My Favorite Economic Factoid

I apologize in advance for bringing this topic up so often, but I just really can't get enough of it. I think it's because it absolutely encapsulates and epitomizes the fundamentally fake nature of the modern American economy.

To wit: the Federal Reserve has just reported that it has remitted $76 billion to the Treasury Department of the Fed's earnings on its $2.9 trillion portfolio of Treasuries, mortgage-backed securities, and other trash. Relative to this number, the Fed maintains a very low overhead (on the order of 1/2 billion), so the Fed's gross earnings essentially equal its net. The Fed is a lean, mean, phony-money-generating machine.

I think what I love more than anything is the learned discourse about this topic among all the major economic thinkers: Ben Bernanke, Paul Krugman, Brad DeLong, Larry Summers, Tim Geithner, Brian Sack of the New York Federal Reserve, as they ponder this awesome contribution to American solvency. They honestly take all this shit seriously, the "money" the Fed is paying into the Treasury, the money the Fed uses to "purchase" Treasuries on the "open market" from the In Crowd Primary Dealers, the "Quantitative Easing" programs that enabled the Fed to take all that dodgy mortgage paper off the hands of its troublesome children in the banking community in the first place. They consult graphs and charts, talk about the "expectations for inflation," note with satisfaction that the U.S. Treasury market remains saturated with offers for the Treasury's promises to pay money in the future on the paper it sells today, and at such a low cost! The Treasury barely pays anything for the privilege of accepting over a trillion dollars a year in new issuance.

Of course, the Federal Reserve is itself the largest holder in the world of Treasury bonds, which it purchased on the open market, as noted above. The Primary Dealers participated in auctions, bought Treasury bonds, then held most of this paper for a few weeks before flipping it to the Fed. The Fed thus avoided violating the rule which prohibits the Fed from simply buying the bonds directly from the Treasury at the original auction. You see, if the Fed did that, it would be directly "monetizing the debt," and the Fed would never do that. Instead, the Fed waits until someone else, a big bank or broker-dealer, first purchases the Treasury bonds; then the Fed conjures money out of thin air with a few keystrokes on its computer, takes possession of the bonds, and credits the reserve account of the Primary Dealer with a few billion, on which the PD earns a quarter of a percent in interest.

The Fed isn't really operating a Quantitative Easing ruse right now; it's running "Operation Twist," whereby as bonds in its portfolio mature, they are exchanged for bonds with longer duration. Thus, 2-year bonds become 5-year bonds, 5-year bonds become 10-year bonds, and so forth. Bernanke wants to lock in the super-low rates on which the Treasury is "obligated" to the Fed for as long as possible, because the Fed's big stash of Treasuries achieves a dampening effect on bond rates in general.

It's quite a high-wire act, the business of running a phony economy. Bernanke knows that he is engaged in a titration problem, analogous to the swimming pool metaphor I used a few posts back. I mean after all, if the Fed can really support the Treasury not only by purchasing bonds with conjured money, but can push the issue by then reporting "earnings" on these bonds and remitting them back to the Treasury to the tune of $76 billion per annum, then why not a reductio ad absurdum whereby the Fed simply buys all of the Treasury's issuance? And why not eliminate all taxation and support the Federal government entirely with Treasury issuance, all of which is purchased by the Fed with conjured money? But no need to stop there. Why not simply put the entire Gross Domestic Product on the government's payroll, all $15 trillion of it, and finance it all with keystrokes from the Fed's corner office computer?

Well, of course now I'm simply being ridiculous. However, in my ironic defense I would say this: if the logic of a proposition can be extended to encompass the absurd conclusion of the reduction in question, then the logic of the actual reality is also absurd. It is only a question of degree. Bernanke has gotten away with it so far because he tries to keep it down to a roar. He asks himself, when considering yet more "quantitative easing:" will this be the pillar, when I yank it out, that finally brings the entire temple down on my head?

