Wednesday, October 31, 2012


...will suffice when justifying current monetary policy.  The following quote is from the President of the Minneapolis Fed, toeing the line for whatever his chosen ministry wishes to do.

And thus, as if by magic, a "best possible forecast" is found to be more useful than a current measurement.  Presumably, these officials don't think the Efficient Market Hypothesis applies to inflationary measures, nor do they believe that current markets in TIPS discount expected inflation.

Basing the Fed reaction function (and subsequent incentive set for the greater economy) on hand-waiving forecasts is not exactly prudent given the Fed's less than perfect record of forecasting the economy.

Current monetary policy is typically thought to affect inflation with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy using our best possible forecast of inflation, not current inflation.

Tuesday, October 30, 2012

Well then...

...let the qui bono theories commence.  On the eve of Halloween, no less.

WARSAW (Reuters) - Polish investigators found traces of explosives on the wreckage of the government jet that crashed in Russia two years ago, killing Poland's president and 95 others, daily Rzeczpospolita reported on Tuesday.
Without citing sources, the newspaper said prosecutors and explosive experts who examined the remains of the plane in Russia found signs of TNT and nitroglycerin on the wings and in the cabin, including on 30 seats.
Traces of explosives were also found in the area where the Tu-154 crashed during its approach to a small airport near the Russian city of Smolensk on April 10, 2010, the daily reported.


I made the point in a previous post that the assassination of U.S. personnel in Benghazi appeared to be a politically motivated, perhaps even personal, attack against U.S. presence there.  I made the point that there are historical echoes as well and made the comparison with Robert Burnes and the Empire of Great Britain.

Much more will be learned from this debacle, but one thing appears certain:  intelligence failures are inevitable on hostile ground and perhaps even more so on "friendly" ground.

More fallout from the events include the sacking of the AFRICOM commander in addition to sober conversations regarding the over-extension of U.S. political power without access to immediate and forceful military follow-up.

And of course the fact this intertwines U.S. interests with Africa as a whole is not lost here.  It now appears that whomever occupies the White House come November, the Obama Doctrine will still come to fruition, if not by overt design then certainly by necessity.

Sunday, October 28, 2012

Summing up monetary policy...

...and its inability to produce the desired effects the Fed wishes, a paper is making the rounds.

Finally, some tacit admission among academia that the bulk of fiat "money" is created ex nihilo via bank loans (and the corresponding deposits).  This implies monetary creation is much more a function of lending environment than interest rates or other factors.

In a financial system with little or no reserve backing for deposits, and with
government-issued cash having a very small role relative to bank deposits, the creation of
a nation’s broad monetary aggregates depends almost entirely on banks’ willingness to
supply deposits. Because additional bank deposits can only be created through additional
bank loans, sudden changes in the willingness of banks to extend credit must therefore not
only lead to credit booms or busts, but also to an instant excess or shortage of money, and
therefore of nominal aggregate demand.

Supply and demand...

Interesting article by Mr. Pinker in the New Yorker.  I tend to agree with some of his points, but the use of some sort of collective cultural memory when describing murder rates leaves much to be desired.  A more simple explanation lies in the demand for violence, which is likely constant with humans, and the ability to experience physiologically significant proxies that satisfy the urge.

I argue the advent of hyper-realistic video games satisfies the killing urge and the resultant sales of various military simulation games certainly gives credence that both the supply and demand are there.  Video games provide endless simulations that provide bloody restitution for various transgressions, and provide evolutionary "satisfactory" proxies for real conflict.

Admittedly, it’s hard to believe that today’s Southerners and Westerners carry a cultural memory of sheepherding ancestors.  But it may not be the herding profession itself that nurtures a culture of honor so much as living in anarchy. All societies must deal with the dilemma famously pointed out by Hobbes: in the absence of government, people are tempted to attack one another out of greed, fear and vengeance. European societies, over the centuries, solved this problem as their kings imposed law and order on a medieval patchwork of fiefs ravaged by feuding knights. The happy result was a thirty-fivefold reduction in their homicide rate from the Middle Ages to the present. Once the monarchs pacified the people, the people then had to rein in the monarchs, who had been keeping the peace with arbitrary edicts and gruesome public torture-executions. Beginning in the Age of Reason and the Enlightenment, governments were forced to implement democratic procedures, humanitarian reforms and the protection of human rights.

