Neo-Keynesian

The imperial tree falls not because the challenges are too great but because the core of the tree has been weakened by the gradual loss of surplus, purpose, institutional effectiveness, intellectual vigor and productive investment. Comparing the American Empire with the Roman Empire in its terminal decline is a popular intellectual parlor game. The comparison is inexact on a number of fronts but despite the apparent difference, the two empires share the key characteristic of all enduring empires: they extract the cost of maintaining the empire from client states and/or allies. The mechanisms differ, but the results are the same: the empire's cost is distributed to those who benefit from its secure trade routes.

The overtly inflationary policy stance of the FOMC is especially significant when you consider that Fed Chairman Ben Bernanke is no longer in control of monetary policy.

Two of the key characteristics of an empire in terminal decline are complacency and intellectual sclerosis, what we have termed a failure of imagination. (The others are military over-reach, chronic deficits, a parasitic Elite that is immune to what's left of the rule of law, weak leadership, mass dependence on the Central State and excessive consumption.) It is important to discuss alternatives before the Status Quo devolves and collapses, so we have an intellectual framework to guide healthier, more sustainable alternatives once the current system implodes.

I argue that Abe is lucky, but now needs to be smart. I made a proposal a few years ago that Japan should return a quarter of its reserves to the Japanese people. The proposal is more compelling now than then. The objections by BOJ officials can be overcome by the Abe government. Reserves are for a rainy day and it is continuing to rain in Tokyo.

“Those are my principles,” Marx said.  “And if you don't like them... well, I have others.”

Two fundamental beliefs have driven economic policy around the world in recent years. The first is that the world suffers from a shortage of aggregate demand relative to supply; the second is that monetary and fiscal stimulus will close the gap. Is it possible that the diagnosis is right, but that the remedy is wrong? That would explain why we have made little headway so far in restoring growth to pre-crisis levels. And it would also indicate that we must rethink our remedies. Policymakers initially resorted to government spending and low interest rates to boost demand. As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand. Yet growth continues to be painfully slow. Why? What if the problem is the assumption that all demand is created equal? Put differently, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand.

Will Congress go over the fiscal cliff?  Yes, we've been going for decades, really since the social unrest of the 1970s. 

The Fed has never met a large bank merger that it did not like and has never been willing to deny such an application by a bank holding company, especialy a BHC that houses a primary dealer. 

Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  

To evaluate the impact of private sector deleveraging on economic growth/GDP in the context of a rapidly releveraging sovereign, we present the following analysis from Citi which observes various European countries and analyzes the "credit intensity" of GDP growth, or in other words which country has preserved, or even grown its GDP even as its private sector has seen substantial deleveraging. The results are interesting and may present a framework for evaluation the winners and losers in Europe in the era of "great sovereign leveraging", permitting a reverse engineering of the success stories, and applying their lessons to the losers.

Obama may not be the most successful president when it comes to creating jobs at home, but when success is measured by the number of blowjobs outsourced abroad, he may be truly second to none, as his visit to Colombia proves before it has officially begun. According to the AP, "A dozen Secret Service agents sent to Colombia to provide security for President Barack Obama at an international summit have been relieved of duty because of allegations of misconduct." Relieved here being a perfectly randomly selected verb. Because according to a tip received by The Associated Press "the misconduct involved prostitutes in Cartagena, Colombia, the site of the Summit of the Americas. A Secret Service spokesman did not dispute that allegation." Or, as Goldman would call it, an "Asymmetric (Secret) Servicing Initiative" where much more than just inside information is leasked. Unfortunately, while he may be far more successful in generating jobs in Latin America than domestically, even those jobs have proven to be quite transitory, just like virtually all quickie temp jobs "created or saved" in the US in the past several years. Furthermore, just like in the US, we doubt that the incremental wealth benefits will trickle down to the local population. After all, unlike in the US, endogenous Colombian liquidity may be abundant everywhere but certainly not at the central bank, which is far, far tighter at a rate of 5.25% (and rising), compared to extra loose central planners the "developed" world over.

There is a good reason why we need not encourage Arianna Huffington to believe she is an important thinker of our time. I believe ridicule is a good way to inform her of that.

Ray Dalio released a study he did on deleveraging. The piece was featured prominently here at ZH. I am a fan of Dalio, but his analysis was surprising. His interpretation of the economy is, remarkably, based on a very conventional ideas and is shockingly wrong. For a guy who is known for thinking out of the box and has who has led Bridgewater to become the biggest hedge fund in the world, he has got the deleveraging process all wrong. 

Two weeks ago we penned "As US Debt Hits New Record, Fiscal 2012 Tax Revenues Are 10% Higher Than Debt Issuance" which unfortunately was very wrong: we completely forgot that tax revenues in the US are a two way street particularly from January through the end of tax season on April 15, when income and employment tax withholdings are offset by tax refunds as consumers rightfully claim (and in the process pad TurboTax revenues simply for having under-exempted themselves) what was overcollected by the government. Unfortunately, it also means that we showed the US in a far better fiscal light than it is in reality, because contrary to our conclusion that tax revenues are higher than debt issuance in fiscal 2012 (starting October 1, 2011), the reality is not only a mirror image, but worse, with total debt issued now surpassing net revenues (withholdings net of refunds) by a whopping 15%! In other words, for $710.7 billion issued in debt YTD (debt has risen from $14.79 trillion to $15.5 trillion), net tax revenues have risen only by $607 billion. Which means that contrary to conventional wisdom that the US collects in taxes modestly more than it issues, at least through the peak of tax refund season that is certainly not the case. It also means that little by little that neo-Keynesian ideal (where we hope we jest but are no longer sure) of all deficits being funded purely by debt issuance, is slowly coming true.

Lest anyone forget what the real story is, here is a reminder. Thank you neo-Keynesian economics for making a mockery of non-scientific notation.