I note with grim amusement that Russia, China, Iran and other countries are now actively seeking ways to work around the dollar-dominated system for settling oil deals and other commodity purchases. It's not hard to see why this would happen. Russia is selling real stuff, oil and natural gas, in exchange for paper originating on the computer in Bernanke's corner office. When China and Russia reinvest the dollars they receive from commodities, they must "repatriate" this money in America in exchange for Treasury promises that pay virtually nothing, with a negative return, in fact, when inflation is factored in. And the paper they buy is with actual money earned from selling real stuff, whereas Bernanke can buy his Treasury paper, with precisely the same value and return, simply by tapping in numbers.

Thus, at some point the foreign buyers will be gone. They won't need dollars anymore because they will find another way to settle their accounts. Not this year perhaps, not next, but soon, and for the rest of America's life. The American government will continue to run its massive deficits, of course, and with our savings rate effectively locked in at zero, it will be up to the Primary Dealers to buy it all, every piece of dubious paper emitted by the Treasury. To attract the foreign buyers, the recipients of all that money we use to buy all the stuff we used to make, or can't produce ourselves (such as most of the oil we use), we would have to pay them a real rate of return. But as the national debt hits $20 trillion and beyond, a rise in interest rates will be disastrous, and it's doubtful that the world's remaining producers of essential commodities (oil, most specifically) are going to be interested in American funny money anyway.

It is all very much like the myth of Narcissus. American leaders feel trapped by the expectations of the electorate; despite all evidence to the contrary, no one who values his favored position in American politics can afford to admit the awful truth, that this whole system is phony, made up out of thin air, fumes if you will, and we are running on those fumes and nothing more. We are transfixed by our own image, by our beauty and self-regard, and we cannot tear ourselves away from the reflecting pool. And one day we will take a header.

Through A Glass Darkly: The Republican Debate

I think Diane Sawyer is cute, always have thought so, and to think she's got the neurons to hang in there with an intellectual/creative guy like Mike Nichols. She's even cuter than George Stepho-etc. thinks he is, and that's very cute indeed. Looking at Diane was the only mitigating factor in the hour of life otherwise wasted watching the Republican "debate" last night. Sometimes, when I have subjected myself to a heinous experience like watching Republicans compete for Luddite of the Year Award, I get an inkling about Barack Obama's actual strategy, and it starts to look pretty clever. If you don't vote for him, then this is what you're looking at.

There are five pasty-white boring guys left now on the Republican side: Huntsman, Paul, Romney, Santorum, Gingrich, Perry. I guess that's six; somehow it doesn't matter. Ron Paul, increasingly, seems like a set of attitudes, borrowed from sources as diverse as Ayn Rand and Noam Chomsky, about how the world ought to work. He thought the Supreme Court decision of Griswold v. Connecticut, which was a 9th Amendment case about privacy rights, and specifically the constitutional right of a couple to use contraception in defiance of Connecticut's "blue law" to the contrary, was a Fourth Amendment search-and-seizure case. Then building on his error, Ron restated that that's one of the reasons he's against the Patriot Act. Here's the alarming part: Rick Santorum, who won some sort of distinction as the stupidest man in Congress when he represented Pennsylvania as a Senator, analyzed the case correctly. Of course, Rick Santorum believes that the states ought to be free to ban contraception if they feel like it, because the "right to privacy" is not in the Constitution.

Mitt Romney, sitting on his razor-thin lead and enjoying no real base of support in the modern Republican Party (a contradiction in terms, I realize), declined to answer the question directly from Cutesie George: does Mitt support the right of states to ban contraception? Well, gee, Mitt said. No state wants to ban contraception, so why talk about it?

That's how weird the Republicans have become. Their leading candidate cannot answer definitively that contraception is a good idea and ought to be available to people. What on Earth is the objection to contraception? Are the Republicans at the point where they think that the biological destiny of each and every ovum to become a (full-grown Christian) human must not be interrupted on pain of a murder charge? Does even God think that every spermatozoa has a soul?

Okay, to be fair, what these antiquarians are squirming to avoid is the recognition of any right to privacy under the 9th Amendment in the first place, because that's the foundation for Roe v. Wade, and that's the real quarry they're gunning for. They all want (Huntsman may be the exception) the unfettered right to a first-trimester abortion overturned, and they know they're only about one vote on the Supreme Court away from the prize. If Huntsman can figure out a way to relate the abortion issue to his years as an Ambassador to China, we'll get a clearer picture of his position.

