Of Joseph & Keynes

Although Keynes’ conceptual framework for macroeconomics was original, the economic ideas broadly known as Keynesianism — the possibility of unclearing markets, and countercyclical spending — are much older than John Maynard Keynes, and their continued predominating association with him is rather puzzling to me. Indeed, looking at Keynes’ ideas through the lens of his predecessors is illuminating.

According to Genesis in the Old Testament, in ancient Egypt, Joseph son of Jacob warned the Pharaoh that his dreams foretold seven years of abundant harvest to be followed by seven years of poor harvests. Farming in the Nile delta depended on good rainfall in the highlands of central Africa to flood the delta area with water and fertile topsoil. Without good rainfall, Egypt was susceptible to famine.

Joseph told the Pharaoh to store a surplus of grain during the first seven years so that the country would have grain during the drought. During the time of plenty, Joseph ordered the storage of 20 percent of farmers’ output in the Pharaoh’s granaries.

This was a countercyclical fiscal policy millennia before Keynes. If we are to be historically correct, Keynesianism might be better known as Josephianism. And although Joseph’s coat-of-many-colours might arouse the suspicions of certain homophobic critics of Keynes, it is noted that Joseph’s wife bore him two sons.

joseph-and-the-amazing-technicolor-dreamcoat-190745897

Keynes’ notion of disequilibrium was a reaction against an idea that only grew wings roughly 130 before Keynes with the industrial revolution — Say’s Law, the notion that “products are paid for with products”, that “a glut can take place only when there are too many means of production applied to one kind of product and not enough to another” and that subsequently “a rational businessman will never hoard money; he will promptly spend any money he gets “for the value of money is also perishable.”

Say’s Law is empirically false. Under certain conditions — including the present condition —  savings levels can soar uncontrollably even while interest rates languish at zero, and while unemployment is elevated. In fact, Say himself foresaw the possibility of massive involuntary unemployment and like Keynes and Bastiat, advocated public works programs to decrease unemployment. Indeed perhaps Say’s Law — at least in its post-Keynes incarnation — is more reflective of the ideas of Nassau Senior or David Ricardo than Jean-Baptiste Say.

Although the human sphere has always been driven to disequilibrium by the divergency of human plans and imaginations, prior to the industrial revolution — like in the time of Joseph and the Pharaoh — the possibility of involuntary unemployment (and starvation, etc) arising out of flood, robbery, famine, plague, drought, barbarian raids or some other externality was everywhere. The difference between the modern breakdowns in the Great Depression and the Post-2008 Depression and pre-industrial breakdowns of production is that the cause of the former is psychological (investors become grossly fearful of markets, etc, allowing resources to sit idle rather than being reallocated to productive uses) while the cause of the latter is actual material scarcity. But in the worst case the result is the same — needs and wants go unsatisfied and skills and trades stagnate. The outcomes of pre-industrial scarcity can seep into the post-industrial world through the channel of human psychology.

Keynes’ and Joseph’s recommendations on saving in the fat years to spend in the lean ones are ultimately apolitical in nature and apply just as much to the private sector as to the public sector. There is a widely-held conception that spending in the slump and saving in the boom is statist and favours central economic planning. This is not necessarily true. If a stateless society — let’s say, a future moon colony led by radical libertarians — becomes depressed, unemployment rises and resources lie idle, one solution to lift economic activity would be voluntary private infrastructure and capital spending. While Keynes himself rather unfortunately noted that “the theory of aggregated production… can be much easier adapted to the conditions of a totalitarian state”, infrastructure spending of private origin would be just as helpful in a depression in a stateless economy.

Yet Keynes sometimes pushed his arguments too far. Keynes suggested that “digging ditches is preferable to doing nothing” and proclaimed that the dawn of the Second World War meant that “the end of abnormal unemployment is in sight”. But wasting idle resources on unwanted projects like ditches or giant space lasers to repel a nonexistent alien invasion, or actively harmful projects like wars even though it may raise aggregate demand is still wasting resources. If the point of countercyclical policy is to avoid excessive levels of stagnation, it seems self-defeating to take idle resources and spend them on something entirely unwanted and unwarranted. Spending labour and capital on a destructive life-ending and infrastructure-destroying war rather than on useful infrastructural and scientific projects is akin to Pharaoh spending grain in a famine to support a war where just as many Egyptians die fighting as would have died in the averted famine.

