The Pied Piper of DC

The document at bottom is one of the scariest things I have ever read.  I looked it up while researching my "turkey" post, and realized it had to be read.  It does.  In here, in 2002, Federal Reserve Chairman Ben Bernanke outlines a very broad range of means the Federal Reserve and the U.S. Government will use to stop an economic collapse, which he charitably calls "deflation", meaning, a severe drop in "aggregate demand" -- meaning, no one is buying any damned thing because they got no jobs and no money.  He describes the exact conditions of our current crisis, but says the chances of it happening are "extremely remote".  He is clearly sympathetic to every single policy measure he outlines, even though he often hedges by saying they might be "undesirable".

There isn't one single correct principle of sound economics that Bernanke endorses in this document.  He holds up 1934, in the midst of the lowest point of the Great Depression, as the single greatest moment in stock market history!   I kid you not. 

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.¹⁷ The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.

It hardly gets worse than that, until you realize that Bernanke is now in charge of the most powerful monetary agency in the world, and every single one of the "anti-deflationary" means he outlines is now being implemented.   I include

the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations,

In other words, if things aren't bad enough over here, let's buy the bad debt of Greece, Spain, Portugal, Britain, ad infinitum, with the paper dollars we're printing out of thin air.  They aren't admitting it, but as I said in a previous post, I'd bet hard money that they're already doing it. (And now you know the real meaning of "credit default swaps", even though it's not called that when governments do it.) 

The paragraph that earned him the title "Helicopter Ben" caps this:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Do you understand what he's saying?  It's a theme in his entire speech.  He regards reducing the value of the dollar as a *good* thing in the pursuit of achieving inflation to increase demand.  To say that this man is a moron is being unkind to morons everywhere.  This can only be the product of advanced higher education.

I've highlighted the scariest comments, and if you don't understand them, try to, because the real meaning isn't always obvious.  View everything in light of this fact:  in a healthy, pure capitalist, gold-backed economy, long-term interest rates are very low, and the general rate of "inflation" (as measured by an average of all prices) is always mildly negative as production efficiencies accrue.  Bernanke, however, calls this a threatening "deflation" that must be attacked with monetary policy such as the TARP bill.   For instance, he refers to the terrible debts piled on people in 1896 as

the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.⁴

The fault is the gold, you see.  The poor devils needed a Federal Reserve to save them. 

Now, some of you might be thinking, "but we don't have deflation.  Aren't we at risk for inflation?"

What is inflation?  It is *NOT* simply increasing prices of things.  You can have inflation with falling prices.  "Inflation" is one of those loaded terms with a lot of baggage from intellectual incompetents like Bernanke.  A proper definition means:  falling value of the dollar (or whatever currency).  That can cause a new car to be more expensive... but if demand is falling and incomes are falling, the price of the car could still be falling, cause no one can afford the damned thing.  

I don't want to go into a treatise on economics here, but the key is always to keep your mind focused on *real* value of things rather than surrogates like paper bills:  how much of your productive effort does it take to buy a car?   Say, a percent of your annual income.  If that percentage is going up, you have inflation in real terms.  And note:  inflation (in the absence of credit expansion) always means you have declining demand.   What gets so scary (and what we've experienced) is the government created phenomena of people getting artificially high present incomes by borrowing against the future. Artificial demand created by artificial ability to buy.  Only we get insulated from cause and effect (truth and consequences) because the government has been artificially reducing prices for years by borrowing in a giant game of monetary musical chairs.  Gross oversimplification, but it points you in the right direction.

What does this mean for the future?  Contemplate:  Every single instance of monetary policy by our government is in exactly the wrong direction. Every one. You can decide whether Bernanke is Wrong Way Corrigan (http://en.wikipedia.org/wiki/Douglas_Corrigan) who did it intentionally, or Wrong Way Marshall (http://en.wikipedia.org/wiki/Jim_Marshall_%28American_football%29) who was just really, really confused, but either way, you know something really bad has to happen before long.

Whither goest thou, America?  After the pied piper, Helicopter Ben Bernanke.

(P.S.:  The real pied piper was a serial killer of children.  http://en.wikipedia.org/wiki/Pied_Piper_of_Hamelin  "In 1284, while the town of Hamelin was suffering from a rat infestation, a man dressed in pied clothing appeared, claiming to be a rat-catcher. ...One hundred thirty boys and girls followed him out of the town, where they were lured into a cave and never seen again."  Or 300 million.)
 

 
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm#fn18

Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002 Deflation: Making Sure "It" Doesn't Happen Here

Since World War II, inflation--the apparently inexorable rise in the prices  of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.

With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.

So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency.

A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.

The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.

Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.

The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.¹ Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.² Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.³ To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.⁴

The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.

Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.⁵

Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.

However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
 
Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.

First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.⁶ Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.

Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.

Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.

As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.⁷

Curing Deflation
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
 
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
 
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).⁸ Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.

Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.⁹

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.¹⁰ Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.¹¹ For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.

