Saturday, August 25, 2012

The watershed of wealth

Savings and the post-capitalist economy.

Consider a thought experiment: the Federal Reserve gives every citizen a million dollars, on condition that they don't spend it. Indeed, it could just as well be a trillion dollars. What would inflation be? What effect would it have on employment? However much wealth we sit on in this way, it would not cause inflation or stimulate the economy, or do much of anything else. It is spending that creates all the other economic effects, not wealth.

This is sort of what the Fed has been doing in the banking system by its provision of extra reserves. They may not have stipulated a no-spending condition, but the banks take care of that on their own by their lack of enthusiasm for lending. And once their animal spirits revive, the Fed will want to reel those reserves right back in.

The exercise also reflects on the larger balance of savings and spending in the economy. Employment depends on the flow of ongoing spending. But spending is dependent on individual decisions that divert income to either savings or consumption. If the amount going into the savings pool increases, spending declines and employment follows, even though nothing in the real economy has changed- people have not become less (or more) productive, and collective wealth has actually increased. So why should the employed suffer for a temporary decline in demand, when the savings suggest that this demand will rematerialize again at some future date?

In a way, we seem to be turning into Japan. Japanese citizens have been champion savers, buying prodigious amounts of their government bonds, while economic demand keeps faltering into deflationary territory. Their demography is just topping out with an aged bulge, who rely on savings to see them through an extraordinarily long life span. They have twice the level of government debt that we have, yet seem to be doing just fine, certainly not suffering from any inflation problems or solvency problems.

The issue is an enduring mismatch between capital needs and savings needs. The latter have now far, far outstripped the former, so returns on savings/invesments are practically zero. We are, in some respects, in a post-capitalist age. An age where there is far more money and wealth sloshing around the system than anyone needs to produce new factories and make other capitalist investments. New economic activities are concentrated in service industries and highly leveraged information technology- not areas where a great deal of capital is needed. The primary need is for savings, (or in the current environment, debt reduction, which is equivalent), since we are collectively (via the baby boom and the decline of exponential human reproduction) heading into new demographic territory where the aged generation isn't the light burden that they were in the past.

A solution (this is classic Keynes, of course) is to accept that the government is well-positioned to make up the difference in economic demand while all these savings are piling up, providing bonds that are not capitalistically productive, but are safe and contribute to the common good through other means like keeping people employed, providing health care, building the internet, educating more nurses, keeping the currency value stable, and the like.

An example that comes to mind is Mitt Romney. What is he doing with his vast savings? Is he creating jobs and trickling down? Is he taking risks? I don't think so (other than what he is spending on his campaign, of course!). There are the dressage horses, and a few homes in far-flung places, but mainly there are a lot of investments- very passive investments in liquid markets of stocks and bonds. Stocks provide liquidity and valuation to the "owners" of corporations, but they don't really create jobs. Very little stock valuation translates into corporate growth. What is Facebook doing with its stock bonanza, or Apple? Virtually nothing. Stock values translate into paper wealth, like real estate prices likewise, without creating spending.

So how much wealth does it take before someone actually starts spending it, creating jobs and trickling down? That is a key question. In my opening thought, a condition of no-spending was instituted. Perhaps that was unrealistic, but the rich are rich because they hang on to their money. Romney doesn't spend all his wealth creating homeless shelters, centers for world peace, institutions of higher learning, or bright new startup companies. In fact, he squeezes every nickle, leaping through hoops of incredible difficulty to deny as much as possible to the government in the form of taxes, and preserving as much as possible for his offspring who did nothing to earn it, so that his wealth is not spent, virtually in perpetuity. At best, it is invested in the passive vehicles mentioned above, whose return is destined to decline as our capital needs diminish.

More broadly, while personal savings rates in the US are not so great, overall wealth accumulation continues apace, after the vertiginous drop at the beginning of the GFC (global financial crisis). Much is thanks to the federal government pumping out enormous quantities of bonds to (mostly corporate and bank) savers and concomitant spending to actual workers and the economy at large, some of which returns again as bond purchases.