So for successful countercyclical policy, I think it is important to emphasise quality projects that people actually want rather than simply emphasising aggregate levels of spending. In  Pharaoh’s Egypt, that was a store of grain…

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Is War Coming Between China And Japan?

Last month, I looked at the legal implications of a conflict between China and Japan, concluding that the likelihood remains low, and that America would not be legally bound to defend Japan:

First of all, it is critical to note that the United States is not legally obligated under its with Japan treaty to intercede on Japan’s behalf. The treaty states that the United States is required to report any such event to the UN Security Council, instead:

Each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes. Any such armed attack and all measures taken as a result thereof shall be immediately reported to the Security Council of the United Nations in accordance with the provisions of Article 51 of the Charter. Such measures shall be terminated when the Security Council has taken the measures necessary to restore and maintain international peace and security.

Very simply, this means that China can attack Japan without fearing an inevitable American retaliation. That fact alone makes a small skirmish fairly likely.

So what if China successfully captured the islands — and perhaps even more Japanese territory — as we can perhaps assume given China’s overwhelming size and military-spending advantages? Well, the United States and presumably the international community other than China’s allies would seek to diplomatically pressure China to stand down and reach a peaceful arbitrated resolution via the UN.

If China refused to stand down and accept a diplomatic solution — that is, if China was absolutely set on staring down the United States — then the United States would be forced to choose between providing military support to Japan — and possibly ultimately escalating up to a global war between China and her allies and the United States and her allies — or facing a humiliating climbdown, and accepting both Chinese sovereignty over the islands, as well as any other Japanese territory that China might have captured, as well as face the possibility of further Chinese incursions and expansionism in the Pacific in the future.

In the last day it has been reported that Chinese forces have been mobilising.

Mobilising

A report out of China by NTDTV (in very broken English) notes:

February 3, Nan’an, Fujian Highway 308, artillery units practical exercise for several days.

February 3 to 6, Fujian, Xiamen, Zhangzhou, Huzhou, a large troop movements, nearly 100 vehicles of various types of military vehicles, armored vehicles, artillery filled the entire road, endless, Xiamen and even the scene of a traffic jam 10 kilometers.

In addition, on February 3 in Shiyan, Hubei, a large number of tanks, wheeled military base from Shiyan room counties is delivered to the coastal areas. Many local residents of the tense situation of some concern.

Prior to this allegation, January 15 and 30, the Chinese navy guided missile frigate, twice the fire control radar lock frigates and ship-borne helicopters of the Japanese Maritime Self-Defense Force, is also considered to enter a combat state.

According to mainland media quoted the “People’s Daily” front-page article claiming that China will not change in point of view on the issue of the Diaoyu Islands , and have to prepare to win the war.

The international media alleged that China has purchased from Russia 239 engine, used in the manufacture of the H-6K. Combat covering the Diaoyu Islands, in this model, the engine can also be used to manufacture transported -20 transport aircraft purchased.

If the engine assembled, will greatly enhance China’s military power.

This may turn out to be much ado about nothing, propaganda released to make a hullabaloo. With China gradually growing relatively stronger, and the United States and her allies growing relatively weaker, China on the surface may seem to have very little incentive to do much other than wait. But with global economic conditions worsening, and both China and Japan becoming more fierce in their rhetoric, it becomes likelier and likelier that China may choose to project its economic problems outward by starting a hot war. Most importantly, with the United States not committed to materially defend Japan, it appears to me like China may see this as a golden opportunity to impose itself on the region, to humiliate the already overstretched United States, and make a statement by pushing Japan out of the islands, or perhaps even by going postal and invading other Japanese islands or even Taiwan. With the world dependent on goods and components produced and assembled in China, China already has a lot of leverage to push the rest of the world into accepting a Chinese-dominated regional order.

