyone, or only 1% of our people? America's current institutions, they figure, don't represent us 99% anymore. They've all been bought by the 1%. The 99% are permanently shafted.


So what can be done about our rank economic injustice, our plutocracy or oligarchy or our corporacracy or corpocracy (if you care to give the racket we call America a more pungently explanatory label)?


Protest, that's what. Take it to the streets. And in the case of OWS, to the parks. OWS folks don't march, they occupy. They make themselves a permanently annoying 24/7 presence. They camp out in public. The park is their spark.


Let's nutshell the whole Occupy phenom in ten easy bullet points.


i. They occupy public spaces as close to the sites of economic injustice as they can, what Hakim Bey has called "Temporary Autonomous Zones," a la Tahrir Square in Cairo.


ii. In these occupied spaces, they build an alternative, self-sustaining community, a tiny utopia, where decisions are taken by consensus in General Assembly meetings -- true participatory democracy -- that take place every day. With microphones and megaphones outlawed, the crowd nearest any speaker repeats what that speaker says so everyone can hear the speaker. All you have to do is yell "mic check!" and the people's megaphone is activated. This very technique creates a sense of consensus and community spirit. It also teaches speakers to hone their thoughts into simple, easy slogans. Various committees deal with logistics: sanitation, food, outreach, media, arts and culture, legal, medical. They even have a Comfort Committee, which looks after the comfort of the campers. Occupyga4


iii. They don't have officials and leaders. They are leaderless and horizontal. Everyone is free to get "on stack" at the GA meetings every day to make proposals. They train new facilitators every day to facilitate (the right word is "lead," but they don't like to use that word) the next General Assembly. No single person is a spokesperson. Their issues are as various as their members.


iv. They are a learning institution with libraries and teach-ins and trainers, and are visited by celebrity intellectuals who drop by to lend their heft.


v. They are non-violent. When the police visit violence upon them, they get publicity, sympathy and growth.


vi. They've made alliances with like-minded groups, like labor.


vii. They collect money donated by the public. Occupy Wall Street alone already has a war chest in excess of $500,000, even if they have nowhere to sleep anymore.


viii. They operate totally above and beyond the system, beyond politics, beyond the two-party system, beyond all institutions. They themselves are not institutionalized (yet).


ix. They say they will hold their first formal national meeting on July 4, 2012 in Philadelphia, where they will meet for the first time as two official delegates -- a man and a woman -- will be sent from all 435 congressional districts in America.


x. They have been under police attacks in Oakland and other places. In New York the police cleared the original occupied zone at Zuccotti Park (or Liberty Square). Perhaps this is where the greatest challenge of Occupy Wall St lies -- to incorporate the police into the 99%. Remember, revolutions ONLY succeed when the police and the military refuse orders from the 1% to attack the revolutionaries. That's when the authority of the 1% cracks and crumbles. The Occupy movement HAS to make the police their allies, and make them understand that the loyalty of the police lies with the 99%, not the 1%. It's very instructive that Wall Street is actually trying to BUY the NYPD -- J.P. Morgan Chase recently donated $4.6m to the New York City Police Foundation.


10. THE THREE THINGS THAT CHANGED HOW AMERICA SEES WALL ST


What makes the hatred for Wall Street so visceral that one little sleep-in on Liberty Square sparked camp-outs everywhere else?


Well, three things have changed how we Americans look at Wall Street. The first was the 2008 financial bail-out that left the crooks of Wall Street richer than ever and left the rest of us -- their suckers -- poorer than ever. Remember, Wall Street's shenanigans made more than a 100 million folks all over the world lose their jobs.


The second was an article by Matt Taibbi in The Rolling Stone of April 5, 2010, entitled The Great American Bubble Machine, which charted how Goldman Sachs has been behind every big economy-wrecking financial bubble since the Great Depression. It contained this mesmerizing opening paragraph:


"The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates."


In one fell swoop of great journalism, Goldman Sachs went from the most admired institution on Wall Street to the most hated, as everyone suddenly felt free to pile on them after Taibbi's deft expose.


The third thing is Occupy Wall St. It's keeping the hatred alive.


This child of Situationism, of 1968, of the Battle of Seattle, of the Arab Spring, of the Spanish Indignados, is a sign that America is not totally asleep. Maybe we're conscious after all. Maybe we even have a conscience.


Occupy Wall St, born of the anarchists from Direct Action, Adbusters, the hackers group Anonymous, the AmpedStatus website, the Battle of Seattle crowd, the US Uncut folks, has done what MoveOn, The Nation, Adam Green's Progressive Change Campaign Committee, Van Jones American Dream Movement, Big Labor, and George Soros' billions have not achieved: a progressive movement that has captured the popular imagination.


It is totally bizarre that a motley crew of anarchists -- dinkum ANARCHISTS, ferchrissake! -- have done something that other more establishment-minded folks have not been able to do in decades of outrage at our plutocracy.


And these anarchists have done it out of outrageous idealism. Sheer outrage coupled with sheer idealistic entrepreneurship. Like they're Gandhi crossed with Steve Jobs. And they're not politicians. They're not even politically minded. What they're doing is profoundly anti-politics, yet they've changed our politics. In a way, they've changed our politics by giving up on politics.


