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What happens after QE?

The big concern is what happens after QE, with a common opinion being that when Bernanke the puppet master removes his hand then the puppet will sag. When Quantitative Easing purchased Treasuries and MBS, the prices of substitute securities certainly increased. But because most institutions and people that own investment bonds don't think of them as substitutes for consumption, it did little to inflate the price of consumer goods. Perhaps QE would have gotten deeper into the economy if the Fed had purchased assets that most households own, like used cars and used appliances. But I digress.

Just because the Fed stops buying securities doesn't mean that the money that they created to buy those securities suddenly disappears. That money is still out there, and will only slowly dissipate as the bonds mature or amortize.  Ending QE changes the flow, but not the stock.

But many people really want to believe the puppet master controls the economy rather than 300 million consumers. Fortunately there have been three rounds of QE, so we can see what happened to the economy between QE1 and QE2, and between QE2 and QE3, when the Fed wasn't creating money to buy securities.

What I see is that right after earlier QE's ended, the stock market fell - but not for long and not that much. And yields on lower rated bonds did increase some after QE, but not for long and not that much. And the yields on highly rated bonds and conventional mortgage interest rates continued to fall, probably reflecting that there was still too much saving and too little investing in the real economy. And the trend on money supply (i.e. bank deposits), unemployment, and the dollar (if there was a trend) were unaffected. Graphs, graphs, graphs - see below.

Ho hum.

The Urge to Save, the Need to Invest

When we hit a recession we invest less, and that's a problem because we need investments to increase our long-term production and income. In the graph you can see that in the past couple of recessions our investments oddly spiked to well above our savings prior to the bubbles bursting. In the most recent recession our savings skyrocketed and our investment plummeted, both a likely function of the housing bust where we paid down our mortgages (saving) and stopped building new houses (investing).

The recent yawning gap between savings and investment are economic activities that aren't happening. The gap must arithmetically be bridged in some combination of the following ways:

1. Private consumption increases by the gap amount.
2. Exports increase by the gap amount.
3. Private income shrinks by the gap amount.
4. Government borrows by the gap amount.

Numbers 1 & 2 aren't happening in a global recession, and number 3 just makes the recession much worse and probably throws us into a doom cycle. So we end up with the government borrowing the private savings and deploying it in either transfer payments for private consumption, or less commonly for government investment and government consumption. This isn't Keynesian, it is arithmetic.

As I keep saying, the reason why we have really low interest rates is mostly because we have more savings supply than investment demand. Unfortunately people have the counterproductive instinct to flight from a recession by hoarding (we just need to save more). But what we really need in a recession is to fight our way out by keeping our investments up. Sure, we don't want to invest more in Internet companies, houses, or whatever may have been the bad investment decision before. We need our new investments to be better than our last ones. 

Unfortunately in a recession the prevailing sentiment is that very little looks like a profitable investment. And no tax incentive is sufficient to make an investor willingly lose money by making why they expect to be an unprofitable investment. This isn't an easy problem to solve, but I think it would help if people at least understood that their instinct to save more in a crisis is collectively counterproductive, rather than urging higher savings as the solution.

Gradually Improving Productivity

Here's something interesting I found while perusing the USDA's website data.

The productivity of an acre of land was flat until the 1940's, even though tractors were invented around the turn of the 19th century and became the norm in the 1920's. I wouldn't have predicted productivity to continue to improve in recent decades, since most of the obvious technology was invented long ago, and because I thought we would near some theoretical limit on how much grain can be squeezed from an acre. Yet up to the 40's we got 15 bushels of wheat per acre, by 1980 we got 31 bushels per acre, and in 2010 we got 43 bushels per acre.

In the short run the productivity per acre planted is volatile, probably due to weather and how much marginal land is farmed that year, but I'mreally surprised it isn't more volatile. Notice that the improvement isn't a percentage increase which would cause yield to increase at an impossible to maintain geometric rate in the long run, but in a linear improvement of the number of bushels.

There are many more details in really figuring out wheat productivity, types of wheat (hard, soft, winter, spring, durham), how much marginal land is planted, and the opportunity cost of planting other crops. The number of acres planted has bounced around a lot over time, and is in a long term decline. Does that mean we will run out of wheat? Since our productivity keeps increasing, we produced as much wheat last year as we did in the late 70's, but needed 30% less land to do so.

If we look at some other grains, we see even more improvement in corn yield. Though for grains that are less popular today, for whatever reason, the productivity improvements aren't as strong. 

I think my mistake was focusing too much on the implementation of a particular technology to create a single dramatic jump in productivity. I suspect what is happening is that we are constantly introducing gradual improvements through technology, and not everyone all at once implements the same technology because we have thousands of farmers experimenting.

