The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Limbaugh, Heffer Epitomize Right’s Ignorance, Lies on Tax Cuts

My usually rewarding scan of the Wall Street Journal was today polluted by the presence of Rush Limbaugh. Quite what the Journal is doing paying this pigheaded shock jock is quite beyond me. The Journal’s main rival from across the pond, the Financial Times, also employs the occasional celebrity columnist, but they’re always in the mold of George Soros or Zbigniew Brzezinski – voices that add value. What on earth could an ape like Limbaugh add to my understanding of economics, finance and business?

Of course, the op-ed was dripping the kind of arrogance, weasel words and outright lies favoured by Limbaugh and others of his extremist ilk; however, its main focus – a recantation of the extreme right’s mantra that any economic stimulus should be in tax cuts – provides an opportunity to expose the egregiousness of the Right’s argument on this matter.

Simon Heffer, the Daily Telegraph’s very own porcine extremist (pictured below), puts the Right’s argument most succinctly, I think:

“Only one thing will give us an economic revival. It is… the transfer of money from the client state to the productive and private sector of the economy. This means spending cuts and tax cuts. Everything else is simply propaganda.”

What the Right is attempting here, as Paul Krugman has pointed out, is an old bait and switch trick.

It is true that a private person is more likely to allocate capital effectively than a government doing it for him – that’s why private businesses are more efficient than state enterprises. Therefore, all things being equal, if people have more money, they will spend more, and do so more effectively than the government. So instead of spending the money through the government, the argument goes, why not give it to businesses and people through tax cuts, and have them spend it for you, more effectively?

Sounds logical, but that is not the matter at hand, and never was. This argument is the equivalent of answering a different question to the one asked. Krugman explains:

“We’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. Things like roads, communication networks, sewage systems, and so on.”

By doing this, the government can directly stimulate private activity by creating jobs and boosting demand for raw materials, services, and manafacured goods.

Tax cuts cannot stimulate spending in the same way, because in this deflationary environment there are huge economic incentives for private individuals and businesses not to spend money. The idea is to inject the money into the real economy in order to stimulate calamatously declining demand, not remove it by cutting taxes so it can be stuck it in the proverbial sock under the floorboards.

Even worse, the Right wants most of the cuts to go to the higher earners, the group least likely to spend the money.

Of course, the extreme Right, as I have argued before, is an absolutist group that will countenance no departure from their scripture – even when departure is the right thing to do. In this situation, economic theory (and common sense) clearly demonstrates that tax cuts will prove less effective than government spending in stimulating demand, but the right, as represented by the likes of Limbaugh and Heffer, is still screaming for tax cuts.

We must conclude that the Right is either ignorant, or is being wantonly intellectually disingenuous.

Filed under: Economics, Politics, , , , , , , , , , ,

Recession 101: How the Vicious Cycle Works

A friend yesterday emailed me an excellent story from the Wall Street Journal. It’s a smart concept: to look at one family forced to make cutbacks after redundancy, and examine how their diminished spending affects their whole community.

This is a elegant way of demonstrating how a recession becomes a self perpetuating cycle downward, and why we need stimulus right now.

Recommended reading for anyone interested in the real effects of the current economic turmoil.

Filed under: Economics, , , , , ,

Financial Crisis: 2009 Equals 1931?

Ambrose Evans-Pritchard (pictured right) is the Stephen King of financial columnists: his articles and blogs for the Daily Telegraph (London) are terrifying.

Evans-Pritchard reports on each new squall of dire financial news with élan and wit, and his remaining readers (surely, I assume, many must have liquidated their assets, bought gold, and fled for the hills) have been rewarded with what has been one of the most prescient columns around: Evans-Pritchard foretold the armageddon long before the true reality of this horrific mess hit home to the rest of us.

This makes is latest column petrifying – and perhaps relieving:

“Barack Obama inherits an economy already contracting at an annual rate of 6pc, much like the mid-Depression year of 1931 (-6.4pc). This may beat Germany (-7pc) Japan (-12pc) and Korea (-22pc) over the fourth quarter. But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis.

The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have lost their jobs since the crunch began. Japan’s exports fell 35pc last month, year-on-year. The central bank is printing money furiously, buying bonds to prevent a relapse into deflation.

It is like early 1931… But it is not yet like 1933.”

Evans-Pritchard paints an arresting picture of the America Franklin D. Roosevelt took over in March 1933, and in doing so provides a startling allegory for the dangers facing us now. Those libertarians and Hoover-Mellon acolytes still appalled by the brazen use of budgetary deficits and monetary easing should read on to get a picture of what happened the last time we did things your way:

“That second leg down [between ’31 and ‘33] was the result of “liquidation” policies by a Dickensian leadership blind to the dangers of debt deflation. By then the Gold Standard had degenerated into an instrument of torture. It forced the Fed to raise rates from 1.5pc to 3.5pc in October 1931 to stem gold loss, with predictable results for shattered banks.