11. HOW DID OCCUPY WALL STREET GET STARTED?


The conventional narrative is that Occupy Wall St started with Adbusters Magazine, the best-looking magazine in the world, which also happens to be a radical culture-jamming glossy that questions consumerism using the smart techniques of consumerist propaganda -- advertising -- itself. On July 13, 2011, the magazine sent out this call to its readers:


"Alright you 90,000 redeemers, rebels and radicals out there,


"A worldwide shift in revolutionary tactics is underway right now that bodes well for the future. The spirit of this fresh tactic, a fusion of Tahrir with the acampadas of Spain, is captured in this quote: 'The antiglobalization movement was the first step on the road. Back then our model was to attack the system like a pack of wolves. There was an alpha male, a wolf who led the pack, and those who followed behind. Now the model has evolved. Today we are one big swarm of people.' -- Raimundo Viejo, Pompeu Fabra University, Barcelona, Spain


"The beauty of this new formula, and what makes this novel tactic exciting, is its pragmatic simplicity: we talk to each other in various physical gatherings and virtual people's assemblies … we zero in on what our one demand will be, a demand that awakens the imagination and, if achieved, would propel us toward the radical democracy of the future … and then we go out and seize a square of singular symbolic significance and put our asses on the line to make it happen.


"The time has come to deploy this emerging stratagem against the greatest corrupter of our democracy: Wall Street, the financial Gomorrah of America.


"On September 17, we want to see 20,000 people flood into lower Manhattan, set up tents, kitchens, peaceful barricades and occupy Wall Street for a few months. Once there, we shall incessantly repeat one simple demand in a plurality of voices.


"Tahrir succeeded in large part because the people of Egypt made a straightforward ultimatum – that Mubarak must go – over and over again until they won. Following this model, what is our equally uncomplicated demand?


"The most exciting candidate that we've heard so far is one that gets at the core of why the American political establishment is currently unworthy of being called a democracy: we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington. It's time for DEMOCRACY NOT CORPORATOCRACY, we're doomed without it.


"This demand seems to capture the current national mood because cleaning up corruption in Washington is something all Americans, right and left, yearn for and can stand behind. If we hang in there, 20,000-strong, week after week against every police and National Guard effort to expel us from Wall Street, it would be impossible for Obama to ignore us. Our government would be forced to choose publicly between the will of the people and the lucre of the corporations.


"This could be the beginning of a whole new social dynamic in America, a step beyond the Tea Party movement, where, instead of being caught helpless by the current power structure, we the people start getting what we want whether it be the dismantling of half the 1,000 military bases America has around the world to the reinstatement of the Glass-Steagall Act or a three strikes and you're out law for corporate criminals. Beginning from one simple demand – a presidential commission to separate money from politics – we start setting the agenda for a new America.


"Post a comment and help each other zero in on what our one demand will be. And then let's screw up our courage, pack our tents and head to Wall Street with a vengeance September 17.


"for the wild,


"Culture Jammers HQ"


This invitation to occupy did not fall on deaf ears. The real, overlooked story is that there was a little-mentioned group in Manhattan that had already had an occupation of their own, called Bloombergville.


They were a labor coalition, New Yorkers Against Budget Cuts, which had arisen in response to Mayor Michael Bloomberg’s austerity proposals to balance the city’s budget. Bloomberg wanted to fire city workers by the thousands, cut funding for city libraries, cut scholarship funding for students at city universities, cluster more schoolchildren per class into smaller rooms, and shut down a a minimum of 20 firehouses. “The real crisis is mass layoffs,” the group said on their Facebook page. “Hunger. Homelessness. Millions of homes in some stage of foreclosure. The bank-sponsored demolition of foreclosed homes. Looting of pensions. Dismantling of public schools. Furloughs. Union-busting.”


A few dozen of them slept for two weeks in June on a sidewalk near City Hall, in what they called Bloombergville. There was a Bloombergville Library and they held teach-ins every evening at Bloombergville University. Every day they marched on City Hall. On June 28 they tried to blockade a building where the City Council was approving the mayor’s cuts; 13 protesters were arrested.


These pre-Occupy Wall Streeters had been partly inspired by the uprising in Wisconsin of the prior February, when more than 100,000 people marched and occupied against Governor Scott Walker, who wanted to end collective bargaining for public-sector unions. The Wisconsin protesters had been inspired by the demonstrations in Egypt’s Tahrir Square. They set up a tent city in Madison, modeled after the Hoovervilles of the 1930s, and they called it Walkerville. A direct inspiration for Bloombergville, down to the very name.


On August 2, after the call from Adbusters, New Yorkers Against Budget Cuts gathered at the market bull on Bowling Green, to have a “general assembly” to plan an occupation. Around 80 people were there. They included a professor of anthropology named David Graeber, on leave from the University of London, and a veteran Greek organizer named Georgia Sagri, who knew each other from the 2010 Athens protests.


Graeber and Sagri, who identified themselves as anarchists, did not like the way the meeting was going. This was no general assembly: it was a plain old rally, with folks listening obediently to leaders holding forth in hectoring speeches. In Graeber and Sagri's anarchist philosophy, a GA should be very different: totally participatory: “horizontal.” Everyone and anyone should be able to speak. All viewpoints should be heard. Everybody should be a leader. Decisions should be made not by leaders, nor by voting, but by consensus reached after exhaustive discussion.


This is what anthropologist Graeber had seen in Madagascar, where many villages had simply absented themselves from any central government and ran their villages in this way.