The Extraction...

...continues in the Middle Kingdom.  Readers here are not surprised.

From the New Yorker:

By all accounts, China today has a growing Swiss Factor. Uncle House, like many other accused officials, was found to have family abroad, some with Australian citizenship, a condition that makes it easier for them to flee if he gets in trouble. (Official records indicate that eighteen thousand corrupt officials have fled the country since 1990, taking with them a hundred and twenty billion dollars.)

And of course even Greenwich seems like a safe haven:

As China's economy is in its slowest expansion rate since 2009, some of the country's wealthier citizens are looking to invest their money overseas, in the shape of sprawling, expensive properties in Fairfield County.

"The upper middle class has a lot of disposable cash, but they're not sure about the political and economic future of China," Yang said. "So they're moving it overseas."

Friday, October 26, 2012


...and of course, as if written by a hollywood film writer, the obvious distraction tactic du jour follows...this would be hilarious comedy if it were not real life.

BEIJING, Oct 26 (Reuters) - China reserves the right to take strong
countermeasures if Japan "creates incidents" in the waters around a
group of disputed uninhabited islands in the East China Sea, a Chinese
vice foreign minister said on Friday.

"We are watching very closely what action Japan might take regarding
the Diaoyu islands and their adjacent waters," Zhang Zhijun said at an
unusual late night news briefing. "The action that Japan might take
will shape China's countermeasures."

Sino-Japanese relations took a dive after the Japanese government
bought the islands, called Senkaku in Japan and Diaoyu in China, from
a private Japanese owner in September, triggering violent protests and
calls for boycotts of Japanese products across China.

"If Japan continues down its current wrong path and takes more
erroneous actions and creates incidents regarding the Diaoyu Islands
and challenges China, China will definitely take strong measures to
respond to that," Zhang said.


...everything I have written in the past 6 years with respect to China, the following should not be surprising to anyone here.

China's foreign ministry has accused the New York Times of smearing the country by reporting that the premier Wen Jiabao's extended family has controlled assets worth at least $2.7bn (£1.67bn).

A spokesman, Hong Lei, said the report "blackens China's name and has ulterior motives". Authorities have also blocked the news organisation's main and Chinese-language websites and banned searches for "New York Times" in English and Chinese on microblogs.

"China manages the internet in accordance with laws and rules," Hong told reporters at a daily briefing when asked why the sites were inaccessible.

The New York Times reported that several of Wen's close relatives had become extremely wealthy since his ascent to leadership. But in many cases their holdings were obscured by layers of partnerships and investment vehicles involving friends, colleagues or business partners, it said, in a detailed and lengthy account based on an extensive review of company and regulatory filings.

A single investment held on paper by Wen's 90-year-old mother Yang Zhiyun – a retired schoolteacher – was worth $120m five years ago, the New York Times said. It added it was unclear if Yang was aware of the holdings in her name.

The report is embarrassing not only for Wen himself – who comes from a modest background and is widely seen as the sympathetic, populist face of the government – but for the party. It is the latest in a string of unwelcome revelations about the vast wealth amassed by those around senior leaders.

Thursday, October 25, 2012

Shocking the world...

...the "World Gold Counsel" recommends using gold.

Awhite paper released earlier this month by the World Gold Council (WGC) proposes that eurozone member States with significant gold holdings relative to their medium-term financing requirements – particularly Italy and Portugal – should consider gold as collateral for sovereign-debt issuance to reduce bond yields.
The paper, compiled by finan- cial consultancy Europe Econo- mics MD Dr Andrew Lilico, was commissioned by the WGC to challenge and assess the merits of its proposals relative to other suggested monetary policy tools, such as the European Central Bank’s (ECB’s) recently proposed Outright Monetary Transaction (OMT) programme.

What is the marginal effect...

