2012

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The Depressing Reality of Indefinite Detention

After all the promises from both Obama and Congressional leaders that indefinite detention for Americans would not be written into law, the 2013 National Defense Authorization Act contains exactly that.

What can we conclude from that? That both the executive branch including Barack Obama, Janet Napolitano and Eric Holder and majority elements of the legislative branch — the Senate voted 81-14, and the House voted 305-107 — want the power to detain Americans indefinitely without charge or trial. And why would they want the power if they didn’t intend to use it?

Ron Paul:

The now-infamous NDAA for fiscal year 2012, passed last year, granted the president the authority to indefinitely detain American citizens without charge, without access to an attorney, and without trial. It is difficult to imagine anything more un-American than this attack on our Constitutional protections. While we may not have yet seen the widespread use of this unspeakably evil measure, a wider application of this “authority” may only be a matter of time.

Historically these kinds of measures have been used to bolster state power at the expense of unpopular scapegoats. The Jewish citizens of 1930s Germany knew all about this reprehensible practice. Lately the scapegoats have been mostly Muslims. Hundreds, perhaps many more, even Americans, have been held by the US at Guantanamo and in other secret prisons around the world.

Rand Paul:

When you’re accused of a crime in our country you get a trial, you get a trial by a jury of your peers, no matter how heinous your crime is, no matter how awful you are, we give you a trial.

And children of those indefinitely detained during World War 2 have launched a legal challenge to the status quo:

The children of Japanese-Americans whose internment during World War II was upheld by the infamous Supreme Court ruling Korematsu v. United States are stepping into a new legal battle over whether the military can indefinitely detain American citizens.

Writing that their parents “experienced first-hand the injustice resulting from a lack of searching judicial scrutiny,” the children of Fred Korematsu and other Japanese-Americans who were interned filed a brief on Monday in support of a lawsuit against the National Defense Authorization Act of 2012. Critics say the law allows the military to lock Americans away without trial merely on suspicion of support for terrorist organizations.

“During WWII, President Roosevelt essentially issued the military a ‘blank check,'” Korematsu’s children wrote in a friend-of-the-court brief. The military’s orders, “to which the Court uncritically deferred, culminated in the internment. In reviewing the NDAA’s new detention provision, the courts cannot afford to mimic the wartime Supreme Court’s failure.”

Then, America was at war with nations. Once a peace treaty was signed, the vile, racist detention ended. But for those detained under an accusation of being a part of decentralised groups like al-Qaeda, or Wikileaks, or Anonymous there are no peace treaties, no definite end to hostilities.

And while the judiciary has so far thrown out indefinite detention as unconstitutional under the Fifth Amendment, this has not stopped the legislative and executive branches of government from bulldozing on. Obama, the “constitutional scholar” defends the principle of the indefinite detention of Americans. The neocon triumvirate of Lindsey Graham, John McCain and Joe Lieberman continue to demand it.

This is terrible. If evidence exists of lawbreaking, suspects can be charged and tried. If the government has no evidence that can stand up in court, it shouldn’t be in the business of detaining anyone.

Today the detained may be those accused of being members of al-Qaeda, Wikileaks, or Anonymous. Tomorrow, who knows who might find themselves in the crosshairs of indefinite detention — journalists, whistleblowers, dissidents. As Naomi Wolf noted when Judge Katherine Forrest first struck down indefinite detention:

Forrest asked repeatedly, in a variety of different ways, for the government attorneys to give her some assurance that the wording of section 1021 could not be used to arrest and detain people like the plaintiffs. Finally she asked for assurance that it could not be used to sweep up a hypothetical peaceful best-selling nonfiction writer who had written a hypothetical book criticizing US foreign policy, along lines that the Taliban might agree with. Again and again the two lawyers said directly that they could not, or would not, give her those assurances. In other words, this back-and-forth confirmed what people such as Glenn Greenwald, the Bill of Rights Defense Committee, the ACLU and others have been shouting about since January: the section was knowingly written in order to give the president these powers; and his lawyers were sent into that courtroom precisely to defeat the effort to challenge them. Forrest concluded: ”At the hearing on this motion, the government was unwilling or unable to state that these plaintiffs would not be subject to indefinite detention under [section] 1021. Plaintiffs are therefore at risk of detention, of losing their liberty, potentially for many years.“

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When Currency Wars Become Trade Wars…

Beggaring thy neighbour has consequences. Neighbours might turn around and bite back.

