Federal Reserve and Monetary Policy: The Federal Property Tax

Yeah, I know there is no Federal Property Tax, however, the Bush administration has structured its economic policy to reflect such a tax. I’m going to use the Alternative Minimum Tax as a guide and show why there is a “Phantom Federal Property Tax”. See ATM Instructions, look specifically at mortgage deductions-line 4. The nut shell of this deduction is: if you use a home equity line of credit to buy a car (non-home improvement) you do not get the interest deduction. I do not think Congress needs to fix the ATM. Housing prices are coming down which will fix the problem.

If one (me) takes the poll results from the mid term elections as a given state of the US consumer (two thirds of those polled indicated that “Wall Street” and “Oil Prices” were not a factor”, but home wealth was) then one (me) can argue the following:

• Bush has pushed paying for his economic policy to the future. Unfortunately for him and the Republicans, his decision has backfired because it will be part of the 2008 election cycle.
• Bush and the Republicans have come to the conclusion that we can borrow unlimited amounts of money because of “Globalization”. Unfortunately for the US consumer, this faulty reasoning was the crux of the Great Depression. See previous post.
• The “Rich” as represented by people like Fisher (“The Only 3 Questions That Count") and Forbes thinks GDP based on borrowing is more efficient than GDP based on US of A’s output. In other words, home owners who do not borrow against their home’s equity (house rich) are being punished, in the aggregate. See Renting Households Financial Obligation Ratio, it is at 25.18. The credit bubble for renters is over. See Survey of Consumer Finances and previous post “Federal Reserve and Monetary Policy: States' Separatist Movements and Local Currencies.” In another nut shell, homeowners need to borrow against built up home equity to pay for health-care, education, heating the house, driving to ones low pay work place and clothing your family. You do so in the hopes that next year will be better than this year.

If I was in charge of 2007 Congressional hearing schedule, I would put GE and the GSEs in the hot seat.
I would use GE as the “poster child” due to their involvement of American Jobs Creation Act of 2004 (K Street Project). Make them justify their tax break and put their parrots (CNBC [GE’s propaganda outlet] and Princeton’s ROSSI-HANSBERG and GROSSMAN [See page 14 of their paper The Rise of Off shoring… “Imports textiles and exports finical services”. Exports finical services is GE’s US business strategy.]) on the stand.

OFHEO has filed civil charges.
The charges "reveal how the individuals improperly manipulated earnings to maximize their bonuses, while knowingly neglecting accounting systems and internal controls, misapplying over 20 accounting principles, and misleading the regulator and the public," OFHEO Director James B. Lockhart said in a statement.

I would use these charges as a lever to get them (Rains, etc) to squeal on the White House’s involvement of the fraud. It was a jobless recovery and the 2004 Presidential race was close. Bush twisted the economic data and use housing as a theme for his race.

I will also put the Wall Street Journal in the hot seat because they are “joined at the hip” with the White House. Charge them, along with GE etc…, under the Racketeer Influenced and Corrupt Organizations Act, with conspiracy to commit fraud and tax evasion. Make the the test case for all negative results from the K Street Project.

If I were a governor I would rescind the Federal Bankruptcy law. Economic data was twisted too such an extent that allow US consumers to over leverage themselves.
See Inflation Targeting under Imperfect Knowledge
A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank’s goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.

I’m glad to see the “REAL” Republican Party has stood up.

I’m expecting an economic policy change to prevent the US going into depression. It’s a game of chick between the Fed and the White House. The implosion, in the sub-prime housing market, CAN NOT stay in the sub-prime mortgage market. One of the reasons given by those sub-prime loan originators was their expectation of housing price appreciation, not a decline. I believe this attitude was wide spread. In Fannie Mae’s 2004 10K PDF page 99. Assessing the sensitivity of the profitability of the single-family mortgage credit book of business to changes in composition and the economic environment sub-section, one will note that Fannie Mae never consider the possibility of a nation wide price decline. This assumption was removed in 2005. Fannie’s Mae 2006 10K PDF page 151 assumes a modest price decline. The housing bubble was based on fraud NOT on economic fundamentals. Reality dictates that “ALL Prices Should have Changed” when the US was shifting production off-shore (the Japanese Recession/Deflationary event). Home prices, at the very least, should not have increased at the rate they did. The White House, through its proxy Fannie and Freddie, placed a priced control floor on housing prices. This lead to their self full filling prophecy of ever increasing price appreciation. Homeowners’ expectations WERE NOT MET.