It is worth glancing at the front page of New York Times on Monday March 6, 1933 to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper splashed with the story that FDR had closed the US banking system – invoking the Trading with Enemies Act – and ordered the confiscation of private gold. From left to right, the headlines read: “Hitler Bloc Wins A Reich Majority, Rules Prussia”; “Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat”; “City Scrip To Replace Currency”; “President Takes Steps Under Sweeping Law of War Time”; “Prison For Gold Hoarders”.

President Obama faces a happier world. The liberal economic order is still in tact, if fraying at the edges. Capital and ships move freely. North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

Roosevelt took over a country where the economic machinery had completely broken down. The New York Stock Exchange and the Chicago Board of Trade had closed. Thirty-two states had shut their banks. Texas had restricted withdrawals to $10 a day.

Few states could borrow on the bond markets. Illinois and much of the South had stopped paying teachers. Schools closed for months. An army of 25,000 famished war veterans squatting in view of Congress had been charged by troopers of the 3rd US cavalry with naked sabres – led by a Major George Patton.

Armed farmers threatening revolution had laid siege to a string or Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota’s governor was recruiting Communists only for the state militia. Lawyers attempting to enforce foreclosures were shot.”

We must not allow the second leg to happen again.

Filed under: Economics, , , , , , , , , , ,

Putin says he is “Too Trusting”

In an exclusive interview with Bloomberg Television to air tomorrow, Vladimir Putin, the Russian prime minister and former president, will say that his greatest fault is being “too trusting.”

I have heard Mr. Putin accused of many things, but I suspect nobody has even considered him “too trusting.” One wonders how paranoid Russia would be if he thought he was ‘trusting enough’.

I guess we can be thankful he didn’t go for the ultimate interview cliché and say he was “too enthusiastic.”

Filed under: Politics, Russia, , ,

Icy Moscow Streets Cause Break in Coverage

Readers of the Parallax Brief may have noticed that there have been no updates since Thursday night. Alas, my beloved slipped on ice near our apartment in Moscow and fractured her right fibula in three places, so I’m sure you’ll all understand if I confess that my priorities lay elsewhere over the weekend.

Ironically, I was actually considering writing about the situation on the pavements (sidewalks) here in Moscow, which of late have left treacherous a distant speck in the rear view mirror on their remorseless drive toward impassable.

Moscow seems to have entered a climatic netherworld too cold to melt the ice and snow completely, but not cold enough to keep it frozen all day. We have a slow, incomplete melt during the day, exposing a core of perma-ice made diamond tough by four months of compacting, which is then lubricated with a thin film of water from the day’s melt.

Walking becomes an exacting challenge, to say the least.

Yet shockingly for a country where this happens every year, the authorities – certainly in Moscow – refuse to put salt on the ground. Salt would allow the ice to melt at temperatures below freezing. Mixed with grit, it would provide grip, too. But instead, the Moscow City Government has an army of workers put down grit only, along with the occasional blob of what looks like wet aggregate, to provide grip. Of course, even in the center, it’s woefully inadequate.

Why no salt, I hear you ask?

Unbelievable as it may be, the Moscow City Government does not salt the pavements because it believes salting would ruin shoes.

As reasoning goes, that is one of the most risible lines of thought I’ve heard in a while – even by the standards of Russian bureaucracy – but it seems the authorities actually wear their refusal to put salt on the streets as a badge of pride. If you shoes get spoiled, a Moscow official apparently told the Moscow Times last year, bring them to us and we’ll replace them.

So, hey, you may need to have a gymnast’s balance and the reactions of a mongoose to escape the Russian winter without a tumble or seven, but at least the damage to your shoes will be restricted to that caused by water, grit, and massive amounts of slush and mud.

Are they insane? Have they never heard that a spoon of vinegar in a cup of water removes salt stains from leather? And quite apart from the whys and wherefores of old wives’ tales about shoe care, surely public wellbeing takes priority over shoes?

When my girlfriend was admitted to hospital, she was told by an administrator that already that day that one facility had administered treatment for over 160 fractures – and it was only 3pm. Imagine how much it costs for the x-rays, bandages, casts, beds, hospital utilities, and staff wages to cope with that volume of traffic.

