Maxine Udall, who bills herself as “girl economist,” thinks really well and as a consequence writes really well.

In a recent post entitled  “I wish it were butter,” about deficit hawks who recommend we all start spending less right now, including the government, Maxine writes:

“We do not need people who hawk deficit reduction strategies with the style and substance of a carny barker. We need deficit falconers. Sensible, informed people. Not just policy makers and politicians, but the electorate, too. We are going to have to spend some money to get out of this hole. How we spend it will matter immensely both for us in the near term and for our children and grandchildren. Worrying about things that haven’t happened (like inflation) and reducing debt by cutting the very things that in the long-run are our ticket out of this is as crazy and short-sighted as selling mortgages to people who have no hope of repaying them and buying complex securities composed of those mortgages under the assumption that if you can’t see the risk, it must not be there.”

Maxine argues that two of the most important investments that are proven to improve economic conditions are education and health.  This is not conjecture.  This is peer studied fact.

“The problem here is that education, much like health, can be thought of as an investment good. It’s something that enables higher rates of production both in this generation and for our children and grandchildren.

There is also strong and plentiful evidence of a strong positive correlation between education and health. Correlation is not causation, you say. Well, here’s a good articleby a team of first rate researchers that includes one of our best economists/econometricians, James J. Heckman(Nobel laureate, 2000) credibly identifying causal links. Understand, this relationship is not occasionally observed, it is always observed and it is observed across nations as far as I can tell. And, yes, it is observed after all the obvious possible confounders are controlled.

So if one were genuinely interested in reining in health care costs, one would not support cutting education funding. In fact, one might attempt to expand it, since it would not only help to rein in health care costs over time, it would increase productivity, which would help to grow the economy out of debt.”

And what about all those unemployment checks going out where people aren’t working.  That’s got to be a total waste, right?

Maybe not, Maxine points out.

“Now, about not extending unemployment benefits. The issue of unemployment benefits is not only an economic issue, it’s an ethical issue for crying out loud. But let’s just look at the economics of it. This is probably not a good time to contract the economy further by cutting unemployment benefits. So in lieu of actual jobs creation (which seems to be stalled, still, because of all that money that for all we know is still being creatively destroyed by the finance casino), wouldn’t it make sense not to withdraw dollars that are helping the jobless to weather the downturn AND that are stimulating what little demand there is? 

Unemployment benefits have the added benefit that they are the right thing to do. Unless of course you live in a world where it’s OK to bail out investment banks and insurance companies with no real penalties for the guys who created the need for a bailout, but helping workers who are unemployed largely because of the antics of those crazy bankers, traders, raters, and insurers causes you to lie awake nights worrying about throwing good money after bad. Oh, would that it had occurred to you to worry about this earlier in the game.”

Well written, and well educated.  But what do you care, deficit hawks?  You’ve got more bank bailing out to do.  Again, thanks to economist’s view for pointing in the right direction.

It seems that economist extraordinaire John Maynard Keynes was thinking favorably about national self sufficiency in June of 1933 when he penned an interesting article about the subject.

When reading it you have to recall the time period.  Communism had come to Russia, Mussolini to Italy and nationalism was on the rise around the world, it seemed.  And in the background was the Depression with its attendant calls for protectionist policies to protect industry and employment.   Keynes doesn’t think much of these efforts, particularly the Russian one. 

But still Keynes makes it clear that he thinks being self sufficient may be, on balance, a good thing as long as the effort doesn’t throw out the good things international trade can accomplish.  Also, this was a change for Keynes, who had previously been an unabashed proponent of internationalism.  From his article:

“I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England’s unshakable free trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy. As lately as 1923 I was writing that free trade was based on fundamental “truths” which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words.”

