Default by Design?

As the kabuki dance of fiscal death spirals towards its uncertain conclusion, amidst conflicting reports of deals made (or not made) to raise the ceiling of the US national debt -- thereby staving off a default on same --it becomes permissible to ask whether or not certain powerful parties view fiscal default as a positive outcome, and if so, why.

There is off course the Tea Party caucus in the US House of Representatives, who are the most visible agitators for default, and in my view, the least interesting.  Their gestalt is best summarized in a quotation from the great Sam Rayburn, who (reportedly) said, "Any jackass can kick a barn down, but it takes a carpenter to build one."  The comparison to the Tea Party caucus is of course insulting to jackasses, but my point is simply that the Teahadists are puppets, incapable of much independent thought, essentially cannon fodder in a larger Class War now being fought in our once-great nation.

Of greater interest to me is the anti-tax oracle and agitator Grover Norquist, who famously declared his desire to shrink the US federal government to a size small enough to permit its being drowned in a bathtub. Although he perhaps does not pointedly attack the great social contract programs of the New Deal and Great Society -- most notably Social Security and Medicare -- both are surely in his gunsights, because of their size and scope.

So how does default work towards his benefit?  Through the medium of Bond Vigilantes.  These mythical beasts -- financial unicorns I call 'em -- are supposed to magically appear in these troubled times of bloated government spending, and magically enforce fiscal discipline by driving up the interest on US government debt.  The only problem is, they haven't.  US government debt remains cheap by historical standards, and would easily permit (were policy makers in Washington but to will it) expansion of the national debt, to finance entitlements, but also anti-recessionary stimulus measures.

However, it doesn't take a rocket scientist, a brain surgeon, or a Nobel laureate in economics to see that a default on the US national debt -- or even the threat of default -- could drive up interest rates over the long term, thus effectively conjuring into existence the heretofore imaginary bond vigilantes.  Therefore from Norquist's viewpoint (and that of like-minded individuals) a default is desirable; and I have little doubt that he is stirring the  congressional pot to this end, through every resource of undercover private lobbying.

Another curious fact has recently been noticed: big banks are not actively lobbying against default.  This is odd on the face of it, since banks have much to lose should default occur.  Have the banks gone over to the Norquist camp, despite the obvious dangers to them of a further financial crisis?

Another point.  Why has not President Obama strongly asserted his right to  unilaterally raise the debt ceiling under the 14 Amendment of the US Constitution?  To the cynics, the answer is of course obvious.  It has been clear, ever since he convened the infamous catfood commission, that the President's much vaunted notion of 'bi-partisanship' means simply helping the GOP accomplish its long-held goal of destroying the Social Contract in America -- or any functional equivalent.  This means Social Security and Medicare must be cut, hopefully with such severity that they will bleed to death.

He has therefore, instead of insisting on a clean bill to raise the debt ceiling, pursued the chimera of a 'grand bargain' with congressional Republicans, to reduce the deficit, and cut social entitlements.  To call this a fools' game is to be unkind to fools.

Food and Karma

I cannot vouch for the provenance or authenticity of this, but the conceit is irresistibly attractive:  That is, I recall reading somewhere, in a discussion of Buddhist doctrine, the statement that the total amount of food in any given world is a direct consequence of the entire sum of accumulated Good Karma, of all sentient creatures inhabiting that world.  This would include all animate beings, from humans down to sea-slugs and gnats (to name but a few.)  Obviously people will argue over who or what is good or evil, and simple dichotomies like Ghandi vs. Stalin won't illuminate much; nonetheless, I believe a certain rough consensus exists that starving people to make money is bad conduct, and therefore bad karma.


It is therefore particularly striking to me when a perceived evil action by some human agency is aimed directly at lowering the availability of food for profit.  Or, in terms less stark, action by some human agency with the perceptible and likely consequence of lowering the availability of food while turning a handsome profit.    The journal Foreign Policy recently devoted a full issue to food, and includes an article blaming Goldman Sachs for the current spike  (or bubble, if you prefer, though the two sound incompatible) in wheat prices globally.  These have added about 25 cents to the price of a loaf of bread in America, but have doubled that price in places like Indonesia, where the average percentage of household income spent on food is far higher than in America.


I am not an expert on financial derivatives, although as a worker in an industry that actually makes and exports things, I have a certain moral horror of (not to mention supercilious disdain for) business enterprises that make money from money, without serving any real purpose in capital formation.  I am assuredly not against capital markets; but to me, derivatives are as parasites on the body of an industrial economy; nonetheless, I will defer that soap-box rant for another day.


