Saturday, April 24, 2010

Fraud, high and low

What do religion and financiers have on common? You guessed it.

The financial crisis remains somewhat opaque as books are written, investigations launched, hearings called, and bills paid. How was so much money lost? How can those responsible for the crisis and ransomed by the government keep raking in money, and keep paying themselves bonuses for doing so?

I think it is useful to just call it fraud. The financial industry has become addicted to it. There is no boring way to make tens of billions of dollars in the financial industry- not if one cares about one's "clients". But there are many ways to make that kind of money through fraud (video).

Take, for instance, sub-prime loans. These are the antithesis of boring banking. Standards one would apply when lending one's own money were thrown out the window. Hopeless loans were reaped from ignorant (or, one might say "faith-based") homebuyers, then passed on like hot potatoes through packagers like Goldman Sachs, and on to investors who were kept ignorant of their true temperature by the collusion of agencies who shared in packaging them with crisp, cool triple-A ratings.

Or take the world of derivatives. In a humbler world, a farmer wants some assurance for his corn crop in advance, so enters contracts to sell it at a set price, long before it is harvested. Who takes the other end of that deal? A speculator who has money to invest and judges the weather, the market, and other factors, including the gullibililty and reliability of the farmer. This is certainly a casino of sorts, but if the derivatives are constructed in a uniform way, prices set publicly in a large market, and public interest rules made and enforced by the state, (i.e. the commodity futures markets), this can yet become a reasonably fair transaction.

But if the same derivatives are sold privately, with no public notice of values and terms, let alone an open and competing market or government regulation, the opportunities for fraud are obvious. Why would any suckers let themselves in for such treatment? That remains a serious question, and a legal one as suits begin to be filed. Often it was one bank trying to take other bankers to the cleaners, leading eventually to seizure of the entire system when one bank said "no more", and the music stopped. Or an insurance company like AIG trying to make some easy money defrauding its customers (and now the taxpayers) by printing pieces of paper in the form of insurance policies on esoteric gambles (CDSs) without any money to back them up, based on fraudulent risk "models".

Often the short term payouts to those doing the deals on both ends were generous, as each in essence were playing their own institutions for suckers. In short, many kinds of fraud were at work in the recent meltdown, some based on blind optimism and ignorance, but more based on cynical arbitrage of short-term greed over fulfillment of basic fiduciary, institutional, and ethical duties.

(Incidentally, a somewhat similar arbitrage happens every day in our short-term energy thinking, defrauding future generations of a healthy planet. But that's another story.)

Which brings me to the other major fraudulent institution of our day- religion. Not just your garden variety televangelist huckster or Reverend Dollar. No, the whole kit and kaboodle, from Bible church of Jesus to the Pope in Rome. Each sells over-pumped products to their clients based on false pretenses, all winding up ultimately in the bankruptcy proceedings of the grave.

Right now the focus is on the Catholic church in its frantic coverup and spin over the fraudulent treatment of minors. No need to go into details. But this is not just a case of a few bad apples in the barrel. No, the abusive priests are bad apples, but the culture of the church, indeed the very premise of the barrel itself, is fraudulent from top to bottom.

Orwellianisms flow without end from the mouths of preachers- life everlasting, god incarnated as man, crucifixion as triumph, prayer as efficacious, god as omnigood and omnipotent. As art, their performances are without parallel, conjuring an alternate universe of meaning, justice, and joy. Confined to art, the harm would be minimal. But true to its shamanistic origins, it is a participatory art, playing on the fears and hopes of its subjects, as all cons do, to rope them into the religion meme- to give money, to give time and energy, to spread the meme to others, going door-to-door, if necessary.

(At this point let me put in a good word for one of Herman Melville's greatest works- The Confidence-Man. He portrays in surreal fashion a riverboat going down the Mississippi with a streaming cast of characters, each preying on the other, but with a mysterious protean confidence man at the center who illuminates the hopes and fears of each party in turn, using Kafka-esque indirection and frankness.)