China and the United States are already locked in an intractable and multilayered currency war. That has not escalated much yet beyond a little barbed rhetoric (although if China want to get a meaningful return on the trillions of dollars of American paper they are holding, one can only suspect that there will be some serious escalation as the United States continues to print, print, print, a behaviour that China and China’s allies are deeply uncomfortable with).

But Brazil are already escalating.

Brazil flag face

The Washington Post notes:

When the Brazilian economy began to stall last year, officials in Latin America’s largest country started pulling pages from the playbook of another major developing nation: China.

They hiked tariffs on dozens of industrial products, limited imports of auto parts, and capped how many automobiles could come into the country from Mexico — an indirect slap at the U.S. companies that assemble many vehicles there.

The country’s slowdown and the government’s response to it is a growing concern among U.S. officials worried that Brazil may be charting an aggressive new course — away from the globalized, open path that the United States has advocated successfully in Mexico, Colombia and some other Latin American nations, and toward the state-guided capitalism that the United States has been battling to change in China. As the world economy struggles for common policies that could bolster a still tentative recovery, the push toward protectionism by an influential developing country is seen in Washington as a step backward.

“These are unhelpful and concerning developments which are contrary to our mutual attempts” to strengthen the world economy, outgoing U.S. Trade Representative Ron Kirk wrote in a strongly worded letter to Brazilian officials that criticized recent tariff hikes as “clearly protectionist.”

And Brazilian officials are very, very clear about exactly why they are doing what they are doing:

Brazilian officials insist the measures are a temporary buffer to help their developing country stay on course in a world where they feel under double-barreled assault from cheap labor in China and cheap money from the U.S. Federal Reserve’s policy of quantitative easing.

“We are only defending ourselves to prevent the disorganization, the deterioration of our industry, and prevent our market, which is strong, from being taken by imported products,” Brazil’s outspoken finance minister, Guido Mantega, said in an interview. Mantega popularized use of the term “currency war” to describe the Federal Reserve’s successive rounds of easing, which he likened to a form of protectionism that forced up the relative value of Brazil’s currency and made its products more expensive relative to imports from the United States and also China.

How long until other nations join with Brazil in declaring trade measures against the United States is uncertain, but there may be few other options on the table for creditors wanting to get their pound of flesh, or nations wishing to protect domestic industries. After all, the currency wars won’t just go away; competitive devaluation is like trying to get the last word in an argument. The real question is whether the present argument will lead to a fistfight.

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Ready For the Apocalypse?

I am not really a doomer. But I do think that societies and individuals that do not prepare for the worst (and hope for the best) are needlessly endangering themselves. Tail risk events happen. An MIT study earlier this year predicted that the global economy would collapse by 2030.

A new national survey by National Geographic and Kelton Research finds some interesting results:

Which cataclysmic movies do Americans worry might come true?

7% of Americans think the Planet of the Apes might come true? Really? 30% of Americans think that the events of Roland Emmerich’s 2012 might occur?

And how prepared do Americans think they are for such events?

But in reality — in terms of what people have actually accomplished — few people seem ready for anything:

9% of people have alternative power sources? 21% have made some attempt to grow their own food? Only 43% have a spare supply of drinking water?

Not prepared at all.

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George Osborne & Big Banks

The Telegraph reports that George Osborne thinks big banks are good for society:

The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer.

“If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.”

His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

“That work has been accepted, as far as I’m aware, by all the major political parties. We are now on the verge of getting on with it,” he said.

Several members of the Commission have argued in favour of breaking up large banks, including former Chancellor, Lord Lawson.

This is really disappointing.

Why would Osborne want to see more of something which requires government bailouts to subsist?

Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks.

The 2008 crisis illustrates the problem with a large interconnective banking system. Big banks develop large, diversified and interconnected balance sheets as a sort of shock absorber. Under ordinary circumstances, if a negative shock (say, the failure of a hedge fund) happens, and the losses incurred are shared throughout the system by multiple creditors, then those smaller losses can be more easily absorbed than if the losses were absorbed by a single creditor, who then may be forced to default to other creditors. However, in the case of a very large shock (say, the failure of a megabank like Lehman Brothers or — heaven forbid! — Goldman Sachs) an interconnective network can simply amplify the shock and set the entire system on fire.

