Minneapolis

One of the basic theories of law enforcement is that the police operate with the consent of society.

Whatever faults lie with the protestors, the fact is that the police have completely lost the confidence of many of the people they are supposed to serve and protect.

When this happens, the police become a defacto occupying army that uses force to repress people. That is not a society.

Bipartisan Trump Removal

In the last few weeks, more and more evidence has piled up against Donald Trump's actions in the lead up to the 2016 presidential election. Campaign finance law breaches and communication with the Russian government mean that he committed serious felonies. The evidence from the US Justice Department indicates that he should be impeached and removed from office.

But is that going to happen? Despite all the evidence of 2017 and 2018 the Republicans in Congress have defended their president. It was impossible for the Democrats to win a two-thirds majority in the senate at the recent mid-term elections. In order for Trump to be impeached and removed, a simple majority vote in the House needs to be passed in order for impeachment, and a two-thirds majority in the Senate is needed to remove the president from office.

Impeachment from the house is a simple matter, but it won't make much difference if the senate doesn't remove him. So the senate is the battleground. 45 Democrats and 2 independents need 20 out the 53 Republicans to vote with them. This is unlikely to work.

But if it could work - if there are enough Republicans who are convinced of Trump's guilt - what would be the necessary compromises made between the two parties to agree to it?

 1. Mike Pence should resign or also be impeached. 

Although Mike Pence has not been linked to anything substantial, the fact remains that he is closely associated with Trump. This association is intolerable. If Trump is removed from office, Pence should not replace him. He should either be impeached and removed at the same time as Trump, or else he should resign prior to Trump's removal.

2. Nancy Pelosi should refuse to serve as President. 

In the presidential line of succession, the House Speaker is next in line after the Vice President. In 2019 this person will be Nancy Pelosi. Pelosi has been a committed Democrat in the US Senate for many years, and while many Democrats would welcome a Pelosi presidency, it would not be something acceptable to Republicans. As part of any potential agreement between the two parties, the ascending of a well known Democratic party leader to the White House could not work.

3. Orrin Hatch should not be selected to serve as President. 

Next in line in the presidential line of succession is the "President Pro Tempore" of the US Senate. This is Orrin Hatch. Hatch, like Pelosi, is a well known Republican party leader. At 84 years of age, he is the third eldest person in the Senate and has shown himself to be an ardent Trump supporter. He should not be selected either.

 4. Find a young, moderate Republican.

In order for the removal of Trump to work, his replacement must be a Republican. Ideally this person should be younger than 50 and should hold a moderately conservative position, as opposed to the more radical tea-party ideologues. Members of the "Republican Main Street Partnership" should be the ones most likely to fit this bill. In the Senate, this would include Todd Young, the 47-year old junior senator from Indiana. For the House, moderate Republican under 50s include: Rodney Davis, Sean Duffy, Brian Fitzpatrick, Mike Gallagher, Jaime Herrera Beutler, Will Hurd, Adam Kinzinger, Brian Mast, Tom Reed, Elise Stefanik, David Valadao and Lee Zeldin.

5. Place this Republican candidate in a formal leadership position. 

This would be, in the case of Todd Young, his appointment to President Pro Tempore of the Senate, replacing Orrin Hatch. In the case of the house Republicans, this would involve them being appointed to the position of House Speaker, replacing Nancy Pelosi. These positions would be titular only, and would only last as long as it takes for the president and vice president to be removed.

6. Impeach and remove Donald Trump, and Mike Pence if necessary. 

With a young, moderate Republican now firmly holding a position in the presidential line of succession, Trump can be removed from office. With Pence gone as well, this Republican will then be in a position to be appointed to the position of president.

7. The Republican President nominates a Democratic or Independent Vice President. 

Unity is important in this day and age. With a Republican president replacing Trump, the chances of social upheaval and violence are lessened. By appointing a Vice President who is a Democrat or an Independent, the president will be publicly showing the importance of bipartisanship and unity.

8. Neither President or Vice President will stand for re-election in 2020. 

One important step to make this work would be the insistence that neither the newly appointed Republican president nor his non-Republican Vice President should be running for the presidency in 2020. By refusing to run, these two people would focus more upon the process of executive power wielded and effective government, rather than upon their own personal ambition to be elected to their position.

9. Donald Trump is not pardoned. 

The final part of this jigsaw must be the assurance that the new president does not pardon Trump. Although it is likely that Trump might be indicted on state charges, and thus not be able to be pardoned anyway, the action of pardoning Trump would create a huge distrust in the process of government.

The Anomaly of George H.W. Bush

The recently deceased former president George H.W. Bush will not go down in history as one of America's greatest presidents, but he will probably be remembered as a good president, and certainly the least controversial president of the post-war era.

If you go through a list of all the presidents after Roosevelt, every single one has a serious black mark against his name, deserved or undeserved. All except GHW Bush.

It's not as though GHW Bush was perfect. He wasn't. He could've done a whole lot better than he did, and he did some bad stuff too.

Here's a list of the postwar presidents, and the controversies associated with them. And remember that these controversies are not necessarily deserved.

Truman - The use of Atomic Bombs against Japan.

Eisenhower - CIA coups in various parts of the world that propped up authoritarian regimes.

Kennedy - Bay of Pigs, Cuban Missile Crisis, Vietnam War

Johnson - Vietnam War

Nixon - Vietnam War, Watergate

Ford - Pardoned Nixon

Carter - Malaise, Iran hostage crisis

Reagan - Reaganomics, Iran-Contra

George H.W. Bush - Gulf War

Clinton - Lewinski Scandal

George W. Bush - 9/11, Invasion of Iraq, Hurricane Katrina, Global Financial Crisis

Obama - Global Financial Crisis, Birth certificate conspiracy

Trump - Collusion with Russia

GHW Bush was president in a transitional period of history. Communism and the Iron Curtain collapsed under his watch, an event that America did not expect and did not adequately exploit. It was also a transitional time for US politics too, with the growing demise of Rockefeller Republicans, of which Bush was one. Bush helped set up NAFTA, a trade agreement that upset a number of economic nationalists and which created a spoiler candidate for him in 1992 in the form of Ross Perot. Had Perot not run as an independent, Bush probably would've got enough votes to beat Clinton. Economically, Bush was against the Supply-Side "Voodoo Economics" that became policy under Reagan, forcing him to raise taxes to address the out of control budget deficit that had been bequeathed to him by Reagan. The decision to raise taxes rather than cut spending was an indicator of his centrist position, but he had made the mistake of initially promising "no new taxes", a policy reversal which further alienated the growing minarchist base of the Republican party.

The greatest event during his presidency was the Gulf War. With the Cold War barely over, Saddam Hussein's decision to invade Kuwait created a potential economic and humanitarian crisis. With the United Nations as a global institution still respected by Washington, Bush and other world leaders skillfully navigated diplomatic channels in an attempt to end the crisis while simultaneously preparing for war. With Saddam unmoved, the Western powers engaged in the largest military conflict since the Vietnam War. The overwhelming victory not only solidified America's place as sole military superpower, but also justified the idea of an all-volunteer military, a process which had begun in Western militaries soon after the Vietnam War finished.

In hindsight, would it have been better if the US had gone on to invade Iraq? The Iraqi military was in chaos and Saddam's grip on power loosened. Yet the post-2003 years showed just how difficult such a process would be. Nevertheless, a 1993 occupation of Iraq with the backing of the United Nations and the keen involvement of all western powers could have arguably produced a better outcome than the 2003 occupation, not least because by 2003 a combination of arrogance and incompetence had begun to typify high-level government leaders under GW Bush, a process which came to a head in 2005 with Hurricane Katrina, and which was also seen by the increasing civil war in Iraq. At least in 1993, such a combination of arrogance and incompetence was not yet noticeable (perhaps due to GHW Bush's many years in public service, including being head of the CIA).

George HW Bush's pardoning of those involved in the Iran-Contra scandal is obviously an issue. The scandal, hatched under Reagan, should have been exposed and the top people involved punished. Bush probably knew about the plan - being the Vice President under Reagan and a former head of the CIA. It's a scandal that didn't reverberate as much as it should have, and modern day American conservatism has been too quick to forget and ignore the near-treason involved in it, with feel-good nostalgia and victory over communism (a modern myth) being their memories of Reagan.

So of course GHW Bush was not a perfect president. No president is. And yet when we look through the turmoil of postwar history we see in GHW Bush as someone who managed to avoid controversies. And just as we wonder what would've happened had Gore or Hilary Clinton had become president had not circumstances intervened, so too can we wonder what would've happened had Perot not spoiled the 1992 election. Would there have been a 1994 Republican revolution with Bush in power? Who would've contested the 1996 election? Who would've been in power on 9/11? GW Bush's run for the presidency could've been delayed had his father served a second term.