We continue to make bigger, faster, more efficient combines. We continue to make better seeds, pesticides, and fertilizer. We get better at timing the planting and the harvest (if you harvest when the shocks are wet from rain the grain elevator won't accept the soon to be moldy produce, but wait too long and the seeds fall from the shock onto the ground). Increasing economies of scale and specialization likely improves productivity, for example hiring migrating contractors (cutters) to harvest wheat with huge, modern equipment that would be terribly expensive for even large farms to puchase for use a few days a year.

The contribution of labor to wheat production has been minimal for years, so this makes an interesting experiment that isolates the improvement due to technology and capital. From this, I extrapolate several theories:

1. Technological improvements tend to be gradual rather than revolutions. The productivity improvements we see from computers and telecommunications across industries may gradually occur over the next century.
2. We can overhype the effect of year to year weather on crop production.
3. Productivity improvement in the short run should make US farmland more valuable, but in the long run as global population growth stagnates and productivity improvements reach less developed nations, we may actually face a surplus in capacity which causes  farm land values to fall.

Are Bubbles Contagious?

In his final edition of "Manias, Crashes, and Panics" in 2001, Charles Kindleberger (or maybe by then it was his co-author Aliber) noted that asset bubbles are historically rare, or at least were until recently. He didn't think it was chance that within 15 years we could have asset bubbles in Japan, along with Sweden, Norway, and Finland, which were followed by asset bubbles in Thailand, Malaysia, and Indonesia, which were then followed by the US dot com bubble. Kindleberger didn't live to see the subsequent real estate bubbles in the US, UK, Ireland, and Spain.

I won't belabor the details of how he thought these bubbles were connected, except that when a bubble burst the money fled the scene and entered another asset class, often in another country. This "sloshing" of money could create enough inertia to move a strong fundamental market into a full fledged bubble.

Is there a bubble anywhere right now? If so, where will the money "slosh" to next? I think gold is probably a bubble because there's no income or utilitarian basis for it to have value, but the gold market isn't big enough to create much economic disruption. Bonds may lose a lot of money, but they aren't purchased speculatively and the upside is limited at zero yield. European values may fall too, but not because of a surge in speculative investments, but because of an untenable currency union. 

Industrial metals could certainly fall a lot, but if so that is largely tied to Chinese demand. Which brings me to the most likely large bubble - China. If China has a bubble, then so may nations like  Australia, Brazil, and Chile, whose growth have been helped tremendously by China's demand for their commodities. Combined, that's a lot of investment money that could be looking for a new home.

One could reasonably say that China's bubble was created, or at least exacerbated, by the Great Recession. When the west's real estate bubble burst, demand for Chinese imports collapsed. In response China created the biggest credit stimulus package ever. Unfortunately a lot of the money was wasted in unused real estate rather than directed to long-term productive investments. That alone would retard future growth, but China also has an aging society, corruption, and the huge difficulty of a centrally planned, export based economy transitioning to a domestic and service based economy. 

China has constant expectations of nearly 10% per year growth. A lot of asset prices have been based on this. If growth drops to 1% per year, then many Chinese asset prices are horribly inflated. It seems that wealthy Chinese already perceive this problem, and are increasingly trying to get their money out of China. This can be seen by the surveys of wealthy Chinese, where half say they want out in order to protect their money. And it is probably seen by the People's Bank of China reducing its purchases of foreign currency relative to their trade surplus (which is the supply of the foreign currency), though this calculation complicated by unreliable export data.

If Chinese are successfully getting their money out of China, for example a firm's export payments are diverted to an account in the Cayman Islands, then that poses two concerns. First, is that it limits the amount of dollars that the PBOC can purchase with newly minted Yuan via the fixed exchange rate. Fewer new Yuan should reduce inflation, which sounds good except that many Chinese bubble debtors are relying on continued inflation to repay their loans. And reduced PBOC purchases of dollars effectively means that they purchase fewer US Treasuries, which pushes US interest rates up. 

The second concern is where the Chinese money will go, along with investments in Australia, Brazil, and Chile. This could be either domestic or foreign money in those nations. Right now the US definitely looks like the strongest major economy in the world. If this continues and the US receives massive investment inflows, then the dollar will appreciate and make imports cheaper. So the strong US dollar would likely keep consumer inflation counter-intuitively low even though US asset prices and interest rates are rising.

It is hard to track the flow of Chinese money internationally. And even if this scenario lines up, it could be years until US equities become a bubble. One thing to watch for is the Fed's Flow of Funds report, which is showing a large reversal in acquisitions of corporate equities by the rest of the world. Are we starting to catch a bubble? If so, at least it will feel good - for a while.

Foreign Net Acquisition of Equities
billions of dollars, sa
	Equities
2011 Q3	-88
2011 Q4	-401
2012 Q1	-166
2012 Q2	-365
2012 Q3	181
2012 Q4	210

No Profit for Prophets of QE Doom

I keep writing about this because even five years after it began, I'm still reading and hearing people who should know better talking about the danger of QE: the money printing, the currency debasement, and the coming rampant inflation. These people are embarrassing and impoverishing themselves.