...on bond prices when buyers may (will?) lose the ability to negotiate advantageous positions.  And furthermore, class, what is the marginal effect on the liquidity of said bonds when secondary ownership loses valuable embedded options (such as the option to seize property of x foreign country)??

An Institute of International Finance panel has suggested that governments insert clauses in the new bonds they issue, to prevent a small group of bondholders from seeking better terms than other investors in the event of a restructuring.
The IIF's Joint Committee on Strengthening the Framework for Sovereign Debt Crisis Prevention and Resolution recommended that sovereign issuers should incorporate collective action clauses with appropriate aggregation clauses containing detailed information on terms and conditions in bond documents.

Attention world.

What you thought was warfare is not warfare anymore.  The rules have changed.  This is a game-changer of the first order.  What good are nuclear weapons when the "launch" button is disabled?

The timing of this is quite auspicious as well, given possible budget cuts at the Pentagon.  But that is neither here nor there at the moment.  Foreign Policy is steeped in calculating power, ability, and willingness to use force...and the capability to disarm a sovereign nation with the payload of smart-guided missiles (and miniaturization must also be taken into account) is a potential instant revolution anywhere the U.S. wishes.

Boeing [NYSE: BA] and the U.S. Air Force Research Laboratory Directed
 Energy Directorate, Kirtland Air Force Base, N.M., successfully tested
 the Counter-electronics High-powered Microwave Advanced Missile
 Project (CHAMP) during a flight over the Utah Test and Training Range
 that was monitored from Hill Air Force Base. (credit: Boeing)

HILL AIR FORCE BASE, Utah (CBS St. Louis) — Boeing successfully tests
 a new missile that can take out electronic targets with little
 collateral damage.

The aerospace company tested the microwave missile last week on a
 two-story building on the Utah Test and Training Range where computers
 and electronic systems were turned on to gauge the effects of the
 missile’s radio waves, according to a Boeing press release.

The missile, known as CHAMP (Counter-electronics High-powered Advanced
 Missile Project), fired a burst of High Powered Microwaves at the
 building, successfully knocking out the electronic systems and
 computers, and even taking out the television cameras recording the

The Punctuated Obama Doctrine...

...I fully expect the incumbent to carry the election come November, and I also expect the nascent (and heretofore, admittedly, rather circumspect) Obama Doctrine to germinate into a full-scale policy response to increased resource competition in Africa.

But there will be punctuations in the Doctrine, which I have compared to an extension of the Monroe Doctrine of the early 1800s.  I expect areas that garner too much friction from Russia (THE antagonist for global competition in the next 20-50 years) to be quietly de-emphasized.

The Monroe Doctrine itself had such punctuations that produces far-reaching effects.  The Falkland Islands themselves were first occupied by Argentinian nationalists prior to being forcefully jettisoned by American personnel.  When the resulting vacuum was filled by the British, the Americans conveniently forgot about the strong rhetoric of the Monroe Doctrine.

Monday, October 22, 2012

Kafka... does indeed imitate art.

"I thought I would have been acquitted. I still don't understand what I was convicted of."

A group of six Italian scientists and a former senior government official have been sentenced to six years over their handling of the L’Acquila earthquale. A court found them guilty of multiple manslaughter over the 2009 quake, which left 309 people dead.

Thursday, October 18, 2012

Commanding attention...

One of the core competencies of popular mainstream economists is their ability to command attention from either their peers or the public at large. There are, of course different distribution functions for both groups (something Krugman noticed) but the point is that a vast majority of academic and popular research is devoted to bolstering the status quo.

This tradition is as old as humanity. How else to get noticed by potential patrons? Cardinal Richelieu was more subtle when he wrote "A defense of the principal of the catholic faith" directly after the French coup of Louis the 13th which marked his ascension. The formula remains the same: offer clever arguments that absolve potential patrons in hopes of a sinecure. Apologetics remains the most furtive grounds for "philosophy" and it's offspring Political Economy.