Even if one is immoral enough to believe that shoes are more important than the misery, pain and suffering caused by slipping over, surely the cost to every tax payer of treating all those fractures (and probably strains, sprains, bone chips, bruises, cuts and ligament damage, too) that would be prevented had pavements been salted is greater than the cost to the same taxpayers of replacing the shoes that wouldn’t have had to have been replaced without the supposed salt damage.

It’s a simple equation: cost of treatment minus cost of shoe replacement equals START SALTING THE STREETS, LUZHKOV.

Filed under: Russia, , , , , , , , , , , ,

Managed Ruble Devaluation Officially Over

Two days after the Parallax Brief predicted that the devaluation of the ruble was approaching its endgame, the Central Bank of Russia has distributed a statement to reporters that the process is ‘finished’.

From Bloomberg:

“‘Bank Rossii has finished with the major gradual correction of the borders of the technical corridor that determines the permissible fluctuations of the value of the dual-currency basket,”.

The weakest level the ruble will be allowed to fall to against the dollar is 36 per dollar and the bank won’t change the size of the trading corridor in the coming months, Chairman Sergey Ignatiev said in a separate statement.”

The ruble is managed against a bi-currency basket of 55% dollars and 45% euros. The lower boundary for the ruble against the basket will be set at 41, according to the statement.

According to Bloomberg, by 1:03 pm Moscow time today (January 22) the ruble had reached 32.7852 per dollar, 42.7814 per euro, and 37.3102 against the basket.

Filed under: Economics, Uncategorized, , , , , , , ,

Wolfowitz Hoists Bush Administration by its Own Petard

This from Andrew Sullivan’s The Daily Dish:

“No U.S. president can justify a policy that fails to achieve its intended results by pointing to the purity and rectitude of his intentions,” – Paul Wolfowitz, 2000.

How delicious.

Filed under: Politics, , , ,

The Right is Against Fairness

A big problem with the extreme right wing of the Republican Party specifically, and the American conservative movement in general (and for that matter the extreme right-wing of the Conservative Party and movement in Britain, too) is that it is slavishly ideological. Anything is acceptable in the name of progressing the Right’s cause; nothing anyone outside the team ever does is ever good.

With this in mind, I found, via Matthew Yglesias’s consistently outstanding blog, a colossally idiotic article by James Besser concerning the possible appointment of a special envoy to aid the Israel-Palestine peace process:

“Some Jewish leaders say the very qualities that may appeal to the Obama administration — Mitchell’s reputation as an honest broker — could spark unhappiness, if not outright opposition, from some pro-Israel groups.

“Sen. Mitchell is fair. He’s been meticulously even-handed,” said Abraham Foxman, national director of the Anti-Defamation League. “So I’m concerned,” Foxman continued. “I’m not sure the situation requires that kind of approach in the Middle East.””

Abraham Foxman, the chairman of the Anti-Defamation League, should be ashamed: as Yglesias himself points out, the article is “incredibly stupid—nobody comes out against fairness.

But herein lies the problem with the pro-Israel lobby, and, I might say, the Right in general. They have a blinkered, ‘you’re either unequivocally with us, or you’re a sworn enemy’ approach to ideology that would make a jihadist proud, and simply can’t tolerate deviation from the play book on any matter at any stage, even if deviating is the right thing to do.

Nowhere is this tendency more evident than with Israel. So hysterical is the right’s defence of Israel, that it has become next to impossible to criticize Israel’s actions without being labeled as a terrorist sympathizer who wants to deny Israel the right to exist.

I’m nowhere near smart enough to disentangle the complex knot of issues that comprises the Israel question, but I would suggest one of the biggest roadblocks to peace is that both sides are primarily supported by absolutists who will brook no compromise or discussion. Of course, this kind of idealogical absolutism has been traditionally associated with Iran, Hezbollah, Hamas and Muslim extremists in general, but the sooner we realize that we have a very powerful contingent in the so-called Judeo-Christian world with similarly intractable, although diametrically opposed, views, the sooner we can sideline both sets of crazies, who would both rather see a continuation of scenes like the one depicted in the picture above than accept compromise.

That way, more reasonable types may be able to get on with the task of finding a “meticulously even-handed”, “fair” solution to what is ultimately an inhumanly destruvtive problem.

Filed under: Defence, Foreign policy, , , , , , , , ,

Currency Update: the Pound and the Ruble

Pound Sterling

No sooner had the Parallax Brief written to defend a weak pound as counter-intuitively desirable for the UK economy, than sterling took a savage mauling on the forex markets. The pound plunged today (Wednesday, January 21) to as low as USD1.3713, only a whisker above the 23-year low of USD1.3682 of June 2001.

