Friday, September 25, 2009

Secret: No More Money Market Fund Protection - The Illusion Continues

This is just a quick note on the state of the market and the economy right now. I am very bothered by the false spin that has been coming out of almost every media outlet and the government ever since this spring. The absence of reasonable economic analysis is almost complete.

The government and the media are currently putting ordinary people at risk by not telling them that certain guarantee programs are ending. As of last week, September 18, the Treasury Department’s ” Temporary Guarantee Program for Money Market Funds” HAS ENDED.

Click to view: (note that this only says that the program will end on September 18, there is no announcement that it has actually ended, which it has)

They obviously don’t want anyone to know this, because they don’t want anyone to withdraw money from these funds. If you remember, this program was started last autumn, because the withdrawals that were seen during the most chaotic days could have absolutely destroyed the stock market. The program was initiated not out of concern for ordinary people who had money in these funds, but as a way to support stock prices. The consideration is the same today.

I have not seen a single media entry, except one mention on the CNBC website, telling this story. The problem with these funds is that people see them as savings accounts. In fact, a lot of the money is invested in stocks, and although the fund will not swing like stocks, there is a much higher risk of losing all your money. There is no FDIC protection. A lot of people in Britain and The Netherlands lost money in this way last year.

There are a few people who seem to be keeping an eye on things though. The government is about to hit its debt ceiling of 12 Trillion Dollars soon, and the word is that Geithner is about to ask for it to be raised. In other words, the government has spent so much money bailing out anything and everything, that the $700 Billion last year is now like a spit in the bucket. The question will soon become: who will bail out the government? The situation is really serious now. Please take a look at CNBC's Heidi Moore's article on that:

The absolute surge in stocks over the summer was not something that I foresaw. I am flabbergasted at it. Then it came to me; this is the same pattern as during the depression. Here’s what happened back then:

- 1929: crash

- Early 1930: stock market up by 50%

- Late 1930: stock market down 50%

A lot of things are different now, but I wouldn’t be surprised if the same thing happens within 4-5 months. By this I mean, of course, that the crash and the 50% surge has already happened, and we're just waiting for the 50% drop. After that, all the terrible mistakes that the Treasury, the Fed and Congress have made will become very apparent. They have essentially done everything wrong in the handling of this crisis.

This is my basis for this accusation: this crisis has been dealt with as if it were a smaller, cyclical crisis, but the medicine has been administered on a massive scale. I believe that this is a structural crisis, and that none of the cyclical theories apply. Now we will only get debasement of currency, more unemployment, and a downward-spiraling trend.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Thursday, September 10, 2009

Manifesto for a U.S. Parliament - 2009 Update

In light of recent political developments, I am, to my great surprise, no longer alone in calling for an overhaul of the way decisions are taken in this country. So far in the year 2009, we have seen more starkly than perhaps ever before how far away the U.S. is from being a democratic country.

The healthcare debate in particular has raised a lot of questions regarding the decision-making process. More specifically, the role of the Senate has been put into question. The media makes it seem as if any healthcare reform hinges on a small group of senators, lead by Max Baucus from Montana. They may in fact be right, and considering the fact that this man represents roughly 0.15% of the population (90% of which are white), it is easy to see why such a situation might be called into question even in the U.S..

In an excellent article in the Washington Post called The Gangs of D.C., Alec MacGillis explains the strange power of the Senate and the impact this has on democracy at large. Also, focusing on procedural issues, Eric Etheridge of The New York Times writes about the Senate, filibusters and democracy.

I obviously agree with what these writers are saying about the Senate; it is an unbelievably undemocratic institution even before taking into account the tens of millions in corporate “donations” that these individual senators receive. However, neither of these issues can hold a candle to the fact that voters in the U.S. never have any real choice to begin with, because there is no proportional representation.

Before I continue, let me just reiterate what proportional representation is. First of all, it is the system of choice of the vast majority of advanced countries in the world. If a party receives 15% of the votes, it receives 15% of the seats in the legislative body. This inevitably leads to more parties, and a range of views being represented. If 10% of the population is environmentally conscious, there will be a green party, and if 10% of the population are libertarians, there will be a libertarian party in the legislative body. Neither of these things could ever happen in the U.S. because there is no proportional representation.