So in the grand scheme of things, GHW did a few things that were good, a few things that were bad, and escaped the levels of controversy of virtually every other US leader in the postwar era. This is a great achievement.

Donald Trump and The 25th Amendment

Any attempt to remove Donald Trump from the presidency using the 25th Amendment is likely to fail

Impeachment is actually more likely to work, as I will shortly point out.

The 25th Amendment was written into the US constitution as a way to determine who runs the government if the president is incapacitated. This would mean that the president is so badly injured or so badly ill that he is incapable of functioning in his position. The president's cabinet, or a committee set up by congress, would then send an official letter to congress informing them of the president's incapacity. The Vice President would then be appointed into the executive role until such time as the president recovers. Once he has recovered, he would then begin working as president while the Vice President returns to his position.

Section 4 of the 25th Amendment, however, cover the possibility of a president potentially going mad or being incompetent. While these terms are not used in the amendment, it is clear that its writers assumed that a time might come when the president is unwilling to give up his role, temporary or otherwise, in the face of a 25th Amendment removal.

When this occurs you then have an impasse. If the cabinet remains committed to remove the president but the president remains committed to staying there, then the decision is referred to congress.

And in order for congress to remove the president, a two-thirds majority in both houses is needed to succeed. This is why impeachment is easier (it needs a majority in the house and two-thirds in the senate).

So if Trump's cabinet does theoretically decide that the president should be removed, the following would occur.

1. The Cabinet would write an official letter to congress stating that it is in their considered view that the president is incapable of functioning in his role. As a result, they are appointing the Vice President, Mike Pence, into the president's position. 
2.  Once this has been done, Trump would then write a letter to congress. In this letter he would say that he is fine, is the most intelligent person on the planet, and quite capable of functioning as president. Once this has been done, he would then go back to being president, and Mike Pence would return to being the VP. 
3.  After this, the cabinet would send another letter to congress, saying that Trump is not capable of functioning as president. Once this has been done, the power to make a decision is given to congress. 
4.  Congress now has to decide whether to remove the president. Two-thirds of both houses of congress are required to make this occur. As this is going on, Trump supporters are protesting outside congress, warning the Republicans in congress to not remove the president or there will be hell to pay. Some Republicans vote to remove him, but the magic two-thirds line is not reached because there are enough Trump supporters in congress to prevent the removal. 
5.  Trump remains president and fires his cabinet. Mike Pence resigns. Trump appoints Jared Kushner as VP.

The only way for Trump to be removed from office using the 25th Amendment is if congress makes that decision. And that decision is harder to make than a decision to impeach.

How Mexico can pay for the wall

Mexico holds US Treasury bonds as part of its international reserve. In October last year, they had $45.9 Billion. Link here.

Assuming the total co-operation of the Republican dominated US Congress, these bonds could be permanently confiscated in order to fund the wall.

Such an act would probably be without precedent.

Iran, for example, was unable to access their US bond holdings until the recent treaty allowed them to. In this case, legislation didn't permanently seize the funds - just kept the owners from accessing it while the dispute between the two nations continued.

Of course, seizing the international reserves of a country in order to make them pay for something is hardly in the best interests of anyone. Yet here we are and Donald Trump is about to be sworn in as president.

We can look forward to some very interesting times ahead. But not "good" interesting.

A sane firearm policy that the US needs

While the words "Sane" and "Gun Policy" are unlikely to be found in US political discourse at the moment, allow me to suggest a policy that might actually do some good, and do so without annoying the gun lobby or law abiding gun owners.

The thing is that mass shootings of the sort experienced recently only ever make up a very small amount of the people who die each year in the US from firearms crime. As a result of the public outrage these shootings cause, there is often a focus upon the banning of assault weapons as a potential answer. Yet while a banning of such firearms much have some effect upon mass shootings, they will have little effect upon the actual death rate due to gun crime.

This is because most of the deaths due to gun crime in the US occur mainly due to street level violence, usually between two people, one of which is armed with a handgun that he or she possesses illegally. In short, most of America's gun deaths are the result of crime. Very few deaths can be attributed to mass shootings. The problem with this, of course, is that the regular shooting deaths of single individuals are so common in the US that most people are numb to it. Mass Shootings are more shocking and, may I say, make more headlines and cause more angst than the regular drip-drip-drip of street level crime.

Think of it in the same way as you would airline safety verses car safety. We all know that you are more likely to be killed driving a car than you are as a passenger on a modern aircraft. Yet the crash of plane and the media angst it causes is far more profitable for the media than car safety. The fact is that flying in commerical aircraft is safer now than at any other time in history (at least in western nations) and this has been due to various laws and regulations set up over the past few decades to ensure that the airline industry follows a safe procedure. Yet this does little to calm my fears when I (occasionally) fly in a passenger plane - white knuckles grabbing the seats, repeating over and over to myself that this is safer than me driving my car...

What I therefore propose for the US is a policy that is aimed solely at reducing the amount of illegally owned weapons while not worrying about the legal gun owners. It's not the AR-15s or Barrett Sniper rifles owned by your local survivalist / tea party member / militia member that is killing Americans. Yet the result of the recent tragedy in the US might just be more restrictions on such weapons. While I'm not too fussed about such policies existing, their effect will be but a drop in the ocean. Any policy that restricts or bans certain types of assault weapons in the US is unlikely to reduce either the instances of mass shootings or reduce the amount of people dying from them. It may make sense in a country with very low levels of gun deaths, which is why I wasn't too worried back in 1996 when the government of Australia banned certain types of guns after a mass shooting  - since then we've had no mass shootings at all, but our gun ownership and level of gun crime back then, like now, was very low. But in the US, a different policy needs to be followed.

What I am suggesting is this: A national, voluntary gun buyback scheme.

Such a scheme would offer gun owners - both legal and illegal - the chance sell their weapons to the Federal government. This would occur in locations all over the US and would be based in police stations or other government  buildings. The guns would be handed over with no questions asked - the gun owner will not be charged with any crime if they hand over any illegal weapons. The price paid by the federal government will be very, very attractive, thus ensuring quite a lot of money for anyone who gives up their weaponry. For the period of the buyback, the government will also halt the shipping of any legal firearms from manufacturers. The gun makers will be compensated financially for this action and will actually end up supporting it because they stand to make a lot of money from it. Legal gun owners - especially those concerned about the gubmint takin their gunz - will not be forced to participate and no one will be taking their weapons.

So who are the sorts of people giving up their weapons in this scheme? It would be those who need the money. In short, those who give up their weapons are highly likely to be those within or on the fringes of the criminal class. They are unlikely to be legal owners (though some who have financial problems would take advantage of it).

What would be the effect of this scheme? It would result in a substantial drop in the supply of guns - especially handguns - owned illegally. This would, in turn, result in lower levels of gun crime as criminals will find it harder to procure the weapons they need - lower supply leads to higher price. A drop in the amount of illegal guns would also lead to an increase in the value of legal guns, which means that legal gunowners would have their collections end up being more valuable. The higher price of guns will also be of benefit to the manufacturers when they begin selling them again.

And as I pointed out before, all guns start off being legally manufactured, sold and purchased. Only after that do they end up being sold to criminals, which means that some gun owners and gun sellers are making a profit out of selling legally procured guns on the black market. One result of this gun buyback scheme would be to see which owners and sellers begin buying and selling more guns.

And what happens to the guns that the government buys back? They get destroyed. They were bought illegally and used illegally - they should not be allowed to re-enter the firearms market.

What would be the cost of such a scheme? Probably billions. But it is money that will end up in the pockets of ordinary Americans. Moreover, additional wealth generated by an economy of less gun crime will more than make up for the initial cost, and this benefit will most likely be enjoyed by private citizens and businesses.

This is a policy that American Gun Owners should get behind. The NRA should support this policy.

Why?

• Legal gun owners are not forced to give up their weapons.
• Illegal gun owners will want to sell their weapons.
  
• Less guns will be available to those who buy them illegally.
• Less guns will be available for criminals to buy.
• Less people will be killed in street violence.
• The firearm collections of legal gun owners will rise in value.
  

Regardless of which side of politics you are on, Americans generally want less gun deaths and less gun violence. Consveratives are wrong in thinking that less guns = less freedom, but progressives are wrong in thinking that assault weapon bans = less gun deaths. 

America's law abiding gun owners... stupid or evil?

Ah, a nice provocative blog title.

That's a HK-417, by the way.

One thing which gun owners and 2nd amendment lovers fail to understand is expressed in one of their better known arguments.