As Andrew Haldane wrote in 2009:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device.

Daron Acemoglu (et al) formalised this earlier this year:

The presence of dense connections imply that large negative shocks propagate to the entire fi nancial system. In contrast, with weak connections, shocks remain con fined to where they originate.

What this means (and what Osborne seems to miss) is that large banks are a systemic risk to a dense and interconnective financial system.

Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. The banking system would either have to self-regulate — prevent banks from getting too interconnected, and provide its own (non-taxpayer funded) liquidity insurance in the case of systemic risk — or accept the reality of large-scale liquidationary crashes.

In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.

Wonderful, right George?

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The Data That Won It For Obama

I wondered during the final debate whether Mitt Romney might steal a phrase from Ronald Reagan and ask Americans if they were better off than they were four years ago. It has worked for the Republicans before, and all the polling data pointed to the idea that voters were looking at the economy as the top issue.

Yet Romney did no such thing. Perhaps that was because by a number of significant measures, many Americans are better off than they were three or four years ago when America was mired in the epicentre of a global economic crisis. While America is in many cases just catching up to ground lost in the 2008 crash, and while many significant and real doubts remain about the underlying fundamentals of the American and global economies, the American economy has reinflated since early 2009.

Real GDP growth has been sustained:

The S&P500 has gone upward:

So has industrial production:

And total wages and salaries:

And here’s corporate profits:

And although total employment remains significantly depressed, headline unemployment has fallen (and those who have dropped out of the labour force have been entitled to expanded welfare programs):

It seems — although this was a very divided election — that these data provided enough juice to give just enough Americans the sense that although they may not be better off than they were at the turn of the millennium, under Obama things are improving just enough.

Certainly, some groups who have not fared well due to low interest rates such as seniors rejected Obama, too. Other groups, like women, deserted the Republicans on social issues. Yet Republicans looking for reasons why Romney ultimately lost probably need look no further than slow but steady reinflation.

Beneath the surface, this tepid reinflation is very much akin to the economy that got Bush re-elected in 2004. That recovery ended in mania and a bubble and finally a crash when subprime imploded in 2008. It is more than possible that this recovery is equally unsustainable and will end the same way, in crushing disappointment and grinding deflation.

Debt — the fuel of bubbles — is slowly growing again, from a perilously high starting point:

Deleveraging in the new quantitatively-eased environment has been very, very slow. This is a delicate and dangerous balancing act. Total debt levels as a percentage of the economy remain humungous and are a grinding weight on the underlying economy:

The Obama-Bernanke reinflation may well be an illusion built on the shakiest of foundations. And it may end more painfully than even the disastrous Bush-Greenspan reinflation. Yet it was enough to guarantee Obama re-election.

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The Great Pacification

Since the end of the Second World War, the major powers of the world have lived in relative peace. While there have been wars and conflicts  — Vietnam, Afghanistan (twice), Iraq (twice), the Congo, Rwanda, Israel and Palestine, the Iran-Iraq war, the Mexican and Colombian drug wars, the Lebanese civil war — these have been localised and at a much smaller scale than the violence that ripped the world apart during the Second World War. The recent downward trend is clear: Many thinkers believe that this trend of pacification is unstoppable. Steven Pinker, for example, claims:

Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species. The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

While the relative decline of violence and the growth of global commerce is a cause for celebration, those who want to proclaim that the dawn of the 21st Century is the dawn of a new long-lasting era of global peace may be overly optimistic. It is possible that we are on the edge of a precipice and that this era of relative peace is merely a calm before a new global storm. Militarism and the military-industrial complex never really went away — the military of the United States is deployed in more than 150 countries around the world. Weapons contractors are still gorging on multi-trillion dollar military spending. Let’s consider another Great Moderation — the moderation of the financial system previous to the bursting of the bubble in 2008.