To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.¹² However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.¹³ Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.¹⁴ For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.¹⁵

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.¹⁶

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.¹⁷ The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.¹⁸

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

Japan
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.

First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.

Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.

In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.<sup>19

(See original link for references and footnotes. )</sup>

Turkey's Away

This is a rather belated post on the economy and government policy, with a slant that's been on my mind for some time.



The video excerpt is from a famous "WKRP in Cincinnati" episode in which radio station manager, Arthur Carlson, arranged a Thanksgiving Day advertising stunt to have live turkeys dropped from a helicopter.

Ben Bernanke got the monicker "Helicopter Ben" some years before becoming Federal Reserve chairman, in a speech where he referred to Milton Friedman's metaphor of a helicopter dropping money on everyone as a way to prevent "deflation" (and by implication, economic collapse), and alluded to the power of the government printing presses to accomplish this end, for which he received a lot of criticism from more sensible people. According to ace reporter Les Nesman,

[Les]  ...What has been described as the greatest Thanksgiving Day event in history.  A lot of happy people out here!  ...and I think I hear something now!  The crowd is moving out into the parking area.   Oh yes, I can see it now!   It's a helicopter!  And it's coming this way!  It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!!  

What a sight, ladies and gentlemen, what a sight.  The copter seems to be circling the parking area now, I guess it's looking for a place to land.  No, something just came out of the back of the helicopter.  It's a dark object, perhaps a skydiver, plummeting to the Earth from only 2000 feet in the air.  There's a second... a third...  There's no parachutes yet.  ...Those can't be skydivers.  I can't tell just yet what they are but -- Oh my God!  They're turkey's!  Oh my God, Johnny, can you get this?  They're crashing into the Earth right in front of our eyes! One just went through the windshield of a parked car!  This is terrible!  Everyone is running around pushing each other!  Oh, my goodness!  Oh, the humanity!  People are running about, the turkeys are hitting the ground like sacks of wet cement!  The crowd is running for their lives!  I can't stay out here and watch this any longer!  [Turns towards the doorway of the shop of a merchant who told him to get lost.]  Oh, I can't go in there!  Children are searching for their mothers!  Not since the Hindenberg tragedy has there been anything like this!  I don't know how much longer I can hold my position here, Johnny, I... [cuts out]

[D.J. "Johnny Fever" at the station]  For those of you who have just tuned in, the Pinedale Shopping Mall has just been bombed with live turkeys.

WKRP Turkey Drop from Mitch Cohen on Vimeo.

(http://vimeo.com/7824102)

I think the metaphor is perfect. With real unemployment (not the bogus government statistics) hovering somewhere near 20% or more, Helicopter Ben and all the other whirlybirds in D.C. are beginning to see how well that idea is flying.

(If you want to see the entire episode, go to http://www.hulu.com/watch/322/wkrp-in-cincinnati-turkeys-away )

Believe it... or Not

Congress votes to strengthen FBI successor

Today at 16:55 | Reuters

Washington, July 4 (Reuters) - Congress on Friday voted to extend the Patriot Act and boost the powers of the new appointee to the FBI, allowing him to summon people believed to be about to commit a crime and threaten jail for those who disobey its orders.

Rights groups said the proposed regulations could be used by the FBI to detain opposition activists and independent journalists and undermine President Obama's promises to foster civil rights.

"It's a step toward a police state," said Betsy Ross, a member of the opposition Tea Party. "It is effectively a ban on any real opposition activity."

The bill, which would allow the FBI to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first voice vote in the House.

All Democrats  present voted in favor, while some Republicans joined with the smaller Tea Party in opposing the bill.  Senate leader Newt Gingrich, whose fellow Republican's rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union, but he believes Republicans can reach a satisfactory compromise."
He said he would lobby for changes to the bill before the second reading. It also needs approval by the Senate, though Mr. Obama has promised to sign it if it isn't watered down too much during reconciliation.

The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FBI agent. Rights groups say the changes taken together could allow the FBI to detain anyone it likes without any judicial process.

"A warning sounds benign, but under U.S. law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FBI that hearkens back to the old KGB in this country."

TACKLING EXTREMISM

The bill, submitted in secret to the House by Nancy Pelosi weeks after the Times Square bombing attempts, was kept under tight wraps until 5 minutes before the 2AM vote to minimize debate. It is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.

An existing law under which slander of a state official can be treated as extremism has also been used against critics of the Obama Administration.

Activists have compared the proposed FBI legislation to the decision by Obama, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after recent primary defeats and other hostage-taking.

But Obama portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.

The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists. This comes on the heels of recent attempts by the Obama FCC to "re-invent" American journalism with a government takeover of struggling major media outlets and the imposition of new taxes on "new" media.

The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give the Administration authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.

The FBI has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime and preventing terrorism.