Banning or restricting guns, they say, will have no impact upon their misuse by criminals. The criminals, they say, will always have access to guns. Banning or restricting the sale or guns will only ever affect the law abiding gun owners. Is this what you want, they say? Less guns in the hands of those unlikely to misuse them while the criminal element still has theirs?

This reasoning is specious for a number of reasons.

The first is that one of the best policies for reducing illegal gun ownership is to have a gun-buyback scheme, whereby guns are turned in to police stations - with no questions asked - and those who turn them in are compensated with money. This sort of policy would work very well amongst the criminal and near-criminal class of people, as they will then have to weigh up their ownership of a weapon with the potential for financial rewards. Any successful gun-reduction policy requires a scheme that would remove illegal firearms from the people who own them, and a no-questions-asked gun buyback scheme is a proven policy used by other countries.

The second reason, however, is more sinister because it casts doubt upon the so called "law abiding" gun owners. The fact is that very few guns are manufactured illegally. There may be some people somewhere who can turn scrap metal and chemicals into a rudimentary firearm and bullet but the mass-production of firearms is conducted legally. This is important, because when manufacturers sell their goods, they sell them legally. Therefore it is logical to assume that every single firearm in America started its life off in the hands of a legal owner. So how did they end up in the hands of criminals? Why are millions of guns owned illegally when every single gun started its life off being owned legally? Simple: The legal gun community is providing the illegal gun community with the weapons that they demand, and are making money out of it. Certainly some guns are stolen by criminals, but the vast majority of illegally owned guns were sold by their legal owners to the illegal owners. So what happens if you restrict gun sales to legal owners? Eventually the illegal owners will have less weapons. Simple as that.

So are law-abiding gun owners stupid or evil?

If all of America's millions of illegal guns have come from criminals stealing them from legal gun owners, then this indicates that there are a huge amount of very stupid legal gun owners out there who just can't seem to keep their weapons secure.

Personally I don't buy that. I think it is far more likely that there exists a substantial amount of legal gun owners who make money from selling their guns onto the black market. By the way If you're a legal gun owner reading this, I'm not saying that this is you.

And also: I am not calling for the removal of all guns. I am calling for much tighter restrictions than there already are, as well as the banning of certain weapons from sale.

And such an attitude is not against the 2nd amendment. The US Constitution allows citizens the freedom to travel throughout the US, but this doesn't mean that planes, trains and automobiles aren't subject to government legislation. In the same way the 2nd amendment allows citizens the right to own firearms to defend themselves, but the government still has the power to regulate what sort of firearms can be used for this freedom. Otherwise people can own their own nukes.

What happens when Conservatives get convinced by Climate Change?

They don't stop being conservatives, they start advocating a carbon tax:

Taking stock of our conservative principles and America’s energy and climate challenges, E&EI believes that the solution is an energy policy which:

• Eliminates all subsidies for all fuels;
  
• Attaches all costs to all fuels;
  
• and Ensures revenue neutrality to prevent the growth of government

A sensible solution is a revenue-neutral tax swap, accompanied by a phase-out of all energy subsidies. A tax swap would, dollar for dollar, ratchet down anti-growth income taxes and shift the tax onto carbon pollution: Tax the bad, quit taxing the good, and let the free-enterprise system deliver the fuels of the future.

Despite my position on the left hand side of the political spectrum, I have always believed that a number of conservative beliefs are worth keeping. The solution proposed by E&EI is probably not enough to solve the whole problem of global warming, but it is a healthy start, and one that comes from a side of politics that seems all too willing to deny science.

Writing Dreams

Two recent events have rocked the world of a couple of internet denizens.

The first is David C. Simon, the creator of the webcomic Crimson Dark. Simon, a talented user of computer graphics and scriptwriting, has been nabbed by the Game company that is producing "Star Wars: The Old Republic". Simon's role will be mainly in writing, but there's no doubt that his skills in creating Crimson Dark were an important part of this process.

The second is that a Redditor named Prufrock451 with a good script idea is now in talks with a Hollywood company. While this is early days yet, it is the culmination of a very quick few weeks in which the Redditor began writing a sci fi/fantasy story in which a Marine battalion in Afghanistan is transported back in time to ancient Rome. The story, called Rome Sweet Rome, started off mere weeks ago as an experiment in writing that somehow gained a huge following amongst Redditors. Just the mere idea of Machineguns mowing down Praetorian Guards got people involved, not just in reading but also in editing. I suppose you could call it a Saw and Sandal epic (see here).

A proposed solution: Co-ordinated international fiscal and currency policy

Synopsis: A new international agreement between China, Japan the US and the Eurozone should be made to boost economic growth: The US Dollar should be actively depreciated against the value of the Japanese Yen and the Chinese Yuan; Japan and China should enact substantial stimulus programs while the US dollar drops in value. This should boost internal demand in Japan and China which would result in a higher amount of goods and services exported from the US. The Eurozone should also enact a stimulus program while depreciating the Euro slightly. This would ensure both an increase in overall economic growth in all nations while solving the current account imbalances which helped create the economic crisis in the first place.

Due to the inter-relationships between various economies and the imbalances that occur between them, it strikes me that one of the better solutions to the world's current malaise would be to enact some sort of co-ordinated fiscal and monetary policy.

I am one who believes that our current situation has arisen mainly due to imbalances in world investment. Huge current account surpluses in some nations have led to a permanent culture of saving while huge current account surpluses in other nations have led to a permanent culture of borrowing. As a result, certain nations have become "geared" to either saving & production or borrowing & consumption. The response to the economic crisis so far has not resulted in a move away from this imbalance but has rather sought to entrench it further. For example, policy in the US is all about the importance to reviving consumption, either via various stimulus packages or quantitative easing - all of which are designed to boost consumption and reduce saving. Meanwhile, China and Japan and other nations geared towards saving and production continue to manipulate forex markets to keep their nations producing and their citizens saving, all the while waiting for the US to begin consumption and borrowing again.

Well let me suggest the opposite as a solution.

If we want to rebalance the world economy at the same time as boost it, then there needs to be a shift towards balanced current accounts. This would mean that the US would no longer be the world's borrower and consumer, and Japan and China no longer be the world's saver and producer. It would work something like this:

1. A new "Plaza accord" is agreed upon between the US, China and Japan and the Eurozone. This agreement would see a depreciation in the value of the US dollar against the Japanese Yen and the Chinese Yuan. A small depreciation in the Euro would also occur.
   
2. At the same time as this occurs, the governments of China, Japan and the Eurozone enact substantial fiscal stimulus programs to boost internal demand.
3. The increase in internal demand from Japan and China combined with a lower US Dollar will result in an increase in US production.
4. All three nations, along with the Eurozone, agree to have a currency board to ensure that a balanced current account exists between them. This currency board would not exist to peg the three currencies but to merely ensure that the current account remains balanced within the limits of a floating currency.

What this will do is ensure that future Chinese and Japanese economic growth is no longer linked to US consumption and borrowing. The stimulus program in China and Japan should increase the demand for US goods and services. This would increase aggregate demand in the US without relying upon US government spending. Now to some questions about this:

How does the Eurozone fit in?
The Eurozone already has a balanced current account. Unlike many commentators I support the notion of the Eurozone and believe that it is an optimal currency area, which means that any internal current account imbalances amongst Eurozone countries is not as important as the current account of the whole. At present, the Eurozone's current account is nicely balanced, which means that any new Plaza accord should aim to change the current account balances of China, Japan and the US, but not the Eurozone. Of course the stimulus program in the Eurozone would only be useful if the current account remains balanced, which is why only a small depreciation in the Euro is required.

But the US doesn't produce anything!
This is plainly wrong as any judicious person knows. The US has the world's largest manufacturing base. Any increase in external demand will result in an increase in US manufacturing. In order to boost manufacturing and create jobs (especially for those with lower skills) a balancing of the current account must be undertaken.

Can we trust the currency boards?
So long as there is an agreement between the nations involved, so long as the boards are kept free from political and market influence and so long as they are answerable for the decisions they make, then they should be trustworthy.

Can Japan afford it?
Japan's long period of economic malaise has been accompanied mainly by a lack of internal demand. Balancing the Japanese current account and enacting a stimulus would ensure that any boost in economic performance arising from the stimulus is felt mainly in internal demand. In short, Japanese consumption - which is problematic - will be boosted; simultaneously US production - which is problematic - will be boosted. Accompanying this new economic situation will be a decrease in Japanese savings levels - which are too high - and an increase in US savings levels - which are too low. The result of this should be an increase in Japanese economic growth and, with it, an increase in tax revenue. Japan's public funds are certainly problematic, and so I would suggest an increase in tax rates accompany the increase in government spending. The short term boost in spending - which would boost economic growth - would then give way to a longer term sustainable economic performance which, because taxes are higher, would result in increase government revenue and more government debt being paid off. It stands to reason that the Bank of Japan change its policy to, at the very least, prevent long-term deflation (a phenomenon that is felt more by the Japanese GDP deflator than in the CPI).