I’m also expecting hearings and Bush going through the impeachment process. “All the President’s Men” part 3. Nixon was part 1 and Regan was part 2.

Or……………….

Washington DC can acknowledge there is a structural problem in the US due to Bush’s trade, tax and economic policies. At the very least they can remove the repatriation reward of mega-corp profits, expand the economic zone from Katrina/Rita to the US and siphon off the Social Security Surplus to a GSE that will use the funds to invest in NEW municipal bonds. I think this last one well have the greatest impact. There will be a need for higher output of building materials and an increase of the “wear and tear” on equipment.

Federal Reserve and Monetary Policy: Cascade Failure

This entry is to describe what is happening (so called Economic Populism) and what can happen to the US (Global) economy. I refer to the reader the following web site: The Great Depression from Futurecast.com

Total US Debt (data from Flow of Funds)

Year - Total Debt in Trillions
1996 14.65
1997 15.2
1998 16.15
1999 17.4
2000 18.35
2001 19.4
2002 20.5
2003 22.4
2004 24.2
2005 26.4
2006 28.35 est.

Linear regression slope 96 to 02 is $1.01 trillion per year

Linear regression slope 02 to 05 is $1.95 trillion per year

Linear regression slope 02 to 05 is $1.95 trillion per year. Using this slope and the 2005 data point, the Total US Debt Burden will be 28.35 2006 est.

Some parallels, my opinion, to the current global situation.

• Germany's reparations obligations parallels US of A’s inability to pay off the massive debt (estimated to be over a trillion $s) owned to China, due to their closed market (a WTO violation).
• Farm output has been exchanged for health-care. The US has a private system while the rest of the world has a public system. The US’s health-care system is under stress and is about to lose critical mass. I know this because I heard a proposal by the system to have the federal government pick up the bill. Health-care rode the housing boom and is over priced, just like housing prices.
• There is also a stealth trade war in progress. Using low cost labor (off-shoring) is a “natural” “trade” barrier. GE’s decision to move their production out of the country is an example (see GE Brings Bad Things to Life). Light bulbs were an export product that was profitable. According to Grossman and Rossi-Hansburg (see The Rise of Offshoring: It's Not Wine for Cloth Anymore), this should not have happen because of the productivity gained by past off-shoring. Their frame is wrong. Wage is not the driving force, its employee value (see The Employment Cost Index, what is it?). GE’s (and other firms) desire to be “closer to their market” overrides any productivity gains.

There are three wrong assumptions.

• Productivity gains do not translate into higher wages. The Census Bureau’s increasing poverty rate and the Bush administration’s classifying hunger as food insecurity are real data that shows this conclusion (assumption) to be false. The Current Population Survey’s wage component is worthless. The Census Bureau’s American Survey has shown an unexpected immigration change that indicates its CPS’s statistical framework has been compromised. The unevenness of the US economy makes it difficult to gain a national trend from the National Compensation Survey (wage data source for The Rise of Offshoring).
• It is not the relative size of countries’ GDPs that is a factor; it is the global supply of labor to its demand.
• Any cost savings due to productivity gains are included in the “return on capital”.
  

The following cascade failure is in effect. Housing prices has decreased (the trigger). Bad loan portfolios have no bottom (drain of liquidly). Health-care system will lose jobs and no longer be the bright spot in the US’s economy (see Health Sector Indicators). .

From The Great Depression The Collapse of International Finance

Substitute US of A for Germany.