Do religions provide hope to the hopeless? Goldman Sachs also provides hope to its clients, in the form of tangible investments to keep them afloat in retirement, or gain money for other purposes. And sometimes, that hope is even fulfilled, unlike the 100% loss sustained by religious believers, year in and year out.

Do people perform good works under the influence of religion? They do, and that is commendable. Such work makes everyone happier and strengthens communities. Banks likewise make philanthropic gestures for their communities and other good causes. They are also to be commended. Are their motives less pure than those of religion? Both are image-building affairs, translating the goodwill of their members (whether earnest or cynical) into public proselytism, hoping to trade on this good image for more business in the future and stronger buy-in among existing members.

Do religions foster community and happiness all around? Ponzi schemes foster community as well, though these tend to burn out quickly. The Madoff scheme was exceptionally long-lived, nurturing the hopes of a large community of his communicants for over a decade. Religious Ponzi schemes, in comparison, can be perpetual, since they concern an undiscover'd country from whose bourne no traveller returns to expose their fraudulent nature.

More seriously, communities fostered by financial institutions are not inculcated with the belief that those sponsored by other such institutions are fundamentally evil, require proselytization, and are going to the devil if they fail to convert to the true doctrine. The high degree of (false) meaning conjured by religion generates commensurately high commitment, leading naturally to extremism in those it fully captures.

Which is the higher and which the lower form of fraud is a matter of debate. The culturally conjured symbols of Mammon, or the fervent and ever-unfulfilled hopes preyed upon by the officers of religion? The dollar, as token of the hard work of others, studiously waylaid in the canyons of Wall Street, or the phantasm of life everlasting peddled in every church in the land? Now that secularity has largely brought the temporal power of the church to heel after several centuries of hard work, one has to say that Mammon has the greater power, and poses the greater danger. Yet the fraud of religion is usually more thorough.
  • Hitchens on the Pope as criminal racketeer. Who ever suspected?
  • Even that nice Michael Ruse has second thoughts about Catholicism.
  • The FDIC fights back.
  • And even Martin Wolf is looking for radical reform.
  • UBS? Fraud ongoing, thank you very much.
  • Next up for the church: women.

Saturday, April 17, 2010

Apocalypse past

Freezing over and burning up ... it's all there in the geological record.

A recent issue of science had an interesting pair of geology articles, one reviewing knowledge about the dinosaur-killing asteroid of 65.5 million years ago, and the other reviewing whole-earth glaciations of ~700 million years ago, in an era now dubbed the Cryogenian. In short, fire and ice.

I don't have much new to write about either event, but want to bring up interesting points of each and try to increase appreciation of the dynamic earth we live on, whose future livability can not be taken for granted.

The first article, on the 10 km diamter asteroid that hit the Yucatan peninsula, is a review that ties various pieces together to solidify the consensus that the dramatic extinctions of this time were indeed caused by the impact, as were a very distinctive set of geologic layers all over the world. Alternately, extensive vocanism occurring in India around this time over about one million years might have begun the environmental destruction. Yet the authors point out that the asteroid lofted a thousand times the sulfur and other debris into the atmosphere that volcanism did on a yearly basis. There simply is no comparison.

They present a fabulous pair of figures, one mapping sampled sites all over the world, with diagrams of typical geological profiles, and a second with one closely annotated core taken from the western Atlantic.

(Click to blow this up)

The green wave on each profile in B is the iridium signature of this asteroid impact- an element that is extremely rare on Earth and is presumed to have come directly from the asteroid and been deposited all over the world in a diagnostic geologic layer.

The "graded clastic unit" of the first panel in B is debris from the impact, pure and simple, quickly overlain with the dust and ashes that were lofted and gradually settled back down. The latter is all one sees in the farther-away sites (distal) which feature the "ejecta spherules", "Ni-rich spinels", and "shocked minerals", each of which are further impact signatures. The spherules are typically tiny sprays of molten rock from the impact site, the nickle is directly from the asteroid, and the shocked minerals are typically very hard minerals (quartz) from the impact site that were not melted but only scarred and turned into dust by the impact.