Still I would say that by far the most rational course for China is to not start a war. But if China starts, it becomes increasingly likely that the United States will respond.

Governments around the globe are advised to remember that while war may increase GDP, and while it may lower unemployment, it destroys an unquantifiably larger amount of real wealth — lives, businesses, physical capital, social capital.

Krugman Claims He Has Been Right About Everything

I don’t think Krugman’s descriptive work on global trade patterns is bad. I don’t even think he has been completely wrong about the post-2008 economic depression. He certainly hasn’t been wronger than the people who are in charge in Europe, or the people running the Fed; he did, after all warn in 2005 that the Fed was “running out of bubbles” to reinflate, while Bernanke was still claiming in 2007 that subprime was contained.

I do think his defence of broken windows is facile, and I think the notion he has advanced that World War 2 ended the Great Depression is not just wrong but dangerous.

He’s a good polemicist; he defines himself through big, bold, wildly partisan claims. But if he’s going to claim that he’s been right about everything — as he just did — he might want to make sure he’s not directly contradicting statements he made just a week previous.

On June 18th Krugman posited:

I (and those of like mind) have been right about everything.

However on June 11th Krugman wrote:

People like me may not have been right about everything, but have accumulated a pretty darn good track record over the past 5 years.

So, um, which is it?

Nobody can be right about everything. Claiming that you have been is just silly hyperbole which will end up making you look bad especially when your record is, in reality, quite mixed. And if his goal is to convince policy-makers to ditch austerity (a goal that I share, at least for the time-being), he’s not going to do it by sticking his foot in his mouth.

Springtime for the Military-Industrial Complex

The FT erroneously concludes that the boom-times are over for the military contractors:

The wars in Afghanistan and Iraq have been a boon to US contractors. The US has used so many of them in the conflicts that at times they outnumbered the military they supported. But the boom times are coming to an end and military service companies in particular are being squeezed.

Moody’s, the rating agency, expects revenue and margin pressure on defence service companies to become visible soon as the US Department of Defence, the world’s biggest military spender, negotiates tougher terms for contractors, reduces spending on them and brings its troops home from Afghanistan in time to meet the end 2014 deadline set by President Barack Obama.

In Iraq and Afghanistan the top contractor was Kellog, Brown & Root, the engineering and construction services company. It earned $40.8bn during the past decade, while Agility, the logistics company, and DynCorp, which specialises in security, earned $9bn and $7.4bn respectively, according to a US government report.

After a decade of unrivalled prosperity thanks to war and a booming global economy the defence service sector will have to work harder through innovation, as well as lean and well-focused management, to prosper.

In a word, nope. What cuts? The Obama budget aims to increase military expenditures far-above their already-puffed-up status quo:

Offering a military budget designed to head off charges that he’s weak on defense, President Obama unveiled a Pentagon spending plan that fails to cut any major procurement programs and calls for spending $36 billion more on the military in 2017 than it will spend this year.

Here’s what Obama intends to increase (and what Romney, of course, intends to increase more):

Yeah, America is spending more today drone-striking American citizens in Yemen, drone-surveilling Mexican drug lords and “turning our attention to the vast potential of the Asia-Pacific region” than she was during the cold war when a hostile superpower had thousands of nukes pointing at her.

Military contractors have nothing to fear. Whether it is the Pacific buildup to contain Chinese ambition, or drone strikes in the horn of Africa or Pakistan, or the completely-failed drug war, or using the ghost of Kony to establish a toehold in Africa to compete with China for African minerals, or an attempted deposition of Bashar Assad or Egypt’s new Islamist regime, or bombing Iran’s uranium-enrichment facilities, or a conflict over mineral rights in the Arctic, or (as Paul Krugman desires — and what the heck, it’s 2012, why not?) an alien invasion, or a new global conflict arising out of a global economic reset, it’s springtime for the military contractors. It’s everyone else who should be worried.

Time to Get Out of the Middle East

It takes a lot of time and effort to try to understand American counter-terrorism policy today.