Romney's the kind of Republican mannequin who would have been a shoo-in for the party's nomination even four years ago, but the ideological miasma of present-day Republicanism is getting in his way. He doesn't actually have any opinions or principles. You can tell he doesn't care if gays get married, if women get abortions, if people copulate with aardvarks on the street. They're all stupid issues, the government should let people do what they want sexually and socially, and he knows it (although now I think we need an Aardvark Rescue movement). He just wants the fricking nomination. He's a Republican like his father before him, and apparently you have to make a lot of dumb statements now with feigned passion in order to get this band of lunatics to let you sail under their banner. Thus, he's unable to attract more than 25% of their support, which must represent the magnitude of the vestigial sanity in the Republican Party.

Rick Perry continues to impress me as perhaps the dumbest person ever to vie for national public office. I don't know why he keeps showing up. It's over, Rick. Mitt Romney misses him most of all, because when Rick was considered tenable, it kept the attention away from the truly awful Rick Santorum and the quirky insurgence of Ron Paul. If Mitt could have maneuvered the race into a final match-up with Rick Perry, so that just the two of them would have been debating, the idiocy of Rick Perry would have become so patent and painfully obvious that Mitt would have won by acclamation. As it is he has to stagger through these debates with the idiosyncratic Ron Paul and the sanctimonious Rick Santorum offering stark contrasts to the empty-suit nothingness that is Romney's position on everything.

The debates do accomplish some things. In the first place, I'm beginning to see that Ron Paul is essentially a Human Bullet Point Announcer. His ideas are civil libertarian, highly idealistic (unrealistically so, in some cases), jarringly impractical (Medicare, access to health care in general), regressive (private ownership rights as superior to civil rights for minorities), and enlightened (the closing down of the American empire and its ruinous cost). The man behind all these ideas seems a little sketchy when you watch him in action, and as I've said, I don't know how he would function as an actual chief executive. The world could very well end on his watch.

I think Obama, of course, will just keep doing what he's doing, tuning in occasionally to watch, and relish, the Republican Circular Firing Squad as it moves from state to state, like the freak circus it is.

Saturday Morning Essay

Brought to You By Peet's Coffee.

As I've said before, if Barack Obama is reelected, then Secretary of Labor Hilda Solis should win the Most Valuable Player award going away. The official unemployment rate, U-3, keeps dropping, now down to 8.5%, despite two facts that would appear to make such a development mathematically impossible. (1) The actual number of jobs in America has not increased, holding steady at around 140 million. (2) The working age population continues to increase, month by month, year by year, and is now about 250 million. Using our fifth grade math, we can simplify terms and create the fraction 14/25. To convert this to a percentage, we divide the numerator by the denominator, and we get about 56%. 56% of the working age population in the United States, other than those in prison, the military or mental hospitals, have jobs.

I would guess that a very large percentage of those with these jobs hate their work and wish they didn't have to work. Such thoughts usually bring me around to thinking about Emile Durkheim, the famous social theorist who gave us the term "organic solidarity" to describe the economies of advanced industrial nations. Durkheim was referring to specialization, that rat-race arrangement that Henry David Thoreau, writing around the dawn of the Industrial Revolution, tried to warn us against. Society in modern countries has become a kind of "organism," a complicated, interrelated contraption in which we perform specialized functions to satisfy our various "needs," such as the need to undergo a weekly spiritual lobotomy while watching "American Idol" or "Dancing With The Stars."

Nevertheless, despite this proliferation of "needs," the actual requirements remain those of the evolved homo sapiens, as described in Walden: maintaining one's vital heat. With modern technology, this is not really that hard to do. For example, I wear clothes, as all non-nudists do. I buy mostly discount clothing at Costco, stuff arrayed on the big tables. Khaki pants, jeans, polo shirts. It's all cheap and it gets the job done. You don't have to spend more than 12 bucks for a pair of pants made in India or Vietnam. I have shirts in my closet that I've had for 20 years. They're in good shape, too; I'm easy on stuff. America makes about 7% of its own clothing these days, down about 80% over the last 40 years. At the next layer of heat maintenance, I have a house. It's about 50 years old, in decent shape, and it retains heat, not as well as it should (it's an American house), but it's warmer in here than outside. I heat it with a furnace fueled with natural gas. America produces a lot of its own natural gas. The electricity for the lights and the various gadgets in the house is furnished by PG&E, and this utility (very hip and committed to the battle against climate change) produces power through natural gas, hydroelectric dams and nuclear power, for the most part. I use compact flourescents for the lighting.

