RedStateEclectic

2011 Predictions

Mostly economic since that's what I'm been paying attention to.  The politics appear to more normalization and less revolution and revolt.  Washington is again going to restrict range of debate.

1. Uncertainty rises and it is harder and harder to make accurate predictions as crisis hits wave after wave.  Volatility reaches a post-great-depression high.

2.  We see another Wikileaks blockbuster.  It once again undermines US government policy and it is once again marginalized by the US government and the US media.  We see some regime-friendly "copy-cats."  They are talked up, but largely irrelevant.

3.  Commodity prices go sideways for a while as people invest in the equity markets instead of commodities.  Base metals demand flags for a while.  Then commodity prices rapidly grow again.

4. A few small cities declare bankruptcy.  We see several municipalities fail to provide essential services.  Several small public pensions go into default.  This is the new misery index.

5. China falls into stagflation and its government desperately tries to prop up the real estate prices.  Housing prices reaches its peak in July.

6. Portugal goes on the verge of default and is bailed out again. China puts in a token effort.

7. Dollar loses hold completely in the Asian markets. Asia gets repriced in Yuan, but people realize Yuan isn't much better.

8. S&P goes up 30% and then down 30%.  Mania first takes hold as inflation is confused as recovery. Mid-year, there is confusion as commodity prices rise sharply and rising costs takes down the "recovery."

9. In October, China's stock market crashes 40%.  Real estate prices crash 60%, and China's bank are effectively bankrupt.

10. China's Central Bankers make a visit all over the world and tries to get everyone to renew inflation.

11. At year's end US 10-year notes yield 4.9%.

I probably misses a few crisises somewhere in there.

China and the US

So the Chinese government is in a real pickle.

The US government pressures it for a yuan re-evaluation to cut down the Chinese trade surplus.  Their own businessmen and workers are relying on favorable exchange rates to make a profit on export industries.

Money from QE1 is floating into China because of the yuan evaluation and Chinese workers are facing rampant headline inflation.  A stock bubble and housing bubble have to be digested by growth or will pop if starved of inflation driven by hot dollars.

The Chinese government may face severe unrest from its own population if the economic prosperity and growth doesn't continue.  They're on the edge of a large economic tempest that is about to break and it's an uncomfortable position for the Chinese government.

Currently their best method is to raise reserve ratio requirements for banks.  This is an excellent too as it curtails banks' ability to create money (M2) and forces banks to have more conservative balance sheets.  The Chinese government has raised the reserve requirements by 50 basis points regularly in the last few months.

Their worst method is to institute price controls on consumer staples.  It's the worst solution ever and will invariably mean shortages and lines.  The Chinese people will hate it and invariably turn to the black market and render the whole policy meaningless and establish a widespread prescendent for flouting the central government.

The little rebellions are signs of unrest to come.

 

The best long term solution for the Chinese is to do exactly what the US government wants of it, raise interest rates and take a large upward reevaluation against the dollar.  The two in combination will pop the stock bubble and real estate bubble and destroy a lot of export companies, but it will be better for their own people in a few years.  Any step in the right direction would be beneficial.

The US government should be careful what it wishes for.  Raising interest rates and a upward re-evaluation of the yuan would mean a reversal of capital flows for a US government that is current depending on capital in flows for borrowing.  If the Chinese don't have excess dollars to lend back US, then what would the government do.  The only recourse would be monetization of debt by the Fed.

The current Yuan evaluation props up an illusion of prosperity for the American people.  Their dollars are still worth something.  And if the illusion disappears, Americans would find themselves jobs, but discover themselves much poorer than previously thought.  How would they feel then as the products that they were accustomed to buy for cheap at Walmart all of a sudden shot up 20-30% across the board?