"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said the new FBI Director appointee, Yuri Putin.


http://www.kyivpost.com/news/russia/detail/69373/

Russia parliament votes to strengthen KGB successor

Today at 16:55 | Reuters

MOSCOW, June 11 (Reuters) - Russia's parliament on Friday voted to boost the powers of the successor to the Soviet KGB, allowing it to summon people it believes are about to commit a crime and threaten jail for those who disobey its orders.

Rights groups said the proposed regulations could be used by the FSB security service to detain opposition activists and independent journalists and undermine President Dmitry Medvedev's promises to foster civil rights.

"It's a step toward a police state," said Vladimir Ulas, a member of the opposition Communist Party. "It is effectively a ban on any real opposition activity."

The bill, which would allow the FSB to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first of three required readings in the State Duma.

All 313 members of Prime Minister Vladimir Putin's United Russia party present voted in favour, while the Communists joined the smaller pro-Kremlin parties, Fair Russia and the Liberal Democrats, in opposing the bill.

Gennady Gudkov, whose Fair Russia party rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union."

He said he would lobby for changes to the bill before the second reading. It also needs approval by the United Russia-dominated upper house and Medvedev's signature.

The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FSB agent. Rights groups say the changes taken together could allow the FSB to detain anyone it likes without any judicial process.

"A warning sounds benign, but under Russian law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FSB."

TACKLING EXTREMISM

The bill, submitted to parliament by Putin's government weeks after two suicide bombings blamed on Islamists killed 40 people in Moscow's metro, is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.

An existing law under which slander of a state official can be treated as extremism has been used against Kremlin critics.

Activists have compared the proposed FSB legislation to the decision by Putin, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after 331 people died in the 2004 Beslan school hostage-taking.

But Medvedev portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.

The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists.

The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give Russian authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.

The FSB has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime.

"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said FSB Deputy Director Yuri

Struck Out by Too Much Tech

I've been bothered for some time that the U.S. military is becoming so dependent on not just GPS -- you've got to believe it's easily jammed or satellites destroyed -- but by high-tech weaponry overall.  Is it safe to have only a few super-capable aircraft or ships or missiles which can be taken out in either a first-strike or by overwhelming low-tech?   

Arthur Clarke wrote a sci-fi story with this idea in 1948,  where one side put all their cards on one fancy weapon which ultimately didn't work, and they were defeated.  The story is "Superiority", in his collection, "The Nine Billion Names of God", but available online here  http://www.mayofamily.com/RLM/txt_Clarke_Superiority.html.  Ironically, the story involves a Professor Norden, which is a veiled reference to the Norden bombsight which vastly improved the accuracy of our bombing in WWII.  Likewise, GPS improves the accuracy of our bombing today.

It is certainly true that high-tech gives a helluva an advantage when it works --but in a protracted war against a major adversary (or adversaries) it may get depleted very quickly.  There's still a lot to be said for sheer numbers.

The problem isn't just GPS guided bombs or missiles -- consider the new fad, UAVs.  Effective, yes, when your enemy is 7th century barbarians, but what if someone more sophisticated jams them? Then what do you do? EMP or radiation will take out the electronics pretty easy.

Submarines don't use GPS, but we're now on the verge of converting all our sub-based nuclear ballistic missiles to plain old bombs, on the premise that GPS makes them accurate enough to take out a hardened silo.  Uh-huh. Even if the GPS works, there isn't very much explosive power you can lob 12,000 miles across the planet from a submarine.  I've got to believe that a hardened silo designed to resist a 200kiloton nuclear warhead inside a radius of 100 yards isn't going to be terribly affected by a 5000 lb conventional explosive.  Assuming GPS still works for a such an accurate counterstrike -- not.

Even if you keep the nukes on our subs, technology is advancing so much, it's hard to keep missile boats hidden these days (the seabed is getting cluttered with sensors), and at any one time, 1/3 of our subs are in port.  Bombers?  A measily 20 B2s. Based at Whiteman, Guam, maybe Diego Garcia.  Don't quite remember.  A few bases. And 94 B52's at bases hither and thither (Grand Forks, Minot, etc).

The first strike problem is one reason I'm so against depleting our nuclear stockpile as Obama is now doing.

Consider the math:  You've got 14 Trident subs (288 SLBMs),  20 B2 bombers, 94 B52s (1083 warheads all bombers, but B1's are no longer used for nukes), 488 ICBMs on land (50 year old Minuteman III's). Say, 5 of those subs are in port at one time.  Realistically, assume a first strike takes out all the bombers and the subs in port.  Easy pickings. But even if all the bombers on alert aren't taken out, you've got to believe a lot of the B52s won't ever reach a target -- they're so damned slow, big and visible.  (Even during the Cold War, 1/3 of bombers were typically in maintenance, and only 1/3 on alert -- I know, I spent 4 years on SAC bases, and I remember when we scrambled for the '73 Arab-Israeli conflict, DEFCON 3.)