Looking again to-day at the statements of these fundamental truths which I then gave, I do not find myself disputing them. Yet the orientation of my mind is changed; and I share this change of mind with many others. Partly, indeed my background of economic theory is modified; I should not charge Mr. Baldwin, as I did then, with being “a victim of the Protectionist fallacy in its crudest form” because he believed that, in the existing conditions, a tariff might do something to diminish British unemployment. But mainly I attribute my change of outlook to something else–to my hopes and fears and preoccupations, along with those of many or most, I believe, of this generation throughout the world, being different from what they were. It is a long business to shuffle out of the mental habits of the prewar nineteenth-century world. It is astonishing what a bundle of obsolete habiliments one’s mind drags round even after the centre of consciousness has been shifted. But to-day at last, one-third of the way through the twentieth century, we are most of us escaping from the nineteenth; and by the time we reach its mid point, it may be that our habits of mind and what we care about will be as different from nineteenth-century methods and values as each other century’s has been from its predecessor’s…..”

But WWI and other events caused Keynes to re-consider his previous, almost total faith in international trade.  In fact, he was becoming a little disillusioned about some even more fundamental shortcomings he saw in the way the old internationalism was turning out.  He was disappointed, in other words. 

“There is one more explanation, I think, of the re-orientation of our minds. The nineteenth century carried to extravagant lengths the criterion of what one can call for short “the financial results,” as a test of the advisability of any course of action sponsored by private or by collective action. The whole conduct of life was made into a sort of parody of an accountant’s nightmare. Instead of using their vastly increased material and technical resources to build a wonder city, the men of the nineteenth century built slums; and they thought it right and advisable to build slums because slums, on the test of private enterprise, “paid,” whereas the wonder city would, they thought, have been an act of foolish extravagance, which would, in the imbecile idiom of the financial fashion, have “mortgaged the future”–though how the construction to-day of great and glorious works can impoverish the future, no man can see until his mind is beset by false analogies from an irrelevant accountancy. Even to-day I spend my time–half vainly, but also, I must admit, half successfully–in trying to persuade my countrymen that the nation as a whole will assuredly be richer if unemployed men and machines are used to build much needed houses than if they are supported in idleness. For the minds of this generation are still so beclouded by bogus calculations that they distrust conclusions which should be obvious, out of a reliance on a system of financial accounting which casts doubt on whether such an operation will “pay.” We have to remain poor because it does not “pay” to be rich. We have to live in hovels, not because we cannot build palaces but because we cannot “afford” them….

The same rule of self-destructive financial calculation governs every walk of life. We destroy the beauty of the countryside because the unappropriated splendors of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend. London is one of the richest cities in the history of civilization, but it cannot “afford” the highest standards of achievement of which its own living citizens are capable, because they do not “pay.”

If I had the power to-day, I should most deliberately set out to endow our capital cities with all the appurtenances of art and civilization on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford–and believing that money thus spent not only would be better than any dole but would make unnecessary any dole. For with what we have spent on the dole in England since the war we could have made our cities the greatest works of man in the world.

Or again, we have until recently conceived it a moral duty to ruin the tillers of the soil and destroy the age-long human traditions attendant on husbandry, if we could get a loaf of bread thereby a tenth of a penny cheaper. There was nothing which it was not our duty to sacrifice to this Moloch and Mammon in one; for we faithfully believed that the worship of these monsters would overcome the evil of poverty and lead the next generation safely and comfortably, on the back of compound interest, into economic peace.”

Seventy seven years later Keynes’ musings still possess relevance.  The “accountant’s nightmare” still reigns supreme.  Keynes would be horrified to see our industrial agriculture churn out a corn based diet–a monoculture.  He would recognize it for what it is: “Maloch and Mammon in one.”

Once again thanks to economist’s view

Bob Pisani covers the NYSE floor for cable channel CNBC.  This morning he observed that he has never seen such “extreme” numbers in his career covering the floor action.

What numbers was he referring to?  These.  More than 96% of all stocks are down on down days, and more than 96% of all stocks are up on up days.  And sometimes these percentages can occur in one day as stocks begin strong and then collapse at day’s close!