I eat fairly low on the food chain, and much of the food, including the beef, is produced locally. We have a big "local food" movement in my county, and it works fine.

So that's it. All of my needs are met. I can stay alive with what I've just listed above. When you think about it, America needs far, far fewer than 140 million people with jobs to get the things done I've just listed. Farming, for example, has mostly become agri-business and is not labor intensive except for certain crops at harvest, and probably more Mexicans and Guatemalans do that work in America than Americans. As noted, we don't make our own clothing anymore; 12 year old girls in Asian countries handle that for us. The energy industries hire a lot of people, but increasingly that work is mechanized as well. Auto manufacturing and sales in the USA are on a steady decline; the 250 million cars and trucks we already have are increasingly being kept for longer periods of time as the economy stagnates. You can fix your beater instead of replacing it every three years just for show, and avoid investing a ton of dough in an immediately depreciating hunk of metal, leather and rubber.

We need trades people, of course, plumbers and carpenters. We need doctors (far fewer than we have and better allocated to useful specialties), accountants and lawyers, although we could probably get by better with about 1/4th the number of attorneys we have. We need teachers to train people in the skills they will need to participate in the "organic" society, an admittedly kind of circular logic.

I really wonder what the "core" number of workers that we need to make society function actually is. It's pretty easy to list completely superfluous professions and occupations: nail salon workers; cosmetic plastic surgery people; tanning salon owners; party planners; wedding planners; florists; financial planners; workers in luxury car factories; personal trainers; 90% of the movie stars and movie makers; radio "personalities;" 90% of the politicians; professional athletes; NASCAR drivers; runway models; anyone named Kardashian; tabloid publishers, editors and writers; 85% of the real estate brokers; the lower half of the island of Manhattan; 80% of federal employees, most of them duplicating work that could be done at the local level; 80% of those in the military, many of whom simply serve because the "organic society" doesn't produce any real jobs; everyone in the fast food industry; all workers in the defense industry other than those making nuclear bombs and the means to deliver them, just to show the world we should be left alone (the only meaningful "national defense"); hundreds of other occupations and preoccupations. My guess is that the common estimate that 20% of the people do 80% of everything necessary is not far wrong, so that 80% of everything could be accomplished by about 28 million people (20% of 140 million, the work force) strategically and intelligently placed in American society, and the remaining 20% is probably, after all, not necessary. So 222 million working age Americans are just kind of futzing around pretending to do something necessary that we don't actually need.

I'm serious, actually, and you probably sense I'm not far wrong. Most jobs in Durkheim's world are completely unnecessary, and many of them (when you consider the extreme degradation of the environment, to the point of human nonviability) are positively harmful and dangerous (consider this list from Desdemona Despair, a depresso-blog about ecological catastrophe: www.desdemonadespair.net/2011/12/50-doomiest-stories-of-2011.html). We're living on the edge because of our calamitous overuse of the Earth.

I think this is why we became a "consumer society." There's really not enough to do of an essential nature, so we just make shit up to do and call it "necessary." Thus, when the total jobs number stays stuck for years and years on end, we try to figure out what's "wrong" with the economy. What's wrong with the economy is that it doesn't make any sense to begin with. What we're trying to do, again, is to create the excess wealth within the economy that will allow millions and millions of people to pursue the superfluous and unnecessary occupations they used to have, and we're having a very hard time doing it. For about 30 to 40 years, we did so by leveraging the existing capital stock of the country (debt and mortgaging against bubble prices) to disguise the fact that the economy had run past its actual usefulness.

Thus, if humanity survives (a very iffy proposition), we will do so either along the lines of the Buckminster Fuller fantasy, where the vast majority of people do not work and are maintained in their vital heat by technology and a small cadre of workers, or we will revert to Thoreauvian, generalist competence, abandoning Durkheim's World. Either way, the times they are a-changin'.