...note that when the meme of Chinese superiority with respect to "Capitalism" (whatever that it certainly does not exist on this planet) seeps so deeply into academia that someone sees the need for an ENTIRE BOOK bearing a preposterous premise, its only a matter of time before something dreadful happens.

While the West struggles, China's economy continues to grow. In her new book, Maonomics: Why Chinese Communists Make Better Capitalists Than We Do, Napoleoni charts the ascent of the Chinese economic miracle and the West’s misconception of China and its economy, even as we acknowledge its growing influence and importance. Are we witnessing the beginning of the collapse of capitalism and the victory of “communism with a profit motive”? What lessons in economic development can the West learn from China? Please join The Chicago Council and Loretta Napoleoni as she discusses the economic revolution that is shifting the balance of power to the East.

Wednesday, October 17, 2012


...and its inextricable links to Government, Power, and regulatory inertia.

Nice podcast discussing some of the history regarding NCAA and NFL football.

Tuesday, October 16, 2012

Moving right along...

...readers here read about this some days ago.  Familiar themes.

Last week U.S. defense secretary Leon Panetta warned that critical infrastructure such as power grids or chemical plants could be inactivated or destroyed by a cyber attack, and he pledged that the U.S. would "defend the nation in cyberspace" as it does on land and sea, in air and space.
But with the art of cyber detection and defense lagging far behind the sophistication of attacks (see "Hey, Hackers: Defense Is Sexy, Too"), the U.S. and other nations appear largely unprepared to rapidly detect and respond to an attack on critical infrastructure. That would make it difficult to respond with "decisive action" as Panetta promised, or even to know whom to retaliate against.
Working out the nature and source of an attack is particularly challenging for critical infrastructure systems, which are operated by tried, trusted, and consequently outdated software 

Monday, October 15, 2012

The spigot needs a new coupling...

...right on the heels of one of my posts that cites the WWI trench warfare tactics depicted in the movie "Paths of Glory", comes this gem of Keynsian ideology, so deeply ingrained in Fed thinking as to be gospel:

William C. Dudley, president of the Federal Reserve Bank of New York, made that point explicit in a Monday speech .
"Monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances," Mr. Dudley said.
He underscored the point later, saying, "With the benefit of hindsight, monetary policy needed to be still more aggressive."

Sunday, October 14, 2012


I would like another line plotted to measure illicit drug prices (indexed and adjusted for inflation), but we do get the general idea here.  Trench warfare tactics (such as those utilized in one of my favorite films, Paths of Glory) were more idiotic.

In terms of drug usage and demand, nothing has changed.

Saturday, October 13, 2012

A new level of Power... to attack and cripple your opponent with complete anonymity.  Fearing no reprisal, and causing your opponent untold frustration and embarrassment.

This is part of the "warfare" of the future:  the ability to destroy order and optical institutional backstops such as legal processes, open markets, electronic grids, etc.  The conquest of physical territory, heretofore the primary goal of military action, is now a distant secondary objective.

This is why the article below is of great importance in my thinking.  The relatively benign explanations (a HFT algorithm testing the markets) are not nearly as interesting as contemplating the implications of a foreign interloper executing what amounts to a massive DDOS attack on American exchanges, and doing so with relative anonymity.

It is also worth mentioning that the business model for many Fortune 100 companies are entirely dependent on internet connectivity, and the risks accompanying that depedenency (and the decidedly non-linear outcomes should problems materialize) have not, in my opinion, been accurately reflected in their prices.  The "known unknowns" have been computed in kind, but not magnitude.

Full article here.

A single mammoth mystery algorithm has set alarm bells ringing for market regulators and players, and underlined the market’s vulnerability to technology and the woeful lack of regulation on algorithms.
A single algorithm last week placed and cancelled orders on the Nasdaq accounting for 4% of all quoted traffic in the US. Not only this, it also accounted for a colossal 10% of the bandwidth that is allowed for trading on any given day.

Friday, October 12, 2012

Safe Havens... I have stated previously, those sovereigns which can guarantee anynymity and provide protection from "interlopers" and protect assets (whatever their origin) will enjoy such a windfall that it is guaranteed to happen.  The difficulty lies in establishing a credible capability of protection and secrecy. The U.S. is the monopoly provider of security (both physical and financial) in the world, but that of course comes with significant drawbacks.