Here’s what I think the Fed really did. They created dollars to buy government bonds. What does that mean? Dollars are currency backed by the US Treasury. Government bonds are loans backed by the US Treasury.  If these two things both sound like pieces of paper signed by the Secretary of Treasury, it is because they are. Except that the dollars pay zero percent interest and can be used to buy just about anything that is for sale. The US Treasuries pay around 1% interest and can be used as 100% collateral to borrow and therefore buy just about any asset that is for sale.

Notice that Bernanke didn’t fly around in the fabled helicopter throwing money out the window. Nor did the Fed mail checks out to everyone. All the Fed did was swap one kind of US Treasury obligation for another. As a weak analogy, it is as if the Fed bought a bunch of $100 bills by paying for them with five $20 bills in the hope that people would be more likely to spend the $20 bills on goods and services. Except that rather than change the size of the currency, they changed the interest rate.

Money that pays no interest was traded for money that pays a tiny bit of interest. Since the kind of people that buy Treasury bonds are investors, they didn’t spend the cash to buy things, but instead invested the money in the next closest thing – corporate bonds, which lowered the borrowing cost for companies. And when the Fed bought government guaranteed mortgage bonds they lowered the rate for mortgage borrowers.

When the Fed created all that money from QE, the bonds they purchased went on the Fed balance sheet as an asset (the Treasury owes the Fed). But the Fed didn’t become magically wealthier because they had an offsetting liability, which were all those new dollars. Most of that liability shows up in the Federal Reserve as bank deposit reserves, which are a liability because technically the Fed owes the banks. But this is a very special kind of liability because the Fed decides how much money the banks are going to deposit with the Fed, and how much interest the banks will get paid.

When banks lend money, they create more bank deposits (and money) because the saver still has the money in their account, and after the loan so does the borrower. Banks don’t have to literally set aside 10% of their deposits at the Fed. Instead the Fed creates a certain sized pool of money called deposit reserves for the banks to compete over. If banks want to lend more money and create more deposits then they have to pay more for the limited supply of bank reserves.

Due to QE the supply of available deposit reserves has exploded. Banks could go crazy lending money and the current level of reserves wouldn’t inhibit them for decades or centuries. But banks haven’t gone crazy lending because they don’t like the credit risk, they don’t have that much excess capital, and borrowers are generally more reluctant to borrow. At any rate, the level of bank capital (for credit losses) would effectively constrain bank lending and deposit creation long before the deposit reserves (for liquidity) would.

And what if inflation did start to take off? What could the Fed do? They could do all the things they could do before, like raise the interest rates they charge banks and make banks hold more reserves. But now they can also simply sell their $3 trillion in bonds back into the market, which would shrink the deposit reserves. So the Fed actually has more inflation fighting power than ever.

But the Fed doesn’t mind if you think rampant inflation is coming, because they hope that will convince you to go out and spend your money and thereby create economic activity rather than hoarding your money. Unfortunately many people just went from hoarding cash to hoarding gold and guns, which still isn’t really economic activity (except for mining new gold and making new guns over the long run).

So now when you hear someone talking about QE, debasement, and inflation, just sell them your gold and guns, and use the cash to buy yourself something nice.

Below are basic measures of inflation, money supply, the dollar indexed to other currencies, and interest rates. I haven't cropped the starting date of any, so that you can see the long-term trend - which don't show anything particularly interesting happening since QE began except for a recession.

 

 

Corporate Euthanasia

We’ve designed corporations to have a potentially infinite life (which wasn’t their original design). That’s fine as long as a company is profitable and useful. But many (all?) companies eventually become obsolete, organizationally senile, or even dangerous to society.

Most of us can recognize when it happens, but the executives often extend the life of the corporation past its usefulness. They slowly drain the cash reserves, swallow poison pills to prevent takeover, fight endless legal battles, and repeatedly reorganize in bankruptcy. Until one day they enter a bankruptcy that they cannot escape. Until that day the executives have preserved their compensation and careers, though the shareholders long since saw their value depleted.

Most technology firms eventually fail because they become obsolete. Large firms have a bad habit of crushing internal innovation either because it threatens their legacy product or because of bureaucratic incompetence. The huge cash reserves built up by the firm are gradually squandered on executive empires, corporate campuses, overpriced stock buybacks, and fruitless acquisitions. Rather than recognize their profits, pay taxes on it, and disperse dividends they waste the money.

Think of Microsoft. At some point, probably soon, wouldn’t it be better if they dispensed all their cash to shareholders in a massive dividend and implemented a plan to sell off their assets and close over 5 years? If someone thinks those assets are valuable, then they can purchase them and continue with some part of the company – hopefully with a rejuvenated business plan. If the executives are so sure of their plan, then they can raise the funds for the new firm themselves.