(Click to blow this up)

This second figure shows one core from drilling point 207 in the first figure, off Guyana, South America. The first thing to notice is the total break between the bottom and top parts of the sedimentary record. Usually, this would be due to a break in the geologic time line, where the bottom unit had been raised up and eroded for some time before being buried again and overlaid with a different type of sediment. Not here! The break represents continuous stratigraphy during a real change in materials being deposited, from calcium rich before the inpact, through the impact episode, to low-calcium shale above. They do not comment, unfortunately, about the details of this macroscopic difference.

In the middle is 1 cm or so of material from the impact event, mostly rubble and other dust (with spherules, "SP"), topped with a lighter melange blown up in B. This image is a doubtless an X-ray spectrum micrograph false-colored with various elemental compositions (purple- calcite, blue- dolomite, and red, quartz). Each of these minerals comes from the impact site, and panel C shows the cracked nature of the "shocked" quartz "Q". Unfortunately, I don't have the expertise to know what the tan matrix is here.. probably sandstone composed mostly of feldspar- various silicon oxides that make up garden-variety rocks.

This paper would not shock most people, but there have been persistent controversies in the field as various critics tried to come up with alternative scenarios. Catastrophism vs gradualism continues to cause tension in studies of Earth's history! One scare in the literature sampled many organisms through the event horizon and concluded that most of them were declining precipitously well prior to the asteroid impact. Later criticism showed, however, that this conclusion was false, due to statistical errors in sampling that didn't properly account for a sudden boundary of zero fossils combined with spotty deposition up to that point- a boundary that the typical paleontologist (and her software) would interpret as gradual decline of organisms up to that point.

The other paper of interest describes better dating of events around the period of "snowball Earth"- very roughly from 600 to 750 million years ago- just before the rise of eukaryotes / animals when the Earth was apparently covered with ice sheets down to the equator. Whether the oceans were iced-over as well is still controversial, but the idea is that once glaciers cover a certain proportion of the land, increased solar reflection drove the process to completion at least on land, resulting in a totally locked-in condition for millions of years.

That condition was only reversed when volcanic emissions drove enough CO2 into the atmosphere to cause a run-away greenhouse effect. CO2 is usually eaten up on geological time scales by mineral erosion- combining with calcium and other elements into carbonates (limestone, marble, dolomite, etc.). With the earth covered with glaciers, there was no air-exposed erosion, and CO2 built up without hindrance. The cold temperatures would have inhibited carbon fixation by oceanic photosynthesizers as well. This part of the process is quite well-understood.

Less understood is why the glaciations happened in the first place. The going theory is that the tectonic plate organization at the time happened to be propitious, with all the land masses at middle latitudes. This made erosion particularly active, driving CO2 levels down, (there's that CO2 again- always a problem!), and also increasing the reflectivity of the planet once snow began to accumulate on the land. Having so much land near the equator made the climate very unstable, allowing icy conditions to reach a critical tipping point. I'd also note that at this time, land was not clothed with plants and greenery as it is today, leaving it uniformly open to erosion.

Model of paleogeography circa 750 million years ago.

In detail, these authors work to more closely pin down two separate episodes of long-term, global glaciation, using a lot of uranium/lead mineral dating. The Sturtian was around 716 million years ago, and they synthesize evidence from other workers to say that it lasted at least 5 million years. That is quite a long time! Catastrophic for anything living at the time. This was repeated in the very similar Marinoan glaciation about 635 million years ago.

The figure gives their interpretation of the timing of this era, combined with estimates of when various eukaryotic lineages arose on the right side. All of the lineages before 700 million years ago are microscopic. The metazoa/animals only arrive in yellow at the far top right (indeed, the closest linage to us of all these is the fungi). The dashes symbolize missing data- the time between the two great glaciations is practically devoid of fossils, for instance. Only afterwards do eukaryotic macro-organisms begin to occur, in the Ediacarian epoch.

Some of the largest organisms from ~750 million years ago, predating the Cryogenian. Eukaryotic protists of some sort.