It's an illusion for the US government as well, since investors would realize sooner rather than later that the US government can no longer pay its bills.  Either it will be defaulting by being a deadbeat or defaulting by debasing its currency.  Maybe some day soon we will be emulating the French and come up with a "Strong" dollar that re-establish the demoninations.  We'll also quickly see the demise of coins as their scrap values exceed their face values.  It's already true for all pre-1982 pennies that are mostly out of copper.  The scrap value is over double its face.  Next time you handle some pennies, take a look at the dates and see if you can still come across a true copper.

The little things are signs of the events to come.

Casablanca in Nebraska?

Just a quick and belated Merry Christmas to our wonderful host Laura Ebke from polar Morocco, Eric Parks from (chilly?) Chile, our Swedish collaborators Angela Thorn and Eric Larson, and the other contributors to RedStateEclectic from all over the world.

For personal reasons, I may not be around much here at RedStateEclectic during the next weeks. I do follow your excellent posts regularly, and am looking forward to publishing more frequently soon again.

 

The source.

Axises of Society and Anarchy

"I challenge you to a duel!"
What drives people to engage in such mutually destructive activities like personal duels where both individuals may be killed or permanently maimed?

Human beings are social creatures and unconsciously place a high premium on social status.  As if by magic, children perceive and internalize the social rules governing the adult world such that they are strongly shaped by the culture and society that they grew up in.  The children absorb the social rules contribute to it with their own experiences and then pass it on unconsciously to their children.

What am I saying is that the rules of society is a cloud of accumulated wisdom.  It is a brief summary of optimal and suboptimal behavior.  These rules have various degrees of mutation speed.  Some rules like fashion may change in the matter of months.  Other rules may take generations to learn or unlearn.  The axises of society take much longer to change and shifts usually take generations or more.  They also have profound permanent impacts and the changes are retroactively identified as social revolutions.

One of these axises of society is the strength of family/tribe relations upon which an individual can count on unconditional support or informal speculative aid.  The behavior is particularly pronounced when dealing with outsiders.  Depending on the cultures, there may be multiple demarcations beyond which an individual would be considered an outsider.  In many cases, doubts of morality and virtue are discarded in favor of tribal loyalty.

Classical liberalism was in may ways a departure from heavy tribal bonds.  Customs of children inheriting debt from their parents was abolished.  Individuals would stand before blind justice regardless of familial connections, and individuals were to be judged by their personal value and contribution to society.  All in theory, since it's still impossible to abolish the family unit.

Another axises of society is the relative importance of goodwill and honor.  The reactions are a warm welcome to positive goodwill, cold antagonism to negative goodwill, and indifference to neutral goodwill.  The reactions are exaltation or submission to those of greater honor, mutual acknowledgment to those of equal honor, and disdain for those of lesser honor.  Goodwill can be gained and lost easily, while it's disproportionately easier to lose honor than gain it.  This difference in behavior means that societies with differing emphasis on goodwill and honor should produce highly divergent behavioral mechanics.

Cooperative societies generally place greater emphasis on goodwill.  Cold antagonism and refusal to cooperate is much more of curse than the disdain of others.  Competitive societies generally place greater emphasis on honor.  Lack of honor in such a society would invite being bullied or being taken advantaged of.  Ironically, in such a society, violence and conflict over lost honor is usually more prevalent than for any other kind of reason.

When examining the application of anarchy - a society without legislators or enforcers, governed by mediators whose only authority is the moral weight of their decisions - it is important to recognize that such a system would achieve its greatest success in an individualistic society based on goodwill.  It is disastrous in a tribal society based on an honor system.

In light of this, I will post two quick notes:

Capitalism, the free market system, is based on cooperation at its core and places high value on individual contribution.

Honor-based tribal societies without strong central governance are quite close the definition of anarchy.  While it is normal for these societies to co-exist with mutual honor, most people associate anarchy with the more violent dynamic between two tribes when they clash for honor.

Freedom and Virtue: The Chicken and Egg

Remember when you were a little kid?  Remember how you acquired freedom?  Remember how you acquired virtue?  Remember raising a kid?  Remember how they acquired freedom?  Remember how they acquired virtue?  Did the level of freedom and the level of virtue ever change. How did they change?