Or consider a bank that has needed government bailouts for reckless risk taking, frequently harmed consumers, illegally manipulated markets, laundered drug money, and sheltered terrorist nations. If the Supreme Court has ruled that corporations have the rights of people, and that people can receive the death penalty – then why can’t corporations receive the death penalty too? The reason why is usually that closing the firm would be too disruptive. But the corporation is not a living entity, but a collection of assets and liabilities that can be dispersed and reconstituted by others as and if needed.

Similar to bankruptcy, we need a process for liquidating profitable corporations under certain circumstances. For example, perhaps once a corporation reaches a certain age it should annually have to put forward a vote to shareholders if they want to continue with the organization or have an orderly liquidation over X years. There needs to be a way for shareholders to force this decision on executives without waiting for a debt-laden leveraged buyout or eventual bankruptcy. This must be a real stockholder election, unlike every board of directors vote, that overrides the Board and executives.

Similarly, there need to be legal requirements for the orderly liquidation of firms that recklessly endanger the society in which they operate. It is not enough for a corporation to be profitable. The corporate death penalty should be a last resort that is not taken lightly, and therefore should require the agreement of high levels of both regulators and the judicial branch. Just the reasonable threat of this action would probably be sufficient to reform or replace some currently fearless executive teams.

When we see a firm that has reached the end of its useful life, we shouldn’t wait for years until it runs out of money and can no longer borrow. We should peacefully wind down the company. A corporation is not a person, and it shouldn’t garner the sympathy or empathy of a person when considering if we should pull the plug.

Is there a new Housing Bubble?

People see bubbles everywhere now, partly because we've seen some whoppers over the past 15 years, and partly because we now expect to see them caused by quantitative easing. You know, the quantitative easing that created trillions of dollars of inflationary money, even though no one we know has ever seen a penny of it. The term 'bubble' used to mean that an increasing number of investors purchased an asset in anticipation of a short-term increase in price. But now 'bubble' just means that an asset price has gone up, and you think it will soon decline.

Not many people are saying there is a housing bubble right now. That includes the so called experts who didn't foresee the last housing bubble, and didn't foresee the housing recovery that started last year (I called it.). It was all obvious if you were looking at the data. Oddly, most experts in the media don't look at data, instead they just spew ideology.

But over the next 6 months it will become inescapable, even to the 'experts', that house prices are skyrocketing in much of the nation. Since most 'experts' have as little understanding of the US monetary system as they do of data analysis, they will immediately shriek that the Bernanke has created another housing bubble. It fits their habit of blaming the government for everything, and glossing over their inability to accurately predict anything. The experts will demand an end of QE to stop the housing bubble, and their fear mongering will probably be enough to get it - which may be just as well if economic growth and inflation expectations are high by then. They will also demand that the Fed raise short interest rates immediately, but they probably won't get that anytime soon.

But why are house prices going up? First, house prices fell too much during the crash in many places. Second, we pretty much stopped building new houses since 2008 and have since consumed whatever excess there was. Third, employment is slowly recovering and families are still being created in the US, so that creates natural demand for more housing. And finally, large institutional investors have recognized the three preceding reasons and are buying up large numbers of houses in order to rent them out.

But nowhere in my description, or I think in any quantifiable account, or even in anecdotal accounts, are people buying houses for the purpose of re-selling them in the not too distant future. People are actually buying houses to either live in them, or because they want to rent them out for someone else to live in. What a great idea, we use houses as shelter! That doesn't sound like a bubble.

Now it may be that some investors enter the housing recovery too late and pay too much. And it may be that investors create too many rentals and drive the rental rates down to unprofitable levels. And some investors may discover that it is hard to get a good property manager, keep the property maintained affordably, and find good tenants that pay on time and don't rip up the house. But that's just describing the investment and management difficulties of any business. Rental houses aren't the lazy man's way to riches, and some will lose money. But that is a very different proposition than 'flipping' houses.

Likewise, there is no bubble in bonds. A 5-year Treasury yields 0.69%. The only way the bond's value can go up much is if market interest rates fall a lot. But they can't fall far from their very low current rate, unless you think Treasury rates will go negative, or unless you expect severe deflation. But the very people who say that there is a bond bubble are the ones also predicting rampant inflation rather than deflation. Of course you can lose lots of money on bonds if interest rates go up, which isn't unlikely someday since current interest rates can rise much more than they can fall. But that's not the same as a bubble, that's just a natural change in the economy.

So here's what's really amazing to me. The people that see bubbles in bonds and housing rarely see one in gold or bitcoins. But gold and bitcoins have all the obvious characteristics of a bubble: their value is based solely on scarcity rather than operating income, they are purchased for appreciation rather than utilization, and many of the buyers knew nothing about the assets a few years ago (aka 'suckers').