If the devaluation had not been accompanied by harsh austerity measures - if it had been "accommodated" by monetary expansion - the inflation of prices could have continued indefinitely, even with Great Depression unemployment. This is the mechanism of inflationary depression - the worst form of economic collapse - and stagflation - its much milder form experienced in the 1970s in the United States.

A two-tiered wage system never worked. The US airlines developed a two-tier wage when the industry was deregulated. Now pilots are taking pay cuts. The Big Three have $1500 of cost the foreign manufactures do not have because they were not unionized. Globalization has, in effect, structured the auto industry as a two-tier system.

U.S. Steel cut wages 10%, and other steel companies followed as labor leaders and politicians howled. Wages in 1928 had been 160% above pre WW I levels and had fallen little since then, while prices had dropped 30 percent - back to 1913 levels. Those who had steady work were living very well and had no complaints. But many were working only part time. General Motors cut salaries 10% to 20% -- wages were not cut.

Another example of a two-tiered system can be illustrated by government spending. The US government is spending 10’s of billions of $s rebuilding the affected areas of Katrina and Rita. Federal money is going towards training home owners in the skills that will allow them to fix their damaged homes. The people who do this enter the work force (a very good example of the positive effect of tax payers money). A counter example would be the “auto industry” getting no help from Bush.

The above paragraph shows the unevenness of the US economy. Another example of this unevenness is my attempt to start my own company. Silicon Valley manages to fund startups (with Cal. tax and regulatory burdens), but Spokane can not do any better than casino jobs.

At an EFGN workshop; a guest;
LISA BROWN is Majority Leader of the Washington State Senate.
She has an avid interest in microenterprises and is spearheading the push for new legislation that can help improve the climate for new business formation in the state.

She stated Washington State has a business tax burden problem.
(Washington State, along with the rest of the country does have a business tax problem. The source of this problem is the federal government. It is bad enough to compete globally and to go against the tax breaks China offers, but the tax break the US of A gives to off-shore jobs is the straw that broke this camel back‘s.)

My funding problem is encapsulated in this statement: "Angle investors have become bankers". Spokane’s investors have the reputation of being very conservative “bankers”. In other words, startups either “die on the vine or move out of the area” (a recurring statement spoken at EFGN workshops and at a LaunchPad 7.0 event).

People, wanting to buy US Treasuries, are NOT a good indicator of financial expectations.

However, the credit of the U.S. government remained good, so the Hoover administration still had the power to act. On October 6, Hoover announced creation of a $500 million central bank fund to aid banks during "runs" and to relieve them from the growing need to hold increasing amounts of assets in cash and highly liquid assets.

The Bush administration’s over reliance of monetary policy is another connection that is going to fail.

On October 8, the U.S. Federal Reserve Bank admitted that its cheap money policy had failed to end the Depression. It raised the rediscount rate from 1 1/2% to 2 1/2%, and again on October 15, to 3 1/2%, in its efforts to stem the gold and capital exodus.

The financial miss-step that is having to biggest effect was Fannie and Freddy’s accounting fraud. This political motivated fraud allowed the housing bubble (hyper-inflation). See Household Debt Statistics for graphs. One can note the change of slope in the 2003 year of the “Debt Burden-Mortgages” graph. I expect home owners will get their balance sheet in order. I base this conclusion on free-market forces. Housing prices are falling which shows up as an increase in homeowners obligation ratio. I base this on the change of slope at 2005. See Household Debt Service-Homeowning Households Financial Obligation Ratio graph.

The homeowners obligation ratio is at 18.08. Wall Street may over look this, but financial companies do not. The sub-prime mortgage sector has gone into stress. Private equity was buying distressed loan portfolios because they saw value (relatively speaking). Private equity is moving away from this activity. This is an indication of the difficulty they are having in determining the bottom (slow moving train wreck).