As a really bad case, suppose the Chinese and Russians have tracked our subs at sea and they've taken them all out in the same strike. So we're down to 488 ICBMs on land -- that's it.  How many of those will be taken out in a first strike?  Guessing -- probably 2/3 (you have to allow for failures in the enemy's own systems).  The Russians or Chinese would have GPS before the action starts.  That makes most of their missiles very accurate.

So that leaves us with 160 missiles. Single warhead missiles, cause the Lefties wouldn't let us have MIRV.  How many of those work when we launch?  Let's say, 2/3.  108 missiles.  How many hit their targets?  Let's so 2/3 of those.  72.  What military targets are you going after?  Too many.  There will still be a lot left over, and let's be real -- nukes aren't as destructive as you've been told.  The radius of total destruction goes down roughly as a 5th power of the radius.   The world won't have ended (that was all part of  KGB psyops to promote nuclear non-proliferation treaties), and there will be plenty of enemy left.

This is all very pessimistic, to be sure, but even then, it assumes Obama or whoever will order the launch of what survives.  I can easily imagine Obama deciding against launching anythign.  We can't attack the enemy!  All the innocent civilian lives that will be lost.  Etc.  Probably to get the Congressional Medal of Courageous Restraint for the Cowardly Lion.

So a total arsenal of 5400 nuclear weapons can go away very quickly in a first strike. To almost zero.  And then you're down to more primitive weapons.   War then gets ugly very quickly.  Hang onto your musket. 

Think about all this while you follow Obama's nuclear disarmament talks.  And remember, his chief negotiator, Rose Gottemueller (some kind of Russian mole -- http://robbservations.blogspot.com/2009/04/next-phase-in-obamas-rush-towards.html) also wants to eliminate those conventional SLBMs for Trident.

By the way, as a really sour note, I think we're on a collision course with another world war very soon.  Obama is almost guaranteeing it.  I make no hard predictions of timing.  But clearly there are forces trying to provoke something right now on the premise that Obama won't do anything.

http://apnews.myway.com/article/20100601/D9G2G6IO0.html

Glitch shows how much US military relies on GPS

Jun 1, 8:55 AM (ET)

By DAN ELLIOTT      

DENVER (AP) - A problem that rendered as many as 10,000 U.S. military GPS receivers useless for days is a warning to safeguard a system that enemies would love to disrupt, a defense expert says.

The Air Force has not said how many weapons, planes or other systems were affected or whether any were in use in Iraq or Afghanistan. But the problem, blamed on incompatible software, highlights the military's reliance on the Global Positioning System and the need to protect technology that has become essential for protecting troops, tracking vehicles and targeting weapons.

"Everything that moves uses it," said John Pike, director of Globalsecurity.org, which tracks military and homeland security news. "It is so central to the American style of war that you just couldn't leave home without it."

The problem occurred when new software was installed in ground control systems for GPS satellites on Jan. 11, the Air Force said.

Officials said between 8,000 at 10,000 receivers could have been affected, out of more than 800,000 in use across the military.

In a series of e-mails to The Associated Press, the Air Force initially blamed a contractor for defective software in the affected receivers but later said it was a compatibility issue rather than a defect. The Air Force didn't immediately respond to a request for clarification.

The Air Force said it hadn't tested the affected receivers before installing the new software in the ground control system.

One program still in development was interrupted but no weapon systems already in use were grounded as a result of the problem, the Air Force said. The Air Force said some applications with the balky receivers suffered no problems from the temporary GPS loss.

An Air Force document said the Navy's X-47B, a jet-powered, carrier-based drone under development, was interrupted by the glitch. Air Force officials would not comment beyond that on what systems were affected.

Navy spokeswoman Jamie Cosgrove confirmed the X-47B's receivers were affected but said it caused no program delays.

At least 100 U.S. defense systems rely on GPS, including aircraft, ships, armored vehicles, bombs and artillery shells.

Because GPS makes weapons more accurate, the military needs fewer warheads and fewer personnel to take out targets. But a leaner, GPS-dependent military becomes dangerously vulnerable if the technology is knocked out.

James Lewis, a senior fellow at the Center for Strategic and International Studies, said the glitch was a warning "in the context where people are every day trying to figure out how to disrupt GPS."

The Air Force said it took less than two weeks for the military to identify the cause and begin devising and installing a temporary fix. It did not say how long it took to install the temporary fix everywhere it was needed, but said a permanent fix is being distributed.

All the affected receivers were manufactured by a division of Trimble Navigation Limited of Sunnyvale, Calif., according to the Air Force. The military said it ran tests on some types of receivers before it upgraded ground control systems with the new software in January, but the tests didn't include the receivers that had problems.

The Air Force said it traced the problem to the Trimble receivers' software. Trimble said it had no problems when it tested the receivers, using Air Force specifications, before the ground-control system software was updated.

Civilian receivers use different signals and had no problems.

Defense industry consultant James Hasik said it's not shocking some receivers weren't tested. GPS started as a military system in the 1970s but has exploded into a huge commercial market, and that's where most innovation takes place.

"It's hard to track everything," said Hasik, co-author of "The Precision Revolution: GPS and the Future of Aerial Warfare."