The key data they offer is the carbon isotope ratio between carbon 13 and carbon 12 in the middle graph, which flips wildly between high prior to glaciation and super-low during glaciation. This ratio, drawn from studies on carbonate minerals, (absent from the period of the glaciation itself, understandably enough), is a bit difficult to interpret, unfortunately. It seems to track biological productivity, since organisms tend to fix light carbon (12) in their metabolism in preference to carbon 13. High levels in geologic deposits correspond to periods when a great deal of carbon was biologically removed from the atmosphere, leaving higher ratios of 13C to 12C, then incorporated into carbonate minerals. Deeply negative values, as seen here at the boundaries of these glaciations, indicate low biological fixation and perhaps release of stored 12C-rich carbon from organic burial/storage, as is happening again today as the atmospheric 13C ratio is declining steeply.

The asteroid impact is well-known, but the whole-earth ice ages prior to the rise of multicellular life are not as well known, making them (possibly) interesting to readers. Both show the dynamic nature of earth's geologic and climate system. The ice ages especially accentuate the role of CO2 as the controlling greenhouse gas. With the current anthropogenic CO2 emissions and climate change, we are not going anywhere the earth has not been before at some point, but we are going to places where humanity has never been before, and going there at (geologically) breakneck speed.

  • Deeply embarrassing and disturbing explanation of Kyrgystan and the US role there.
  • Maureen Dowd expresses horror at being a Catholic. But will she man up and leave?
  • Another testament to hallucinogens.
  • Five billion tax dollars go to the fossil fuel industry (pdf).
  • Meg Goldman-Sachs-board-member Whitman offers supply-side, trickle-down media policy.
  • Astonishing tale from the Balkans- criminal states, or states with criminals?

Saturday, April 10, 2010

Communism 2.0

An attempt to get at the kernel of communism, and what we might make of it today.

"In the individual expression of my life I would have directly created your expression of your life, and therefore in my individual activity I would have directly confirmed and realised my true nature, my human nature, my communal nature." - Marx, on free production

After studying the biography of Leon Trotsky, one question remained- what on earth actuated such sustained and apparently blind devotion? What was the motivating core of communism that could move so many to such sacrifice, even accepting that there were many opportunists who saw in this new religion (as is ever the case) a means to power?

An off-hand comment by Trotsky, mentioning the ruins of the slave civilization of ancient Greece, struck me as illuminating the whole question of what was going through their minds. Marx was calling his time to a new consciousness of iniquity, which we have yet to fully appreciate, as we still live within the tenets of the capitalism.

Slavery in antiquity was accepted as the natural course of affairs. If one's gods failed to keep the city, if one's army turned and fled, if one's debts rose over one's head, or if fate was otherwise unkind, slavery was one of the natural (and remorselessly Darwinian) consequences. Slavery was not individually an unalterable condition, as occasional slaves bought their way back out of slavery, or rose to high office and respect. But no one thought it was an unnecessary or optional institution. Even the Christians who took in slaves as fellow worshippers had no special animus towards the institution- because they didn't see it as an institution, but as part of the normal course of affairs, now and forever.

This tendency to take for granted the system one lives in is natural enough, and comes to mind now, after free-market-ism, Republican jingo-ism, and capitalist / managerial greed-ism has come under a cloud. Now that the various communisms of the twentieth century have definitively all imploded or petered out, perhaps we are freer to look around without fear at the warts of capitalism and consider whether there is a better way to live than this one we take as natural.

Communism in its original incarnation was a direct comment on the new slavery of Marx's time- the Dickensian horrors of early/middle capitalism, much like what China is experiencing right now, ironically enough. Marx decried the dehumanization, the regimentation, and the rank oppression of his day, and thought that the new concentration of labor engineered by capitalism was propitious for political and social action against that system.

Such action, whether taking revolutionary color, or the modest shape of labor unions, struck fear into the hearts of capital, prompting counter-revolutionary propaganda that continues to this day, celebrating the US as the home of freedom, contented capitalism, God, and apple pie. It led to substantial progress in working conditions and in wages, especially from the New Deal through mid-century; progress that is eroding continually.