Which brings me to the underlying problem of bubbles. We have seen more bubbles than usual in the past 15 years, but they are correlated rather than caused by low interest rates and lose monetary policy. We have low interest rates mostly because we have more savings than we have investment demand for the savings. The Fed has brought down rates somewhat - BlackRock's fixed income head estimated the Fed lowered the long bond yield by 100 bps with QE, which sounds reasonable to me, but even +100 bps is a low interest rate by historical standards.

Bubbles regularly occurred when economies operated on the gold standard (Tulip mania, South Sea bubble, etc.), so monetary policy isn't what causes a bubble. Though debt financing of a bubble can make the downside much worse. No, a bubble is created by a confluence of excited suckers who think they can make large amounts of money without either working themselves or putting their money to work over the long run. We can always find people like that.

We have seen more large bubbles in the past 15 years because we don't know where to invest our money in a productive enterprise. We have an enormous amount of savings looking for an investment: sovereign wealth funds investing their trade surplus in the US, pensions and retirement funds, massive corporate retained earnings, and the fortunes of very wealthy individuals. Even if our consumer demand were stronger, I'm dubious that our service based domestic economy has a use for that much in savings. All those savings result in low real interest rates, regardless of what the Fed does.

When someone does find a good investment opportunity, a huge pool of savings moves in and provides all the capital that was needed. So the asset price jumps, and that appreciation attracts even more investors who can turn a legitimate investment into a bubble. With the big housing bubble so fresh in investors minds, I really doubt we will see another one so soon (give it another decade). Regardless of the asset class, as investors get more used to bubble behavior, they get ever faster at jumping in and out of bubbles and shorten their cycle.

We either need more legitimate investment opportunities (including possibly infrastructure and education), or we need to turn a lot of the savings into consumption. Significantly increasing bank capital ratios is one way to put idle savings to work, and in return for that investment we get an environment with fewer government bailouts, and the reduced leverage wouldn't fuel future bubbles. Besides, we don't need additional leverage in a savings glut.

Counter intuitively, something else that I think would increase our productive investment is if inflation were quite a bit higher than the Fed's 2% target. When business people are considering investment decisions, they don't really think about it in terms of the inflation adjusted real return (business schools be damned). Right now many safe investments may reasonably yield 3%, But absolutely no one wants to pitch a business investment at a 3% return. It just sounds pathetic. So to hit higher returns investors turn to leverage or bubbles, and sometimes frighteningly both.

But if the underlying inflation rate were 5% and the nominal return was 8%, then that's quite acceptable for an un-leveraged, safe investment. I know the real investment return hasn't changed in these scenarios, and business people should know better - but optics are important, particularly to executives, committees, and shareholders. Note that this increase must be done with inflation, because if the Fed merely raised real interest rates to 5% then the higher cost would crush the amount of credit that borrowers could profitably bear, and cause investment and consumption to plummet.

As long as we trade with nations that buy their currency down in order to export goods to us, the US will tend to have a surplus of savings and a deficit of jobs, no matter how we manage monetary policy and bank leverage. Meanwhile the looming threat of a fractured Euro and floundering China could cause even more capital to flee to the US for safety. So we had better figure out how to put the savings to good use rather than embracing existing bubbles, running from imaginary bubbles, and living in the absurd terror of 3-5% inflation.

The Problem with Global Warming

No, this isn't a post claiming that the earth isn't warming or that humans aren't causing a warming climate due to higher CO2 levels. This is a complaint about the way that global warming is communicated.

There are two problems. First is that most real scientists (as opposed to media hungry self promoters) are terribly precise thinkers if they are any good. When scientists communicate they instinctively abhor speaking in imprecise terms, which means that they don't create good sound bites or interesting stories.

The second problem is that most media reporters are lazy and dim witted, and the firms they work for are peddling infotainment rather than understanding. So they are unlikely to try to understand or explain what a scientist says - only report in a simple and sensational manner. They like to report stories as controversial "he said, she said", which both seems fair and absolves them of understanding it themselves. So they pick out the most rabid representatives they can find to make each side's pitch.

The result is that most people think the climate warming forecast is skyrocketing temperatures. The average person assumes that means temperature regularly exceeding 100 in Minneapolis in a few years, not an increase measured over tenths of degrees in a decade. And whatever the latest severe weather event is, it will now be repeated every year in the future. Needless to say, such forecasts will only create more global warming sceptics, particularly in the winter.

I know that climate models are incredibly complex, but someone really has to provide a reasonable narrative for them, so that we know what to expect. Saying that the world is on average warming a few tenths of a degree Celsius per decade doesn't explain anything to most people. Explaining the effects over hundreds of years is also too abstract.

I'm suspicious that the nearer term risk of global warming isn't that it gets too hot, as much as that the arctic sea ice is quickly getting smaller in the summer and fall. That is reducing the contrast between the termperatures of arctic ice and the open waters to the south. The contrast in temperatures is vital because that is what creates large high pressure systems over the northern Atlantic and Pacific.