We have to reconceptualize the flow of GDP and economic transactions as a small aspect of the whole economic picture, a river within a much larger watershed of savings, debt, and wealth levels, easily flooding or drying up from changes in sentiments- about saving, consumption, real estate values, and much else. If we don't mind hunkering down with our stockpiles of ammo and emergency rations, we could get by, perhaps, but I think we rightfully have higher expectations of this river's consistency, especially when it comes to unemployment, which is individually and socially so devastating.

Of course this leads to questions of how high the flow should be. Organic demand may be fickle and destructive in its cycles, but it is also difficult to manage artificial levels of demand, to know or predict where they should be set. This is a big economic field, balancing inflation with unemployment, and weighing the demand impacts of taxes vs spending, and of spending on public goods versus transfers to needy recipients. But it isn't hard to figure out when we are in a crisis like today that we are not at the optimal level.

And optimizing this river's flow, especially during downturns, requires one of two policies from the government's perspective- either liberating existing wealth from its static, inert condition, or issuing new wealth by way of new government spending (and bonds, if it wishes to offer them). Conservatives should be wary of their knee-jerk calls for reductions in government spending and borrowing, since the alternative is sharper taxation and expropriation. The 99% may be fooled for a while by scare-mongering about deficits, but will ultimately revolt from the clutches of rising economic injustice so baldly mapped out by the Republican party.

This is, then, a trickle-down theory of sorts, but one which involves active management of the watershed for consistency of the ultimate flows, rather than a faith-based coddling of the rich, (under which I include the reduction Romney's own taxes under the Ryan/Romney plan from his current scandalous 13% to an outrageous 0.8%), who rarely display the entrepreneurial spirit they preach so reverently, or the community-minded benevolence which would be another route to a real, broadly effective form of wealth management.

  • The wealth & power view from the National Review- comical, if it weren't so appalling.
  • The corrupt are trying to rewrite the history of their corruption.
  • QE and trickle-down.
  • Pollution from gas drilling- what would Ayn Rand do?
  • Dirty energy hearts Mitt. 
  • Another example of a gene wearing more than one hat.
  • Russian style neo-fascism and Pussy Riot. I particularly liked how the church called for "mercy" only after the show-trial and sentencing. Very classy!
  • The incredible powerlust of Islam and its jihadis continues, now in Mali. Evil in its most concentrated form.
  • Republican convention may have to face up to that global warming hoax after all.
  • Economics quote of the week, from Bill Mitchell:
"Charles Killingsworth was a strong advocate of public employment (PSE) programs to relieve unemployment and provide a better life for everyone. In his speech he said that “a ten billion dollar public service employment program … can increase gross national product at least as much as a ten billion dollar tax cut. That is elementary macro-econmics.”
In fact, it would increase GDP by considerably more because some of the tax cut will be lost to saving and it is highly likely the marginal propensity to consume of those given wages in the program would be higher than the national average."

Saturday, August 18, 2012

Humans are a mess

We are full of significant mutations... maybe the GOP has an answer.

Two recent papers describe the partial sequencing of thousands of human genomes. What did they find? We are a mess, full of genetic variations (i.e. mutations). Far more variations than a typical population of our size. Their conclusion is that the explosive population growth we have experienced over the last ~ 5,000 years has allowed the accumulation of a large excess of deleterious mutations, compared to the more stringent selection that would have happened if our numbers had stayed more constant.

The population history of humanity is that Africans have the most diversity, Africa being the origin and home of our species. Various migrations out of Africa, to Europe, Asia, and Australia, happened in small groups; small sub-sets of the genetic pool available in Africa, thus constituting bottleneck events that reset genetic diversity in those new regions to low levels.