This is called gambling, folks.  It has absolutely nothing to do with economic fundamentals.  This is trend trading based upon computer algorithms.  Sell everything.  Buy everything.  Anything unexpected happens, and these programs leave the building, sucking out 60% of the daily trading volume they represent and cratering liquidity.

In short, the inmates are now running the asylum.  Oh, and by the way, the TBTF bank holding companies are major players in all of this steroidal gambling.  And why not, they get their money more cheaply than the competition, and once the computer infrastructure and algorithms are in place it’s ridiculously easy pickings.

Of course all of this is ridiculously expensive for the economy as a whole.  Lack of stability and high volatility in asset pricing makes doing business more expensive, and risky, because productive businesses have to pay more to hedge their various risks.

They will continue to do this until it doesn’t work anymore.  And the most likely cause of it not working will come from an unexpected “shock” to the economy.  Not being able to help themselves, the speculators will ride a huge downside move.  Where, for heaven’s sake, do you think the money comes from for all those obscene bonuses?

Most if not all of our economic advancement comes from extraction.  We take from nature that which we have found useful.  This simple model has managed to elevate billions of people out of poverty.

Unfortunately this model contains the seeds of its own destruction.  It may take a while to destroy, but the fundamental fact is that much of what we extract is of finite supply.  And mother nature can’t make more fast enough for our extraction model.

Even organic farming, one of the few industries that adds to nature, still depends upon machinery.  Base energy production could eventually become close to sustainable as it moves away from the extraction model.  But here again, it takes machinery.

So even if we become less dependent on extraction for energy, and more organic farming adds nutrients to the soil, we still need to extract from the earth material we cannot replenish.

Nature does show us how to extend the life of our extraction model, however.  Nature recycles everything.  So must we.  

Here’s a brief article explaining how Europe is approaching this opportunity.  It’s from the European Commission.

“The EU is aiming for a significant cut in the amount of rubbish generated, through new waste prevention initiatives, better use of resources, and encouraging a shift to more sustainable consumption patterns.

The European Union’s approach to waste management is based on three principles:

1. Waste prevention:  This is a key factor in any waste management strategy. If we can reduce the amount of waste generated in the first place and reduce its hazardousness by reducing the presence of dangerous substances in products, then disposing of it will automatically become simpler. Waste prevention is closely linked with improving manufacturing methods and influencing consumers to demand greener products and less packaging.
2. Recycling and reuse: If waste cannot be prevented, as many of the materials as possible should be recovered, preferably by recycling. The European Commission has defined several specific ‘waste streams’ for priority attention, the aim being to reduce their overall environmental impact. This includes packaging waste, end-of-life vehicles, batteries, electrical and electronic waste. EU directives now require Member States to introduce legislation on waste collection, reuse, recycling and disposal of these waste streams. Several EU countries are already managing to recycle over 50% of packaging waste.
3. Improving final disposal and monitoring: Where possible, waste that cannot be recycled or reused should be safely incinerated, with landfill only used as a last resort. Both these methods need close monitoring because of their potential for causing severe environmental damage. The EU has recently approved a directive setting strict guidelines for landfill management. It bans certain types of waste, such as used tyres, and sets targets for reducing quantities of biodegradable rubbish. Another recent directive lays down tough limits on emission levels from incinerators. The Union also wants to reduce emissions of dioxins and acid gases such as nitrogen oxides (NO_x), sulphur dioxides (SO₂), and hydrogen chlorides (HCL), which can be harmful to human health.”

Beezer here:  This train of thought came directly from a post at economist’s view, which highlighted an article by Paul Collier, entitled “Toward a New Ethics of Nature” that appeared in the Financial Times.

One of the commentators to this article was someone writing under the handle “Organic George.”   Here’s organic george’s take on the subject.

Yes us romantics created organic farming; a bunch of back the land hippies with degrees in English Lit were able to create a $24 billion dollar US industry in 2 decades without support, in fact over the objections of the US government, Land Grant Universities, and Ag industrial.