Personally, I think the status quo is like trying to treat a cocaine overdose with methamphetamine. It’s like trying to cure chlamydia by having sex with multiple random strangers in a park. It’s like trying to cure a broken nose by punching oneself in the face.

Or, as Glenn Greenwald puts it:

I absolutely believe that another 9/11 is possible. And the reason I believe it’s so possible is that people like Andrew Sullivan — and George Packer — have spent the last decade publicly cheering for American violence brought to the Muslim world, and they continue to do so (now more than ever under Obama). Far from believing that another 9/11 can’t happen, I’m amazed that it hasn’t already, and am quite confident that at some point it will. How could any rational person expect their government to spend a full decade (and counting) invading, droning, cluster-bombing, occupying, detaining without charges, and indiscriminately shooting huge numbers of innocent children, women and men in multiple countries and not have its victims and their compatriots be increasingly eager to return the violence?

Isn’t it painfully obvious? The interventionist policies — occupation, drone strikes, cluster-bombing, indefinitely detention, false vaccination programs and so forth — in the middle east advocated by both “liberal” and “conservative” hawks that are supposed to prevent terrorism are creating anger, creating enemies, and creating terrorists. I too am amazed another 9/11 hasn’t happened. I despise jihadism and Islamism. It is contrary to everything I stand for. That’s exactly why I oppose a foreign policy that serves as a hugely effective recruiting tool for the totalitarian jihadists. 

Yemeni lawyer Haykal Bafana explained the rationale last month:

Dear Obama, when a U.S. drone missile kills a child in Yemen, the father will go to war with you, guaranteed. Nothing to do with Al Qaeda.

Or as convicted terrorist Faisal Shahzad put it:

Well, the drone hits in Afghanistan and Iraq, they don’t see children, they don’t see anybody. They kill women, children, they kill everybody. I am part of the answer to the U.S. terrorizing the Muslim nations and the Muslim people.  And, on behalf of that, I’m avenging the attack.  Living in the United States, Americans only care about their own people, but they don’t care about the people elsewhere in the world when they die.

Or as former CIA counter-terrorism expert Michael Scheuer noted:

The idea that has been pushed by President Clinton and President Bush and Mr. Cheney and Barack Obama and Senator McCain, that America is being attacked [for its freedom] is a disservice to the population of the United States. This war is not against Americans because we’re Americans, it’s motivated by the activities of our government and its allies in the Muslim world.

So why do we keep doing this? Two reasons: hubris and greed.

First, the hubris. We know Ron Paul was booed in South Carolina for advocating that we should do to others as we would like done to us:

My point is if another country does to us what we do others, we’re not going to like it very much. So I would say that maybe we ought to consider a golden rule in — in foreign policy. Don’t do to other nation what we don’t want to have them do to us.

But that’s just the propagandistic nature of being a superpower. Years of prosperity, military supremacy and pro-war propaganda have made it normal to believe strongly in the idea that America is intrinsically better, and wherever America goes America brings freedom, and anyone who doesn’t agree with that needs to be waterboarded until they do.

Yet however many times as the phrase “they hate us because we are free” is repeated, mantra-like by a Rick Santorum or a Newt Gingrich, it does not become truer. It is just an illusion, just a fantasy. While the jihadis were always anti-American, anti-democratic and anti-capitalistic, Osama bin Laden, Ayman al-Zawahiri and Sayyid al-Qutb — the fathers and grandfathers of modern Wahhabism, jihadism and al-Qaeda — became anti-American militants because of America’s role in the middle east.

As bin Laden himself said:

Those who kill our women and innocent, we kill their women and innocent, until they refrain.

And even more clearly:

Free men do not forfeit their security, contrary to Bush’s claim that we hate freedom. If so, then let him explain to us why we don’t strike Sweden, for example.

Second, the greed. America is in the middle east because America likes cheap energy. That myth of America as liberators flourished first as a justification for America’s petrodollar foreign policy.

And people get rich from America being at war — so far in the region of $4 trillion has gone to fighting since 9/11. A lot of weapons contractors are happy with the status quo.