Those high pressure systems suck warm weather up from the south and push cold weather down from the north. That circulation makes our jet stream fast, and makes it dip down. It brings cold fronts and rain to the south central parts of North America and Asia. And brings (relatively) warmer weather to Europe and Alaska.

When the contrast in ocean temperatures drop from July to December (which is to say that he Arctic surface is warmer), then the jet stream becomes weaker. Weather tends to stagnate. Colder northern latitudes stay cold, and interior southern latitudes stay hot and dry. Tropical storms aren't so much stronger, as much as they occur at more northern latitudes because there is less instability in the tropical zones, and less resistance from high pressure systems over temperate oceans.

But every winter when the sea ice expands to its normal extent (which doesn't change much year to year), then the weather seems normal again and lures us into a false sense of security. I'm not a climate expert, and I'm sure my description is over simplified. But there needs to be a much better narrative of climate change than is currently told. In the near term, our bigger problem probably isn't that the climate is warming, but that our weather is stagnating. Weather patterns in the latter half of the year tend to just sit and stay. It isn't as simple as global warming, but I think it is a better warning to people, and one that they can understand.

The more complex underlying problem is that our climate is out of equilibrium. The polar ice cap is an obvious and major component of climate. It is rapidly shrinking, and causing a vicious cycle of changes in the Northern Hemisphere. I think this vicious cycle is counterintuitive to most people's understanding because their usual observation is that nature moves towards equilibrium. What is scary is that I don't see what will reverse or even stop the melting arctic cap and the many problems associated with it (reduced solar reflection, changing currents, changing jet stream, release of permafrost methane).

We need a better understanding of our climate. That means ignoring the climate sceptics that want to argue over data because that will always devolve into a 'he said, she said' discussion that is so boring that nobody listens and the sceptics win by default. Instead we need a narrative that makes sense to most, without seeming sensational or technical.

Separate marriage between church and state

Marriage contains two parts, the first is a religious ceremony and social recognition of two people's commitment to each other. The second part is a legal contract for multiple people to share in income, assets, and debts - or a civil union. Why don't we formally split the two?

Government and religion should be separated here. If two people want to get married and find a minister to decree it, then so be it. It is none of the state's business to interfere in how religions operate or define marriage. Nor is it the state's business to decide who can be a minister. The value of the marriage is that the couple recognizes some expertise and authority in who they chose to marry them. Religions each have the right to define marriage their own way, based on their dogma.

It is the state's business to set the possible parameters of a civil union, because that is a legal contract. If more than a hundred thousand people can work for or share ownership in a corporation, then why can't any two adults agree to in effect incorporate? It needn't have anything to do with gender or copulation. Nor does it need to be limited to two people, though at some point it is quickly impractical. For tax and contractual reasons, a person could be a partner in only one civil union at a time.

A civil union allows people to specialize their activities towards a common goal, to diversify and share their finances, and for the strong to help the weak. It allows multiple persons to be treated as a single tax entity and to purchase certain services such as insurance collectively. And the civil union allows one partner to care for another without the benefits being considered a commercial transaction or gift. 

A civil union might be between family members, friends, or lovers. Since the state can require that the contract be indefinite and that the partners co-habitate, the partners had better like each other a lot. A formal civil union contract may also formally dictate the terms of sharing and conditions upon termination, kind of like a 'pre-nup'. 

Separation of religious marriage from legal contract does not prevent or excuse the state from protecting all members of a civil union, including forcing the termination of the contract if there is abuse. Nor does the separation prevent the state from providing tax and other benefits to activities that are considered beneficial, such as bearing and raising children.

Hooptedoodle

There was an island where people lived and loved all the things that people should. Sometimes they had scarcity, sometimes abundance, and a few times even war. But their island always provided enough for them to at least get by, and usually more. They helped and served each other, and because of that they were wealthy.

 One day a visitor from a land called Mammonia came and showed them all that they lacked. Other nations had fashion, technology, and luxuries – much of it was made in Mammonia. The islanders were as Adam and Eve when they discovered their backwardness.

 The visitor explained how easy it was to get those fancy things and to be modern and sophisticated. They only had to use Mammonia’s money for everything. Mammonia would even make the exchange for free. And so the islanders excitedly agreed even though most nations consider their own money to be a sovereign right.

 With the new money the islanders went crazy buying nice things from around the world, which seemed very cheap with Mammonin currency. And when they had spent all their currency, the islanders made loans to each other to buy even more imports, and sold the loans to the Mammonians as payment. Soon the islanders stopped helping each other and spent all their time trying to acquire more Mammonian currency.

 Being paid to trade money seemed like a much better business than serving each other, but there weren’t enough people or money on their little island. So they borrowed and lent huge amounts of money from other nations. That became their main business, yet they failed to understand that
when you borrow money you have to be able to invest the money at a higher rate in order to repay it. But the little island couldn’t possibly profitably invest all that borrowed money.