One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. Ben Bernanke (2004)

Bernanke attributed this outgrowth of macroeconomic stability to policy — that through macroeconomic engineering, governments had created a new era of financial and economic stability. Of course, Bernanke was wrong — in fact those tools of macroeconomic stabilisation were at that very moment inflating housing and securitisation bubbles, which burst in 2008 ushering in a new 1930s-style depression. It is more than possible that we are in a similar peace bubble that might soon burst. Pinker highlights some possible underlying causes for this decline in violent conflict:

The most obvious of these pacifying forces has been the state, with its monopoly on the legitimate use of force. A disinterested judiciary and police can defuse the temptation of exploitative attack, inhibit the impulse for revenge and circumvent the self-serving biases that make all parties to a dispute believe that they are on the side of the angels. We see evidence of the pacifying effects of government in the way that rates of killing declined following the expansion and consolidation of states in tribal societies and in medieval Europe. And we can watch the movie in reverse when violence erupts in zones of anarchy, such as the Wild West, failed states and neighborhoods controlled by mafias and street gangs, who can’t call 911 or file a lawsuit to resolve their disputes but have to administer their own rough justice.

Really? The state is the pacifying force? This is an astonishing claim. Sixty years ago, states across the world mobilised to engage in mass-killing the like of which the world had never seen — industrial slaughter of astonishing efficiency. The concentration of power in the state has at times led to more violence, not less. World War 2 left sixty million dead. Communist nations slaughtered almost 100 million in the pursuit of communism. Statism has a bloody history, and the power of the state to wage total destruction has only increased in the intervening years. Pinker continues:

Another pacifying force has been commerce, a game in which everybody can win. As technological progress allows the exchange of goods and ideas over longer distances and among larger groups of trading partners, other people become more valuable alive than dead. They switch from being targets of demonization and dehumanization to potential partners in reciprocal altruism. For example, though the relationship today between America and China is far from warm, we are unlikely to declare war on them or vice versa. Morality aside, they make too much of our stuff, and we owe them too much money. A third peacemaker has been cosmopolitanism—the expansion of people’s parochial little worlds through literacy, mobility, education, science, history, journalism and mass media. These forms of virtual reality can prompt people to take the perspective of people unlike themselves and to expand their circle of sympathy to embrace them.

Commerce has been an extremely effective incentive toward peace. But commerce may not be enough. Globalisation and mass commerce became a reality a century ago, just prior to the first global war. The world was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances, and a new culture of cosmopolitanism. Yet the world still went to war.

It is complacent to assume that interdependency will necessitate peace. The relationship between China and the United States today is superficially similar to that between Great Britain and Germany in 1914. Germany and China — the rising industrial behemoths, fiercely nationalistic and determined to establish themselves and their currencies on the world stage. Great Britain and the United States  — the overstretched global superpowers intent on retaining their primacy and reserve currency status even in spite of huge and growing debt and military overstretch.

In fact, a high degree of interdependency can breed resentment and hatred. Interconnected liabilities between nations can lead to war, as creditors seek their pound of flesh, and debtors seek to renege on their debts. Chinese officials have claimed to have felt that the United States is forcing them to support American deficits by buying treasuries.

Who is to say that China might not view the prize of Japan, Taiwan and the Philippines as worthy of transforming their giant manufacturing base into a giant war machine and writing down their treasury bonds? Who is to say that the United States might not risk antagonising Russia and China and disrupting global trade by attacking Iran? There are plenty of other potential flash-points too — Afghanistan, Pakistan, Venezuela, Egypt, South Africa, Georgia, Syria and more. Commerce and cosmopolitanism may have provided incentives for peace, but the Great Pacification has been built upon a bedrock of nuclear warheads. Mutually assured destruction is by far the largest force that has kept the nuclear-armed nations at peace for the past sixty seven years.

Yet can it last? Would the United States really have launched a first-strike had the Soviet Union invaded Western Europe during the Cold War, for example? If so, the global economy and population would have been devastated. If not, mutually assured destruction would have lost credibility. Mutually assured destruction can only act as a check on expansionism if it is credible. So far, no nation has really tested this credibility. Nuclear-armed powers have already engaged in proxy wars, such as Vietnam. How far can the limits be pushed? Would the United States launch a first-strike on China if China were to invade and occupy Taiwan and Japan, for example? Would the United States try to launch a counter-invasion? Or would they back down? Similarly, would Russia and China launch a first-strike on the United States if the United States invades and occupies Iran?