So the military-industrial complex — the lobbyists, the weapons makers, the media — may accept it if Obama kills 14 women and 21 children to get one suspected terrorist. More terrorism means more weapons spending. For the lucky few it’s a self-perpetuating stairway to riches. Yet for wider society it means spending time, money and effort on war, instead of on domestic prosperity. It means the constant threat of terrorism. And it means the loss of our liberty, as the security state adopts increasingly paranoid anti-terrorism measures.

We should do to others as we would have done to ourselves. That means — unless we are comfortable with the idea of ourselves living under military occupation and drone strikes — getting out of the middle east, and letting that region solve its own problems — forget another costly and destructive occupation in Syria. Slash the war and occupation spending, and redirect the money to making America independent of middle eastern energy and resources.

The Trouble with Rand Paul

Rand Paul just endorsed a man who is deeply hostile to human liberty.

Perhaps that’s Rand’s idea of playing politics? Come to the table, strike a deal, get what you can. Trouble is, it’s tough striking a good deal when the guy on the other side of the table believes that the government should be allowed to claim — without having to produce any evidence whatsoever — that certain people are terrorists, and therefore should be detained indefinitely without any kind of due process.

That’s textbook tyranny.

Yes, I would have [signed the NDAA]. And I do believe that it is appropriate to have in our nation the capacity to detain people who are threats to this country, who are members of al Qaeda. Look, you have every right in this country to protest and to express your views on a wide range of issues but you don’t have a right to join a group that has killed Americans, and has declared war against America. That’s treason. In this country we have a right to take those people and put them in jail. If I were president I would not abuse this power. But people who join al Qaeda are not entitled to rights of due process under our normal legal code. They are entitled instead to be treated as enemy combatants.

Mitt Romney

Except, if the government had any evidence they were really members of al-Qaeda and engaged in a war against America they could be charged with offenses under current laws and tried in front of a jury of their peers. As was proven when Judge Katherine Forrest struck down the indefinite detention provision of the NDAA as unconstitutional, the real detention targets are people like the ones who brought the case — writers, investigative journalist and whistleblowers: people like Chris Hedges, Noam Chomsky, Daniel Ellsberg, Jennifer Bolen, and Birgitta Jonsdottir.

Rand Paul might have done some good work trying to filibuster the Patriot Act, but endorsing Mitt Romney goes beyond the pale. The NDAA is Romney’s most egregious transgression against liberty, but not far behind are his desire to start a war against Iran, to increase military spending, to start a trade war with China and his belief that corporations are people.

I know I will never agree with any politician on every single dimension of every single issue, and that to some extent politics will always involve compromise. Certainly, I disagree with Ron Paul on some issues. But Mitt Romney’s stances on these issues seem much, much, much closer to Barack Obama than they do to Ron Paul. In fact, he might as well have endorsed Obama for President.

And the Ron Paul supporters are noticing: Rand has probably burnt most bridges to his Father’s supporters now. His Facebook page has seen a huge outpouring of fury:

Just lost a lot of faith in a man I otherwise adored.

You suck Rand! Traitor!

That’s why this country is doomed! Even the person you trust is a sell-out. I’m done with politics, people deserve what they get. Let the country run itself to the ground, and still people will not understand what freedom and self-responsibility is about. People want big gov’t, big brother every step of the way. Well, they got it. The rest of us, might as well try to move to another country or find an island and move there.

I knew I’d never vote for Mitt… Now I know I’ll never vote for Rand.

He has fully sold out to the bankers

Endorsing Romney is tantamount to an utter sell-out of conservative principles.

Did George Washington, Thomas Jefferson and James Madison try to compromise with King George? Or — when it became obvious that they were facing tyranny — did they stand up for the principles of liberty?