Ambrose Evans-Pritchard, in his now regularly terrifying blog, argues:

“For the first time since this crisis began eighteen months ago, I am seriously worried that [the] British government is losing control. The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn…

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged… Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?”

Yikes!

Prichard points out soberingly that sterling is now teetering on its twenty-year support line, and another fall could send it crashing through the line toward dollar parity. Should this happen, Britain would very likely be faced with a full blown financial crisis, and perhaps even the first British default in modern history.

If omens are anything to go by, the presence of Jim Rogers does not bode well. The Bank of England must have groaned when it read his interview in the Financial Times, arguing that the euro is a far better bet than sterling. Some of you may remember that it was the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.

For what it’s worth, I’m not sure I agree with Rogers. First, he only seems to ever talk these days about how truly wonderful Asia is as an investment opportunity, and again in his interview today he appears to making a point not against the British economy, but against the British economy compared to Asia: “The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west?” 

Second, his argument regarding the euro is debatable. If Britain is compared to the euro’s strongest member, Germany, Rogers has a point, but what about Britain compared with Greece, Italy, Spain, or Ireland? There are many who would argue that a currency is only as strong as its weakest link.

Finally, Britain isn’t the only country in dire states at the moment. European banks are just as heavily indebted and leveraged as American or British banks, and the eurozone economy isn’t exactly moving along at warp factor eight at the moment. Sooner rather than later, the hawkish ECB is going to have to face facts, swallow its pride, put a pommander under its nose, get down to the zero rate lower bound and crank up those printing presses.

The equally parlous state of the rest of the world might just be sterling’s saving grace.

The Ruble

Yesterday, the Parallax Brief argued that the step-by-step, managed devaluation of the ruble was approaching its endgame, and today we received further confirmation. First, the ruble held steady against the basket for the third straight day, and second, according to Russian business daily Kommersant, the Central Bank of Russia (CBR) yesterday hosted a meeting in which it informed bankers that the devaluation process was over.

The more wonkish among you can read this article from Bloomberg, in which MDM Bank’s Nikolai Kashcheev argues the CBR may now employ a dirty float.

CORRECTION: I mistakenly wrote that “the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.”

It has been pointed out to me that Rogers was long gone from Quantum by the time it broke the BofE. Shame on me. 

Filed under: Economics, Russia, , , , , , , , , , , , ,

Global System More Fragile than we Think

Much of my recent reading has been dominated by the financial crisis sweeping the world. Working in an investment bank at the moment feels rather like being a office cleaner for the Pentagon during the Cuban Missile Crisis: there is no respite from the torrent of apocalyptic news but there is little one can do to influence the situation.

However, while the effects of the current credit crisis and financial turmoil on economies, job markets, and businesses are difficult to underestimate, there is also a broader, global issue at play. Until recently, I had assumed that globalization was a new phenomenon, driven by modern developments in logistics and communication. But if you, like me, assumed this, you’d be wrong.

Paul Krugman, Nobel Laureate for Economics takes up the story:

“…our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment.”

I first heard of this ‘first great globalization’ when watching Naill Ferguson’s excellent television series, The Ascent of Money. In it, Ferguson alluded briefly to a world which was, in relative terms, as financially interconnected as it is today.

Serendipitously, I stumbled on Krugman’s op-ed at around the same time, and what makes the first great globilization such a frightening story is the tightly corresponding similarities to the world of today: technological advances, increasing integration, and full blown globalization that fueled unparalleled economic growth.

Further, people of the time, like now, assumed that war would be so unprofitable and economically damaging that it would never happen. Of course, we now know understand the fallacy of this thinking, but the story has some sobering implications for the world of today. Krugman explains:

“But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together…

Can things fall apart again? Yes… the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.”

Certainly worth a read for those interested in history, economics, and geo-politics and foreign affairs. And something else that is of interest is Ferguson’s recent review of a book covering a related subject for the Financial Times.

The point I’m trying to make is that while we live in a stable, interconnected, increasingly prosperous world, it only takes one financial or economic shock handled in the wrong way to bring nationalism back into vogue in one or two places, encourage countries to pull up the barriers, and, at the very least, lead to a domino effect that sends us drifting away from the model of increasing integration and division/specialization of labour which has made the world more prosperous than ever before. Conflict is unprofitable, but it didn’t stop us last time, and to think it will this time is folly.

I would hope we would now be more mature, but I’m not so sure. It is well known, for instance, that the Smoot-Hawley Act expedited the onset of the Great Depression, yet China and Russia have both overtly sidestepped toward a more protectionist stance of late, and dark rumblings of an Sino-American trade war can be heard just over the horizon.

You have been warned.

Filed under: Economics, Foreign policy, , , , , , , , , , ,