At the rally, Graeber's woman friend from Greece, Georgia Sagri, began to yell: "This is a rally! This is not a general assembly!" She was a horizontal objecting to the vertical, hierarchical rally. "Anyone who wants to join in a general assembly," she said, "come over there." So she went to another space behind the bull, where she and Graeber and a few others started a true General Assembly. Soon the original 10 grew to 30. Then everybody joined them.


That's how Occupy Wall Street began: a revolt inside the little revolution itself; a revolt that changed that revolution.


"Why not call ourselves the 99%?” asked David Graeber in one of the brainstorming sessions after this GA. “If 1% of the population has ended up with all the benefits of the last ten years of economic growth, controls the wealth, owns the politicians … why not just say we’re everybody else?”


Following the GA of August 2, the group met around half a dozen times in Tompkins Square Park and elsewhere and planned Occupy Wall St. Self-organized subgroups with names like Process, Communication, Outreach, and Direct Action were started. A listserv was built. A week before the appointed day they staged a rehearsal: a dozen campers settled the sidewalk on Wall Street, but were arrested.


On September 17, 2,000 people descended on Bowling Green and marched to Chase Manhattan Plaza, but found it already barricaded. By consensus they decided on a backup site: a small park of stone slabs and flower beds between Liberty and Cedar streets, just off Broadway, two blocks away from Ground Zero. Nobody had any idea it would last more than a day or two.


But it took off like a rocket in the media sphere, especially when the police brought the occupation loads of publicity by being dumb enough to harass them at a march across Brooklyn Bridge. The cops got just a little too free with their pepper-spraying. Labor unions jumped in, and the ranks swelled.


Now it looks like Occupy Wall St has changed the political discussion in America. Perhaps forever. Let's not forget that FDR's New Deal innovations -- Social Security, the law keeping commercial and investment banks separate, the strenghening of Labor Unions -- all started because these ideas were birthed and slung around long before by the People's Party of the 1890s, aka the Populists, a party of farmers who hated the banks and the railroad magnates. They were the 99% of yesteryore who agitated against the 1% of their time (the very same banksters and crony capitalists of our 1%). Their party fell apart after 1896, but their ideas outlasted their party and became reality after a good long 40 years when FDR struggled to lift America out of the Great Depression. Perhaps Occupy Wall Street's ideas will be implemented 20 years from now, given that things move faster these days.


12. THE IMPOSSIBLE AMBITION OF OCCUPY WALL ST


You can never tell what size fire you might get from lighting the tiniest spark. Anthropologist Margaret Mead is, among many things, famous for having said, "Never doubt that a small group of thoughtful, committed people can change the world. Indeed, it is the only thing that ever has," even though no one can prove that she actually said it.


It would appear that the small group of August 2, 2011 may have done this.


Because one thing we cannot doubt is the overarching ambition of OWS. They want to change the world, which makes it difficult for that world -- for our media -- to actually understand them. They are NOT operating as a conventional members-only dues-paying organization with strict demands, outspoken leaders, and a closed agenda. They're not functioning in the world of instrumental politics. They are operating in the domain of symbolic politics and culture. They are a politics of the imagination more than a politics of praxis. They're a meme generator -- "we are the 99%." They're activists of the mind. Action as symbol. Conversation interrupters. Culture jammers. A sowing of seed more than a full growth.


In terms of praxis, the most important thing they are doing is breeding a new generation of activists from the soil of those folks who are actual born-and-bred activists -- those anarchists who gave us 1968 and the Battle of Seattle.


Their self-anointed task is about more than changing our politics -- it's about changing the content of our minds. They tell us it's time to dream. They ask us all to think and talk and dream and demand a rebirth of democracy that actually represents us, the 99%.


It's what Martin Luther King did, what the feminists did, what the disabled wheelchair-bound have done, what gays are doing now, what the environmental movement and the climate change protesters have been doing. These are movements that have changed our society far more than our politics have. They are people movements, issue movements, not political movements.


They remind us that folks who look to our politics for change, are looking at the wrong instrument. We don't change the world when all we do is vote. For real actual on-the-ground change, we have to get out there. Protest. Rally. March. Occupy. Think different. We are the change, not Washington. Our conversation is the change, not their conversation. Not the media conversation. As our conversation changes, so will the media conversation, and so will Washington's conversation.


In an October 17 article in The New Yorker, Hendrik Hertzberg properly described the OWS sensibility as “a cri de coeur, an exercise in constructive group dynamics, a release from isolation, resignation, and futility.”


13. LIBERTY, EQUALITY AND FRATERNITY VS. PRECARITY


Activist Christine Kelly writes in Logos Journal:


"Stalked by the Four Horseman of mass joblessness, mass incarceration, debt-for-life and environmental blight, an entire generation of young adults now face unprecedented challenges, all of which will continue to affect the 70 million 0-18 years olds unless dramatic reforms are undertaken."


To a young person today, it seems quite obvious that Washington has abandoned the American people. The conversation in Washington has less and less to do with the real lives of Americans. It's simply the rich and privileged talking among themselves.


For the 99% today, life is precarious. You can't look forward to working for the same company all your life and retiring with dignity on a good pension. Those days are gone, stripped from us by the greedy 1% and their globalized high-tech economy of corporations as formidable as nation states.


It looks as if the middle-class is being transformed, not into the proletariat, but into the precariat. The nation state, seen as a welfare provider ever since Bismarck started transforming it into a caretaker of its citizens, has now been bought by the banks, who lend everybody money and turn us and our states into their debt slaves, and have accordingly made us a precariat.