These papers continue a story that has been developing since the first human genome was sequenced in 2000: the hunt for human genetic variation, which accounts for much of the diversity of the human body and mind, in sickness and in health. At first, researchers set up huge projects to find common variants and link them to common diseases. The idea was that perhaps there was a "gene for" heart disease, and "gene for" cancer, and the like, and that a few common variants in those key genes would explain most disease susceptibility. We could make up a few diagnostic kits, predict everyone's future, and voila- molecular medicine would arrive.

Well, needless to say it was a bit more complicated and they were making a false virtue of the limitation of primitive sequencing technology. As mentioned previously, elementary evolutionary theory would have told them that common variants are common because they don't have strongly deleterious effects- they can not be responsible for a significant disease burden, because if so they would be selected out of the population.

Now we are to the point that thousands of genomes can be substantially sequenced without too much trouble, and these papers discuss the rates and nature of the rarer variants that come out of that analysis. Variants that can have much stronger effects on disease. In the limit case, an embryo gets a fatal mutation that prevents it from being born at all. Next up would be a less-than-fatal birth defect that may not prevent life, but does prevent reproduction. These kinds of variants never propagate in the population at all. They arise and die immediately, and are thus vanishingly rare.

So there is a sliding scale of mutations, from harmless ones that propagate by random drift in the population, not being subject to any selection pressure, to deleterious ones that get selected out (by "purifying" selection) at a rate directly related to how bad they are (their effect on "fitness").

The current projects tried to estimate the harmfulness of their observed variants in two ways. One was by comparing synonymous and non-synonymous mutations in protein-coding genes. The universal genetic code has 64 three-letter codes for 20 amino acids, so some of the codes are interchangeable, i.e. synonymous. Thus some mutations in a protein-encoding gene have no effect, and comparing those to the ones that do change the resulting protein gives a measure of the strength of selection in that area of the genome, and on those variants.

The first paper is titled: "An Abundance of Rare Functional Variants in 202 Drug Target Genes Sequenced in 14,002 People". They find a direct relation between the frequency of a variant in the population and its likelihood of being synonymous, which is to say that it would have very low or no effect on the organism.

The frequency of variants in the samples genomes (x-axis; singleton means it happens once in the whole data set, doubleton twice, etc., MAF = mutant allele frequency) relates inversely to their likelihood of encoding a change in a protein (non-synonymous; NS), vs a synonymous change (S) (y-axis).

But.. both groups mention that that the rate of rare and damaging mutations is unexpectedly high in the human populations they sample, traceable to the recent phase of exponential growth with relatively weak purifying selection.
"On average, individuals possess between 318 and 580 predicted functional protein-coding SNVs [single nucleotide variants] depending on how functional variants are defined."
"In particular, the vast majority of protein-coding variation is evolutionarily recent, rare, and enriched for deleterious alleles."
- quotes from the second paper, entitled "Evolution and functional impact of rare coding variation from deep sequencing of human exomes." Here, "deep" means they sequenced a lot of samples, and "exome" means they only sequenced coding part of genes, not promoters, introns, other control regions, or other junk of the larger genome.
The second paper performs a more complicated estimate of which variants might have real effects on the organism, affecting coding areas with known function, conserved domains, etc. They provide their counts in an elegant "fiddle" plot:
Plot of the frequency of mutations in putatively functional positions. European-American genomes (EA) and African-American genomes (AA), under more (dark) or less (light color) conservative models of what constitutes a functional mutation, using definitions that extend beyond simple synonymous/non-synonymous coding to take into account the known function and centrality of the affected protein and site, and other factors.

This in a genome of only ~25,000 genes. So we are perpetually skating on thin ice, accumulating deleterious mutations across the population that maybe don't get discarded so rapidly under the less-than-stringent conditions that we have experienced over the last few thousand years.