Launching a first-strike is highly unlikely in all cases — mutually assured destruction will remain an effective deterrent to nuclear war. But perhaps not to conventional war and territorial expansionism. With the world mired in the greatest economic depression since the 1930s, it becomes increasingly likely that states — especially those with high unemployment, weak growth, incompetent leadership and angry, disaffected youth —  will (just as they did during the last global depression in the 1930s) turn to expansionism, nationalism, trade war and even physical war. Already, the brittle peace between China and Japan is rupturing, and the old war rhetoric is back. These are the kinds of demonstrations that the Communist Party are now sanctioning:

And already, America and Israel are moving to attack Iran, even in spite of warnings by Chinese and Pakistani officials that this could risk global disruption. Hopefully, the threat of mutually assured destruction and the promise of commerce will continue to be an effective deterrent, and prevent any kind of global war from breaking out. Hopefully, states can work out their differences peacefully. Hopefully nations can keep war profiteers and those who advocate crisis initiation in check. Nothing would be more wonderful than the continuing spread of peace. Yet we must be guarded against complacency. Sixty years of relative peace is not the end of history.

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Explaining Hyperinflation

This is a post in three sections. First I want to outline my conception of the price level phenomena inflation and deflation. Second, I want to outline my conception of the specific inflationary case of hyperinflation. And third, I want to consider the predictive implications of this.

Inflation & Deflation

What is inflation? There is a vast debate on the matter. Neoclassicists and Keynesians tend to define inflation as a rise in the general level of prices of goods and services in an economy over a period of time.

Prices are reached by voluntary agreement between individuals engaged in exchange. Every transaction is unique, because the circumstance of each transaction is unique. Humans choose to engage in exchange based on the desire to fulfil their own subjective needs and wants. Each individual’s supply of, and demand for goods is different, and continuously changing based on their continuously varying circumstances. This means that the measured phenomena of price level changes are ripples on the pond of human needs and wants. Nonetheless price levels convey extremely significant information — the level at which individuals are prepared to exchange the goods in question. When price levels change, it conveys that the underlying economic fundamentals encoded in human action have changed.

Economists today generally measure inflation in terms of price indices, consisting of the measured price of levels of various goods throughout the economy. Price indices are useful, but as I have demonstrated before they can often leave out important avenues like housing or equities. Any price index that does not take into account prices across the entire economy is not representing the fuller price structure.

Austrians tend to define inflation as any growth in the money supply. This is a useful measure too, but money supply growth tells us about money supply growth; it does not relate that growth in money supply to underlying productivity (or indeed to price level, which is what price indices purport and often fail to do). Each transaction is two-way, meaning that two goods are exchanged. Money is merely one of two goods involved in a transaction. If the money supply increases, but the level of productivity (and thus, supply) increases faster than the money supply, this would place a downward pressure on prices. This effect is visible in many sectors today — for instance in housing where a glut in supply has kept prices lower than their pre-2008 peak, even in spite of huge money supply growth.

So my definition of inflation is a little different to current schools. I define inflation (and deflation) as growth (or shrinkage) in the money supply disproportionate to the economy’s productivity. If money grows faster than productivity, there is inflation. If productivity grows faster than money there is deflation. If money shrinks faster than productivity, there is deflation. If productivity shrinks faster than money, there is inflation.

This is given by the following equation where R is relative inflation, ΔQ is change in productivity, and ΔM is change in the money supply:

R= ΔM-ΔQ

This chart shows relative inflation over the past fifty years. I am using M2 to denote the money supply, and GDP to denote productivity (GDP and M2 are imperfect estimations of both the true money supply, and the true level of productivity. It is possible to use MZM
for the money supply and industrial output for productivity to produce different estimates of the true level of relative inflation):

Inflation and deflation are in my view a multivariate phenomenon with four variables: supply and demand for money, and supply and demand for other goods. This is an important distinction, because it means that I am rejecting Milton Friedman’s definition that inflation is always and only a monetary phenomenon.

Friedman’s definition is based on Irving Fisher’s equation MV=PQ where M is the money supply, P is the price level, Q is the level of production and V is the velocity of money. To me, this is a tenuous relationship, because V is not directly observed but instead inferred from the other three variables. Yet to Friedman, this equation stipulates that changes in the money supply will necessarily lead to changes in the price level, because Friedman assumes the relative stability of velocity and of productivity. Yet the instability of the money velocity in recent years demonstrates empirically that velocity is not a stable figure:

And additionally, changes in the money supply can lead to changes in productivity — and that is true even under a gold or silver standard where a new discovery of gold can lead to a mining-driven boom. MV=PQ is a four-variable equation, and using a four-variable equation to establish causal linear relationships between two variables is tenuous at best.