The Air Force said it's acquiring more test receivers for a broader sample of military and civilian models and developing longer and more thorough tests for military receivers to avoid a repeat of the January problem.

The Air Force said the software upgrade was to accommodate a new generation of GPS satellites, called Block IIF. The first of the 12 new satellites was launched from a Delta 4 rocket Thursday after several delays.

In addition to various GPS guided weapons systems, the Army often issues GPS units to squads of soldiers on patrol in Iraq and Afghanistan. In some cases a team of two or three soldiers is issued a receiver so they can track their location using signals from a constellation of 24 satellites.

Space and Missile Systems Center spokesman Joe Davidson said in an e-mail to The Associated Press that the system is safe from hackers or enemy attack.

"We are extremely confident in the safety and security of the GPS system from enemy attack," he said, noting that control rooms are on secure military bases and communications are heavily encrypted.

"Since GPS' inception, there has never been a breach of GPS," Davidson said. He added that Air Force is developing a new generation of encrypted military receivers for stronger protection.

The military also has tried to limit the potential for human error by making the GPS control system highly automated, Davidson said.

GPS satellites orbit about 12,000 miles above Earth, making them hard to reach with space weapons, said Hasik, the defense industry consultant. And if the GPS master control station at Schriever Air Force Base, Colo., were knocked out, a backup station at Vandenberg Air Force Base, Calif., could step in.

Iraq tried jamming GPS signals during the 2003 U.S. invasion, but the U.S. took out the jammer with a GPS-guided bomb, Hasik said.

The technology needed to jam GPS signals is beyond the reach of groups like the Taliban and most Third World nations, Hasik said. Jamming is difficult over anything but a small area.

"The harder you try to mess with it, the more energy you need. And the more energy you use, the easier it is for me to find your jammer," Hasik said.

More worrisome, Hasik said, is the potential for an accident within U.S. ranks that can produce anything from an errant bomb to sending troops or weaponry on the wrong course.

In 2001, a GPS-guided bomb dropped by a Navy F-18 missed its target by a mile and landed in a residential neighborhood of Kabul, possibly killing four people. The military said wrong coordinates had been entered into the targeting system.

A Stake in the Heart of Living Beings

The Castroite/Chavista Left is truly out of control.  You've got to believe they know how destructive it is to take all the profit out of venture capitalism.  They can have only one goal:  its naked destruction.  What other possible rationalization could they have for almost trebling the taxes on their profits -- when only a fraction of their investments make any money at all?  (Not that venture capital hasn't been severely damaged already, as my partners and I know oh-so-well from trying to raise money for an electronics startup.)  To quote Dagny Taggart  in Atlas Shrugged once again (from a previous post):

"Have you anything left to loot? If you didn't see the nature of your policy before--it's not possible that you don't see it now. Look around you. All those damned People's States all over the earth have been existing only on the handouts which you squeezed for them out of this country. But you--you have no place left to sponge on or mooch from. No country on the face of the globe. This was the greatest and last. You've drained it. You've milked it dry. Of all that irretrievable splendor, I'm only one remnant, the last, What will you do, you and your People's Globe, after you've finished me? What are you hoping for? What do you see ahead--except plain, stark, animal starvation? ...Give up!"

[Jim Taggart] looked at her blankly.

"Give up--all of you, you and your Washington friends and your looting planners and the whole of your cannibal philosophy. Give up and get out of the way and let those of us who can, start from scratch out of the ruins."

"No!" The explosion came, oddly, now; it was the scream of a man who would die rather than betray his idea, and it came from a man who had spent his life evading the existence of ideas, acting with the expediency of a criminal....

Sound familiar?

http://pajamasmedia.com/blog/tax-venture-capitalists-ventures-go-unfunded-%e2%80%94-does-reich-understand-incentives/

Tax Venture Capitalists, Ventures Go Unfunded — Does Reich Understand Incentives?

A liberal pitches a tax-and-spend idea with no basis in economic behavior or statistics. Ho hum.

May 25, 2010
- by Jeffrey Carter <http://pajamasmedia.com/blog/author/jeffreycarter/>

Robert Reich is advocating <http://www.huffingtonpost.com/robert-reich/closing-tax-loopholes-for_b_586378.html>  a rise in the tax on “carried interest” — the money that venture capitalists (VC) and private equity (PE) partners make after all their investors have been paid. Reich would like to see the tax on carried interest go from its current rate of 15% to the top rate of 35%. Of course, next year, the top rate will be 39.5%, and even higher for higher earners.

In Reich’s world, virtually every investment that a VC or PE firm makes has the Midas touch. They never lose. However, in the real world they do lose, often.

VC and PE partners raise money for their funds. They receive a management fee and a percentage of the funds raised. They are taxed for this effort, as they should be, since they have zero risk associated with this activity. No matter what happens with their investments, they still get paid. Hence, they pay the highest rate of tax, whatever it is.