What to do? Our heroic desire to save every premature infant and fix every birth defect shouldn't blind us to the virtues of the selective process over the long haul. On the other hand, diversity is the seed bed not only of cultural vibrance, but also of evolutionary success. That is why scientists have adopted the more neutral term "variation" vs the pejorative "mutation". Just because a variant is in the majority doesn't always make it better.

In times past, there were often very severe selective conditions on human populations (however deficient in the view of these studies!). The battle against nature was far more dire. Disease killed most children, and eventually most adults. Injury or accident didn't mean a trip to the friendly orthopedic surgeon, it meant privation and often starvation. On the positive side, social success in group politics tended to lead to reproductive success, most flagrantly shown by the vast harems kept by the kings of yore. Genghis Khan is thought to have spread his Y chromosome to 8% of the men of Asia.

More recently on the political scene, we have switched from royal hereditary leadership, with its seat-of-the-pants theory of genetics and hereditary merit, to a more or less wide-open functional meritocracy. But critically, it is one where converting one's social success into reproductive success is frowned upon, to say the least. Our fixation on the peccadillos of politicians goes very much against (their) nature.

However, the fact is that a great deal of purifying natural selection in humans still takes place, and most of it happens before birth, in failed conceptions, failed embryos, and stillbirths. This is where unfortunate combinations of all those mutations that these researchers have uncovered are discarded, like bad hands dealt in a card game. This is where sexual reproduction shows its power, as a way to re-deal out genetic hands every generation, allowing some to win, and others to fold, discarding deleterious genetic variants where they become fortuitously concentrated.

So the idea that some eugenic program of Spartan inspection and destruction of newborns is going to do much for our genomes or posterity is fundamentally flawed. But the question of mental capabilities- that is a much more delicate and significant one. Intelligence and other characteristics like temperament, emotional warmth, social skill, artistic ability, even religiosity, are heritable to some degree (though hardly enough to make hereditary nobility a reliable proposition!). These characteristics only become apparent later in life, and have through human history been under much stronger positive selection than they seem to be today.

The main force is probably mate selection- who wants to marry a dolt? Reproduction has generally been the reward of good behavior, and other forms of maturity and success. Now such selection is substantially weaker, as we have outlawed polygamy and frown on other linkages of personal and reproductive success, in an effort to become a more equitable and fair society (fair among men, at any rate). Success is less genetically rewarding. Perhaps that is why the monetary rewards of success have come to be fought over with such unthinking abandon- as a faded remnant of what real success would look like.

That is where I would guess the GOP is going with its Ayn Rand, class warfare campaign. The morality of rewarding the rich and throwing the poor and unsuccessful overboard is that fundamentally, money equates with moral goodness and just deserts. It is a Darwinian proposition where success should be rewarded and lack of success punished. Even if that success was fed by a silver spoon or based on a century of attachment to the government teat, as in the case of the Ryan family. Even if the culture of the moment links the most psychopathic behavior and values to financial success. Wealth is what we worship and should worship, as the premier metric of human value.

The idea that the US might fail to reward the rich enough to run the country in every political, economic, and social sense seems deeply disturbing to the Republican party. But there is more to it. There is a racist element in addition to the classist one; a feeling of entitlement, despite all the lip-service to "equal opportunity". A strong dedication to keeping opportunity firmly in its traditional bounds. The refrain of the country "being lost" and needing to be "regained" is clearly of this sort. Romney's recent bizarre attacks on Obama for inappropriate kindness to welfare recipients fall into this category as well- substantively groundless, but strident dog-whistles with racial meaning. In short, the Darwinian proposition extends to reproduction, that America should remain white, pure, Christian (in the white sense, which now tolerates Catholics, even Mormons, with some grumbling!). It is a population genetic proposition, as well as a political one.

While it is obvious that some degree of meritocracy and reward for success is essential to run a society that is collectively successful in its pursuits, the question is whether we need to go back to a nature-red-in-tooth-and-claw sort of world either to run a working society, or to insure the flourishing of human genes into the future. And there is always the question of what constitutes human merit, in the most ultimate sense.