And Now the Presidential Race Really Begins!

One must begin somewhere.

"He came in one day to rehearse a speech, fuming. 'This is a dangerous world,' he said for no apparent reason, 'and this cat [Obama] isn't remotely qualified to handle it. This guy has no clue, I promise you'." Quote attributed to George W. Bush in 2008.

It's 2012 now, a leap year, and thus a Presidential election year. I'm sure we're all on the edge of our seats. The chief protagonists in the drama would appear to the incumbent; Mitt Romney, former merger-and-acquisition hatchet man for Bain Capital; and Ron Paul, a country obstetrician from Texas. If Obama is reelected, nothing will change. If Romney is elected, nothing will change. If Paul is elected, things will change in dramatic and unpredictable ways.

Most liberals actually want Ron Paul to win, without saying so out loud. They go about saying this in different ways, such as announcing confidently that Ron Paul has no chance of securing the Republican nomination, let alone winning the whole shebang. Once you have safely sidelined a candidate, marginalized him out of the Reality Zone, you are then free to speak wistfully about what it would be like if he were actually the President without saying, you know, that you want him to be President. This is how the game is played in our politically correct culture. Ron Paul has some dodgy things on his record concerning white supremacy and abortion, not to mention his unrealistic ideas of trading brain surgery for a dozen eggs, et cetera, and these positions mean that liberals must always be careful not to endorse him. Out loud, that is. Liberals can only support someone who agrees with them on absolutely everything - the slightest deviation from the liberal catechism means the candidate is out. I have observed since my earliest days of familiarity with liberalism, on the campus of the University of California at Berkeley in the Roaring Sixties, that liberal orthodoxy is enforced far more stringently than its conservative counterparts. Everyone must think the same thing about everything.

Still, liberals know that only Ron Paul is saying things that make any sense whatsoever. Liberals realize that Paul is savaged by the Mainstream Media because he threatens their meal ticket, the USA as a colossal empire. America as the Big Deal of the world is the basis of life in the Imperial City of Washington, D.C. The USA can't become France, or something. Thus, Paul is criticized as an "isolationist." Think for a moment about what this means. What other country in the world has 750 military installations worldwide? What other country has been fighting wars in as many as six countries during the last five years? What other country began and maintained two large-scale ground wars halfway around the world with troop commitments in excess of 200,000 soldiers for years at a time? What other developed country spends over two-thirds of its income tax revenue on the military, espionage and security?

It is only because we have become accustomed to the insane that a commonsense idea such as closing all of the foreign bases, bringing all soldiers home and scaling back the defense budget by 25% (all ideas of Ron Paul's) sound so "extreme" and "radical." Naturally, one can see that what is actually extreme and radical is the status quo. A person who argues for the alteration of the insane status quo is criticized as unrealistic and "kooky." Similarly, Ron Paul believes that American citizens should not be assassinated by their own government without presentment of charges and some kind of hearing, at the very least.

Mitt Romney and Barack Obama are totally fine with American citizens being assassinated by their own government without charges or hearings of any kind. It's the New Normal in America, so it's okay with them. In Barack's case, he might have qualms but I think George W. Bush, bless his heart, had the O Man about right. Obama simply lacks the inner resources to push for anything different, so he goes along with the hyper-conservative flow of modern Imperial Washington. Wherever that leads, secret drone missile attacks on faceless enemies, killing of civilians, assassination of Americans, indefinite detention without trial, it doesn't matter: if this is what the country does now, it's okay with him because it's just way too much trouble to oppose it, and more crucially, people might not think he's tough enough.

Ron Paul doesn't mind being a kook. This is his great strength. I really have no idea what his personal qualities are beyond that, what it would be like if he actually had to govern the country. In that sense, he is the same mystery that Barack Obama presented. What Ron Paul mainly is can be characterized as a series of startling positions that are way out of the mainstream of the dominant Center-Right politics in this country. The other two guys will just float along in the mainstream and change nothing.

Gee, if only Ron Paul had a realistic chance, which of course he doesn't, it would be a tantalizing opportunity to effect real change. Glad I'll never be faced with that choice.