But once the money is raised, they become bankers and investors. In VC, they make investments in up-and-coming companies on the cutting edge of new industry. Billions of dollars of capital have been invested in Silicon Valley tech firms, biomedical firms, green energy firms, and anywhere there is innovation in the world. If the firms they invest in are successful, the VC makes money by selling them, or taking them to an initial public offering (IPO) on a public exchange.

The investors in the fund are then paid off from the proceeds of the sale. The VC keeps the rest and is taxed at 15% on those gains.

However, nine out of ten of these ventures end in failure. VC is a risky business fraught with danger.

The PE world is much different. They raise funds, just like the VC. Then they invest the funds by purchasing existing, operating companies. They internalize the companies and float a large amount of debt on that company.

The next step is to restructure the company so that it runs more efficiently and can grow quickly — quick growth is necessary to pay off the debt load. As the debt begins to be paid off, the PE firm either sells the company or takes it to an exchange for an IPO. They are taxed at 15% on those gains.

If the firm doesn’t grow, the debt load eats the PE firm alive. It either has to wait longer for a return on investment, or lose. Leverage causes huge profit when the firm is right, but cuts mercilessly when wrong.

Both PE and VC firms create thousands of jobs via their investments. If the U.S. raises taxes significantly on them, they will have zero incentive to invest. Innovation has already been kicked in the teeth with the passage of ObamaCare: recall the 10% increase in taxes on medical devices? Tax increases of this sort dig the economy’s grave, bury the corpse, and fill the hole with dirt.

Reich lives in a fantasy world where incentives don’t matter. He fails to follow real-life statistics — when capital gains taxes were cut in 2000 from 20% to 15%, government revenue actually increased significantly. Why? Because unproductive capital sitting in unproductive assets was repatriated into productive assets.

Reich also fails to understand the difference between accounting and economics. In accounting analysis, one plugs in numbers and monkeys with percentages to get output. It is static, one-dimensional. Economic analysis takes into consideration the change in behavior given different inputs and incentives. Sometimes, it’s counterintuitive — lowering taxes can actually lead to greater government revenues.

Instead of continuing the tax-and-spend path our government is currently pursuing, they ought to consider cutting both taxes and spending. The multiplier effect of a government spent dollar is zero, or very close to zero. Yet a 1% drop in taxes creates a significant amount of economic activity.

A different tax standard might indeed be appropriate for VC and PE. However, the new standard ought to be thoughtfully considered using sophisticated statistical economic analysis. Incentives matter. We shouldn’t use the random, pie-in-the-sky analysis Mr. Reich has applied to the problem.

Marxists in the Boardroom and on the Battlefield

In February 2009, McChesney wrote in a column, "In the end, there is no real answer but to remove brick-by-brick the capitalist system itself, rebuilding the entire society on socialist principles.

I remember not so long ago when most people thought I was too conspiratorial about Obama being a communist. Ah, to be on the vanguard.  And though I wish I was wrong, I think it's as certain now as anyone can be of something in the realm of politics.

It's also become more clear to me recently that Soros must be some kind of communist and not just a socialist. He makes money to destroy capitalism.  I'm pretty sure that's his conscious rationalization and deliberate goal. A telling comment that sticks in my mind (if I'm not misremembering) is that he wants to "prove markets aren't efficient". I didn't take that comment seriously enough before, I think. A pathetic Popperian powerluster, who, in a rational world, would be treated as more dangerous than muslim terrorists, picked up by a CIA rendition team and hauled off for interrogation as an enemy of the United States, to get his plans and accomplices.

I'm even wondering these days (you're not paranoid unless you're wondering) if the Trade Center attack didn't have some kind of Marxist origins.  I don't mean bin Laden is a communist -- according to the history, he's opposed even to communism. But commies love proxies, and it would have been an easy thing to anonymously inspire, goad and help fund Obama and his clan of kooks to do something. Think about it: the World Trade Center -- what could be a more prime target for capitalism hating commies? What could be better for them than to get someone else to do the dirty work?

All idle speculation based on the logic of their psycho-epistemology and goals. No evidence whatsoever.

As for the efficient market theory that Soros and others denigrate -- I think conventional notions of "efficiency" is the problem. A market can only be efficient if the philosophy of the dominant investors is rational. In my view, "efficiency" is only a long-term average assessment of security prices. Efficiency is certainly not valid in the short run or arbitragers and anyone else would never make money.

Pricing mechanisms can only be accurate when investors know how to objectively appraise value in securities and commodities -- and even then, it only reduces the spread between objective value and market value. But teach an entire generation of financial types the wrong investment theories -- and you'll get significant deviations from "efficiency". Suddenly "fundamentals" (which Soros publicly derides) don't matter. Even without the government screwing things up, markets will inflate, gyrate and fall back in response to irrationality. The Dot-com bubble is a perfect example.