What about Wall Street?
Let the follow rather than lead. With an increase in US manufacturing and exports, Wall Street should begin investing in companies that actually produce goods and services. Then Wall Street will be doing its job properly.

What about the rest of the world?
With China, Japan, the US and the Eurozone combined, this agreement accounts for over 75% of world GDP. The other 25% will probably need further international agreements - but at the moment we can leave that for the future.

What about US Conservatives?
This agreement won't need much in the way of further government spending for the US. US Conservatives couldn't care less about Japanese, Chinese or European big government spending. Actually, they should be happy that US goods will be increasingly sold in China. They should also welcome the profits made by US industrialists.

Why not create new banks from QE3?

Banks are unique to an economy. They are the creators of money, via the fractional banking system. How banks use their money greatly affects the way the economy runs.

Currently banks are sitting on $1.6 trillion in excess reserves. Excess reserves have always been a part of the banking system but not in the amounts seen since 2008 Q4. The sheer size of these reserves has hobbled monetary policy - every dollar sat on by banks in excess reserves is a dollar that has effectively been removed from the economy.

Why are the banks sitting on so much money? The answer is that they are suffering from an increasing amount of insolvency. They are Zombie banks, whose net worth is negative but who continue to operate. As Paul Krugman and others have pointed out, monetary policy is only effective in a liquidity crisis, not a solvency crisis.

Obviously these banks need to stop sitting on their reserves and begin lending again. If they lent their money out, the fractional system would gear up, increase money velocity and create enough money for the banks to operate their way out of insolvency. Ironically, the banks' response to the crisis is, in effect, perpetuating the crisis.

But there is a solution - new banks must be formed.

New banks, created without any solvency issues, have no real reason to sit on excess reserves. But new banks are usually created by the market itself. Since the market isn't creating any new banks, then new ones must be created by government: Congress, Obama and the Federal Reserve acting together.

Now it's not as though the government would own these banks long term. The idea would be to create them and privatise them as quickly as is practicable: onto the share market within 12 months of their creation.

But where would this money come from? Are we going to increase government spending and thus taxes? Well if the Fed is going to indulge in QE3, it might as well use the money it creates out of thin air to create something solvent and profitable, rather than prop up institutions that are insolvent and unprofitable.

The Fed's Quantitative easing program involved the Fed creating money out of thin air (by fiat) and then using that money to buy back government securities. Yet this process was hobbled by the Zombie banks because much of the money created in this process ended up in excess reserves. QE2, for example, resulted in excess reserves increasing from $971 billion in November 2010 to nearly $1.6 trillion today: that's around $600 billion in fiat money - the entire QE2 amount - that went nowhere.

But what if that $600 billion was spent capitalising a series of new banks? With no solvency issues to encourage excess reserves, these banks would've used their capital more freely. With QE3 a distinct possibility, why not direct the money at creating new banks?

There is a historical precedent here: The First Bank of the United States, formed in 1791 by congress (see pic above). Although this bank was essentially an 18th century version of a central bank, it did have direct market operations in lending money to the market, borrowing money from the market, and taking deposits. It was also created to be purchased by the market in the form of shares. Moreover, the precedent of creating a bank, coming almost immediately out of the formation of the first congress by the founding fathers, should prevent any complaints by political conservatives that such an action would be unconstitutional.

If we assume that these new banks do get created through the QE process, what of the Zombie banks still out there in the marketplace? My suggestion is that they should be allowed to permanently die - to be declared insolvent and shut down, with deposits (backed by the government) being shifted to newer and/or more solvent banking institutions. While killing off a Zombie bank would have a negative effect upon the market if it was done in isolation, killing them off while new banks are growing and blooming would be more sustainable.

(I wrote about this before in November 2010)

Thoughts on the debt deal

This was definitely a compromise solution, but one in which each side calls the other the "winner".

I read quite a few lefty blogs, which is fine because, if you look at the graph showing my political and economic positions, I am a lefty. Now the lefty blogs are all saying that this is a victory for the Republicans. They're also critical of Obama. I've just watched John Stewart and that's pretty much what he said.

But I also check up on Redstate once in a while to look at how the other side feels and they are definitely unhappy too. "Cut, cap and balance" was their mantra and that was not achieved.

I guess the best place to check this is Wikipedia which, ironically (at least to many), has a more dispassionate and factual summary of what was achieved:

• Cut spending more than it increases the debt limit. In the first installment ("tranche"), $917 billion would be cut over 10 years in exchange for increasing the debt limit by $900 billion.
• The agreement establishes a joint committee of Congress that would produce debt reduction legislation by November 23, 2011 that would be immune from amendments or filibuster. The goal of the legislation is to cut at least $1.5 trillion over the coming 10 years and be passed by December 23, 2011. The committee would have 12 members, 6 from each party.
• Projected revenue from the committee's legislation must not exceed the revenue baseline produced by current law.
• The agreement specifies an incentive for Congress to act. If Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress can grant a $1.2 trillion increase in the debt ceiling but this would trigger across the board cuts ("sequestration") of spending equally split between defense and non defense programs. The across the board cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. The sequestration mechanism is the same as the Balanced Budget Act of 1997. There are exemptions—across the board cuts would apply to Medicare, but not to Social Security, Medicaid, civil and military employee pay, or veterans.
• Congress must vote on a Balanced Budget Amendment between October 1, 2011 and the end of the year
• The debt ceiling may be increased an additional $1.5 trillion if either one of the following two conditions are met:
  
  1. A balanced budget amendment is sent to the states
  2. The joint committee cuts spending by a greater amount than the requested debt ceiling increase.

My understanding is that cuts were achieved and this was done without increasing tax revenue. This is therefore a broad conservative political victory. Conservatives, nevertheless, do not see this as a victory because it doesn't go far enough.

The reason for conservative unhappiness has more to do with their extreme ideological position. Since the onset on the Tea Party and their influence on Republican Party politics, the GOP has, amazingly, become even more ideologically conservative. Minarchism is now the default position of conservatives, which means that any form of government spending outside of military spending and law enforcement must be excised. This form of ideology, however, is backed up by a crazy form of patriotism that sees minarchism as the intended model explicitly advocated by the "founding fathers", which means that any different position (whether it be left wing or centrist) is automatically branded a threat worth "watering the tree of liberty for" (ie the blood of tyrants and patriots resulting from an armed struggle). Add to this the peculiarities of the US congressional system and the only real compromise position is the one which was passed.

As far as the effect on the broader economy, my understanding is that most of the cuts will come in after a two year period, which theoretically allows Obama some breathing space to run for a second term in 2012. The debt limit has been increased to allow for borrowing in the meantime and, all things being equal, should not require another increase until after the 2012 elections. "All things being equal" though is not a good phrase in these dark economic days. I have already predicted that the US will enter another downturn in 2012 and if this occurs the debt ceiling may need to be increased before the election, especially if unemployment ends up in the mid-teens, thus reducing government income tax revenue.

As for the Keynesian approach of pump priming the economy via deficits, this piece of legislation is of no help. My own call for a "Total War / New Deal" type economy (whereby large increases in government spending in health, education and alternative energy are accompanied by large tax increases) is even less likely to occur. Since the US economy's many structural flaws have not been addressed since the credit crunch of 2008, I thus have little faith that the free market will be able to generate jobs and economic growth in the short-medium term.

A quick solution to the debtlocked Congress

It involves finding an average between the three constitutional bodies - the House, the Senate and the Executive.

The first thing to do is discern how much the difference between revenue and expenditure currently is. In 2011 Q1 it was $2.5231 trillion revenue and $3.7290 spending, a difference of -$1.2059 trillion. If we assume that that number has to be reduced to zero it should come as a result of spending cuts, taxation increases or a combination of both.

So what happens is that each member of the House is given a piece of paper. On that piece of paper they write down what percentage of this -$1.2059 Trillion should be paid for by spending cuts and what percentage by tax increases. I'm sure that right wing extremists are likely to nominate 100% cuts and 0% tax increases, while some lefties are likely to nominate 0% cuts and 100% tax increases. At the same time as members of the House do this, members of the Senate do as well. President Obama also does it.

Equal weighting is given to each of the three bodies (House, Senate, Executive) because they are equally weighted under the Constitution. The "averaging out" process would essentially be enforcing a mathematically based bipartisan compromise.

What happens then is that the average for cuts and tax increases is determined for the House. Let's say it is 61% cuts and 39% taxes. Let's say the Senate average is 46% cuts and 54% taxes. Now let's say that Obama goes for 40% cuts and 60% taxes.