A recent radiolab podcast marveled at how radiation-resistant humans are, focusing on one Japanese man who survived close calls with both nuclear bomb blasts in world war II, yet went on to have more or less normal children. Wider studies of Japanese survivors and others exposed to radiation have reached similar conclusions. As I mentioned above, most selection takes place before we can even see what is going on- in utero. So the radiation dose is just added to the pile of the many mutations we have anyhow, the bad combinations are discarded, and the better combinations go on to live and reproduce.

So I think we will be OK. The exponential population growth of humanity is over in any case, though whether we enter an apocalyptic population crash due to resource and biosphere constraints remains to be seen. We don't need a politics/economics of fake success and unjust rewards to forge a better future. We need to nurture human diversity and cultural richness where many forms of success are valued- are employed, paid, and supported by our collective prosperity. The leading symbol of Mormonism is, after all, the beehive, not the private equity fund.

  • Christian Kansas, becoming "Brownbackistan". But do the Kochs care about abortion? Probably not. They care about crazy.
  • Books about natural selection and cooperation.
  • What has happened to common purpose?
  • Robots on Mars have message for humanity: government works.
  • Romney- pot calling the kettle black department.
  • Paul Ryan's selective concern about federal power.
  • The real record at Bain.
  • Unemployed continue to get the shaft.
  • The worthiness of Obama, and the unworthiness of Republicans, continued..
  • Sarah Vaughan, misting up.
  • Economic quote of the week, from Simon Jenkins via Bill Mitchell:
"British economic policy is like the Olympic Park without the athletes. It is barren of activity and incident. More than £325bn has been “injected into the economy” by the Bank of England, money that has gone nowhere near the economy. It is sitting in a bank vault. My Olympics legacy would be to get it out and inject it properly. With the economy deep in a liquidity trap, it needs an inventive genius like Boyle, who can blow £60m in just three hours of happiness. As Bob Geldof would have said, had he been invited, “just spend the effing money”."
  • Bonus political image of the week:

Saturday, August 11, 2012

Death- beginning or end?

What are we to make of the near death experience? A review of "Evidence of the afterlife" by Dr. Jeffrey Long.

Apparently, it feels wonderful to die. Everyone has by now heard about near death experiences (NDEs), which comprise floating out-of-body experiences, approach to a white light or tunnel, a highlight reel of one's life, communing with others who are dead, and positive feelings all around. This book is built around a large compendium of first-person reports of such NDEs, and, as the title indicates, comes to a definitive conclusion about what they mean for one of the most durable hopes of humanity- the afterlife.

The book is build from a web site the author set up to solicit NDE reports from around the world. He has compiled over 1,000 reports, using a structured survey form, and has personally interviewed over 600 respondents.

The first thing to say is that these observations all seem true. These people are not lying, and accurately report what they experience. The experience is not only curious, and very positive, but also personally powerful, altering their view of life and death, and their personalities. They are often making reports many years after the fact, recalling phenomenally durable and affecting memories. Just that alone is amazing to hear about, and even to the most inveterate skeptic makes the whole process of death a bit less daunting.

One example with many of the typical elements:
I found myself floating up toward the ceiling. I could see everyone around the bed very plainly , even my own body. I thought how odd it was that they were upset about my body. I was fine and I wanted them to know that, but there seemed to be no way to let them know. It was as though there were a veil or a screen between me and the others in the room. 
I became aware of an opening, if I can call it that. It appeared to be elongated and dark, and I began to zoom through it. I was puzzled yet exhilarated. I came out of this tunnel into a real of soft, brilliant love and light. The love was everywhere. It surrounded me and seemed to soak through in my very being. At some point I was shown, or saw, the events of my life. They were in a kind of vast panorama. All of this is really just indescribable. People I knew who had died were there with me in the light- a friend who had died in college, my grandfather, and a great-aunt, among  others. They were happy, beaming. 
I didn't want to go back, but I was told that I had to by a man in light. I was being told that I had not completed what I had to do in life. 
I came back to my body with a sudden lurch.