My unschooled and very limited knowledge of "classical" efficient market theory (1960's classical) is that it is probably some variant of intrinsic value theory, and essentially a-causal -- it assumes stock and commodity prices will seek the right level "somehow" without regard to human volition. But it's served as a wonderful false alternative, punching boy and straw man for the alleged flaws of capitalism.

http://www.wnd.com/index.php?fa=PAGE.view&pageId=159337

Head of Marxist-led institute joins Obama team

Soros-funded group urges more government control of media

Posted: May 28, 2010
12:45 am Eastern
By Aaron Klein
©2010 WorldNetDaily

NEW YORK – The policy director at a George Soros-funded, Marxist-founded organization calling itself Free Press has just taken a key State Department position, WND has learned. Free Press Policy Director Ben Scott has been named a policy adviser for innovation at the State Department.

"We will miss Ben's leadership, wise counsel, and strategic brilliance – for Free Press and the overall movement for media and technology policy in the public interest," said Free Press President Josh Silver. Free Press is a well-known advocate of government intervention in the Internet.

Scott authored a book, "The Future of Media," which was edited by the founder of Free Press, Robert W. McChesney. McChesney is an avowed Marxist who has recommended capitalism be dismantled.

He is a professor at the University of Illinois and former editor of the Marxist journal Monthly Review.

In February 2009, McChesney wrote in a column, "In the end, there is no real answer but to remove brick-by-brick the capitalist system itself, rebuilding the entire society on socialist principles."

The board of Free Press has included a slew of radicals, such as Obama's former "green jobs" czar Van Jones, who resigned after it was exposed he founded a communist organization.

Last week, WND reported Free Press published a study advocating the development of a "world class" government-run media system in the U.S.

Now the group is pushing a new organization, StopBigMedia.com, that advocates the downfall of "big media" and the creation of new media to "promote local ownership, amplify minority voices, support quality journalism, and bring local artists, voices and viewpoints to the airwaves."

Free Press has ties to other members of the Obama administration. Obama's Internet czar," Susan P. Crawford, spoke at a Free Press's May 14, 2009, "Changing Media" summit in Washington, D.C.

Crawford's pet project, OneWebNow, lists as "participating organizations" Free Press and the controversial Association of Community Organizations for Reform Now, or ACORN.

Crawford and Kevin Werbach, who co-directed the Obama transition team's Federal Communications Commission Review team, are advisory board members at Public Knowledge, a George Soros-funded public interest group.

A Public Knowledge advisory board member is Timothy Wu, who is also chairman of the board for Free Press.

Like Public Knowledge, Free Press also has received funds from Soros' Open Society Institute.

With research by Brenda J. Elliott

Global Warming Support Declines, Hot Air Rises

While this story describes a massive decline in public support for global warming among Britons and Germans, the real thrust of the article is an opening salvo for a renewed attempt to get a Cap and Trade bill passed in Congress. It's all about the ignoramuses, dolts and buffoons who refuse to accept human induced climate change. East Anglia? Independent government reviews have shown they did nothing wrong!

The more insidious and unintended purpose of the article is the coming assault on free speech in this country:

In March, Simon L. Lewis, an expert on rain forests at the University of Leeds in Britain, filed a 30-page complaint with the nation’s Press Complaints Commission against The Times of London, accusing it of publishing “inaccurate, misleading or distorted information” about climate change, ...

...Stefan Rahmstorf, a professor at the Potsdam Institute for Climate Impact Research, successfully demanded in February that some German newspapers remove misleading articles from their Web sites.

And who decides what is "misleading"? Government researchers. German government, British government, American government.

...The public is left to struggle with the salvos between the two sides.

How do you resolve the struggle? The government will clearly have to mediate and decide what constitutes facts or legitimate criticism. Probably in an "Information Regulation Bill" that establishes committees of experts to review everything that gets into the press, or put on the web. For our own protection, of course.

http://www.nytimes.com/2010/05/25/science/earth/25climate.html

Climate Fears Turn to Doubts Among Britons

By ELISABETH ROSENTHAL

LONDON — Last month hundreds of environmental activists crammed into an auditorium here to ponder an anguished question: If the scientific consensus on climate change has not changed, why have so many people turned away from the idea that human activity is warming the planet?

Nowhere has this shift in public opinion been more striking than in Britain, where climate change was until this year such a popular priority that in 2008 Parliament enshrined targets for emissions cuts as national law. But since then, the country has evolved into a home base for a thriving group of climate skeptics who have dominated news reports in recent months, apparently convincing many that the threat of warming is vastly exaggerated.

A survey in February by the BBC found that only 26 percent of Britons believed that “climate change is happening and is now established as largely manmade,” down from 41 percent in November 2009. A poll conducted for the German magazine Der Spiegel found that 42 percent of Germans feared global warming, down from 62 percent four years earlier.

And London’s Science Museum recently announced that a permanent exhibit scheduled to open later this year would be called the Climate Science Gallery — not the Climate Change Gallery as had previously been planned.