That much is obvious. So where are we today? Is capitalism the natural and default condition, or is there there something better that we can imagine?

At this point, I was going to present a model of an equal-wage economy, where everyone was paid the same, eliminating much of the alienation and competitiveness, leading to greater workplace and cultural cohesion. Unfortunately, there are serious defects with such a model, especially in combining it with free buyer markets, capital mobility, and other freedoms, which is in some part what the Soviet Union found as well (though in a radically different context). Such a blanket form of egalitarianism, while an interesting thought experiment, has to be approached in a more gradual fashion, much as we have in the US through tax-based redistribution, and as the quasi-socialist economies of Scandanavia have come close to achieving.

The point, of course, is that salary pricing in the labor market is both grossly inefficient, (witness prices paid to spectacularly incompetent managers as a matter of course), fundamentally dehumanizing / devaluing, and also largely unnecessary, since positive human motivation arises mostly from other factors such as status, personal relations, and intellectual interest, not money. Places like Japan manage to have prosperous economies and civic cultures with far less monetary inequality. Indeed, in my ideal world, the people with the worst jobs (maids, garbage men, farmers) would be paid the most, and those with the most satisfying jobs (CEOs, academics) would be paid the least, while the labor market would be far more transparent and active than it is now, based on interest and working conditions, not pay.

In this way, wage slavery would be ameliorated and human values propagated, while preserving the many other freedoms essential to civic and economic prosperity. Such a broad program would be more interesting and effective than the labor movement, since labor routinely descends into simple greed of its own, whether it is the featherbedding of longshoremen who hold our ports hostage, or the staggering pension debt (estimated at a half-trillion dollars unfunded for California alone) of public employees unions extorted by their political clout. While they did "bring us the weekend", those days of general civic benefit are long gone.

So I see the true legacy of communism as living on in the gradual democracy-to-socialism spectrum of Western political systems, which have substantially corrected many of the deficiencies of early capitalism, (though not in the West Virginian coal mines, apparently), but still have a long way to go to reach a fully humane social system- one which allows people to express their talents and productive motivations in a truly free way.

  • Not to mention that prosperity and freedom promote atheism.
  • Regulatory postmodernism and Schrödinger banks. (My understanding is that the decline of Rome was far more gradual than portrayed here, indeed almost imperceptible to its subjects. Still, an interesting post.)
  • Relink on Krugman and the climate- absolutely imperative reading (and doing). With all the economic analysis, the even more important and deeper reason for resolving climate change is moral- to leave future humans (and other biosphereans) the kind of healthy planet that was left to us. 
  • Humans have removed 90% of large fish from the oceans. That is not decimation, it is extermination.
  • And the current sea level rise predictions.
  • Funny discussion of our energy future.
  • Feynman on the ultimate answers.
  • Republicans show their colors.
  • Still a long road in Afghanistan.
  • Bill Mitchell quote of the week:
"One could also argue that the introduction of a tax in the first place is oppressive. It all depends on how you define oppression. It is oppressive to have red lights at intersections and fine people who disobey them. But the benefits of safety and relative certainty on the roads easily offsets this invasion of our liberties. It is all about judgements we make about the “efficiency” of living together."
"I have seen no credible research that suggests that private rates of return in nations that have larger public sectors are lower than otherwise. But I have seen a lot of credible research that shows that reduced inequality in income distributions is a positive fillip to economic growth rather than the other way round. Nations that impoverish vast masses of their population waste the greatest potential they have – the capacity to work and achieve."
  • And another outstanding Mitchell blog takes the long view on financialization and intergenerational policy.
"The crisis has it origins back in the 1970s when the OPEC oil price shocks led to a change in the dominant macroeconomic paradigm from Keynesian to Monetarist (which has morphed into other schools of thought just as evil). In this broadly neo-liberal era, the fundamental changes to the distributional system – via the attacks on unions and the redistribution of national income to profits was a fundamental building block of the current crisis. For it presented the capitalist system with a realisation problem.
If you are going to cut workers wages and entitlements and keep real wages subdued while productivity growth was strong then how were the goods and services being produced going to be purchased and consumed? Answer: bring in the financial engineers who loaded the workers up with debt."