Through the multivariate lens of relative inflation, we can grasp the underlying dynamics of hyperinflation more fully.

Hyperinflation

I define hyperinflation as an increase in relative inflation of above 50% month-on-month. This can theoretically arise from either a dramatic fall in ΔQ or a dramatic rise in ΔM.

There are zero cases of gold-denominated hyperinflation in history; gold is naturally scarce. Yet there have been plenty of cases of fiat-denominated hyperinflation:

This disparity between naturally-scarce gold which has never been hyperinflated and artificially-scarce fiat currencies which have been hyperinflated multiple times suggests very strongly that the hyperinflation is a function of governments running printing presses. Of course, no government is in the business of intentionally destroying its own credibility. So why would a government end up running the printing presses (ΔM) to oblivion?

Well, the majority of these hyperinflationary episodes were associated with the end of World War II or the breakup of the Soviet Union. Every single case in the list was a time of severe physical shocks, where countries were not producing enough food, or where manufacturing and energy generation were shut down out of political and social turmoil, or where countries were denied access to import markets as in the present Iranian hyperinflation. Increases in money supply occurred without a corresponding increase in productivity — leading to astronomical relative inflation as productivity fell off a cliff, and the money supply simultaneously soared.

Steve Hanke and Nicholas Krus of the Cato Institute note:

Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy—to name a few.

So in many cases, the reason may be political expediency. It may seem easier to pay workers, and lenders, and clients of the welfare state in heavily devalued currency than it would be to default on such liabilities — as was the case in the Weimar Republic. Declining to engage in money printing does not make the underlying problems — like a collapse of agriculture, or the loss of a war, or a natural disaster — disappear, so avoiding hyperinflation may be no panacea. Money printing may be a last roll of the dice, the last failed attempt at stabilising a fundamentally rotten situation.

The fact that naturally scarce currencies like gold do not hyperinflate — even in times of extreme economic stress — suggests that the underlying mechanism here is of an extreme exogenous event causing a severe drop in productivity. Governments then run the printing presses attempting to smooth over such problems — for instance in the Weimar Republic when workers in the occupied Ruhr region went on a general strike and the Weimar government continued to print money in order to pay them. While hyperinflation can in theory arise either out of either ΔQ or ΔM, government has no reason to inject a hyper-inflationary volume of money into an economy that still has access to global exports, that still produces sufficient levels of energy and agriculture to support its population, and that still has a functional infrastructure.

This means that the indicators for imminent hyperinflation are not economic so much as they are geopolitical — wars, trade breakdowns, energy crises, socio-political collapse, collapse in production, collapse in agriculture. While all such catastrophes have preexisting economic causes, a bad economic situation will not deteriorate into full-collapse and hyperinflation without a severe intervening physical breakdown.

Predicting Hyperinflation

Hyperinflation is notoriously difficult to predict, because physical breakdowns like an invasion, or the breakup of a currency union, or a trade breakdown are political in nature, and human action is anything but timely or predictable.

However, it is possible to provide a list of factors which can make a nation or community fragile to unexpected collapses in productivity:

  1. Rising Public and-or Private Debt — risks currency crisis, especially if denominated in foreign currency.
  2. Import Dependency — supplies can be cut off, leading to bottlenecks and shortages.
  3. Energy Dependency — supplies can be cut off, leading to transport and power issues.
  4. Fragile Transport Infrastructure — transport can be disrupted by war, terrorism, shortages or natural disasters.
  5. Overstretched Military — high cost, harder to respond to unexpected disasters.
  6. Natural Disaster-Prone — e.g. volcanoes, hurricanes, tornadoes, drought, floods.
  7. Civil Disorder— may cause severe civil and economic disruption.

Readers are free to speculate as to which nation is currently most fragile to hyperinflation.

However none of these factors alone or together — however severe — are guaranteed to precipitate a shock that leads to the collapse of production or imports.

But if an incident or series of incidents leads to a severe and prolonged drop in productivity, and so long as government accelerates the printing of money to paper over the cracks, hyperinflation is a mathematical inevitability.