It is the young precariat whom Christine Kelly talks about who are now saying "Enough." They're a generation not only longing for change, but also for community. Rock concerts in the 60s gave that generation a sense of community; now it's Facebook and Occupy communities.


And it's almost as if the cry of the French Revolution, "liberte, egalite, fraternite," is being brought to life again.


In America, liberty has always been big. But equality and fraternity not so much. Yet it has become increasingly clear that you cannot have true liberty without more equality and more solidarity.


It's the loss of fraternite that has rendered Washington powerless to do anything. Ever since Newt Gingrich introduced scorched-earth Carl Schmittian "enemy" invective to our legislative politics, Washington has found it increasingly difficult to govern effectively -- gone are the let's-make-a-deal politics of political opponents Ronald Reagan and Tip O'Neill sitting down and swopping Irish stories over whiskey and cigars. Civic camaraderie? Gone that-away, Tonto.


And ever since the 70s, when big business consciously decided to start dominating our politics by funding think tanks, lobbies and campaigns -- inspired by fear of the Nader Raiders and the subsequent Powell Memo of 1971 that told big business how to fight back -- we've lost any egalite we may have had.


Consequently, there's not so much liberte anymore. But plenty precarite.


The 1% are using government -- our entire edifice of democracy -- to put the 99% in a constant state of fearful precarity.


Obama is letting this happen -- the same candidate whose hope message got the vote of two-thirds of the 18-29 year-olds, of whom a record 51.6% actually voted.


OWS happened because Obama failed that young vote. He let them down. He didn't change a damn thing for them -- in fact, he probably made it worse, or did nothing to stop it from getting worse, despite nice little changes like taking outrageous bank profits out of the student loan equation.


However, those youngsters did get something out of voting Obama into power: a sense of their own collective power. And now this power is back as Occupy Wall St.


Demands? Well, what is there to demand when we all know that money is buying policy anyway? Christine Kelly, one activist voice among many, states her own demands thusly:


"If we take our cue from the threats confronting this generation, a broad outline then emerges for 2012: Create Jobs, Shrink Jails, Forgive Debt and Sustain the Planet."


14. THE FREEDOM OF PRECARITY


Forgive debt is a good place to start, methinks. And one way to get your debts forgiven is to stop paying them.


This is actually the single act of financial rebellion I would urge upon all Americans. If you don't like what Wall Street has done to us, this is the best way of fighting back. They haven't paid their debt to society, so we should refuse to pay our debt to them.


It's not that hard to do. The only price you'll pay is pesky daily phone calls from debt collectors. Big companies walk away from their debts all the time and say, so sue me. You can walk away from your debt, too.


Home owners walk away from their underwater mortgages even when they can afford to pay it. It's called strategic default. The Mortgage Bankers Association itself defaulted and walked away from their $79m mortgage on their own building, so follow their example. Then live in your house for free until you finally have to leave. Then rent a place. The trick is to rent a house or apartment big enough with a room or two extra you can rent out to help you cover your own rent.


What about your credit card debt? Well, cut up your credit cards and default on those debts, too. The bank will chase you for a while and then sell that debt for pennies on the dollar to a debt collector, who'll chase you for a while, too, and then give up. Meanwhile you stay living on the money you make with a debit card instead of a credit card, and stay out of the credit card business forever.


Your bank was a fool to give you a credit card, so punish them for being foolish. Let them suffer, not you.


David Graeber, one of the behind-the-scenes leaders of OWS, wrote a whole book about debt (Debt: The First 5,000 Years) that questions the claim that debt is a moral obligation. He reminds us that ever since debt began, way before money, there has been debt forgiveness, with Debt Jubilees starting in ancient Mesopotamia -- when all debt is forgiven, all lands restored, and life starts anew. We should be having a Debt Jubilee in America right now. But why wait? Start your own personal Debt Jubilee by defaulting on all your debt.


Don't feel ashamed. Look at a morality-laden concept like debt "forgiveness", and change it to a more neutral phrase: debt "cancellation". You're not refusing to "honor" your debt, you're simply "canceling" it. Makes you feel better, doesn't it? It's a matter of accountancy, not morality. Yes, you willingly promised to pay back your debt, but the bank willingly took the risk that you might not. Nothing personal; just business.


Greece, if it had any sense, would go back to their own currency, refuse to "honor" their debt to the German and French banks, and go their own way. That's what Argentina did when they made a 35-cent-on-the-dollar offer to their creditors, and 93% of their creditors took it, even though the customary offer under their circumstances was more in the 50-60% range. And then Argentina got back on their feet a whole mite damn quicker than if they had tried to "honor" their full debt.


It was Germany's futile attempts to pay back their war debts imposed on them by England and France that led to the rise of Hitler. Just recently Iceland refused to "honor" the debt of its banks, and good for them. (Well, they really had no option -- the debt was many times their actual GDP.)


That is the freedom of precarity, gentle reader. Cancel your debt, or go into bankruptcy if you have to, and start fresh. If only one reader cancels their debt and manages to live free from credit for the rest of their lives, this article has been worth writing. Having a moral obligation to "honor" your debt to predator banks and vulture capitalists is the most annoying piece of complete crap that Americans are thinking.


Today is the day to start your rebellion against Wall Street and the fraudulent banksters. If the government refuses to prosecute the fraudsters and send them to jail, you can at least give them the big pain of not paying them what you owe them.