On the other hand, Long handles these observations in a most unscientific way, hammering away on the "proofs" he has assembled for the interpretation that they are exactly what they seem- trips to that undescovered country, from whose bourn Shakespeare thought no traveller returns. His proofs are nine-fold:

1. In medical terms, the patient is dead or close to death when these experiences take place- no pulse, no EEG, no breathing. Squaring this with the complexity of the NDE experience is rather difficult.

2. Out of body experiences occur, typically a sense of floating high in the room, and observing what is going on, often in precise detail, even of activities going on in nearby rooms.

3. Even people who have been blind from birth can have visual experiences during an NDE.

4. Subjective consciousness is typically heightened during NDE- the person reports feeling exceptionally clear, and is later able to report quite a bit of detail. This while they would otherwise be going unconscious and losing bodily function, blood circulation, and EEG signals.

5. The flashing life review is accurate, even dredging up forgotten episodes.

6. 96% of the beings encountered in this experience have previously died, consistent with the idea that their final abode is being encountered.

7. Children as young as three have all the elements of these experiences that adults do.

8. People around the world have all the elements of these experiences as well.

9. Those who experience NDE frequently undergo deep changes in their attitudes and lives, including increased psychic abilities.

As you can imagine, some of these characteristics are less probative than others, and their value as evidence depends on what counter-model one uses for comparison. For instance, the ability of blind people to have visual experiences during an NDE (even though they do not typically have visual dreams, for instance) may derive from a brain experience that exists purely in consciousness, rather than requiring the sensory brain areas. One is eating the pure frosting, as it were, rather than the whole cake. Blind people have functional and physical maps of the world, so transposing them into pure experiential consciousness might make them seem visual, under unusual circumstances. Similar arguments apply to the moving nature of these experiences, and the sense of understanding everything (which often comes up in NDE narratives) which arise in LSD trips and other extreme hallucinations.

A great failing is that Long does not offer very coherent skeptical perspectives. My model of all this is that hearing may remain intact during these experiences and accounts for the ability to perceive quite accurately what is going on around the patient, during the out-of-body experience. This resembles our ability in dreams to incorporate auditory perception, though to a less accurate degree. Out-of-body experiences are more common than NDEs, happening during nightmares, drug experiences, etc., and do not seem to generally require a non-naturalistic explanation. Looking to Long's web site for NDEs by deaf people, there are a few, and none appear to offer the kinds of precisely observed out-of-body experiences that the others do, which would be consistent with such a hypothesis.

A second part of my model for NDE is that there is a great deal more to the brain than is detected by an EEG. EEG picks up surface brain waves, but the more important areas, at any rate more emotional and consciousness-forming parts, seem to lie deeper. One could imagine that loss of blood flow does not lead to a uniform shut-down of everything, but rather a flooding of some pain-relieving hormones, and concentration of remaining activity in some core areas.

Key areas for emotion (and memory) happen far from the surface of the brain.

Additionally, the executive cortical areas of the brain typically have the function of slowing down or modulating older areas, (the old Freudian super-ego/id system), so one can imagine that a catastrophic loss of blood flow might have just the NDE effects based in core brain areas plus persistent auditory function. Indeed, study of decapitated rats indicates that there really is quite a bit going on in the minute after blood flow stops, even under a naturalist paradigm.

At any rate, the NDE is a serious challenge to a naturalist world view. While one can offer some speculative models of how all this might be explained from brain activities, we are dealing with a lot of unknowns. We don't even know how consciousness arises in the brain, so determining how extremely unusual alternate states of consciousness happen is going to be heavily speculative for the time being.