This would mean that an average 49% of the three constitutional bodies say spending cuts while 51% want higher taxes. This would translate to $590.891 billion in spending cuts and $615.009 billion in new taxes (in annual terms). If you do the math, that would result in $3.138109 trillion revenue and $3.138109 trillion spending - a balanced budget.

Of course this voting structure would mean that the final number would have to be accepted by all parties before the vote is cast. This will allow members of congress to vote according to their ideology and please their voters, while at the same time creating a compromise solution.

It goes without saying that an increase in the debt ceiling would also accompany the bill.

The 14th Amendment and the potential for economic disaster

The 14th Amendment of the US Constitution is currently being examined and touted as an important factor in the current debate about the government debt limit. I've blogged about this recently but I've had some more ideas about it. Here is the text again:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave. But all such debts, obligations and claims shall be held illegal and void.

Okay, the background of this amendment was post civil war. In its original context that first sentence guarantees the payment of debts incurred by the Federal Government in fighting and defeating the South. The second sentence, however, absolves the Federal Government from having to pay debts incurred by the Confederate States of America. The third sentence spells this out even more, permanently settling the question of Confederate debt.

It's the first sentence that applies in this current situation. Obviously the framers of the amendment thought it important not just to guarantee payment of debt by the Federal Government in the successful waging of the civil war, but to make it part of the constitution itself via an amendment. This means that they intended the principle behind this amendment to have an ongoing application.

The question is, what does it mean by debt? Obviously this debt is public meaning that it is owed by the Federal Government. In short it is money owed, and money owed that has been authorized by law. In other words, it is money that the Federal Government owes creditors - so long as it has been authorized by law.

As I pointed out in my recent article, this naturally applies to government bonds. As of the 26th July 2011, the US Government owes $14,342,830,116,551.28 in public debt. But is "Public Debt" in 2011 the same as "Public Debt" in 1868? There is a broader application of this term: there is debt accrued by borrowing, and there is debt accrued by buying. For example, if a government office gets a local company to mow their lawns, they naturally have to pay this local company. If we expand this idea outwards, we see that the Federal Government has legal obligations to pay for goods and services delivered to them by private industry.

But what about entitlements? Are entitlements considered debt? I think not. Entitlements such as Medicare and Unemployment benefits are probably not considered "debt" in this situation. Sadly this means that the 14th amendment does NOT cover money spent on Medicare or other social services.

"Public debt authorized by law" has also been interpreted by various bloggers and experts recently as to apply simply to spending bills authorized by congress. Essentially it means that if congress has authorized spending, then this cannot be invalidated by a debt ceiling... hence the debt ceiling as it stands is unconstitutional. I'm not sure of this broad definition for a number of reasons. The first is that the amendment itself doesn't specify it. The second is that we are talking here about Public debt - debt owed to the Public, ie not the government.

If you take this second definition to be important - PUBLIC debt - then what to make of government spending bills authorized by law? Well so long as the PUBLIC get what they are owed, the 14th amendment will not be broken. But if the Federal Government decides to stop paying its own employees, that is completely different because the money owed to their employees is not public. There are approximately 2.8 million people employed by the Federal Government.

Here's a summary of my thinking on this issue:

• "Public Debt" means money owed to non Federal Government creditors.
  
• These creditors include those holding government bonds, as well as those who have sold goods and services to the government.
• The 14th Amendment prevents the Federal Government from defaulting on money it owes to bond holders.
• The 14th Amendment does not specify whether payment of money to bond holders needs to be paid "on time" or "later"
  
• The 14th Amendment prevents the Federal Government from defaulting on money it owes to private businesses and individuals for goods and services provided.
• The 14th Amendment does not specify whether payment of money to these private businesses and individuals needs to be paid "on time" or later".
• Money for those who qualify for government services and entitlements - such as unemployment benefits and Medicare services - are not considered "Public Debt" since they are not "owed" money they have directly invested or money they owed through the provision of goods and services.
  
• Under the constitution, Congress is responsible for all spending bills.
  
• A self imposed limit on the amount of debt the Federal Government can borrow is within the constitutional powers of Congress.
• The 14th Amendment does not prevent the Federal Government from defaulting on money it owes to itself on the bond market. Intragovernmental debt is not "Public Debt".
• The 14th Amendment does not prevent the Federal Government from defaulting on money it owes to itself via spending bills.
  
• Money owed to government employees and government departments is not "Public Debt".
  

So given that these are true, what happens if the debt ceiling is not passed? We need to assume here that without a debt ceiling, the Federal Government will be forced to spend only as much as it gets in tax revenue. Specifically what might happen here?

• The Federal Government will not default on paying back interest and principal on bonds owed to the Public.
• Social Security payments are likely to be defined as money owed to the Public, so payments will continue.
  
• The Federal Government will not default on paying back money owed to private businesses and individuals for goods and services provided.
• Delays in payments nevertheless may occur.
• The ordering of future goods and services from private businesses and individuals may be cut.
  
• Money for entitlements (Health Care, Unemployment benefits, etc) can be cut.
• Money for defense can be cut.
  

As I have pointed out, I don't think an arbitrary self-imposed debt limit set by Congress is somehow unconstitutional since Congress is responsible under the constitution for spending government money. Also, it won't be a case of a law passed earlier (the debt limit) being superseded by a law passed later (spending bills) since the earlier law was specifically designed to prevent something happening in the future.

So if the debt limit is not passed and is not declared unconstitutional, what we won't see is a default on government bonds but there is a chance that these payments might be delayed. This would be viewed by the market as a form of selective default. Similarly Social Security payments might end up being delayed, as would be money owed to government suppliers for goods and services owed.

But in order to ensure that these obligations are met (either straight away or over time), certain government departments would have to undergo a drastic reduction in spending. We would see the government either retrench or put on furlough tens of thousands of its employees, if not many, many more. Those with unemployment benefits would have them reduced or postponed indefinitely. Those awaiting or needing medical procedures covered by Medicare will have them delayed indefinitely with priority given only to the most severe cases.

As I pointed out in my previous post on this subject, the US Federal Government currently takes in revenue equivalent to 15% of GDP while its spending is equivalent to 25% of GDP. The 10% gap between revenue and spending is shored up by borrowing. If the debt limit is not raised then the Government will have to reduce its spending to meet its revenue. We would see a reduction in spending from 25% or GDP to 15% of GDP, which is a 40% cut in spending. If we assume that bondholders, social security recipients and government suppliers are protected by the 14th amendment then everything else covered by government spending will be cut.

Needless to say this will have a hugely negative effect upon the economy. With 10% of the economy suddenly halting, you could assume that GDP would drop by at least 10%. The knock-on effects, caused by the money multiplier going into reverse, could conceivably double this impact. And this would be the case even without defaulting.

It's so gratifying to leave you wallowing in the mess you've made

Not good news:

Negotiations over a broad deficit reduction plan collapsed in acrimony on Friday after House Speaker John A. Boehner suddenly broke off talks with President Barack Obama, raising the risk of an economy-shaking default.

The epic clash between the White House and Congressional Republicans came a week before the government hits its borrowing ceiling, and set off sharp accusations from both sides about unwillingness to compromise.

A visibly angry President Obama, in a hastily scheduled White House news conference, demanded that Congressional leaders come to the White House on Saturday morning.

“I want them here at 11 a.m. tomorrow,” Mr. Obama said. “They are going to have to explain to me how it is that we are going to avoid default.”

Anyone who has played Sim City 2000 will remember the importance of maintaining a tight budget. But if your city in the game gets to a point where you're running out of money you have a number of serious choices to make in order to balance the budget. One option you have is to cut funding to roads. When you do so, this guy (your roads and transport secretary) pops up and yells at you:

What happens then? As time goes by your roads begin to crack up and become unusable. This is turn reduces economic activity and your own tax revenue even further. It's a short term solution but ends up costing you far more in the longer term. It's a sure fire way to lose to game.

Then, of course, there is that Simpsons episode where Homer becomes the town's sanitation commissioner. He manages to gain this position through an election campaign where he simultaneously lies about the incumbent (and even defames him) and gives outrageous promises to the voters, all with Bono's consent. When the scheme blows up in his face (the yearly sanitation budget is used up in a matter of weeks) he resorts to a scheme whereby funds are generated by taking the trash from various US cities and storing it underneath Springfield. This, of course, turns the town into a smelly, garbage infested hell hole. An emergency meeting is held in the town hall and the people unanimously vote for the previous commissioner (Ray Patterson, voiced by Steve Martin) to retake the job. Patterson saunters on stage to music and then says this:

Oh gosh. You know, I'm not much on speeches, but it's so gratifying to... leave you wallowing in the mess you've made. You're screwed, thank you, bye.