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A Critique of the Methodology of Mises & Rothbard

I find myself in the middle of a huge blowup between Max Keiser and Tom Woods over Mises, Menger and Austrian economics and feel that this is an opportune moment to express some doubts I have regarding contemporary Austrian methodology.

I am to some extent an Austrian, on three counts.

First, I subscribe to the notion that value is subjective; that goods’ and services’ values differ according to different individuals because they serve various uses to various users, and that value is entirely in the eye of the beholder.

Second, I subscribe to the notion that free markets succeed because of the sensitive price feedback mechanism that allocates resources according to the real underlying shape of supply and demand and conversely the successful long-term allocation of labour, capital and resources by a central planner is impossible (or extremely unlikely), because of the lack of a market feedback mechanism.

Third, I subscribe to the notion that human thought is neither linear nor rational, and the sphere of human behaviour is complicated and multi-dimensional, and that attempts to model it using linear, mechanistic methods will in the long run tend to fail.

It is not, then, the overall drift of Misesean-Rothbardian economics that I find problematic — indeed, I often find myself drawing similar conclusions by different means — but rather the methodology.

I reached my views — some of which new evidence will eventually wash away — through a lot of theorising mixed with much careful observation and consideration of case studies, historical examples and all sorts of real world data. I love data; and one of the things that attracted me toward thinking and writing about economics is the beautiful superabundant growth of new data opened up to the world by computers and the internet. No, it is not universal or complete, and therefore building a perfect predictive model is not possible, but that is not the point. If I want to know how the corn price in the USA moved during the first half of the twentieth century, the data is accessible. If I want to know the rate of GDP growth in Ghana in 2009, the data is accessible. If I want to know the crime rate in France, the data is accessible.

Miseseans choose to reach their conclusions not from data, but instead from praxeology; pure deduction and logic.

This is quite unlike the early Austrians like Menger who mainly used a mixture of deductionism and data.

According to Rothbard:

Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act.

And Mises:

Our statements and propositions are not derived from experience. They are not subject to verification or falsification on the ground of experience and facts.

This is completely wrongheaded. All human thought and action is derived from experience; Mises’ ideas were filtered from his life, filtered from his experience. That is an empirical fact for Mises lived, Mises breathed, Mises experienced, Mises thought. Nothing Mises or his fellow praxeologists have written can be independent of that — it was all ultimately derived from human experience. And considering the Austrian focus on subjectivity it is bizarre that Mises and his followers’ economic paradigm is wrapped around the elimination of experience and subjectivity from economic thought.

If, as I often do, I produce a deductive hypothesis — for instance, that the end of Bretton Woods might produce soaring income inequality — it is essential that I refer to data to show whether or not my hypothesis is accurate. If I make a deductive prediction about the future, it is essential that I refer to data to determine whether or not my prediction has been correct.

Exposing a hypothesis to the light of evidence augments its strong parts and washes away its weaker ones. When the evidence changes, I change my opinion irrespective of what my deductions led me to believe or what axioms those deductions were based upon. Why reach the conclusion that central planning can induce civilisational failure through pure logic when the historical examples of Mao’s China and Stalin’s Russia and Diocletian’s Rome illustrate this in gory detail?

This is elementary stuff. Deduction is important — indeed, it is a critical part of forming a hypothesis — but deductions are confirmed and denied not by logic, but by the shape of the evidence. In rejecting modelling — which has produced fallacious work like DSGE and RBCT, but also some relatively successful models like those of Minsky and Keen — praxeologists have made the mistake of rejecting empiricism entirely. This has confined their methods to a grainier simulation; that of their own verbal logic.

It is not necessary to define a framework through mathematical models in order to practice empirical economics. Keynes was cited by Rothbard in support of the notion that economics should not be fixated on mathematical models:

It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis, that they expressly assume strict independence between the factors involved and lose
all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as
imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

And I agree. But nowhere did any of the figures cited by Rothbard; not Keynes, nor Wild, nor Frola, nor Menger endorse a wholly deductionist framework. All of these theorists wanted to work with reality, not play with logic. Create a theory; test; refine; test; refine; etc.

Praxeologists claim that praxeology does not make predictions about the future, and that any predictions made by praxeologists are not praxeological predictions, but instead are being made in a praxeologist’s capacity as an economic historian. But this is a moot point; all predictions about the future are deductive. Unless predictions are being made using an alien framework (e.g. a neoclassical or Keynesian model) what else is the praxeologist using but the verbal and deductive methodology of praxeology?