A way to measure expectations;
Use convolution (moving average [sort of]) of neighbors’ home values.
Example:

House Value 11	House Value 12	House Value 13	House Value 14
House Value21	House Value 22	House Value 23	House Value 24
House Value 31	House Value 32	House Value 33	House Value 34
House Value 41	House Value 42	House Value 43	House Value 44

Use a kernal:

1	1	1
1	1	1
1	1	1

Your choice for the boundary conditions.

The above can be used to get the neighborhood’s wage and salary. One can make this analysis complete by the inclusion of health-care. A zero entry for those neighbors who have no insurance and an entry of one for those who do. Once one has all of this data, one can use an “expert” application (example; CLIPS) to gain a sense of expectations.
Example;
Rule 1 - House Value less than yours.
Rule 2 - Wage less than yours.
Rule 3 - No health-care insurance.
Output - expect housing values to remain under pressure. Note the phrase “under pressure”. Price changes materialize during the buying and selling. If home owners do not panic and stay in their “primary residence” until whatever economic transitions are taking place around them subside, then the pressure on prices will abate.

Federal Reserve and Monetary Policy: Mass Hysteria and Racial Tensions

The way the Republicans have been using psychological warfare on the US of A population there is a probability that those Republicans who truly believe the world would come to an end if the dems take control of Congress will, on one extreme, kill themselves (as depicted in an WWII film showing a Japanese woman jumping off a cliff). And/Or, put off purchases (the Y2K syndrome). And/Or have “Neo-Nazi” and “Waco” compounds spring up in “Red States”.

Some political pundits are observing Democrats have somehow morphed themselves into Republicans (and visa versa). This observation is interesting given the timing in this election cycle (Nov 2006 Mid-Term). If one watches this GOP political ad (Too Hot for Corker) one can sense the Republicans have set the clock back to pre-civil war years. This ad points to the racial taboo that exists in Tennessee (and the south). A “BLONDE, WHITE woman going out with a BLACK man”. (I used to work with a person who was a white supremacist. I over heard a discussion regarding his opinion about black athletes: "the goal of a black athlete is to marry a blonde, white woman".) The way the Republicans are gaining influence in the south (see George Allen makes demeaning comments as other example) makes one think the RNC has been taken over by white supremacists. I don't think the Democrats will want to go down this route. The US of A might have fight the Civil War again (Dems oppose Black and Hispanic slavery with the Republicans wanting to separate).

Bush’s policy of polarization has us going at each others’ throat. Or, to be accurate, Bush’s policy of the “White Supremacists'” agenda.

I guess that guy in Corker’s ad was wrong. He needs more guns for the up coming civil war.

Federal Reserve and Monetary Policy: Pending Refuge Crises Coming from Mexico

To those whom are happy about the Dow 30 having a new record high, I suggest you look towards Mexico. Fox is about to "crush" the rebellion in Oaxaca, Mexico.
From Marcos: "Oaxaca Is Not Just an Emergency, It Is Also an Example to Follow"

Today’s conference included much behind-the-scenes organizing for both the efforts to free the political prisoners and the transportation logistics for the upcoming 54-day tour to the US border (Narco News and The Other Journalism with the Other Campaign were among the alternative media and other organizations invited to send representatives on a 42-seat bus that will be accompanying Delegate Zero starting Saturday, October 7; your reporters and filmmakers will be there, and also reporting in advance and behind the tour for the next two months, as well as our news teams in Atenco-DF and Oaxaca, among other parts of Mexico and a country called América), and elaborate analyses of the current political situation in Mexico by Marcos and by political organizations that adhere to the Other Campaign, some of which will be published in full on these pages in coming days. But the light of the continuing struggle in Oaxaca was, perhaps, that which shone brightest during today’s kick-off meeting.

"Oaxaca is not just an emergency," said Subcomandante Marcos. "It is also an example to follow."

I'll be more concern about a pending refuge crises coming from Mexico.

This event will be the "straw that breaks the camel’s back".

The US of A is on the "edge of a sword". Anything can push us into a depression. Events such as:

Housing prices are set to fall: Forecast sees housing prices falling

And of course there is Iran: Iran offers an 'idea' to end atom stalemate

and the effect of saber rattling on oil prices.