I have to say that part of me wants to call the Republicans' bluff and not raise the debt ceiling. To be honest with you it would be the easiest and quickest way for them to achieve their ideological ends. I have already pointed out that such an action would cut federal government spending by around 40% and represent a cut in spending from about 25% of GDP to around 15% of GDP. According to historical notes on the US budget, the last time the US government was that small was 1951 - in other words the Republicans have a once-in-a-lifetime chance to shrink the government to its lowest level in 60 years. Moreover, this would not lead to debt default, as the 14th Amendment protects bondholders.

And it's not as though such a move wouldn't be popular, at least initially. There are many in the US who claim that the Federal Government has no real input into the economy. "Let's shut her down!" some would say, confident that such a move would have no real impact upon the economy and society in general. And as for all those pesky civil servants out of a job, well they weren't doing anything really important anyway. And it's not as though we can't afford to pay them unemployment benefits since such benefits would disappear anyway for everyone once the great spending cut occurs. And with so many people unemployed and not receiving benefits, they would then be able to get off their collective lazy asses and find jobs. Then the economy would start booming again.

Of course these sentiments are nonsense. Anyone with any understanding of the complexity of economics, the effect of government programs and the problems besetting the unemployed would know that such a gigantic cut in government spending would have only a negative impact upon the US. It would cause social and economic pandemonium.

And yet part of me wants to the GOP to do it. I do admit that there is some perverse pleasure in watching an economic collapse unfolding, in the same way that people hang around and watch the aftereffects of an accident.

Nevertheless I do have a rather pragmatic reason for wanting this to occur - the disaster that it brings on the nation (and the rest of the world) will be so damaging that no one would take hard-line conservatism seriously ever again. The disaster would be so horrible that Obama would be re-elected by a landslide and the Republicans would be utterly humiliated in Congressional elections. More than that, hard-line conservatism throughout the world would be discredited in the same way as communism was discredited after the collapse of communism.

And why? Conservatives have painted themselves into a corner. They are just so angry that things like Medicare, NASA, unemployment benefits and the Department of Education exist. It's not just that they don't like big government, it's that they so strongly believe that their understanding of limited government was the same thing believed by the founding fathers that anything, anything which suggests slightly higher government tax revenue or spending is immediately cause for revolution and "watering the tree of liberty". In the words of Grover Norquist, "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

Of course I see such people as not just hard-line but extremist. Their ideology has regressed so far that even Ronald Reagan, patron saint of Conservatives, would be labeled a "Republican in Name Only" for many of his policies.

And so this is why part of me wants the Republicans to follow through with the extremist ideology that now controls their party - it would allow them the chance to finally do what they've always wanted to do while simultaneously proving to the rest of America and the world the utter stupidity and unworkability of their policies. Their fate would be to disappear from the political landscape for a long, long time. The world would then become a much better place.

And as their doom descends and the party faithful shrink in horror at what they've done and seek to make amends, the voice of Ray Patterson calls out to them:

It's so gratifying to leave you wallowing in the mess you've made. You're screwed, thank you, bye.

The 14th amendment and the possible government shutdown

Oh dear:

Crisis talks on the United States' debt limit remained deadlocked overnight as negotiations led by US president Barack Obama degenerated into a slanging match.

The president is said to have stalked out of the latest debt talks, which both sides have acknowledged as the most heated yet.

"This may bring my presidency down, but I will not yield on this," Mr Obama is quoted as saying.

The prospects of politicians reaching a deal to raise the debt ceiling are still in question after fifth straight day of talks.

Some econ bloggers have pointed out that the 14th Amendment of the United States renders the "debt ceiling" unconstitutional:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave. But all such debts, obligations and claims shall be held illegal and void.

My view is that the "debt ceiling" is not unconstitutional. What is unconstitutional is to default on this debt. Let me explain.

All the "debt ceiling" does is prevent the government from borrowing any more money beyond the previous predetermined limit. Since congress has the power under the constitution to legislate borrowing and spending bills, any self imposed limit on the amount of money the federal government borrows is entirely within their purview.

So what happens when congress doesn't increase the debt limit a "government shutdown" is initiated?

All it means is that the government will have to cut spending in order to fit into the amount of money they do receive. Spending must be cut. And if we believe that the 14th amendment will be followed, then we can assume that paying back interest and principal on money borrowed will not be affected at all. Instead, spending cuts will be made to other areas of government control. Spending on health care will be cut drastically. Military spending could possibly be cut. Social Security spending cuts would only occur if the spending is not considered "government debt".

My spreadsheet tells me the following about US government debts and receipts:

So if revenue represents 16.61% of GDP and spending represents 25.29% of GDP, then any failure to increase the debt ceiling will force the federal government into spending only as much as it gets. This would mean 16% spending instead of 25% spending. In short, it would reduce the spending size of government by around two-fifths. You can imagine how devastating such an action would be upon the economy.

But what about government debt? The last time I checked, interest paid on government debt made up around 2.8% of GDP. Even after a potential failure to increase the debt ceiling, interest on treasury bonds and other debts will have ample room to be paid back.

A failure to raise the debt ceiling will most certainly shrink government spending, but it will not result in debt default. The unemployed will no longer be given payments, Medicare will grind to a halt, NASA will disappear, even social security has the potential to be scaled back... but at least those who lent the government money will get their interest - hardly a cause for celebration.

To summarise the 14th amendment on this issue: The amendment doesn't invalidate a debt ceiling, it just ensures that government debt will be paid off even if any debt ceiling isn't increased.

Bernanke's money printing idea is interesting - but I have a better one

I'm no fan of Federal Reserve chairman Ben Bernanke. Bernanke's response to the 2008 credit crisis was to first state that it wasn't happening and then, when it happened, to say that it wouldn't be too bad. Fail. Moreover he was one of the members of the Federal Reserve Board under previous chairman Allan Greenspan who approved of policy keeping interest rates too low between 2002 and 2005, thus creating the conditions for the property bubble. Epic Fail.

But credit where credit's due - the recent announcement of $600 billion in bond repurchases is a step towards a more effective form of monetary policy, though I do question whether it is needed.

Bernanke has the dubious honour of being labelled "Helicopter Ben" because of some comments he made many years ago about how radical monetary policy could have solved the Great Depression. Given the damaging, persistent deflation during that period, Bernanke surmised that increasing the money supply by seigniorage (money printing) and then handing said money out willy nilly to people and businesses would have wiped out deflation and stimulated the economy to begin growing.

Of course those who ran the world economy in the 1930s did not have the information that we do now, namely that inflation and deflation can be controlled through manipulation of the money supply by central banks. The problem with conventional monetary policy is that it focuses solely upon interest rates to achieve its goal - in the case of the United States, adjusting the Federal Funds Rate is the way interest rates are raised or lowered. Developed countries have similar tools while developing countries tend to increase or decrease the reserve ratio as a way to influence monetary conditions.

Adjusting interest rates affects the money supply: Increasing interest rates will remove money from the money supply while decreasing interest rates will add money to the money supply. If a central bank wants to reduce inflation, it removes money from the money supply by raising interest rates; if a central bank wants to increase inflation (to prevent deflation), it adds money to the money supply by lowering interest rates.

Unfortunately, conventional monetary policy is constrained by the natural limits of interest rates. While there are no upper limits to interest rates, the lowest rate is obviously zero. You cannot have negative official interest rates because depositors will simply withdraw their money from banks - hiding cash under the bed is a better investment than keeping it deposited at the bank. When interest rates reach zero there is nothing conventional monetary policy can do to stimulate domestic demand - Japan is a classic example of this, with interest rates near zero for the last 15-20 years.

The Federal Funds rate is currently 0.20%. It has been below 1% since 2008-10-15, which means that the US has, for the past two years, reached the limit of conventional monetary policy. Enter Ben Bernanke and quantitative easing, and you have a radically new monetary policy tool.

The thinking is rather simple:

• To create more inflation, the money supply needs to be expanded.
• Since conventional monetary policy has reached its limit, no more money can be added to the money supply through the lowering of interest rates.
• Therefore money needs to be added to the money supply through different means.
• Seigniorage (money creation by fiat) is then used to buy back government bonds, thus increasing the money supply.

Seigniorage has been used injudiciously in the past, most notably by Weimer Germany and Mugabe's Zimbabwe, and has created hyperinflation. Yet this is the same process Bernanke is undertaking now. The difference is that the amount being created is limited, which means that the inflationary effect will be similarly limited.

But there are naturally limits to even this level of monetary policy - it is limited by the amount of government bond holders (US treasuries). While the amount of money currently tied up US government debt is huge (over $9 trillion in public debt), in theory this amount may be brought down to zero. This is an important limit for nations like Australia and Norway, whose gross government debt levels are comparatively low (and are actually net negative). Such forms of quantitative easing (as this policy is now known as) do have natural limits that need to be taken into consideration.