Debtors of the world, unite! You have nothing to lose but your debts.


How about it, dear debt slave? You in? What you say?


The Great American Debt Jubilee Rebellion! Join it today -- and live free.



Sunday, January 15, 2012

ZULAUF: THE KEY TO 2012 & THE COMING BANKING BUST

ZULAUF: THE KEY TO 2012 & THE COMING BANKING BUST:

The 2012 Barrons Roundtable came out this morning and the discussion is always interesting. I have tended to veer towards the comments of Felix Zulauf since he’s the global macro master at the table. That said, here are some of his macro thoughts. I think he’s a bit dramatic, but given that he’s one of the few roundtable members who has been able to connect the dots (for the most part) his comments are always worth considering (see past performance from Roudtable members here):


Zulauf: Europe is going to be key this year for the markets and the economy. China is slowing; the emerging world is slowing, and the U.S. is barely above water, constrained by its structural problems. I have called the euro a misconstruction since its birth. The problem is a difference in competitiveness among European countries, and you can’t solve it by lending money to the less competitive countries. You have to deflate wages and prices in the south, and inflate the north. But given Germany’s history, it will never inflate.


The members of the euro zone agreed in December that each country could have a structural deficit of no more than half a percent of GDP. If a deficit goes above 3% of GDP, the country will be sanctioned. This agreement now has to be ratified in all countries. But when you agree to such a prescription and you are uncompetitive, your currency is overvalued by 30%, you can’t devalue, and your nominal interest rates are too high, that is a recipe for a depression. It is a death sentence. Several countries won’t ratify the contract, and the next day their markets will be repriced accordingly. They will exit the euro, and the turmoil will go to the next level. Greece is bust in either case. If you can devalue your currency by 40% or 50% in that situation, at least you will have the chance to see the sun again and recover.



Zulauf: The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.



Zulauf: Every European country will be in recession in 2012, and probably in 2013.



Source: Barrons

Friday, January 13, 2012

David Rosenberg Shares The "Lament Of A Bear"

David Rosenberg Shares The "Lament Of A Bear":

Yesterday, in a must read post, Gluskin Sheff's David Rosenberg played the devil's advocate and presented a much needed experiment in contrarianism, attempting to unravel what it is that bulls may be seeing in the economy and the market (an analysis which may have to be revised after today's pro forma 400K in initial claims and deplorable retail sales update). While we don't know if anyone was converted into the permabullish fold as a result, it certainly was useful to have a view of what "sliding down the wall of satisfaction" means currently . Today, Rosie is back to his traditional skeptical self with today's publication of the "Laments of a Bear", which is yet another must read inverse view of everything that yesterday was not. Our advise to readers: be aware of both sides of the argument and make up your own mind. Plus at the end of the day the only thing that really matters is what side of the bed Bernanke wakes up on...


From Gluskin Sheff's Breakfast with Dave


Lament of a Bear


Yesterday, we highlighted the bull case for equities, primarily based on the view that the stock market is cheap by historical standards and that the high bar for expectations is far lower than it was this time last year.


Today, we provide a counter view, even as we tip our hat to the bulls, who have been more right than wrong since early October last year, but prior to that were dreadfully wrong from the late-April recovery highs.


As it now stands, the S&P 500 is basically where it was at the close on the first business day of the year and smack-dab in the middle of the 2011 min-max range. It's still a see-saw battle.


To be sure, the near-term backdrop is being constructively underpinned by positive seasonal and technical factors. Tactically, it is probably not a bad thing to have some toes in the risk pool, and our investment team began to add some beta a few weeks back — even in the challenging 2011 environment, having the risk-on trade on for the first few weeks/months was a pretty good alpha- generating thing to do.


But in the secular bear market we are in, and as the evidence from the 2011 experience (even much of 2010 before the onset of QE2) illustrated, rallies are to be rented, not owned. For the most part, we remain quite cautious and skeptical even as we join in this traditional early-year rally.


That said, valuation is at all times a case of beauty being in the eye of the beholder. Yes, classic trailing and forward P/E ratios are very low, but on a cyclically smoothed real earnings basis, the market is at best fairly valued and actually overvalued on a Tobin Q basis (market value versus replacement cost).


And as for sentiment, it is a mixed bag. As I debated Jim Paulsen at the CFA forecasting dinner in Charlotte this week, I realized how much emphasis the uber-bulls place on sentiment and confidence, citing how depressed the surveys are — "if only we got a little confidence boost...".


To be sure, the economics community is less effusive than they were heading into 2011, but is a 2.1% consensus real GDP growth forecast really that downbeat? Or, say, $107, or 10%, growth for corporate earnings out of the analyst community? The Investors Intelligence survey, as we said earlier, is over 50% in terms of bullish sentiment. Consumer confidence is at an eight-month high. The NFIB small business sentiment index is at a 10-month high. The IBD economic optimism index jumped 11% in January, up five months in a row, to stand at its best level since last February.


So by what measure exactly is sentiment truly washed out, as the bulls claim?


To be sure, 2011 was a flat year for the market in a period that saw positive profit growth undercut by a compression in the P/E multiple. In 2012, we may yet again have a flat year — with intermittent volatility — but the with tables turned: multiple expansion offset by an earnings contraction.
Indeed, it can hardly be said that the consensus of forecasts is bearish when it points to a record $107 of operating earnings for this year. But what is key is these EPS estimates are coming down and until that process stops, the overall backdrop for equities will be rather challenging. Low valuations among the traditional P/E metrics may provide a cushion to the downside, but the downward path in analyst earnings revision ratios will limit the upside.