Saturday, April 3, 2010

The curious case of Japan

According to the deficit terrorists, Japan should be going down the drain.

After a Republican administration where "deficits don't matter", as Dick Cheney put it, we are back in familiar territory with a Democratic administration hounded by the deficit terrorists for "profligate" spending and a "burgeoning" public debt that is "unsustainable", "out of control", with debt clocks counting down (or up) and warnings of armagaddon. Which is it, and why all the drama?

The drama, as one can imagine, is almost entirely political. But before we get to that, one needs to understand the substance of national debt. In this analysis I am following the Modern monetary theory school of William Mitchell et al., whose blog rewards close study. This perspective was also recently put very well by James K. Galbraith.

In the modern state system, nations issue fiat currency that has no intrinsic value- it isn't based on gold, conch shells, or anything else. Its value derives from the state's power to coerce all citizens to settle their taxes to and payments from the government with this symbolic tender, and the promise that the government will maintain that tender at stable value through its monetary policy actions. It also floats vs the currencies of other countries, adjusting relative value continuously in response to trade balances and related currency trading.

Other systems, where nations have pegged their currency to some external value, are not uncommon (the Euro nations have notional sovereignty individually while not having sovereign currencies, and China has effectively pegged its currency to the dollar). But they have an entirely different set of problems, are not the focus of this theory, and are not relevant to the US monetary system. Gold, thankfully, is no longer used anywhere as a currency base.

So the government creates currency and spends it, transferring it to the private economy, and then demands some of it back as taxes. The government is free to produce as much currency as it likes, but if it goes on a bender, (as in Zimbabwe), then its people find that their currency has become worthless, since an excess of paper notes are chasing a limited number of real goods. Note that the Zimbabwe situation is due both to excess currency production, and also to a death-spiral decline of real goods production.

The next step of a currency-issuing government is to allow banking to take place. Banks take deposits of currency in return for promises of interest payments and safekeeping, and likewise extend loans for (higher) interest in return for promises of repayment. This system has the ability to create money as well, in the form of loans which the bank credits as deposits to the account of the debtor. There is no intrinsic need to have deposit money on hand to cover the loan created, and indeed according to MMT, there isn't really even a fractional necessity for some reserve amount to support lending- a point that Ben Bernanke has recently underlined by suggesting that the US scrap fractional reserve requirements entirely for banks. "The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

Allowing banking is quite dangerous, since this money created by banks (called endogenous, as balanced debt and asset accounts in the private economy) and can implode in crises like we have recently experienced. Banks call in and extinguish loans, refrain from making new loans, and debtors walk away from their remaining balances, which are then written off. This is in addition to the market-based paper wealth lost in such a crisis, also in large amounts. The government tries to control this money by regulation, like centrally controlled interest rates, capital requirements, and sound lending practices. We learned recently what can happen when these controls go by the board.

Part of the mechanism by which the government controls interest rates and inflation are Treasury bills, notes, and bonds, created to exchange money out of the private system in return for more ornately printed pieces of paper which function as longer-term money, with maturities set from one month to thirty years.

If the government offers a bond at a selected interest rate, and finds buyers, this sets the national interest rate at that maturity level, since private bankers, with their higher risk and need for a spread, would never offer loans for lower interest, nor deposits for much higher interest. They get their liquid money from this bond system and related instruments, after all. The government can (print up) and buy and sell massive amounts of such bonds in its market operations in order to achieve the interest rate structure it desires.

The key question is- why is money available to buy these bonds? Isn't everyone busy buying and selling real goods, and also squeezing their last farthing to pay taxes? No- some people restrict their consumption in order to save for the future. Much of this saving constitutes the private debt/asset balances of investment and bank operations, and as such keeps churning around the private economy. But if the government offers a perfectly safe way to save and pays a modest level of interest as well, why not take advantage of it?