So what's my idea then?

Back in March 2009 I wrote an article titled Thoughts on fractional lending and quantitative easing which outlined some ideas I had at the time about unconventional monetary policy. Here it is:

The Central Bank creates money by lending it to Commercial Banks.

This would take the form of a deposit. The central bank creates money by fiat, and then deposits this money in as many banks and financial institutions (institutions that are part of the fractional banking structure) as it can find. This won't be a bond buyback, but a simple deposit. It is not important as to whether the commercial banks pay interest on such a deposit since paying back interest is not important - expanding the money supply is.

Of course, with more money deposited, commercial banks would then have more money to lend out, thus alleviating any credit crisis. There is no money entering the money supply via any bond buybacks or stimulus plans. It's simply money appearing by fiat and being deposited into banks.

But what happens once the economy begins to recover, credit begins to flow again and inflation begins to rise? Well obviously the central bank could then withdraw all or part of its deposit with commercial banks. This would reduce the amount of money commercial banks could lend out and act as a contraction of the money supply.

And then I got thinking again - what if this form of quantitative easing replaced current monetary policy completely? So rather than money being removed or injected into the money supply through bond issues or buybacks - why not simply have the central bank deposit money into commercial banks or withdraw money from its commercial bank accounts? It would still be an open market operation, but one which doesn't require a government bond market to exist or even some form of centrally set level of interest - rates would be completely market controlled and dependent upon how much money the central bank deposits into, or withdraws from, commercial banks.

So, to summarise:

To stimulate growth in the money supply (to battle deflation and thus stimulate economic growth), the central bank creates money by fiat and deposits it into commercial banks.

To restrict growth in the money supply (to battle inflation and thus restrict economic growth), the central bank withdraws money from its commercial bank accounts.

In both cases, the money supply is affected by the ability of the commerical bank to lend up to 100% of its deposits - the more deposits, the more money is lent; the less deposits, the less money is lent.

----------------------

Naturally, Paul Krugman and others will point out that increasing the money supply during a solvency crisis does little (the "pushing a string" theory) and I would agree that some level of Keynesian stimulus might be necessary, but one which sources its money from central bank money creation rather than by borrowing from the market.

In this scenario, instead of Bernanke's $600 billion being used to buy back government bonds, it is used (for example) to build wind turbines all over the country. It is monetary policy (money creation) AND fiscal policy (increase in production) acting together, and it is aimed at bettering the environment. Of course the $600 billion could be used to build tanks and machine guns for the army, or it can be used to buy everyone in the US multiple cans of Coca Cola, or it can be used to build mansions for the rich, or it can be used to build houses for the poor - the possibilities are endless, as is the potential for both intelligent or stupid spending.

What makes standard Keynesian fiscal policy work is twofold: firstly, money is injected into the economy, and, secondly, goods and services are produced, leading to a multiplier effect. Modified forms of Keynesian stimulus - such as Bush's tax cuts in the early 2000s - have only a single effect, namely money is injected into the economy. Monetary policy, even of the unconventional (quantitative easing) or radical (my March 2009 proposal) variety, has a similar effect: money is increased, but its demand (money velocity) is not. What the market does with the money after it has been gained depends upon how the market is acting, which is why monetary and/or fiscal stimuli do lead to some level of economic growth, but not as much as that enjoyed by a true Keynesian injection.

So the question comes down to this: what will the markets do with the $600 billion that Bernanke injects into the economy through "QE2" (as many have called it)? That, of course, is the issue. Will the markets use that money to invest back into the US economy or will they do something else? The markets have already reacted to the announcement by dumping some of their US dollar holdings, so it may be that QE2 just leads to a dollar devaluation, with the fiat money instead being directed towards Japan, Europe and other major economies. Here in Australia the dollar has breached parity and made buying CDs and books from Amazon.com that much cheaper. Thanks for stimulating the Australian economy, Ben.

But then all this goes back to whether the money supply should be increased. While US inflation is low (currently 1.14%, year on year) deflation is hardly a problem just yet. Deflation hit the US economy very hard in late 2008 when the credit crisis hit, but since then prices have stabilised somewhat. Paul Krugman and others would argue that the US should actually target 4% inflation as a goal rather than as a limit, in which case Bernanke's policy is heading in the right direction. Interest rates have certainly bottomed out, but where is the deflation that can't be influenced by conventional monetary policy?

And this therefore calls to question the reason for quantitative easing. Is Bernanke aiming to stimulate the US economy or is he simply trying to maintain price stability? If it were the latter, then Bernanke is crazy since the US doesn't have a problem with price stability at the moment (unless you adhere to absolute price stability like I do, of course, but that's another topic!), which means that QE2, as an inflationary policy, is being implemented when prices are not in danger of deflating. This can only mean that Bernanke is aiming to stimulate the US economy, and this is problematic.

Who in government should be responsible for direct actions to stimulate the economy? In most nations this responsibility is undertaken by politicians - in other words, elected officials. The Federal Reserve Bank is not run by elected officials but by public servants. Most central banks the world over see price stability as their major, if not sole, concern. Stimulating economic growth should not be the role of a central bank, though central banks should be open to being co-opted by governments to produce outcomes aimed at stimulating growth (an example being my proposal of Bernanke's $600 billion being used to build wind farms above). But if any policies are pursued to stimulate economic growth, they must originate from, and be ultimately controlled by, congress or parliament or diet or duma.

The problem with having a dual role - as the Federal Reserve obviously has - is that it is more open to corruptive influences. "Stimulating the economy" may mean dumping $600 billion into the accounts of troubled financial giants whose incompetency is what drove them to the verge of bankruptcy; it's not a coincidence that these financial giants just happen to own a considerable number of US treasuries that they can sell to the Federal Reserve Bank for the $600 billion being offered. If the Fed was only concerned with price stability they could simply ignore these troubled corporations and only respond to price signals from the Consumer Price Index.

Nevertheless QE2 does open the doors to monetary experimentation, which should be welcomed by those who have been concerned with the limits of interest-rate-based monetary policy.

Update 00:15:00 UTC

If $600 billion were used to build wind farms, the result would be huge. The Cape Wind project will produce 454MW for $2.5 billion. Using simple maths, $600 billion could buy 253.34 GW of nameplate electricity generation. Since the US has around 1075 GW of nameplate electricity generation, you're looking here at 25% of the US electricity market. Obviously these are hard and fast facts and there are certainly limitations to this form of extrapolation, but the sheer amount of money involved here needs to be subject to opportunity cost: would $600 billion of fiat money be better spent constructing wind turbines or injected into the US bond market?

Thoughts on the US mid term elections

As a progressive I was naturally hoping for the Republicans not to gain any power. This doesn't mean I support the Democrats of course, and have criticised Obama more than I have praised him, but this election result is certainly one that the Democrats can certainly be blamed for.

Much has been read and said by others (and myself) about the radicalism besetting the Republican Party. The GOP and the Tea party created an atmosphere of such fear and anger that it was inevitable that mainstream opinions would be changed. Even from day one after Obama's election, conservatives were screaming socialism, communism and Nazism; gun and ammunition sales increased markedly. Then the Tea Party formed. After a while the recession began to be understood as being Obama's fault, even though reasonable and informed people knew otherwise. The GOP has thus swept to power in the House of Representatives by voters who believed the propaganda and the lies of the well funded campaign.

The Republican victory in the house is comparable to that of the 1994 Republican revolution. In 1994 the GOP took control of both the House of Representatives and the Senate from the Democrats. In that year, the Republicans gained 54 seats in the House and 8 in the Senate, wresting control of both. This time around, a similar amount of seats has been gained by the GOP, with 6 Senate seats being won as well. The Democrats will still control the Senate, though.

Nevertheless, there is a difference between the 1994 and the 2010 victory. The 1994 victory was based partly upon a reaction against entrenched Democrat corruption. The Democrats had held the lower house for 56 of the preceding 62 years, and so new, fresh faces were required to keep pushing conservative views forward. American conservatism had, by 1994, been finally subsumed into the Republican party, having spent the previous few decades living mainly amongst the Democrats (the South, once a Democrat/Conservative stronghold, is now a Republican/Conservative stronghold). Of course the "class of 94", led by Newt Gingrich (whom I regard as America's finest conservative politician) was able to use its position firstly to lead a "government shutdown" in a showdown against Bill Clinton, and then, via an investigative process into Clinton's (then) alleged sexual proclivity, was able to humiliate the president into admitting a sexual relationship and then force impeachment based upon the fact that he lied about the relationship under oath.