The main issue, however, is that "soul" theories have many more problems than naturalistic ones do. The scope of soul theories has steadily contracted over time. No one expects to explain liver function by invoking the soul, or function of the heart. Those days are long gone. Our mental lives too are being progressively pinned down to physical events in the brain. Memory, for instance, depends on hippocampal function, and can be tracked to cortical engrams relayed from the hippocampus. What is left for a putative soul to do, once memories are stored physically, emotions happen via basal areas like the amygdala, and decisions are made in the neocortex? The whole concept makes less and less sense with time, as intuition gives way to reality-based analysis of what actually creates our minds and selves.

Lastly, whether the NDE is informed by some cultural programming as well as biological programming is quite a live issue. One subject related as follows:
"The review was measured in the beginning, but then the pictures came faster and faster, and it seemed like the movie reel was running out ... It went faster and faster, and then I heard myself, along with the entire universe in my head, screaming in crescendo, "Allah ho akbar!'"

Such a fate would surely be disconcerting, not only to me, but to many believers in the soul and afterlife.

  • Islam's gravest sin. God: “I am as My servant thinks of Me.”
  • Apparently, atheists are at fault.
  • Finding gullible, on TV.
  • Some notes on corruption, cooptation, and Washington sleazefests.
  • Republican strategy of complete intransigence and destruction emerges. Why is anyone surprised?
  • Why does this man want to be president? Krugman chimes in too.
  • Tribute to Milton Friedman.
  • Elvis Costello provides a playlist.
  • What happened to Japan? Is this what we are facing?
  • Economists lying for ideology.
  • Local police get awfully trigger-happy around black people. 
  • Is race less of a factor in this election? I would say it is more.. in a future blog.
  • A little Oscar Peterson.
  • Economics quote, from Mark Thoma, on the Ryan budget.
"If you think the middle class has it too good, too much security, taxes aren't high enough, not enough fear of unemployment, too much help for education, and so on, while the wealthy haven't been coddled enough in recent years, not enough tax cuts, too little upward redistribution of income, not enough bank bailouts, etc., etc., then the Republican proposals should make you happy."

Saturday, August 4, 2012

Debt and debt bombs

Which debts are the most toxic? Which are prairie fires, and which are hearth fires?

Apparently, the US is running up a tab that our children will be working in coal mines to repay until the end of time. That is, to hear the Republicans talk about it, now that Democrats are in charge of spending. When Republicans are in charge, the national debt "doesn't matter", and military adventures particularly are ripe for charging on the big credit card, being "special" expenses, of course.

The US is full of debts. Every dollar bill is a liability of the US Treasury, and most financial assets are someone else's debt. What makes one debt toxic and another a pillar of stability and the American way? A rundown of the most significant debt pools in the US, is, as far as I can make out, runs something like this:

Total bonds of all kinds:31.2 trillion
Corporate bonds:3.6 trillion
Mortgage debt:13 trillion
Municipal bonds2.7 trillion
Federally issued bonds:17 trillion
Consumer credit debt:2.5 trillion
Corporate paper1 trillion
Money Market / Repos10 trillion
Currency in circulation 1.0 trillion
(Corporate stocks:15 trillion (NYSE only)
4.5 trillion (Nasdaq) )
(Home equity20 trillion, residential
5 trillion, commercial)
Total wealth:~60+ trillion
(Derivatives:hundreds of trillions, in virtual gambles.)

So about half of what is customarily considered wealth in the US is in the form of debt instruments. What makes a debt instrument problematic to the economy at large? One characteristic is volatility. The current crisis was brought on by the unanticipated (by most) reversal in housing appreciation. Collateral disappeared, refinancing capability dried up, and an enormous edifice of debt (CDOs, MBS's, banks themselves) built on top of this creaking foundation was called into question, then into panic. The Federal reserve / Treasury, using its essentially limitless funds, allowed some to die and some to live.