This saving is foregone consumption for the private sector as a whole, and the government gathers up this net saving as its inflow of bonds, amounting to the national debt, denominated in its own currency, which means that it can pay any interest required by again printing money as needed. All this foregone consumption doesn't contribute to inflation, which is a function of consumption, so neither does the bond and debt position of the government.

What we have here, then, is a grand cycle of money creation and storage, where money issued by the government is collected back from the private sector in taxes and bonds, then spent again (or burned, or stored on an electronic account) by the government, as it deems best to keep the value of the currency stable. If government spends too much without collecting commensurate amounts of money back in taxes or bonds, (or seeing it disappear into the hands of foreigners by way of the balances of trade), inflation results. Conversely, if it collects too much, or issues too little, then deflation results, barring the effects of private money creation.

You can see from all this that the absolute level of government debt is immaterial. It is the flows that are important, and these flows tend to be self-correcting as the system evolves, with excess spending and public debt in low points of the business cycle where private savings flee to the safety of government bonds just as the government has greater spending needs for unemployment and other cyclical costs, (or more hopefully, for anticyclical fiscal intervention), and conversely at high times of the business cycle, high appetite for private investment risk (rather than government bonds) and lower government spending.

When well managed, these flows keep the currency value stable even as they counteract problems that private economy creates through the business cycle, and also provide a savings vehicle that institutions and citizens take advantage of (now that, through the wonder of capitalism, they typically have no pensions and may still be thinking about retirement). Low inflation can be as compatible with high debt as with low debt, since the absolute amount of debt has no direct effect on inflation. Nor does it have effects on anything else, other than an obligation for the government to, minimally, keep printing the money required to service the debt and to redeem it or roll it over, as it desires for its macroeconomic policy settings.

At last, we now get to Japan, whose population of champion savers has generated a government debt of 200% of GDP, the second highest in the world (second to Zimbabwe, indeed). That is 2.5 times the level of ours, which stands at 80% of GDP. With all the hue and cry about our public debt, you would think that Japan is a bananna republic, already twirling down the proverbial drain. The ratings agencies think so, having downgraded Japan's soverign debt a few times.

But they don't know anything. (Big surprise!) Japan can keep on printing whatever money is needed to cover the interest as well as further fiscal stimulus, since it has been facing deflation, not inflation, for nearly twenty years. The meaning of this is that Japan, as a currency system, has been underconsuming for many years, preferring to save vast amounts of money in their state-run postal / banking system: the money that the people owe to themselves. Additionally, Japan's large export surpluses mean that, unlike the US, Japan is not devoting any of its public money creation or fiscal spending to the accumulation of foreign Yen balances. So the system stands out as unusual, but also quite innocuous- a stable and prosperous nation which happens to have a super-high amount of debt (i.e. savings) owed to itself in a great big government piggy bank.

What does the future hold? Could everyone in Japan take a year off of work and consume out of savings? That wouldn't work, since there would then be nothing produced and nothing to buy. Inflation would quickly result. But a little of that would't hurt, since deflation has been ongoing for over a decade.

Savings rates are declining in Japan, and its pension funds have become net sellers of government bonds. This means that the government will find it more difficult to sell bonds at its chosen interest rate of near zero. This won't be a problem in the least. Japan does not need to sell bonds to "finance" its public spending (nor does any fiat currency-issuing government). They can just print it. Indeed, perhaps at that point, without mitigating bond sales, their fiscal stimulus will finally have the positive effect of reversing the deflation that has been dogging the economy so long.

The debt will decline as the demographic transition works out, and the real claims this debt represents will be drawn as consumption, returning Japan to a more normal state of economic affairs, perhaps even importing more goods from the US, and devoting more of its saving to business investment after a long period of investment decline. Japan's public debt may well remain relatively high, however- a healthy safety blanket for a security-minded, saving-oriented culture.