Yep, we created a new workable, long-term sustainable, world-wide industry without the help of econometric modeling.

In organic Ag we build soil for the next generation, we do not use synthetic pesticides, fertilizers or misuse raw manure, all of which are responsible for the dead zone in the Gulf of Mexico (Gulf Hypoxia), death of the Chesapeake bay, polluted ground water, pesticide laden rain in the Midwest, etc. Conventionally grown food does not include the down stream cost of chemical farming, if it did conventionally grown food would be more expensive than organic.

Us romantic environmentalist have long understood intrinsic value of nature; it’s the econometric models that show extraction from nature is better than working with nature.

These economic models tell us that treating farm animals as widgets of industrial production is good business. Animals standing in their own filth 24/7, in confinement spaces so small it’s difficult for the animal to do anything but stand in one place to eat and sleep. Econ models lack any humanity, it’s all about the lowest-dollar-cost at all cost.

This is why the US middle class is disappearing so quickly, these extraction models have created a form modern day colonialism. Look at the history of colonialism around the world and you will find the same pattern of wealth extraction to the detriment of the local populations. The multiplier effect for US Ag dollars, once as high as 7 to 1 now is at best 1 to 1, resulting in little or no money flows to the rural economies, leading to their continued decline as money transfers from rural areas into corporate coffers.

Couple this with industrial Ag’s dependence on taxpayer dollars to support commodity farmers, which keeps the cost of raw Ag commodities artificially low, coupled with the taxpayers $150,000,000.00+ dollar bailout last year of the corporate hog producers and you can easily see the flaws in the industrial Ag models.

Organic farming is about respect; for the earth, the people working the land and the consumers who buy our products. Organics may not meet the current definition of economic efficiency, but we are sustainable.

What is needed is less dependence on mathematical models and more dependence on humanity.”

Beezer again.  It’s posts and commentary like this which have made economist’s view one of the most popular economics oriented blogsites on the internet.  The blog’s host, professor Mark Thoma, has created a huge aggregation of economic oriented thought which is as timely as it is voluminous.  Whatever is news of the day, becomes dissected almost as quickly at economist’s view.  It’s a must visit site.

I don’t know diddly squat about drilling for oil, but I’d like to know why BP hasn’t drilled another hole next to the broken one in order to take the pressure off.  

Consider the deep reservoir to be a tire.  There’s lots of pressure coming up through the first hole, like a hole in a tire.  But sometimes flat tires have several holes.  The one that leaks is the largest hole.  Plug that and the air begins escaping through a smaller hole. 

So reverse the process and give the reservoir another hole, only maybe a slightly larger one.  You might not even need a larger hole, however, because the pressure of one mile of water depth is pushing on the open hole whereas a new hole connected to the surface via the pipe would alleviate the counterweight of a mile of ocean pressure. 

There’s probably something important I’m missing here.  But I do know how you fix flat tires.

Markets are about predicting the future.  There’s an old saw that the equity markets have predicted 10 of the last 5 recessions.

That said, today’s markets are particularly dangerous because they’ve been overwhelmed by speculators, politely called “traders.”  The short term betting on number (price) movements, up or down, has even become a common avocation for retail speculators who have other jobs in their real lives.  Television advertisements about “trading” strategies are played at almost every commercial break on CNBC, the primary cable channel covering the markets.

So an inherently difficult job of predicting has been amplified because speculators aren’t interested in why a price does what it does, they only want it to do something and they want to guess which way it will go.  This type of market produces wider swings in prices on a daily basis.  That’s called volatility.  There’s even a volatility measurement that’s traded.  In today’s market you can even make a bet on whether markets will be more or less volatile.

For non speculators–productive endeavors like manufacturing, agriculture or mineral extraction–volatility is expensive.  These businesses need to hedge future prices on their raw materials (input) as well as their final product (output).  They also need to hedge their currency exposures, particularly if they sell, or import from, foreign countries.