This is what one gets when they us supply-side economic theory in a global market. There is no optimum tax rate. Supply-side economic can only work in an isolated market.

The converse is also true: A negative reaction can occur due to the openness of one’s market to the global work force. This reaction, by its people, to the negative rate of change of GDP, will force that market into a nationalistic, protectionism stance.

Federal Reserve and Monetary Policy:States' Separatist Movements and Local Currencies.

Separatist movements in the 21st century? How can this be?

The ingredients are a President that believes he is above the US Constitution.
Bush signing statements 'undermine rule of law': ABA task force

[JURIST] An American Bar Association Task Force on Presidential Signing Statements and the Separation of Powers Doctrine [ABA materials] has determined [press release] that President Bush's practice of attaching signing statements [1993 DOJ backgrounder] to new laws "undermine[s] the rule of law and our constitutional system of separation of powers." In a report and recommendations to be released Monday, the task force found that the frequency and purpose of signing statements has changed dramatically during the Bush administration. Bush has used signing statements to clarify his interpretation of laws and in some instances reserve the right to bypass laws more than 800 times, compared to just 600 signing statements for all other presidents combined. ABA president Michael Greco expressed concern that Bush's "unchecked" use of bill-signing statements "does grave harm to the separation of powers doctrine." The task force recommended that Congress adopt legislation to allow the president, Congress or other entities to challenge signing statements in court any time the president claims he has the authority to change the bill duly enacted by Congress, and urged President Bush to veto bills instead of signing them with a statement attached. The ABA Board of Governors [ABA backgrounder] voted in early June to launch an inquiry [JURIST report; ABA press release] into President Bush's frequent use of signing statements to bypass provisions of new laws because of his interpretation of presidential and executive powers under the US Constitution. The bipartisan task force [member list] will report its findings to the ABA Board of Delegates at their annual meeting [ABA materials] in August, where the ABA policymakers will decide whether to adopt the task force findings and encourage legal challenges over signing statements.

Add an illegal alien crises.

See The Role of Immigrants in the U.S. Labor Market
and a judge who will not uphold the law. Judge Keeps 11 Illegal Immigrants From Deportation

The CBO report also shows immigrants with technical skills are also dragging down wages.

Mix well with income distribution problems.
Treasury Secretary Sees Inequities in U.S. Economy

“Amid this country’s strong economic expansion, many Americans simply aren’t feeling the benefits,” Mr. Paulson said in a speech at Columbia Business School. “Many aren’t seeing significant increases in their take-home pay. Their increases in wages are being eaten up by high energy prices and rising health care costs, among others.”
It was a somewhat unusual concession from an administration that has spoken only glowingly of recent economic gains and has generally joined with Republicans in Congress in dismissing Democratic concerns about growing economic equality in the United States as “class warfare.”
Mr. Paulson made no reference to specifics, particularly the debate in Congress over tying an increase in the minimum wage, as advocated by Democrats, to sharp cuts in the federal estate tax, as pushed by Republicans. Democratic leaders in Congress accuse the Republicans of cynical politics in packaging the two proposals to get Democratic support.

This income distribution problem was evident in the Federal Reserve's Survey of Consumer Finances.