As we said, rent the rallies. This is no time for dogma on either side of the debate.


As for Q4, here is the reality. The bottom-up consensus view is now +7.1% YoY, which is way off the +15% forecast when the quarter began. This is the slowest trend since the third quarter of 2009, just as the economy was escaping from the grips of the most severe recession in seven decades. And if you haven't noticed, in terms of corporate guidance, the ratio of negative pre-announcements to positive ones is now at 3.5x, the highest this has been since the Great Recession was celebrating its first birthday in Q4 2008 (a typical ratio is more like 2.3x). Against this background, the consensus has sliced the Q1 earnings growth forecast to +5.4% on a YoY basis from 10.2% three months ago.


The Bloomberg consensus is for sequential contraction in U.S. corporate earnings for Q4 of 2011 and Q1 of 2012. So there may not be a recession in GDP — GDI (Gross Domestic Income) may be something else however — but it may be the case as far as corporate earnings is concerned.


And in the end, it is profits that investors pay for, not GDP, which is the domain of the economics community. The hurdles for corporate earnings for 2012 are numerous and building:



  • Recession in Europe — affects 20% of revenues of U.S. corporations

  • Slowing in Asia — China's import growth was sliced in half to 11.8% YoY in December and its inbound traffic is somebody else's export receipts

  • Margin squeeze from stubbornly high oil prices

  • Stronger U.S. dollar impact on foreign-sourced profits

  • Reduced tax benefits

  • Higher employment expenses and lower productivity growth.

  • Crimped pricing power (as per the latest NFIB survey)

  • Profit margins coming off six-decade highs ... no more room for expansion

  • No yield curve for the banking sector to ride off of, limited ability to squeeze more earnings from loan loss reserves


The key to success will remain much as it was last year. Focus on companies and sectors with earnings visibility, non-cyclical characteristics and a demonstrated ability to provide dividend yields with payout growth. The pundits at Standard and Poor's are forecasting a record of at least $252 billion of dividend payouts this year, surpassing last year's $241 billion.


That means avoiding luxury-goods retailers like Tiffany's, which just posted disappointing sales results and cut their profit guidance. Its Fifth Avenue store posted negative YoY sales and others are bound to follow as financial sector layoffs mount and bonuses are pared back.


It is difficult to believe that with a 2% yield in the broad market that the dividend theme is somehow a crowded trade or an old story now just because it worked so well last year. It worked well for the right reasons. In a market meat grinder, at least you have the dividend tailwind at your back (but avoid the traps — 101 companies also cut or suspended their dividends in 2011). Telecom has a 6% yield, Utilities at 4.2% (and 15% price appreciation last year) and Health Care at 3%.


Bristol-Myers, Home Depot and Con Ed are all examples of companies in a challenging "market" that generated double-digit returns last year, with the help of the dividend stream (not to mention AT&T lifting its quarterly payout by a penny to 44 cents a share or Ford resuming its dividend policy for the first time since 2006). Even the gold miners have a "yield" in today's environment where the boomers are craving more income in the total return of their portfolios. What about McDonald's? A fast food restaurant that is largely non-cyclical, has a global brand, earnings stability and a nice 2.8% dividend yield to boot (having just boosted its quarterly payout 15% to 70 cents). Look — even bears are carnivorous.


On a final note in this chapter, we find it extremely fascinating that as everyone gets excited over the start to the year in equities, the action in Treasuries is serving up a big fat non-confirmation on any view that the risk-on trade is being built on any lasting cyclical momentum. Sorry — but that is the message from the Treasury market where the yield on the 10-year note has been dragged back below 1.9% after yesterday's very robust auction. The other message is that secure income is increasingly becoming a scarce commodity.


And it is against that backdrop that we are seeing a growing trend towards diversified ways to play the "boomer-driven income theme". Three examples showed up in yesterday's WSJ alone (and all in Section C):



  • U.K. Debt Continues to Shine (the country is a surrogate for troubled Europe

    • fiscal austerity is a reality and the debt/GDP ratio is lower than in [MU)



  • A Market Builds for Single-Family Rentals (our global macro fund PM has been paying attention to this for a while now)

  • Storage REITS Enjoy a Boom (talk about a creative way to generate yield in a nearly recession-proof industry)

Thursday, January 05, 2012

David Rosenberg On The Coming Gunfight At The OK Corral Between Mr Market And Mr Data

David Rosenberg On The Coming Gunfight At The OK Corral Between Mr Market And Mr Data:

While the market continues to simply fret over when and where to start buying up risk in advance of inevitable printing by the US and European central banks, those of a slightly more contemplative constitution continue to wonder just what it is that has allowed the US to detach from the rest of the world for as long as it has - because decoupling, contrary to all hopes to the contrary, does not exist. And yet the lag has now endured for many more months than most thought possible. And making things even more complicated, the market which doesn't follow either the US nor European economy has decoupled from everything, breaking any traditional linkages when analyzing data, not to mention cause and effect. How does reconcile this ungodly mess? To help with the answer we turn to David Rosenberg who always seems to have the question on such topics. His answer - declining gas prices (kiss that goodbye with WTI at $103), and collapsing savings. What happens next: "in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment." Indeed, one little noted tidbit in the monthly NFP data is that those who "find" jobs offset far better paying jobs in other sectors - as a simple example the carnage on Wall Street this year will be the worst since 2008. So quantity over quality, but when dealing with the government who cares. Finally, will the market continue to decouple from the HEADLINE driven economy, which in turn will decouple from everyone else? Not unless it can dodge many more bullets: "As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data." Read on.