The island went bankrupt. They asked Mammons for help, but were chided for buying things with the money rather than hoarding it as good Mammonians do. You see only the Mammons could create more of their money, which they would never do because that would make their existing hoards worth less.

 The Mammons still demanded the loans be repaid, but that was impossible because the Mammons had all the money and the islanders had none. So the Mammons demanded that the islanders have less food and education and healthcare and everything, even though that could not possibly help repay the loans.

Eventually one day in their poverty, the islanders decided to default on their loans and go back to helping each other and making things for each other. To their surprise they became wealthy again even though they had no Mammonian money and looked backward.

What was odd was that this was a terrible tragedy for the Mammonians because they realized that they had less of all that really mattered to them – money. Their banks went bankrupt. Even though they created many wonderful things, the Mammonians made them to sell for more money rather than enjoying themselves. And so they ended up with neither their money nor their wonderful things.

Of course this is just a silly story, but just because it never happened doesn’t mean that it isn’t true.

Why pay high taxes?

The giant question of the US sequestration, of British austerity, of Cyprus deposit taxes, and so many other questions is: "How much must I pay in taxes?"  

It really isn't about the national debt, because given any choice between cutting spending and cutting taxes, the latter is always taken. It isn't really about racism, because many people would resent being compelled to help many of their close blood relatives, whom they consider to be incompetent boobs and deadbeats, much less helping an unseen recepient of any color with their tax dollars. And it really isn't about rewarding the deserving, because the idle and inherited wealthy deserve nothing (e.g. Kardashians, Kennedys, and Hiltons), yet there is no popular initiative to prevent it.

The political debate is really about MINE MINE MINE. Greed is emotional, instinctive, and self rightous.

How much can the government compel us to give in taxation? 50% sounds excessive to anyone who has to pay it (less so if someone else has to pay it). If you add 39% federal income tax, 7% state income tax, plus sales tax - you get pretty close to 50% for high incomes. Though many people deceptively describe themselves at their top marginal bracket instead of their effective tax rate, and they include social security and medicare in the calculation even though they are a hybrid of taxation and pension/insurance.

A 50% tax rate gauls me from an emotional level. But from an intellectual standpoint, it isn't that outrageous in our modern economy. Machines harvest our food and make our goods, so our essential "things" don't cost much. In time, renewable energy won't cost much either. Where will we spend our money? What will cost a lot is healthcare, and saving for retirement, and education of our young. Machines haven't reduced the cost of those - in fact they created more demand, so those services will increase as a share of the total economy.

Education, healthcare, and retirement are services which the government provides better than the private sector. Hereticall, but true for any government with its own currency. Private providers of the three services have higher operating expenses (profits), smaller efficiency of scale, and greater credit risk than the government. The government is imperfect at education, healthcare, and retirement - but I have not seen a better private provider. 

So what should the government charge for education, healthcare, and retirement? Then add in the cost of infrastructure services that we share (if you enjoy fresh food then thank government infrastructure). Now add the cost of providing safety for your person and property. That costs a lot of money. Maybe not 50%, but a lot. A lot more than we want to pay.

Some countries hide government expenses in value added taxes, which are less obvious, but more regressive, than income taxes. Maybe that is best because it creates less political turmoil.

Regardlesss, we delude ourselves that our success is self made and that we don't deserve to be taxed to help others because we can all be successful. The government wastes taxes on the lazy (in other words, the poor). Certainly our success is partly due to drive, and partly due to genetics. It is also partly due to luck and environment. Luck is a big ego hit that many refuse to take. I suggest that nature's nobelmen try their "skill" in another nation, particularly one with really low tax rates and where they don't have personal connections. I doubt they will be rewarded nearly as well.

This leads to the conclusion that the wealthy pay higher tax rates for two reasons. First, because they can afford to pay it (for the same reason Neiman-Marcus doesn't locate stores in slums). Second, because a large part of the wealthy's success is due to environment and luck.

So how much should we pay in taxes? I don't know, but it is a lot, and it will be increasingly so in the future. It is unpleasant to see half our paycheck disappear, when we imagine all the wonderful things we could do with the money. But just because we don't like it doesn't mean that it isn't true. That said, the greedy find a way to not understand the many parables of Jesus warning the rich, so why would the greedy understand the need for taxation?

Principles of Political Districts

What is the principle to be followed when drawing political districts? Is it to ensure that minorities are represented, or that political parties are evenly represented, or that the majority political party retains power? The first two principles often cannot reasonably be observed within an area, and end up being convenient excuses for gerrymandering so that one party retains power.

The problem with the drawing of political districts is that we don't have clear principles of how they should be drawn - or if we do have principles they are in confict with each other.