But apparantly, even Ghana is no safe haven.

Nobel: Give it to the entire planet.

When 740 Million people and/or an entire continent receive the Nobel Prize, I think we can safely say the award is meaningless.  Historians of the future will look at this and snicker playfully when explaining just how ridiculous and premature all these calls of "peace" are fated to be.  The Nobel prize commission (or whatever it is) has been extremely successful in attaching itself to the latest fashions, as a cursory examination of recent winners has demonstrated the commissions remarkable ability to award a zenith prior to a precipitous fall.

Next up, the entire planet will receive the prize, and I eagerly await my award of .00014 Euros, which is probably the cost in ink of saying "NOBEL PEACE PRIZE LAUREATE" upon my resume.

full article here.

PARIS — The Norwegian Nobel Committee awarded its 2012 peace prize on Friday to the 27-nation European Union, lauding its role over six decades in building peace and reconciliation among enemies who fought Europe’s bloodiest wars, even as the Continent wrestles with economic strife that threatens its cohesion and future.

Wednesday, October 10, 2012

The Intellectual movement... denounce "short-term" and "myopic" thinking is reaching its zenith.  The concept that "long term" strategical thinking is more effective than a stranglehold on current measurables is somehow simply assumed.  The Soviets employed strategy that would take decades if not centuries to mature, for example.

And, as I have intimated before, what does an alternative to this "myopia" look like in real terms?  You are simply reclaiming lost power to management and other "central planners" and incentivizing "very" close ties to policy makers and other folks who can pull the strings of strategical planning.  Power concentrates much more quickly under these conditions, and that is hardly an ideal set of circumstances to encourage equitable competition.

From a recent Foreign Policy article: (the fact that foreign policy wonks would love a reality where strategical planning wins over "short-term" thinking is not lost on this reader)

Full article here.

The biggest problem facing the global economy is not climate change, trade imbalances, financial regulation, or the eurozone. It is short-term thinking. An epidemic of myopia has swept over the world in the past few decades, and it threatens our living standards like nothing else.

Tuesday, October 09, 2012

Sheik-mat for Syria?

"Sheik-mat" (The King is dead, in Arabic) and its English counterpart in chess "Checkmate" is a good way to describe the Syrian regime.  With Turkey at the door and the U.N. setting new records for obsequity, its only a matter of time for the latest installment of the Arab Spring.

ANKARA, Turkey — Turkey’s top general inspected newly deployed units on the Syrian border Tuesday following six days of firing by Turkish batteries against President Bashar al-Assad’s forces.
Turkey has deployed additional tanks, howitzers, and missile defense systems on the border since a Syrian artillery shell killed five people in the town of Akcakale on Oct. 3, prompting parliament to give the government a one-year mandate to send forces into Syria if necessary.
General Necdet Ozel, chief of the general staff, today inspected troops in Hatay province, which was hit by seven artillery shells or mortar rounds in the past week, state-run TRT television said.

Thursday, October 04, 2012

The Apologists...

...declare victory over the Global Financial Crisis...

The 2008 financial crisis posed the biggest challenge to the global economy since the Great Depression and provided a severe "stress test" for global economic governance. States rely on a bevy of institutions—the International Monetary Fund, World Trade Organization, and the Group of Twenty—to coordinate action on the global scale. Since the Great Recession began, there has been no shortage of scorn for the state of global economic governance among pundits and scholars. However, in this International Institutions and Global Governance program Working Paper, Daniel Drezner concludes that, despite initial shocks that were more severe than the 1929 financial crisis, the evidence suggests that these structures responded to the financial crisis robustly. 

Monday, October 01, 2012

Pandora's box

Reversion to immortality is an ability held exclusively by Greek Gods...certainly not nation states...

Euro zone sovereign bonds will be regarded as risk-free again when markets are convinced that the member states will stick to sound budget policies, European Central Bank Executive Board member Benoit Coeure said on Monday.