From Gluskin-Sheff


Less Than Meets The Eye


Some members of our investment team asked me yesterday what numbers out of the U.S. have come out soft of late. Well, here's a short list we came up with:



  • Industrial production

  • Core orders

  • Core shipments

  • Home prices (every measure)

  • Real disposable income

  • Real PCE for November


Keep in mind that Q3 GDP was marked down to sub-2% and I think Q4 will be around 3%. Last year's Q4 also surprised to the high side but was no predictor for the next two-three quarters. To be sure, the economy has done better than I had thought five-six months ago, but much of what "bounce" we got was a belated comeback in auto production, the sharp decline in gas prices (which I wasn't expecting) and the pullback in the savings rate which I can't see being sustained. We are creating more jobs, but in low-paying industries and losing them in high-paying government and financial sector jobs.


Hence no growth in real personal income. I see that as a problem for it means that either exports accelerate or the savings rate declines to underpin the economy going forward. U.S. home prices have sagged more than 20% annual rate in the past four months and represents a substantial wealth loss for homeowners and calls into question the degree to which home inventories have receded in terms of creating a true and durable demand-supply balance.


It is useful to compare and contrast the GDP and GDI (Gross Domestic Income) data. Earlier in 2011, the latter suggested that the surprising weakness in the former was overdone. Now the tables have turned — the "pickup" in spending is not being validated by the income data, which have all but stagnated in Q2 and Q3.


Based on the real personal income data, there is no growth in Q4 thus far and it looks as though profits, at least based on S&P 500 data fell for the first time since the recession ended 21/2 years ago. That would mean a third quarter of flattish or even negative GDI data and believe me, if this is what the more closely-watched GDP was flagging right now, the markets would be under some pressure — assuming denial was held at bay.


Okay, so to recap: We have real personal disposable income growth running at a mere +0.5% annual rate in Q4. And according to S&P 500 EPS data, corporate profits are contracting at a 3.8% annual rate for Q4. This is the first sequential decline since the fourth quarter of 2008. So at best we have a flat quarter for real GDI on our hands — for the third quarter in a row (after 0.2% at an annual rate in Q2 and Q3). Now that doesn't classify as a recession —just the next rung up that is called stagnation. This in turn explains why bonds got a heck of a lot more expensive in the past year and why it is stocks got a whole bunch cheaper. The U.S. economy, more from an income than spending perspective perhaps, is skating on some very thin ice here.


Let's do some arithmetic to help explain what has happened on the spending side.


First, since mid-2011, gasoline prices have plunged 60-cents, which is in effect an $80 billion tax cut for the household sector. The problem is that this windfall is behind us, sadly enough. Eighty billion dollars at an annual rate is akin to a 4% pay raise for the average worker in real terms. That's hardly trivial for the likes of Bob Cratchit, we can assure you.


Second, since June, the personal savings rate has plunged from 5% to 3.5%. This sort of decline over such a short time span has occurred but five times in the past 12 years. This in turn freed up $150 billion at an annual rate in real terms yet again for spending purposes.


So we have a total of $230 billion of support that temporarily bolster the consumer since the mid part of 2011.


Yet real consumer spending since June has only risen by $105 billion at an annual rate in real terms.


That means that in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment.


Now it may be the case that prices at the pump have bottomed, but why can't the savings rate still go down? Well, if it continued to decline at the rate since June, it would be at zero by summer. That is not impossible, but it's not exactly a base case scenario either. What we do know is that in Q2 and Q3 together, the combination of weak equity markets and eroding housing values dragged down net worth by some $2.5 trillion. Now there are not a whole lot of data samples to pick from historically, but the last two times this happened, the savings rate rose in the ensuing three months.


As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data.


Monday, January 02, 2012

The Market Ticker - Krugman: Time For A Skullf%c*ing

The Market Ticker - Krugman: Time For A Skullf%c*ing:

This fool continues to prove that having a Nobel is actually a sign of stupidity rather than intelligence:

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

Oh, you mean you've found a way to repeal the laws of mathematics? You mean exponential curves really don't run away from each other in a hyperbolic blowoff in each and every case, and that this outcome isn't guaranteed by literal middle-school mathematics?

Well I'll be damned.

Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

So let's see if I can put this into stark relief.

There is this general economic principle called "a balance sheet." It's called that because surprise, surprise, it always balances. For every debit there is a credit, you know.

Now here's what Krugman says:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Oh well, how's that worked out in point of fact?

Let's remember the premise, and let's in fact expand that: So long as your debt grows slower than your improvement in output it's not a problem.

This is a postulate. It is true for a family, it is true for a company, and it is true for a nation. It is always true because so long as you grow debt slower than you grow production your "coverage" improves no matter how you look at it. Improving coverage tends to lead to lower rates over time, absent intentional manipulation and fraud, because lenders see that you're becoming more able over time to pay down your debt. This induces them to charge you less, all things being equal, as it's less likely you will default.