Instead, the U.S. system has evolved into nothing short of a corporate state. It is clearer than ever that citizens actually have very little say in what happens in their country. This would never happen in a system with proportional representation.

Here is my suggestion for bringing democracy to the U.S.: The U.S. Parliament

The Inception of a U.S. Parliament

The idea behind a bicameral system (the current system) where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy, white, older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered.

In my suggestion, the two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501 (in order to prevent a deadlock). Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering and other abusive tools would be removed entirely.

The fact that all states have an equal voice in the Senate is frankly absurd. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.

For Montana with 0.3% of the population, to have equal power to California with 12% of the population, is beyond absurd, and deeply undemocratic.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time.

In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method, and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Bill of Parliament

The concept of a “Bill of Parliament” would be very different from a “Bill of Congress”. The problem with bills in the U.S. today is that they lead to corruption through earmarks and lack of coherence. Earmarks obviously lead to corruption by individual Congressmen, when money is being appropriated to corporate donors by the recipient Congressmen. However, the sprawling nature of American bills of Congress also further weakens the small aspects of democracy that do exists in the U.S..

If a bill about, for instance, construction safety is being held hostage by means of a provision about space exploration in the same bill, it amounts to making a mockery of the political system. For a political system to work for the voters, bills must be philosophically coherent and earmarks as we know them must be abolished. It must be this way in order for the most rational, efficient solution to converge with the will of the people.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament.

The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.

As a result of the government in general receding since the days of Reagan, a power vacuum was created. Slowly but surely, aided by both Republicans and Democrats, the U.S. actually turned into something that is very much like a “corporate state”. In some ways, this state can eventually turn almost as bad as a “failed state”, since it may lead to a form of anarchism (a sort of Ayn Rand-style unregulated economy).

All money contributions to politicians must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

A U.S. President is the head of state, the head of government and commander-in-chief. No other modern country has this configuration, and for very good reasons. To give one individual such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship. It should be easier to fire the President through a vote of no-confidence.

It is definitely possible to have a significant President, elected in a separate election, as well as a Parliament with proportional representation. Finland is one country that has this.

Homogenization of Voting Cycles - Avoid The Do-Nothing Government

In the current system, as a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government. In a unicameral system, like the one I'm suggesting, this could not happen, but there could nevertheless be harmful effects of voting cycles via the interaction between local and federal elections.

In a system with a U.S. Parliament, there would obviously still be local elections, with proportional representation of course. Those elections must be held at the same time as the Parliamentary election in order to avoid the situation with the do-nothing government, where local elections are unfairly impacted by national politics, for instance. The goal should be to have as vibrant a political discussion as possible, with the merits of different policies at center stage at all times.

Increase Voter Participation by Practical Means

The United States has, by far, the lowest voter participation out of the OECD countries

This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:

The Netherlands: 84.8% (proportional representation)

Sweden: 83.3% (proportional representation)

Israel: 80.0% (proportional representation)

Germany: 80.0% (proportional representation)

Great Britain: 73.0% (fundamentally the same voting system as the U.S.)

Canada: 66.9% (fundamentally the same voting system as the U.S.)

United States (midterm): 40.6%, (presidential) 55.1%

As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.

There are a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

Tuesday, September 1, 2009

Low-Hanging Fruit

Over the last few months the American media has been reporting that the economy seems to be recovering across the board. The stock market has risen almost 50% on these news, anticipating a full-blown recovery.

I have argued before that the supposed recovery is only an illusion, and I will continue to explain why below. I would also like to remind readers that this year’s pattern in the stock market is actually very similar to the pattern during the Great Depression (I won’t go into that further right now, but I recommend reading John Kenneth Galbraith’s “The Great Crash of 1929).

News stories tend to be self-reinforcing. Journalists feed on each other’s sentiments and the reactions from readers. That is why you get news cycles that eventually peter out, while others take their place. In yesterday’s New York Times, Robert Schiller makes the connection between news cycles and the stock market in the article An Echo Chamber of Boom and Bust.

In my view, what Schiller argues is a somewhat exaggerated view on the impact of news cycles on the stock market, but I think the Schiller’s thesis is nevertheless relevant at this point in time.