Man may be created free and equal, and freedom maybe our birthright, but at the moment of birth, humans are hardly free to do what they wish.  They're babies and they have no freedom.  They're babies and so they also have a clean history of morality and lack all virtues.  Babies can't even take care of themselves and rely on adults to shove food nearly all the way into their mouths.

But babies grow up into children.  Children grown into teenagers, and teenagers turn into adults.  At least, that is how it is suppose to work.  At every step along the way, maturing individuals become more capable of taking responsibility for their own well-being.  In turn they are given more freedoms and acquire their own moral compass and other moral virtues.  Often parents, stewards of their children's freedoms, give their children more freedoms once the children demonstrate an ability to effectively use their existing freedoms.  Often the ability to effectively use freedoms is considered a virtue.

So for immature individuals, the idea of linking virtue and freedom is a valid and natural phenomenon.  But the rule applies on an individual basis and only for children who are under the stewardship of their parents.  How could the rule apply to the entirety of society or to full-grown adults?

But more about the development of freedom and virtue in children.  In a way, freedom and virtue go hand-in-hand, increasing as the children get old.  That's the way it has always worked, so that children may develop into a full responsible adult by the time they reach the age of maturity.  So is it ever a good idea on the part of the parent to permanently revoke a freedom that a child might have acquired?  Is it a good idea for a child to reach the age of maturity without having a taste of any of the freedoms that adults have?  Is it really a good idea to treat your teenagers like a 10 year old kid or your 10 year old kid like they're little babies?

Recovery-less "Recovery"

These days we have many talking heads talking about an end to the recession in this calendar year.  The definitional of an end to the recession is when the economy is no longer contracting - GDP is no longer failing.  In light of that definition, the recession may very well be over this year.  The GDP isn't going to contract that much more while the government spends money like a drunk idiot.  But the most important phenomenon Americans should be looking for is a recovery.  They need to the economy to grow again, create jobs, and ultimately create prosperity.

A similar but more benign phenomenon happened in 2002-2003.  During that period, the American economy had an jobless recovery.  It was only natural because the Fed had papered over the recession.  No one took the pain of the burst of the tech bubble only for the money to flow into a new housing bubble.  During 2002-2003, the economy wasn't in a recession, but the average American didn't see much benefit - unless they were part of the housing bubble - in which case they leverage themselves to the hilt by extracting equity out of their homes.

Likewise this time, for the average American, the end to the recession means nothing.  The end of the recession is merely an academic exercise of number crunching done by the tax-payer funded accountants or maybe even free market accountants. But this phenomenon is not going to be forthcoming anytime soon.  In fact, based on government activity, it is going to be pushed out further and further.  That is what TARP has been doing.  That is what the bailouts have been doing.  That is what the stimulus will do.  Because while these acts of government can bring an end to the recession, it will also forestall any meaningful recovery.

Unfortunately what we have to recognize that the government is being advised a bunch of quack economists that would have the recession fester beyond the recession.  They advise the government to give the American economy a shot of painkillers an to do nothing about the underlying rot and disease.  In fact, the government is advised to force more of the same activity that brought about the original disease.  Except now the disease has progressed to a critical stage, and the entire economy by virtue of government actions must bear the weight of zombie banking institutions and the gangrene of the Big 3 in Detriot.

And in this situation, while the American economy might no longer be techinically in recession, it will be in a state of stagnation and perhaps suffer from inflation indefinitely as dead industries spread their plague to the healthier parts of the economy.  There will be no recovery.

Envy and Voodoo Wealth Distribution

    The anti-capitalist argument centers around "greed," "exploitation," and "inequality."  Long term "greed" and "exploitation" are untenable.  Entrepreneurial arbitrage will punish greed and exploitation in the form of loss of competitiveness or loss of goodwill.  In the short term, the scarcity of resources of capital can manifest itself in a large amounts of profits.  It is possible for individual actors to act with great selfishness during periods of great scarcity and amass large amounts of wealth.