So some debts are destabilizing if their solvency is pegged to market valuations that can gyrate significantly. Corporate debt is similar, though less prone to market-wide crisis than real-estate debt, which is pegged to a single nation-wide market. Corporations go bankrupt all the time, yet the corporate bond market marches on, adding layers of higher and higher (junk) risk for adventurous speculators. Rarely, however, does a complete market meltdown occur. Even if the stock market crashes, bonds are senior and get first crack at the assets of a company in any crisis.

A second issue is serviceability. Again in this crisis, as people lost jobs and income, their mortgages succumbed to deliquency and ultimately foreclosure- a loss to everyone involved. Corporations can go bust as well, but their books tend to be a bit better understood, with risks priced into their bonds as the market evolves. At any rate, the corporate bond market seems less prone to cataclysmic revaluations than real estate, at its marginal frontiers.

Lastly come government debts. Municipalities do go bankrupt, as we have recently seen. And it may become more common as the enormous public pension commitment overhang screws more cities to the wall. But still, it is very rare, and bankruptcy by entire states is unknown in the US.

Still more is bankruptcy by the federal government unknown. Not only is its power to tax enormous, but its power to issue the currency makes insolvency literally impossible, from any financial perspective. So its stock of debt neither gets called in during a crisis, nor is subject to wild swings of perceived quality and soundness for any financial reason, but instead swings, if at all, at the perceived willingness of the political institutions to stand behind it.

So the cost of federal debt does not lie in financial system instability or serviceability, unlike other forms of debt. It lies elsewhere, in the political pressures of taxation to pay the debt's interest, and / or inflation if the neccessary taxation is spinelessly avoided. Obviously, at this low point in the business cycle, these costs are not issues at all. The cost of our federal debt continues to decrease as interest rates decline and the government rolls over past longer-term debt. This is a good time to exchange private debt for public debt.

But in the long run, nominal and real interest rates will go up, and inflation pressures will re-appear, and the political cost of carrying high federal debt (i.e. transferring money from taxpayers to rich bond-holders) will increase. When and by how much? It is hard to say. Japan is going on 2+ decades of ultra-low interest rates and economic stasis. If we face that future, then essentially never and not much is the right answer. At the same time, this is not a future anyone wants.

Even if we don't care about grinding unemployment and domestic hopelessness, perhaps we might care about our geostrategic position that is melting away as the US and the West stagnate vs the growing powers of China and Asia. Or perhaps we might care about the real demographic problem of the baby boom, which is not (in macro terms) how to pile up enough pieces of gold for their retirement, but how to educate enough workers and drive enough real economic innovation and growth to take care of those boomers in old age without impoverishing everyone else. Dollars don't do nursing and don't replace hips ... doctors and nurses do.

If we were to successfully use federal debt to restore normal domestic economic activity, we might have to reduce federal spending at some future point, or raise taxes to match, or use the Federal Reserve's interest rate arm to dampen growth in the private sector. It may be difficult politics, but it isn't rocket science. There are plenty of tools at our disposal to deal with it. It just takes a functional & rational political system. Which is truly the worrisome point in today's dilemma, making all the more maddening the political right's policy of destroying the government to prove their thesis that government is bad, which justifies destroying it, .. because it doesn't work .. because .. you get the picture.

  • Krugman on why the debt is OK.
  • The left side of the deficit debate is hardly left at all.
  • California is in a serious energy bind.
  • Life after fossil carbon.
  • Steve Jobs- the lost interview. Very interesting thoughts on technology, craftsmanship, and how to run companies.
  • This would be hard to make up.. "British solution to unemployment – make them work for free", by Bill Mitchell.
  • A post-religion story.
  • China faces a real estate crunch.
  • NHS- what real democracy looks like.
  • Defense department: best-in-class at screwing up software projects.
  • Poland has the answer to the euro.. get out of it.
  • Now to take your mind off it all, a Haydn recommendation from Steven Stark.