“Before, I thought, ‘Oh my God, this climate change problem is just dreadful,’ ” said Jillian Leddra, 50, a musician who was shopping in London on a recent lunch hour. “But now I have my doubts, and I’m wondering if it’s been overhyped.”

Perhaps sensing that climate is now a political nonstarter, David Cameron, Britain’s new Conservative prime minister, was “strangely muted” on the issue in a recent pre-election debate, as The Daily Telegraph put it, though it had previously been one of his passions.

And a poll in January of the personal priorities of 141 Conservative Party candidates deemed capable of victory in the recent election found that “reducing Britain’s carbon footprint” was the least important of the 19 issues presented to them.

Politicians and activists say such attitudes will make it harder to pass legislation like a fuel tax increase and to persuade people to make sacrifices to reduce greenhouse gas emissions.

“Legitimacy has shifted to the side of the climate skeptics, and that is a big, big problem,” Ben Stewart, a spokesman for Greenpeace, said at the meeting of environmentalists here. “This is happening in the context of overwhelming scientific agreement that climate change is real and a threat. But the poll figures are going through the floor.”

The lack of fervor about climate change is also true of the United States, where action on climate and emissions reduction is still very much a work in progress, and concern about global warming was never as strong as in Europe. A March Gallup poll found that 48 percent of Americans believed that the seriousness of global warming was “generally exaggerated,” up from 41 percent a year ago.

Here in Britain, the change has been driven by the news media’s intensive coverage of a series of climate science controversies unearthed and highlighted by skeptics since November. These include the unauthorized release of e-mail messages from prominent British climate scientists at the University of East Anglia that skeptics cited as evidence that researchers were overstating the evidence for global warming and the discovery of errors in a United Nations climate report.

Two independent reviews later found no evidence that the East Anglia researchers had actively distorted climate data, but heavy press coverage had already left an impression that the scientists had schemed to repress data. Then there was the unusually cold winter in Northern Europe and the United States, which may have reinforced a perception that the Earth was not warming. (Data from the National Oceanic and Atmospheric Administration, a United States agency, show that globally, this winter was the fifth warmest in history.)

Asked about his views on global warming on a recent evening, Brian George, a 30-year-old builder from southeast London, mused, “It was extremely cold in January, wasn’t it?”

In a telephone interview, Nicholas Stern, a former chief economist at the World Bank and a climate change expert, said that the shift in opinion “hadn’t helped” efforts to come up with strong policy in a number of countries. But he predicted that it would be overcome, not least because the science was so clear on the warming trend.

“I don’t think it will be problematic in the long run,” he said, adding that in Britain, at least, politicians “are ahead of the public anyway.” Indeed, once Mr. Cameron became prime minister, he vowed to run “the greenest government in our history” and proposed projects like a more efficient national electricity grid.

Scientists have meanwhile awakened to the public’s misgivings and are increasingly fighting back. An editorial in the prestigious journal Nature said climate deniers were using “every means at their disposal to undermine science and scientists” and urged scientists to counterattack. Scientists in France, the Netherlands and the United States have signed open letters affirming their trust in climate change evidence, including one published on May 7 in the journal Science.

In March, Simon L. Lewis, an expert on rain forests at the University of Leeds in Britain, filed a 30-page complaint with the nation’s Press Complaints Commission against The Times of London, accusing it of publishing “inaccurate, misleading or distorted information” about climate change, his own research and remarks he had made to a reporter.

“I was most annoyed that there seemed to be a pattern of pushing the idea that there were a number of serious mistakes in the I.P.C.C. report, when most were fairly innocuous, or not mistakes at all,” said Dr. Lewis, referring to the report by the United Nations Intergovernmental Panel on Climate Change.

Meanwhile, groups like the wildlife organization WWF have posted articles like “How to Talk to a Climate Skeptic,” providing stock answers to doubting friends and relatives, on their Web sites.

It is unclear whether such actions are enough to win back a segment of the public that has eagerly consumed a series of revelations that were published prominently in right-leaning newspapers like The Times of London and The Telegraph and then repeated around the world.

In January, for example, The Times chastised the United Nations climate panel for an errant and unsupported projection that glaciers in the Himalayas could disappear by 2035. The United Nations ultimately apologized for including the estimate, which was mentioned in passing within a 3,000-page report in 2007.

Then came articles contending that the 2007 report was inaccurate on a host of other issues, including African drought, the portion of the Netherlands below sea level, and the economic impact of severe storms. Officials from the climate panel said the articles’ claims either were false or reflected minor errors like faulty citations that in no way diluted the evidence that climate change is real and caused by human activity.

Stefan Rahmstorf, a professor at the Potsdam Institute for Climate Impact Research, successfully demanded in February that some German newspapers remove misleading articles from their Web sites. But such reports have become so common that he “wouldn’t bother” to pursue most cases now, he added.

The public is left to struggle with the salvos between the two sides. “I’m still concerned about climate change, but it’s become very confusing,” said Sandra Lawson, 32, as she ran errands near Hyde Park.