    This is individual failure of morality.  It is not a moral failing of the system.  But greed and selfishness is a far more universal than anyone would like to admit.  While they might like to condemn the greed and selfishness of others who have made their wealth by greed and selfishness on a grand scale, it is far more difficult to come to terms with the small amounts of wealth that oneself has gained by greed and selfishness on a small scale.  The condemning of greed and selfishness starts by looking in the mirror.

    The final arguments concerns "equality" in the form of discrimination.  But while there is a lot of inequality in the world, none of it is attributable to the free market.  It is the failure of society that racism, illiteracy, poverty, and many other vices persist to this day.  The spearhead for the "equality" argument is not born out of a benign desire to give everyone what they deserve but out of a malicious manifestation of envy to tear down the successful.

    The effect that we see in the world is that white-collar workers and intellectuals often overvalue their own contributions to society and undervalue the contributions of society of the entrepreneurial class.  They look upon the New Rich with supreme skepticism that the wealth was accumulated legitimately.  Perhaps, the New Rich practiced some form of Voodoo Wealth Distribution and stole all of that wealth from the rest of society instead.

    White-collar workers look upon their bosses and belittle their contributions.  They only see the paper pushing and the mindless administrative jobs that they can handle.  They don't see the creativity, the awareness, or the perseverance that the entrepreneurial class must deploy to succeed against the competition.  Intellectuals will often have a high assessment of their own intelligence and creativity, and look upon the entrepreneurial class with disdain.  Yet the free market doesn't confirm their disdain since the free market rewards people that actually satisfy people's needs - not ivory tower types that dream up unproven ideas.

    While supporters of free markets and capitalism can debate amicably with anti-capitalists, but when the debate falls to moral outrage, it is imperative that we attack all manifestations of envy in the anti-capitalists and show it for the evil that it is.  The conversation may turn sour, but supporters of capitalism are not moral voids.  We must defend the moral high ground.

Paradigm Shifts

Nicholas Taleb has a discussion with Charlie Rose about black swan events. Relevant portions of the video starts at 2:20.

Here's another discussion on the same topic over a year earlier.

World War II and the Great Depression: Redux

    I got some great feedback on my previous post so I'll post some of the best ideas that I came away with.  Many thanks to Georg, Eric Larson, Eric Parks, and Laura.

    First of all, to clarify, this is an exposition of the World War II stimulus from a philosophy of mercantilism (tip: Eric Larson) towards governance and economy.  I had cited Roosevelt's system of tariffs and regulations as effective price floors in the economy and assumed that goal of setting price floors (in real terms, so adjusted for inflation) were a given, and tried to show how World War II removed the need for government controls over the economy since the economic equilibrium reset above the price floors.  If the government had instead operated with a philosophy of capitalism and freedom, recovery would have been strong and swift (tip: Eric Parks and Georg).  This philosophy of mercantilism is somewhat similar to the philosophy prevalent among the political elite, today.

    The effective stimulus from a mercantilistic view towards the world is the destruction of foreign competition so that domestic producers can sell more at home and abroad.  Wars have this stimulating effect by destroying foreign capital for production through collateral damage.  Destruction of capital include activities such as killing skilled laborers, destroying arable farmland, and bombing and shelling factories - basically the definition of collateral damage.  Insofaras war achieves the destruction of foreign capital, it is stimulative for domestic producers.

    In this economic view of the world, all the money that a country consumes for war is the cost and all the destruction that it inflicts is the benefit.  Should the country spend money on a war without destroying foreign capital, then economists would call the entire venture deadweight loss.  Should the country spend money on other activities that have no value in the market place, those expenditures would also fall into the category of deadweight loss, and rationally, a government should seek to expend as few resources as possible to achieve the same amount of foreign capital destruction.