So as I understand the substance of the FP article, two factors have been operative.  First, in 1991, GS creates a commodities index product (GSCI), in which different commodities (hogs, soy , wheat, metals etc.) sliced and diced and re-assembled into a composite index.  This didn't lead to much, until de-regulation entered the picture.  From FP:

For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sowed or reaped. Then, in 1999, the Commodities Futures Trading Commission deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food.

Goldman's system was designed so that one can only buy; when time comes to roll over a futures contract it can't be sold short in a falling market.  This creates an inevitable upward pressure on commodities prices, including food.  


As other speculative bubbles (Tech, Real Estate) have burst, more and more money has flowed into commodities derivatives, hence we now find ourselves with a global food bubble -- not overly noticeable in the G7 perhaps, but disastrous in poorer countries.


So, am I being to hard on GS? pulling out the moral and rhetorical stops on them, and unleashing the impotent fire and brimstone of an obscure commentators, even whose friends are careful not to ask for the URL when this blog is mentioned conversationally?


Certainly there are countervailing opinions, by those who think that grain prices are responding rationally to the simple mechanics of supply and demand.  On the evidence I disagree.  Goldman has the global economic bit in its teeth, and is running wild.  They are altogether unchastened by their recent escapes from annihilation in 2008; and God help us all if they are not brought under control.

S&P Downgrade of US Credit Fixed!

The recent threat by rating agency Standard & Poors, to downgrade its rating of US Bonds, is easily neutralized by but this simple step:  Return the top marginal tax rate to the levels which obtained at the end of the Reagan Presidency.

Sound simple?  Hell yes!  Likely, with the Rethuglican pin-heads and Democratic wimps in DC?  Hell no!

Davos and the Rest of Us

Simon Johnson, at Baseline Scenario, has posted an interesting dispatch from the meeting of World Economic Forum in Davos, Switzerland.   He writes:

On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our “too big to fail”/”too big to save” banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad.

But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate.  There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern.

(My italics.)   Well my view of this is somewhat simple minded.  We start by parsing the concept of  Globalization, which to me represents the notion that in a global economy with sufficient interconnections, there is always to be found sufficient purchasing power to enrich a sufficiently globalized corporation (and its management) -- regardless of the economic conditions of workers and consumers in any particular nation.  What this says most directly is that a global labor market is a buyer's labor market, which promotes a race to to the bottom for  wages in erstwhile highly industrialized and prosperous nations, as exemplified by members of the G-8.

This runs counter to the old Henry Ford dictum: "I have to pay my workers enough to buy one of my cars."  The executive view of today is that globalization has given the lie to old Henry, and that there is no penalty for squeezing one's workers.

In this context, the unconcern (by CEO's) about unemployment is natural -- it's a feature, not a bug; depressed wages mean higher profits.  "Our responsibility is to our shareholders".... which, more and more, means to management itself.

Kleptocracy Update

The ever-brilliant yet diffident and understated Atrios has more on the Force-closure express.  It seems that the state of Virginia has greased the legal skids so that home-owners will receive two weeks (you read that right, two effing weeks!) notice that their homes are to be sold at auction.  Obviously this gives no time to legally contest, and the path most taken (as Atrios notes) is to run out the clock trying (bootlessly fruitlessly) to negotiate with the lender.  Gods protect us all!

The NYTimes and the Obama tax-cut deal.

An editorial in the Sunday NY Times (Dec. 19 2010) seeks to have it both ways on tax cuts.  Having earlier praised the deal, the Grey Lady now awakens its deficit-busting potentialities, noting that extension of the Bush era tax cuts through 2012 "...will account for roughly 40% of today's deficit."

Then continuing in the vein that the President must lie in his bed as he has made it, the Times adds: "When deficit reduction begins in earnest, tax increases and cuts in big-ticket programs — Medicare, Medicaid, Social Security and defense — will be the focus."  (My italics.)


OK, let me get this straight.  Tax cuts for high bracket individuals are deficit busters, and must be paid for by sacrificing the cornerstone programs of the New Deal and Great Society.


Am I missing something here?  Wouldn't it have been easier to let the Bush tax cuts expire?  Does anyone realize that top marginal rates are at historically low levels now, far lower than during the great era of post-WW II American prosperity?


Just askin'.