Why is high volatility more expensive?  Simple.  If the price you’re trying to hedge is moving in a 2% range the hedge is less expensive than if the price is moving in a 10% range.  The greater the price moves, the more expensive the hedge because it must cover a larger risk.

Speculators profit from greater volatility.  From their perspective, volatile markets present more opportunities to profit from the numbers’ greater moves.   

Therefore, speculators profit from the increased expense volatility layers on the cost of doing business in the productive economy.  Speculators need that increase in cost (increase in volatility) in order to make their profits.   Massive speculation in today’s markets is hugely counterproductive and expensive for the real world economy.

The current recession is a direct product of this rise in speculative activity.  A whole new layer of securities for speculation have been layered on the base securities that existed before.  These new securities all fall into the “innovation” called derivatives.

The myth propounded by those who make huge profits (they turned out to be fake profits as it turned out) in derivative speculation is that this speculation provides “liquidity” to the markets.

Two observations about this myth.  The markets prior to the explosion in new derivatives didn’t suffer from a lack of liquidity.  It’s a problem that didn’t need solving.  But it did turn out to be a problem once the new derivatives gained dominance in global markets.  Funny about that.

Second, speculators need to amplify price moves in order to make greater profits.  As it turns out, the derivatives that were so “innovative” amplified a housing bubble in American into a global financial near collapse.   

Professional speculators profit primarily from the sell side in a recession.  For a moment, think about how selling an asset makes money.  Speculators sell “short” a security by borrowing it from the real owner.  Naked short selling removes even the need to borrow.  So very little money is invested to begin with by the speculator.  It’s a form of leverage.

The short becomes more and more profitable as the asset price slides downward.  At some point the speculator buys back the security he never owned and profits from the difference in price from where he borrowed the security and where he bought (known as “covered”) it back.  So, the speculator can sell a security he never really bought, say for $20, and then he can buy it back for $10 and double his money.

Please note that in this transaction, the market has lost $10 in liquidity until the speculator puts his profits back to work.  In fact, what would the price of securities be if all the shorts made money?  That would be zero.  A complete absence of liquidity.

Further compounding this sorry state of affairs is that large commercial banks were allowed to enter this business in a big way.  This used to be prohibited because regulators realized that the economic role of commercial banks is to lend money to business.  Regulators understood that speculative behaviour might damage a bank’s ability to provide this very necessary service to the productive economy.

Unfortunately for taxpayers, businesses and even national economies, these bank speculators are in the position of profiting from successful speculation, but because of their role in the greater economy, when that speculation goes sour, the banks can hold everyone else hostage and demand everyone else pay off the losses.  ”Heads, I win.  Tails, you cover my losses.”  In short, the taxpayer and the productive economy were the two “suckers” at the poker table.

And in a final insult to the non speculative people in the world who must pay the bills, all the liqudity in the world doesn’t really help much when the recession is caused by excessive bank speculation fueled by leverage.  That’s because the banks are insolvent from their speculations, and any money (subsidy) given them is not used to lend to productive endeavors, but used instead to rebuild insolvent balance sheets.  The banks have to pay off their speculative losses first.

There’s much much more to all this.  Someday I may write about how the big money in speculation comes primarily from the “squeeze,” a nuance of betting where large short or long positions are “squeezed” and forced to cover or sell at a loss. 

The relevant take aways from all this speculative behaviour?  Governments must enforce tough regulations on markets and prohibit the newer derivative securities entirely, or at minimum, place legitimate uses for them to trade on open, totally transparent markets.  And they must once again prohibit commercial banks from speculative activities.  Until that happens, legitimate investors must keep a larger portion of their portfolios in cash and await the day when the speculators are once again put under leash and saddle.

Beezer Addendum:  If I were king I’d prohibit short selling entirely.  There are options markets available where one can “bet”  on price movements.  Options don’t involve the physical selling or buying of a security and thus exert less direct pressure on the underlying security, up or down.   In addition options do provide a benefit to real investors in that they can be used to legitimately “hedge” risks.