Incidentally, why all the political posturing on public debt here in the US? Some fears are honest, but inapplicable. Others are purely opportunistic. Debt denominated in a currency you don't administer is indeed highly dangerous, as Greece found out this year. They are in the same situation as any household- having to balance income with outgo, and make up the difference with temporary borrowing on the private bond markets. No printing Euros for them! Debt to others is risky indeed. But public debt in our own currency is not, even if that currency is lying in Chinese bank vaults (whose spending would cause devaluation of the dollar vs the RMB, exactly what China so staunchly resists).

One might also compare all this for a moment to private debt, like sub-prime mortgages or over-leveraged credit default swaps. Such debts are unstable, since they are not backed by a fiat currency- issuing government, (supposedly, at least). Such a government may make an error in its inflation settings, but has no reason to ever default on its own-currency debt. Private debts are subject to loss of confidence of repayment or outright default, such as in the Lehman situation, when the ability to make payments is interrupted, if only temporarily in a great game of musical credit chairs. Such catastrophic loss of confidence is impossible for public debt in financial terms. Only in political terms, through revolution or other complete breakdown, could such confidence be put in question.

Much confusion arises since the word "debt" is used, and the analogy of government debt to household debt is so very tempting. But they are not the same at all, and shouldn't be confused. Public debt could just as well be called public savings, (much like the chimerical Social Security trust fund), though either way it only represents redistributed claims on future real production, not actual saved-up production or loss.

So Dick Cheney was right. Debt doesn't matter, other than how the Treasury and central bank handle its flows in their pursuit of stable monetary value. Real macro-economists worry about inflation and unemployment, not public debt.

However, much of the confusion and vitriol is not honest at all, but part of a longstanding conservative agenda to hobble government, to prevent policy action by Democrats, to keep the private sector in the driver's seat of (volatile) money creation, and, most perniciously, to prevent the use of fiscal tools to improve the position of labor.

The original mandate of the Federal Reserve was to keep the money stable and to maintain full employment. Conservative ideology has chipped away at the latter bit by bit, until today that part of the Fed's mandate is all but forgotten, in favor of the first. High unemployment (as much as low inflation) is in capital's interest, decreasing labor costs in a hyper-competitive labor market. Proper use of Keynesian policy with fiscal support at ebbs of the business cycle can keep employment high with minimal impact on inflation, however, as it did in the 50's and 60's.

Certainly in this cycle, the amount of fiscal stimulus in the US has been insufficient, and been inefficiently applied. Unemployment remains shockingly high. Debt terrorism is explicitly dedicated to preventing any more stimulus from being created, even as we still face more deflation than inflation pressure, and more importantly, devastating unemployment. From a macroeconomic perspective, this makes no sense, since we have such glaring infrastructure and other needs (green energy) which could be so productively matched with unemployed labor. But no! Nothing further should be done- we must await the spiritual stirrings of our bankers who, doing God's work, may, in the fullness of time, once again deign to lend to worthy capitalist projects.

  • Some more data on Japan, with a conventionally alarmist view of debt.
  • Excellent counterpoint.
  • Some more details on the Fed... accountability might be better than independence.
  • Newsletter of Fed data, with graph showing the direct relation of private saving with government debt (I believe BOCA refers to the leakage due to trade deficits, to be added to private saving).

  • Debt terrorism, cont... not that a smaller union among a few northern European nations wouldn't make more sense than the broad euro zone, but that there is any "possibility of a catastrophic plunge in faith in the dollar" from "which global investors could flee".
  • Legalize it (the poppies) ...
  • Then replace the Afghan government.
  • And then my wife said: "What's an atheist at his funeral? .. All dressed up, and nowhere to go."
  • Manipulation of morality in the brain.
  • Goodbye to coal.
  • Bill Mitchell quote of the week:
"It is now forgotten but the ECB also took advantage of hundreds of billions of US dollars provided by the Federal Reserve via swap lines which helped prevent an entire collapse of the European banking system.
Further, the only sustained fiscal response to the crisis by the EMU has been to pressure member governments to employ pro-cyclical policies to get back within the “rules” even though the rise in the budget deficits was driven significantly by the automatic stabilisers. Pro-cyclical fiscal policy is the exemplar of bad policy practice and defies the concept of sustainable fiscal intervention."