Much like median income, median real family net worth in the 2001−04 period increased 1.5 percent, but mean net worth rose 6.3 percent. The increase in wealth appears to have been clearest in the middle income group. Over many other demographic groups, the data show a complex pattern of mixed increases and decreases in wealth; in some instances, median and mean values moved in opposite directions, a pattern that signals distributional changes within groups. In contrast, the growth in wealth between the 1998 and 2001 surveys and between the 1995 and 1998 surveys was stronger both in the mean and in the median, and the growth was shared by most
demographic groups (figure 2). Three key shifts in the 2001–04 period underlie the changes in net worth. First, the strong appreciation of house values and a rise in the rate of homeownership produced a substantial gain in the value of holdings of residential real estate. Second, despite the general recovery of prices in equity markets since 2001, the direct and indirect ownership of stocks declined, as did the typical amount held. Third, the amount of debt relative to total assets increased markedly, and the largest part of that increase was attributable to debt secured by real estate. As debt rose over the period, families devoted more of their incomes to servicing their debts, despite a general decline in interest rates. Also, the fraction of families with large required debt service payments relative to their incomes rose a small amount, and the fraction of families that had payments that were late sixty days or more in the year preceding the survey rose more substantially. These increases affected mainly the bottom 80 percent of the income distribution.
One liability of using the median as a descriptive device is that medians are not ‘‘additive’’; that is, the sum of the medians of two items for a common population is not generally equal to the median of the sum (for example, median assets less median liabilities does not equal median net worth). In contrast, means for a common population are additive. Where a comparable median and mean are given, the growth of the mean relative to the median may usually be taken as indicative of change at the top of the distribution; for example, when the mean grows more rapidly than the median, it is typically taken to indicate that the values comprised by the top of the distribution rose more rapidly than those in the lower part of the distribution.

Education is no longer the equalizer. Delphi decided to shut down its engineering department and move it to China along with the production. An engineering degree is now worth less than toilet paper!!!!!!!!

States and cities are taking action on laws the US government should be enforcing.

Arizona began the process of intercepting Federal Tax money with SB 1459.

I live in eastern Washington state. A few conservative, right wing nut cases tried to create a separate state. They argued that eastern Washington had its own climate, political ideology, etc... I guess they got tired of being associated with the west coast when their fellow right wingers called the west coast the left coast.
SJM 8009 – 2005-06 Petitioning for the creation of a new state in Eastern Washington.
I know a separatist movement has already formed.

In time, other states will see that they (the states) will need to protect their revenue source and follow Arizona's process. Its every man/woman/child for him/her self.

The States' separatist movement is predicted by economic theory. One can go as far back into history to the time of Adam Smith and show the proof. See An Inquiry into the Nature and Causes of the Wealth of Nations book 4 chapter 1

Mr. Locke remarks a distinction between money and other movable goods. All other movable goods, he says, are of so consumable a nature that the wealth which consists in them cannot be much depended on, and a nation which abounds in them one year may, without any exportation, but merely their own waste and extravagance, be in great want of them the next. Money, on the contrary, is a steady friend, which, though it may travel about from hand to hand, yet if it can be kept from going out of the country, is not very liable to be wasted and consumed. Gold and silver, therefore, are, according to him, the most solid and substantial part of the movable wealth of a nation, and to multiply those metals ought, he thinks, upon that account, to be the great object of its political œconomy.*3

I'm going to change money to mortgage related securities.

Others admit that if a nation could be separated from all the world, it would be of no consequence how much, or how little money circulated in it. The consumable goods which were circulated by means of this money would only be exchanged for a greater or a smaller number of pieces; but the real wealth or poverty of the country, they allow, would depend altogether upon the abundance or scarcity of those consumable goods. But it is otherwise, they think, with countries which have connections with foreign nations, and which are obliged to carry on foreign wars, and to maintain fleets and armies in distant countries. This, they say, cannot be done but by sending abroad money to pay them with; and a nation cannot send much money abroad unless it has a good deal at home. Every such nation, therefore, must endeavour in time of peace to accumulate gold and silver that, when occasion requires, it may have wherewithal to carry on foreign wars.

...