Journalists in the mainstream media are generally painfully ignorant of economics as a subject. On the CNBC website, I went through all the profiles of the journalists that I regularly see on the network, and only ONE person, Michelle Caruso-Cabrera, has any sort of degree in economics (she is, by the way, a border-line fascist, so her “insight” should be taken lightly). The so-called “chief economics reporter”, Steve Liesman, seems to have no education whatsoever in economics.

Without really knowing what they’re talking about, journalists have over the last 6 months or so all jumped on the recovery story bandwagon. I’m not sure how it started, but it might have been because of the stimulus money, the supposed optimism of the Fed and other government officials, but the recovery story in its essence is this:

The economic crisis is leveling out

“Leveling out” is a term that usually implies that the worst is over and that a change in direction is about to come. However, I would argue that it definitely does not have to mean that, and in the case of this crisis, does not mean that.

By far the most important measure of how well an economy is doing is employment. The “real unemployment rate” in the U.S. is currently between 16% and 18%. That is basically the percentage of people of working age who don’t have jobs (and who don’t study, are housewives or are on disability). That is in my mind the only relevant figure. One of the most important factors in the “recovery story” is that job cuts are leveling out. In other words, companies are currently cutting jobs at a slower pace.

As the economic crisis has been going on for over a year, this makes perfect sense. What companies have been doing is that they’ve been picking low-hanging fruit. They’ve been laying off staff-members without whom they can still function, in order to preserve cash. They’ve gotten rid of an extra secretary, some superfluous salesmen, and they’ve stopped having donuts delivered every morning.

When companies have gotten rid of all their non-essential spending, they couldn’t possibly get rid of more spending at the same pace without drastically changing their business model and becoming an entirely different company (although this has happened as well). That job cuts are leveling out is an economic inevitability.

To illustrate this, I would ask you to think of the U.S. economy as a regular guy. This guy loses his job. This is what he will probably do:

1. He’ll stop going as much to restaurants

2. He’ll stop taking expensive vacations

3. He won’t buy a new car

What this guy is doing is picking low-hanging fruit. He is cutting down on non-essential things, but, for now, he won’t do something radical like selling his house. As a result of cutting down on expenses, he now has more money than he would have had if he had kept going as if nothing happened, but that does not mean that he is on his way to recovering his old life-style. He has not gotten a new job.

In order for our guy to keep cutting down on expenses, he would have to do something more radical, like selling his house and moving into an apartment. He’s very reluctant to do that, because that would radically change his life-style.

Just like the guy has not gotten a new job, and keeps cutting down on expenses, U.S. companies don’t have any new or improved revenue streams. Demand is not up, domestically or abroad. U.S. exports are not very successful, judging by the trade deficit. For U.S. companies to start hiring again, and for the guy to get a job again, the money has to come from somewhere. you can’t just will it to happen, or magically create it.

The important thing to remember is that companies are still cutting jobs, at a pace that would have been utterly frightening only three years ago. This means that, if anything, demand for goods and services will keep going down and down and down. This will force companies to cut even more jobs, and the cycle continues.

So I ask again: what has improved? A leveling out is not an improvement. This is the basic thing that U.S. journalists do not seem to understand. Journalists have been jumping for joy, saying that the car industry is coming back as a result of the “cash for clunkers program”. But again, where’s the money coming from? It’s coming directly from the government, so the “improvement” is just an illusion.

When the government hires someone, it is not “job creation”, and when the government spends money, it cannot be counted as economic improvement. Government spending can do all sorts of things, but it is a type of economic activity that must not be confused with the market. With respect to the “clunkers” program, government spending is a zero-sum game.

In conclusion: how do you know when the economy is improving? Let me present a few alternatives:

1. You export your way out of the crisis, like Sweden and South Korea did in the 1990s. You sell more abroad than you buy from abroad = more money for the country.

2. You inflate a new bubble of some asset class and try to convince people that the price of this asset class will continue to go up forever. It seems to work for about 5 years and then do a lot of damage, while the elite has gotten richer. This is the traditional approach in the U.S., and the one that seems to be in the works right now.

3. A massive technological leap forward radically improves productivity, like it did during the industrial revolution, and to a smaller extent, in the 1990s with the PC revolution.

4. You permanently re-align the economy at a lower place with lower amounts of consumption compared to before, as Great Britain had to do when the empire slowly crumbled over a few decades. This is also a possibility for the U.S..

Moreover, I advise that the winner-takes-all voting system should be destroyed.