The US is a republic, which is to say that citizens vote for others to represent them in the government. A politician has difficulty representing everyone because we are diverse - by race, religion, gender, sexuality, occupation, income, age, etc. We will even have differences of opinion that can't be defined by any non-political descriptor. There will be non-random geographic concentrations of defining characteristics, so that a district will inevitably lean one way or another in many descriptions of voters.

What is essential is that political districts be drawn in ways that have some natural identity. Only then can politicians reach voters by marketing, can the media inform about politicians within markets, and most importantly that voters have some hope to organize, or even remember, who their representative is. A small city with 3 different congressmen is unmanageable. Gerrymandered districts that reach into parts of many different metropolitan areas should never be allowed. Such districts prevent reasonable representation of the citizens (even if the population shares some characteristic such as race). That is after all the entire point of a republic. 

A first principle is that, where possible, political districts should not cross municipal or county lines. That means that some representative entities will tend to be urban, and others rural. Some areas will be white, and others black or mixed. So be it. At least they will be entities. Then everyone in a medium sized city can say that they are represented by "so and so" rather than "who knows". 

Hopefully then many politicians won't have constituencies designed simply to re-elect them and won't take their elections for granted. Hopefully then voters will know from whom to demand better government, and be better able to band together to demand it. Because our gerrymandered government does not represent the people, it is a failing republic.

Prosperity After the War

We have been through years of economic decline and stagnation. Large government stimulus programs are over, though they did more to survive than prosper. Interest rates are at rock bottom, government debt has never been higher, unemployment remains high, and the dollar is strong largely because all other currencies are in trouble. The war is finally over. After years of foreclosures, people are buying homes in large numbers, and young people are going to college in droves.

The above paragraph could describe both 1945 and 2013. After WWII there was fear that the nation would fall back into depression. But we didn't. Partly it was because of the GI bill that enabled widespread investment in education and housing, and partly it was because private deleveraging had occurred. But I think it was mostly because of widespread optimism.

I see optimism returning today, I think because people see hope and are fatigued by prophesies of financial austerity and apocalypse. Good.

What remains to be seen is if inflation and interest rates will skyrocket as growth returns. If they do, then the banks are in trouble and their business model of borrowing short and lending long may even be untenable. Yet interest rates and inflation rose very gradually after WWII, and I bet that they will now too.

That is particularly true if you appreciate that the Fed's QE only created cash by purchasing bonds, and the Fed can remove the cash by selling those bonds if needed. Nor for that matter has our money stock (M2) increased at a faster rate since the financial crisis hit. Most QE fear mongers don't understand what money or the monetary base is. Ignore them.

We face many problems, and the next decade will not be utopia. But as I look back to the late 40's and 50's, I bet that the next decade will be a good one for the US.

On Brill's Bitter Healthcare

There is a lot of discussion on Steven Brill's lengthy health care article in Time. I wish an editor had tightened up the writing, and I'm dubious of some conclusions. Nevertheless, the ancedotes that he tells are anguishing. The best comment is in Interfluidity.

Two policy ideas struck me:

• Non-profit health care providers should publish their price list of procedures and products on-line, with the corresponding Medicare codes and reimbursement amounts. If an organization isn't built for profit and isn't paying taxes, then they should disclose their fee schedules. Public prices would drive out price gouging and gaming.

• Non-profit employee compensation of individuals should be capped, at say ten times the family median income. It is repulsive that executives of non-profit hospitals, museums, and charities robe themselves in benevolence while they are paid millions a year.

If non-profits don't want to do these things, then they can start paying taxes. Hypocrisy has its limits. But these suggestions only go so far. Steve Waldman's remarks in Interfluidity are right, we need outrage and shame to pierce the bureaucracy and ideology that shields predation.

GOP Can't Play Sheriff Bart

In Blazing Saddles the black sherrif proposterously takes himself hostage and threatens to blow his own brains out unless the prejudiced, enraged townspeople put down their weapons. The townspeople immediately yield to save the life of the sheriff that they were about to gun down.

In retrospect, Obama has done a good job negotiating the with the GOP. The first time the GOP threatened to default on the debt, they had shock leverage. Since then Obama has taken Medicaid and unemployment benefits off the negotiating table, for whom the recipients had little politcal power. In the sequestration it was agreed to take Medicare and Social Security off the table, which was easy since neither party wants to anger elderly voters. Most of the rest of the budget is defense and daily government operations.

What is strange is not only that the GOP allowed this maneuver - to remove those things that they most want to cut, but afterwards they didn't change their negotiating tactic. Taking a budget hostage only works if it is your opponent's budget. When the GOP is threatening to destroy the defense budget that they lobby for, the tactic isn't nearly as scary. And when they threaten to halt daily government services that will anger most voters, then the tactic is absurd. Particularly when Republican leaders on record for supporting the sequestration bill.

Right now Obama must be hugging himself and saying,"Oh baby, you are so talented. And they are so dumb!"