    The US government consumed an unprecedented amount of resources for its War effort.  The war had the unpleasant effect of consuming a lot of domestic capital.  Hundreds of thousands of Americans young men died, and farm equipment and all other capital unrelated to the production of weaponry went into disrepair.  Besides, the belligerents would have inflicted a staggering amount of capital destruction upon each other regardless of America's entry into the war.  One might say US massively overpaid for marginal economic stimulus received.  And because of war time distortion of the economy, the earliest definitive evidence that the Great Depression ended is in 1946 (tip Eric Parks).

    In summary, the idea that war spending stimulates the economy is a confusion of cost and benefit.  If mercantilists really wanted economic stimulus through spending, they have to propose a plan of action that results in massive amounts of destruction of foreign capital.  They should be advocates of murder and wanton violence on an unprecedented scale.  This is the true moral dilemma (tip: Laura).

World War II and the Great Depression

    It is my belief that World War II ended the Great Depression for America.  I know.  I know.  Eric Parks specifically talked about how we needed to argue that US involvement World War II didn't end the Great Depression in order to make discredit the consensus on Keynesian economics, so I am going to state ahead of time that I am making a completely different argument.

    The Great Depression came about as a result of the bubble-boom of the 1920s.  Capital investments had been made that caused production to vastly eclipse demand especially in the agricultural sector.   The Great Depression was prolonged and exacerbated by the interventionist policies of Hoover and the New Deal policies of Roosevelt such that in 1939, the American economy still suffered from excess capacity in agriculture and manufacturing.

    The rules and regulations of Roosevelt's New Deal for all intensive purposes put a price floor on goods and labor.  The price floors left workers jobless and factories empty.  Government extracted a large portion of the economy and put it towards the non-productive subsidization of agriculture by paying farmers for fallow fields or buying and stockpiling excess foodstuffs.  But World War II changed all of this; not US involvement in World War II, but World War II itself.

     World War II was a large exercise in capital destruction.  The European powers invaded, bombed, burned, and sabotaged farms and manufacturing centers all across Continental Europe.  Soviet Union destroyed its own industries and farms so that Germans would find themselves advancing across scorched earth.  Germany sent bombers over London to target munitions factories during the Battle of Britain.  Germany conquered France, but agricultural and manufacturing output of the country dropped sharply.

    Faced with reduced production capability, the belligerent powers dropped their import trade restrictions in an effort to optimize their economies and win their war.   And all of a sudden America found herself as one of the few nations with much needed excess productive capacity.  Had America stayed neutral, she would have found her workforce gainfully employed feeding, clothing, and supplying all nations of the world with her productivity.  But instead America under the leadership of Roosevelt found herself embroiled in war in both the Pacific and the European theaters after Japan made a surprise attack on Pearl Harbor.

    Then wealth and capital destruction happened on an even grander scale.  USSR and Germany fought to a grinding halt in Stalingrad and Leningrad and shelled each other with artillery from the broken buildings of the cities.  Allied forces and Axis forces traded tank rounds over French farmlands and between the hollow shells of French factories and fought slowly and steadily over the cities of Italy.  Finally, America in her effort to win the war in both theaters sanctioned the strategic bombing of production centers, targeting any and all capital that was retooled or could be retooled for war effort.  The result was the complete and utter devastation of the both Japanese and German industrial complexes and critical damage to those of Italy, USSR, Poland, France, and Great Britain.

    US involvement in World War II had two ramifications for average Americans.  They had to suffer through the horrors of a war, to serve as a soldier on the battlefield, or work in the war machine, suffer heavy taxation and consumed rationed goods.   And they ensured that US would emerge as the only intact industrialized nation because they destroyed everyone else.  It is the latter that solved the overcapacity of the Great Depression.  So if we want to apply the World War II model of recovery to the current crisis, we have to find some countries to invade and lots of factories to destroy.  That is, of course, making the assumption that the current crisis is the same problem of overcapacity rather than some other type of flaw.