This time around, though, it is very different. The Democrat controlled Senate will prevent any spurious impeachment of Obama at least until 2012. Moreover, the current victors do not bring a "fresh" congress but one bereft of new ideas. Gingrich and the 1994 congress acted in concert with Clinton to reduce spending and debt and institute new conservative ideas. In 2010 there are very few new conservative ideas beyond cutting taxes. Repealing Obamacare will be impossible without either Senate or Presidential approval.

Part of me relishes the opportunity that the GOP has to now implement its failed policies all over again. Why not cut taxes for the rich again? Why not increase the size of the budget deficit? Why not force another government shutdown in order to create a situation in which government cannot spend? Why not aim to impeach Obama? And while we're at it, why not go Tea Party and shut down Medicare and Social Security while we're at it? Of course these policies will result in massive economic and social degeneration, proving beyond any reasonable doubt that such radically conservative ideas should be permanently dispensed with.

But another part of me knows that such activities will result in much suffering and wants America to avoid it. I like America and want it to be strong and trustworthy. I don't want Americans to be frightened because, as a non American, I can see what happens when Americans fear too much.

But back to these mid term elections. The Democrats were unable to "control the narrative". The Tea Party and its crazies were the focus of everything going on. Beck's rally in Washington may have been a cynical exercise but it worked. Progressives were essentially reduced to being reactionary. Even the "Rally for sanity and/or fear" by Colbert and Stewart was a reaction to Beck. There was nothing huge and exciting that progressives and Democrats were doing to "control the narrative". It was all Tea Parties, Sarah Palin, Christine O'Donnell and Rand Paul. I may be sounding too much like a pundit here, but it seemed that progressive proactivity died out almost as soon as Obama was elected, to be replaced by Conservative Proactivity. Since the Tea Party formed, progressives and Democrats were reduced to being reactive.

Of course one of the big problems here is simply the nature of US politics, which is based on an electoral system that encourages radicalism and hatred rather than consensus and judiciousness. The US electoral system is still based on 18th century ideas and policies and is in need of an overhaul. A preferential voting system would not require any changes to the constitution and it is essential for US politicians on both sides to support such a measure if the US is to have a better functioning congress.

OSO's pontifications at Reddit

I've realised that some of these are worthy of posting here:

In response to the GOP's "Pledge" about controlling the US budget:

I'm actually a person who has looked at the stats. I know how much the US budget deficit is. I know how much US public debt is. I know the proportions of spending by various government agencies.

So let me summarise from here what the biggest things in the budget are, in order of amount:

1. Department of Health and Human services. (Medicare and Medicaid).
2. Social Security.
3. Department of Defense.
4. Interest paid on money owed

So there are only these four places for the Federal Government to cut into. Everything else represents a very small proportion of government spending. Even if you completely cut funding to NASA, Homeland Security, the FBI, or Department of Education, the result will be negligible.

So what Americans need to ask the GOP is "What are you going to cut spending on to bring the budget back into balance?".

1. Is the GOP going to gut Health and Human services? This means less money for Medicare and Medicaid. Old people especially will be hit by this.
2. Is the GOP going to gut Social Security? Less money for retirees.
3. Is the GOP going to gut Defense? Yeah right I see that happening.
4. Is the GOP going to stop paying debt off? That would mean defaulting on treasuries.

In the end the only real solution is to increase tax revenue, which means increasing taxes. The GOP won't do that. In fact they'll probably cut taxes for the rich again, convinced that maybe this time it might work.

Which means that the GOP will simply put the Federal government further and further into debt. That's what they've been doing since 1981, so we can assume that they'll go with tradition on that one.

In response to predictions of the "end of the world" and the fact that so many have failed:

The thing is that history is replete with instances of societal collapse and population downturns. War, famine and disease have taken away huge proportions of human population.

The "end" is never the "end", unless you're talking about Jesus returning or a massive impact event. The Roman empire ended - slowly and painfully. But people still lived in Rome. Other empires came along and replaced them.

We have around 6 billion people living in the world at the moment. If global warming takes a turn for the worse and agricultural production drops by 95%, it will probably mean the deaths of billions. But it won't be the end. People will still survive. Countries will disappear, governments collapse, borders moved, but there will still be stable governments and healthy people for a minority of the people on earth. And it will be that minority that will eventually flourish to replace the collapse.

So it's not the end of the world, but an end of a chapter.

In response to a Conservative Redditor who is very concerned about radicals taking over the Republican Party:

As a Liberal/Progressive, I like you.

We disagree over spending: I'm happy to increase spending and increase taxes; you're happy to decrease spending and decrease taxes. Both of us, however, oppose the stupidity of continually running deficits.

Even though I'm a lefty I have, like most people, a foot in both camps. I may believe in increasing welfare but I also believe in personal responsibility; I may believe in wealth distribution but I also believe that the talented and the hard working should be rewarded; I may oppose corporate corruption and tyranny but I also oppose government corruption and tyranny.

What saddens me is that conservatives in the US have degenerated into anti-intellectualism, blind ideological adherence and an inability to think critically. Popular conservative commentators reflect this belief.

Conservatism as a set of political beliefs has a lot to offer - seriously it does. But conservatives in the US pose a net threat to America's safety and prosperity.

If the GOP and the Tea Party do not do as well as they hope during the 2010 mid terms (ie control one or both houses of congress) I can see violence resulting.

A further comment on the same thread:

I don't even know who the "extreme radical left" are in the United States. There are certainly a few unreconstructed Marxists out there who still preach class warfare and the need for a people's revolution but they have, as far as I know, almost no influence upon the Democratic Party. Even Bernie Sanders is too right wing for these old Marxists.

There's a few anarcho-primitivists in the environmental movement, but they are too small.

I visit Daily Kos often - it's probably a good place to start in finding out the thoughts and beliefs of the young mainstream left in the United States. Although they support an expansion in government spending to fund universal health care, better public schools and better environmental policies, they are hardly trying to create a communist America. The policies of the Kossacks and those like them in the Democratic party is to move the US into more of a Western European social democracy. They may find the free market problematic and in need of change, but they are not preaching a complete government takeover of private businesses, wealth and property. By all means of measurement, the left in the US is moderate compared to historical progressive policy.

By contrast, the right wing in the US has no real precedent in history. The US right want the government to be turned into Minarchism while maintaining a series of very conservative social laws (eg against homosexuality & abortion, more censorship, etc). The America that the US right wing want is one in which the federal government runs the armed forces, state governments run law enforcement and the legal system is covered by both. Apart from that, the government should do nothing. Education will be run either as a private business or home schooling. The poor will receive no welfare except from the charitable giving of the wealthy. Health care will be provided entirely by private business and insurance agencies, with those who cannot afford it left uninsured or begging for charitable handouts. Social security should be eliminated and people should provide for their own retirement. These policies are a complete repudiation of all that has been learned in the last 150-200 years of Western Civilization. Thus the right wing in the US is historically very radical in its views and not moderate by any way of measuring political and economic beliefs.

And the more radical a belief is, the more likely that violence is to erupt. It erupted on the "left" when communism swept into Russia and China. It is likely to erupt on the "right" in the US due to the Tea Party.

And I finish by promoting Absolute Price Stability on a thread discussing the gold standard:

Fiat currencies are as inherently failure-prone as a car is - it depends upon the driver.

Car drivers can be stupid, they can be smart. If a car crashes it is oftentimes the fault of the driver.

When it comes to fiat currencies, it is up to central banks to control supply to ensure that it matches demand. When the demand for money increases so should its supply. When the demand for money decreases, so should its supply.

Money demand is called Money Velocity.

Basically it goes like this: Money velocity is sped up or slowed down according to the actions of the market and the government; Money supply is increased or decreased by the actions of the market and government when they respond to interest rates set by the central bank.

It is quite possible for a fiat currency to exist without any form of long term inflation. Japan since the early 1990s has had enough bouts of deflation and inflation to ensure that the Yen has neither gained nor fallen in value.

Of course Japan's economy during that period has not been the best, but what it does show is that an economy can function, GDP and GDP per capita can be raised and prices can remain stable even when a fiat currency is being used.

The key here is absolute price stability: ensuring that money neither rises nor falls in value over the long term.

Of course, by this argument, even low inflation targets are too high. The ECB, for example, tries to keep inflation under 2%. They should be keeping it just above or just below zero so that the average over the long term is zero.

As for gold... the problem with a gold standard is that for it to act as a currency it would need to not just retain its value but neither increase nor decrease in value, otherwise inflation or deflation would result. To increase gold supply would require more gold to be extracted from the ground (which would make mining companies de facto central banks) and, once it has been extracted, it cannot be "unextracted". By contrast a fiat currency can be created or "decreated" instantly by the actions of a central bank.