It has been the predictive success of contemporary Austrian economists — at least in identifying general trends often ignored by the mainstream — that has drawn young minds toward Misesean-Rothbardian economics.

Of those economists who predicted the 2008 crisis, a significant number were Austrians:

Yet Miseseans including Peter Schiff damaged their hard-earned credibility with a series of failed predictions of imminent interest rate spikes and hyperinflation of the dollar by 2010.

That is not to say that interest rate spikes and high inflation cannot emerge further down the line. But these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation, while ignoring the empirical reality of Japan, where a huge post-housing-bubble expansion of the monetary base produced no such huge inflation. Reality is often far, far, far more complex than either mathematical models or verbal logic anticipates.

Like all sciences, economics should be driven by data. For if we are not driven by data than we are just daydreaming.

As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods — noted:

The merits of a theory always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements.

Praxeology is leading Austrian economics down a dead end.

Austrianism would do well to return to its root — Menger, not Mises.

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How Badly Does Wall Street Want a Romney Presidency?

Apparently, this badly:

But this is chickenshit money — it doesn’t even add up to Lloyd Blankfein’s 2007 bonus.

Let’s see where the real money is going.

Markets couldn’t seem to care less:

The S&P is still well up during Obama’s presidency.

So does Wall Street really want a Romney Presidency? Or could Wall Street not care less, because they know that both sides will gladly do their bidding? After all it’s not like Obama has tried to jail corrupt bankers — Corzine, who after raiding segregated accounts is surely up there with the most corrupt guys on Wall Street, has been bundling for Obama as recently as April.

Ignore the chickenshit donations. If markets fall significantly between now and November — 1300, 1200, 1100, 1000 — the powers that be on Wall Street want a Romney presidency. After all, it’s not only possible but extremely easy to deliberately crash the market when you have at your disposal algorithmic trading programs that can buy the spike and sell the dip 40 times a second (that’s 2400 times a minutes, 144,000 times an hour). No market crash? They’re happy to stick with Obama.

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The Eminent Domain Mortgage Heist?

Matt Taibbi:

Something very interesting is happening.

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.

But there’s something brewing that looks like it might be a blueprint to effectively take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well the program will work, but it’s certaily been effective in scaring the hell out of Wall Street.

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble.

I approach the issue and constitutionality of eminent domain — government seizing of property in exchange for whatever the government defines as just compensation — very suspiciously. While I am altogether hostile to the idea of government being able to declare that what is yours is not yours, it has recently become a device for government to transfer private property from one private owner to another.

In Kelo v. City of New London (2005), the use of eminent domain to transfer land from one private owner to another private owner to further economic development was deemed to be constitutional. In a 5–4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible public use under the Takings Clause of the Fifth Amendment.

While seizing land with compensation to build a highway for public use is one thing, seizing property for the private profit of others is quite another. Yet many like Taibbi are heralding the potential of seizing underwater mortgages. I will consider any initiative to reduce total debt and deleveraging costs, as I believe that excessive total debt is the largest cause of today’s depression. But given the history, I have every right to be cautious and even suspicious.

Taibbi:

The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern.

Here’s how it works: Mortgage Resolution Partners helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).

Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans.

At that point, the JPA [i.e. the taxpayer!] is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.

On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back his own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.

First — why municipalities? Why not states? The answer is that while all states other than Vermont have some form of balanced budget amendment, and cannot so easily take on debt, municipalities can freely take on debt. How much? Well, it’s almost certain to be open to legal challenges by current mortgage-holders, and courts may end up forcing municipalities to pay far more than municipalities initially stipulate. But at whatever values the mortgages are seized at, there is no doubt that the taxpayer will end up holding a lot of new debt.

The biggest problem though, is surely the danger of corruption. How many municipalities will end up using these opaque procedures to enrich well-connected insiders? How many will buy junk at inflated prices, or seize and sell to a well-connected insider at far below value? Who polices such transactions? Where is the transparency? How do we make sure that this is not just an excuse for bad lenders to offload junk to the taxpayer at inflated prices and cream a profit when they were set to reap a loss?

Matt Taibbi admits:

MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.

“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we’re businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”

And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been  sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages.

What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer.

While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole. 

H/T to @MoiraCathleen