I have always been uncomfortable with the children of politicians becoming politicians. Every anointed child feels like a step away from meritocracy. Dynasties are dangerous, because the dynasty itself comes to be more important than the qualities of the politicians. Who would Rand Paul be if he wasn’t Ron Paul’s son? Just another neocon. Neocons often have a few “unfashionable” libertarian or constitutionalist sympathies; look at Charles Krauthammer. But — unlike Ron Paul — the neocon never has the spine to do much about their libertarian or constitutionalist sympathies. They just ride on the establishment steamroller, into foreign occupations, empire building, corporate welfare, and banking bailouts. Into Iraq, and soon into Iran.

Rand Paul just got on the steamroller.

Enter the Swan

Charles Hugh Smith (along with many, many, many others) thinks there may be a great decoupling as the world sinks deeper into the mire, and that the dollar could be set to benefit:

This “safe haven” status can be discerned in the strengthening U.S. dollar. Despite a central bank (The Federal Reserve) with an avowed goal of weakening the nation’s currency (the U.S. dollar), the USD has been in an long-term uptrend for a year–a trend I have noted many times here, starting in April 2011.

That means a bet in the U.S. bond or stock market is a double bet, as these markets are denominated in U.S. dollars. Even if they go nowhere, the capital invested in them will gain purchasing power as the dollar strengthens.

All this suggests a “decoupling” of the U.S. bond and stock markets from the rest of the globe’s markets. Put yourself in the shoes of someone responsible for safekeeping $100 billion and keeping much of it liquid in treacherous times, and ask yourself: where can you park this money where it won’t blow up the market just from its size? What are the safest, most liquid markets out there?

The answer will very likely point the future direction of global markets.

Smith is going along with one of the most conventional pieces of conventional wisdom: that in risky and troubled times investors will seek out the dollar as a haven. That’s what happened in 2008. That’s what is happening now as rates on treasuries sink to all-time-lows. And that’s what has happened throughout the era of petrodollar hegemony.

But the problem with conventions is that they are there to be broken, the problem with conventional wisdom is that it is there to be killed, roasted and served on a silver platter.

The era of petrodollar hegemony is slowly dying, and the assumptions and conventions of that era are dying with it. For now, the shadow of that old world is still flailing on like Wile E. Coyote, hovering in midair.

As I wrote last week:

How did the dollar die? First it died slowly — then all at once.

The shift away from the dollar has quickly manifested itself in bilateral and multilateral agreements between nations to ditch the dollar for bilateral and multilateral trade, beginning with the chief antagonists China and Russia, and continuing through Iran, India, Japan, Brazil, and Saudi Arabia.

So the ground seems to have fallen out from beneath the petrodollar world order.

Enter the Swan:

We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later).

But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.

And would funds surge into US Treasuries even in such an instance? Maybe initially — fund managers have been conditioned by years of convention to do so. But how long  can fund managers accept negative real rates of return? Or — much more importantly — how long will the Fed accept such a surge? The answer is not very long at all. Bernanke’s economic strategy has been focussed  on turning treasuries into a losing investment, on the face of it to “encourage risk-taking” (or — much more significantly — keep the Treasury’s borrowing costs cheap).

All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).

So Paul Krugman will likely get something much closer to what he claims to want. Problem solved?

Nope. You can’t solve deep-rooted structural problems — malinvestment, social change, deindustrialisation, global trade imbalances, systemic fragility, financialisation, imperial decline, cultural stupefaction (etc, etc, etc) — by throwing money at problems. All throwing more money can do is buy a little more time (and undermine the currency). The problem with that is that a superficial recovery fools policy-makers, investors and citizens into believing that problems are fixed when they are not. Eventually — perhaps slowly, or perhaps quickly — unless the non-monetary problems are truly dealt with (very unlikely), they will boil over again.

As the devaluation heats up things will likely become a huge global game of beggar thy neighbour. A global devaluation will likely increase the growing tensions between the creditor and debtor nations to breaking point. Our current system of huge trade imbalances guarantees that someone (the West) is getting a free lunch , and that someone else (the Rest) is getting screwed. Such a system is fundamentally fragile, and fundamentally unstable. Currency wars will likely give way to economic wars, which may well give way to subterfuge and proxy wars as creditors seek their pound of flesh, and debtors seek to cast off their chains. Good news, then, for weapons contractors and the security state.