Now why were we able to grow output faster than debt for a while after WWII? That's pretty simple, actually: We literally bombed into dust the production capacity of virtually the entire civilized world, except for our factories and facilities. We also managed to kill a hell of a lot of competitors for jobs. This is not the "broken window" fallacy, which puts forward the (easily demonstrable as false) claim that breaking "things" means more work -- it is the axiomatic fact that destruction of productive capacity elsewhere leads you to have the best competitive position for a while until your former competitors can come back online.

But eventually they do come back online and then the game is over. Attempting to act as if that didn't happen leads to an ugly outcome.

Remember my wee chart? You know, my favorite one? Let's look at how things have been in the economy as a whole over the last 30 years:

Oh darn. Up until the crash there was not one single three month period where GDP (output) grew faster than outstanding debt did in the economy as a whole. In other words Krugman's claim that we can do this today is a outrageously false statement, as he cannot point to one single three month period from 1980 to 2009 where what he claims is "good debt" -- by his own definition -- actually happened in the economy as a whole. His "example" cited, WWII, is one that left America as virtually the only industrial nation on the planet through literal carpetbombing of the entire European continent and the dropping of two nuclear bombs in Japan!

You want to know why that feat post-WWII hasn't happened again since? Because we have replaced capital with lending. Capital is the surplus from what you produce. When you have an excess of capital it is formed into new ventures covered with the fruits of previous labor. This improves debt coverage as output increases with the new industry but debt does not change -- as a consequence output rises but debt does not. That's economically positive.

On the other hand when you borrow more than output increases that's economically negative. Debt coverage deteriorates and eventually you reach a point where people discern that you'll never pay them back in good value. This is why people tend to say that "I went broke slowly, then all at once." They did -- they were accumulating more and more negative debt coverage right up until lenders concluded they would not pay, at which the roof caved in "all at once."

Greece anyone?

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

Immaterial. If you owe debt to yourself you still have to pay, and further the compounding still happens. The only way to escape this is to "print money", which sounds like a panacea. It is not, as I will demonstrate.

Krugman follows with this:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.

Ah, but you see there are only three possible ways to pay that interest, right?

  1. Increase taxes. This sounds like a great idea, but it contracts GDP. Why? Because GDP is mathematically "C" (Consumption) + "I" (Net private Investment, which includes savings) + "G" (Government Spending) + "x - i" (Net exports). When you increase taxes you are covering "G" (interest payments by government) with money that the taxed would either put into "C" or "I". Therefore GDP must fall by one dollar for every dollar of increased taxation to cover the debt service. Remember, Krugman's thesis and the entire premise of his argument is that so long as debt grows slower than does GDP it's all ok. But when you increases taxes GDP will go down, ergo you must also decrease the amount of debt. This means you must decrease "G" as well. The next year you are thus compelled to increase taxes more, and decrease "G" more. Eventually you tax literally everything that the people make and they either riot or refuse to work for nothing, at which point the tax base collapses and the government ceases to exist.

  2. Spend less so you can cover the interest. This decreases "G" directly. GDP decreases and if you pay down no principal then coverage gets worse, since the debt level remains the same but GDP is decreased. Not so good either as this is a downward spiral -- next year you must spend even less to restore the previous coverage, which decreases GDP even more. Eventually you're spending all government revenue on interest at which point the government ceases to exist.

  3. Print money. This looks like a "freebie" way out. It's not. Increasing the denominator simply makes each unit of currency worth less. So you still get a $50,000 a year salary but unfortunately all the things you wish to buy go up in price. Due to economic inefficiency (all transference of things is inefficient to some degree) the common man sees his purchasing power destroyed by this process. That is, in REAL terms "C" decreases. But wait! This means GDP (in real terms) decreases which means that debt must decrease in real terms too according to Krugman! Now we're back to the same spiral downward that inevitably leads the government to cease to exist!

There's no way out of the box by "increasing spending", "increasing taxes" or "printing money"; as the chart above shows Krugman's claims may be correct but his implementation has never worked -- not then, not now, not ever and it won't this time either. Shifting money from one pocket to another does nothing and increasing the debt load means that more and more of the tax revenues go to interest instead of government spending on programs.

This inevitably leads to either collapse or devaluation and in either case the citizens and government ultimately get screwed.

The good news is that the premise of "devaluation" is out the window because banks don't like this idea very much. They're very uninterested in lending you $500,000 to buy a house and getting back that $500,000, plus another $250,000 in interest over some period of time, but having those repaid funds buy a toaster oven when they get them back!

That, I assure you, is not part of their business plan.

The only solution is to stop the compounding and accept the economic damage that we have accumulated by being serially stupid through our listening, as people and as government officials, to people like Krugman.

This means no more deficit spending and a tax structure sufficient to actually pay down the national debt to extinction over time. That, in turn, means accepting both a major contraction in the size of government and, temporarily, GDP so as to clear that debt or defaulting it. Since defaulting it is impermissible under The Constitution without an amendment this leaves us with paying it down, unless you think you can get the States to ratify a change to Amendment XIV.

At the same time we must realign our economy to address the other distortions we have taken on in our attempt to hide the economic damage. Tax, trade, immigration, medical care, education and energy policy are the big ones, all of which I've covered in detail both here and in Leverage.

It would be nice if Krugman, before shooting off his mouth with statements that have a basis in fact (you're fine so long as you increase output more than you increase debt) would actually look to see whether the nation has managed to do this at any time in the last 30 years on an aggregate basis. If he had, he would have recognized, using nothing other than the Fed Z1 and BEA GDP series, that it had not and thus his claimed tonic was a crock.

And so, once again, is Krugman.