The enormous expence of the late war, therefore, must have been chiefly defrayed, not by the exportation of gold and silver, but by that of British commodities of some kind or other. When the government, or those who acted under them, contracted with a merchant for a remittance to some foreign country, he would naturally endeavour to pay his foreign correspondent, upon whom he had granted a bill, by sending abroad rather commodities than gold and silver. If the commodities of Great Britain were not in demand in that country, he would endeavour to send them to some other country, in which he could purchase a bill upon that country. The transportation of commodities, when properly suited to the market, is always attended with a considerable profit; whereas that of gold and silver is scarce ever attended with any. When those metals are sent abroad in order to purchase foreign commodities, the merchant's profit arises, not from the purchase, but from the sale of the returns. But when they are sent abroad merely to pay a debt, he gets no returns, and consequently no profit. He naturally, therefore, exerts his invention to find out a way of paying his foreign debts rather by the exportation of commodities than by that of gold and silver. The great quantity of British goods exported during the course of the late war, without bringing back any returns, is accordingly remarked by the author of The Present State of the Nation.*24

...

A nation may purchase the pay and provisions of an army in a distant country three different ways: by sending abroad either, first, some part of its accumulated gold and silver, or, secondly, some part of the annual produce of its manufactures; or, last of all, some part of its annual rude produce.

The gold and silver which can properly be considered as accumulated or stored up in any country may be distinguished into three parts: first, the circulating money; secondly, the plate of private families; and, last of all, the money which may have been collected by many years parsimony, and laid up in the treasury of the prince.

States are funding Bush's vendetta in Iraq (Hatfield vs McCoy syndrome). They do this with the help of mortgage related securities (just substitute homeowners' mortgage related securities with “the plate of private families”). The rest of the world holds $923 billion. See Flow of Funds Matrix pdf page 123. Bush cuts taxes while this war rages.

Smith on trade:

The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported, it necessarily became the great object of political œconomy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry. Its two great engines for enriching the country, therefore, were restraints upon importation, and encouragements to exportation. The restraints upon importation were of two kinds.

First, restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported.

Secondly, restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous.

The local currency I'm referring to are mortgage related securities due to the local housing market. The US dollar has less value than the local, per dollar value, of the equity of ones home. The Bush administration's economic policy is the same the Japanese took when their twin asset bubbles popped (land and equity stock values). The deflation was a natural process due to the Japanese shifting production to China. Prices are relative. See Neoclassical Theory. Homeowners natural reaction toward a pending downturn in their local economic environment is to act as an land monopoly. This restricts new ownership. I live in an area in which a house-siding firm was offering half-off on the cost of labor, not on materials. The only way this firm could do this and make a profit is to employ an illegal alien work force. Homeowners' desire to maintain the value of their home reduces their worth as laborers. This is the source of class warfare.

Bush's policy of using housing wealth to pay for the Iraq war only served to hyper-inflate the housing market. The inflation genie is out of the bottle. The Federal Reserves current monetary policy is restrictive relative to the mortgage debt burden. See Household Debt. Note mortgage debt burden is at 93.32 and Homeowner Obligation is at 17.59, the highest in 10 years. The growth rate of debt can not maintain housing prices which will force prices to reflect local economic conditions.

Bush tax policy are not what free market calls for. These policies only accelerate the income distribution problem due to the giving of a reward for off-shoring production and services. The US of A is not trading.

One final quote:
The undertaker of a great manufacture, who, by the home-markets being suddenly laid open to the competition of foreigners, should be obliged to abandon his trade, would no doubt suffer very considerably. That part of his capital which had usually been employed in purchasing materials and in paying his workmen might, without much difficulty, perhaps, find another employment. But that part of it which was fixed in workhouses, and in the instruments of trade, could scarce be disposed of without considerable loss. The equitable regard, therefore, to his interest requires that changes of this kind should never be introduced suddenly, but slowly, gradually, and after a very long warning. The legislature, were it possible that its deliberations could be always directed, not by the clamorous importunity of partial interests, but by an extensive view of the general good, ought upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, nor to extend further those which are already established. Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder.

GE moving more production offshore

FAIRFIELD, CT, United States (UPI) -- Most of General Electric Co.`s production will be outside the United States by 2010, the Financial Times said Thursday.
GE is moving production to low-cost, fast-growing developing markets such as China and India to help lift earnings by at least 10 percent every year.

Bush has made certain his corporate masters get a chance to bail out of the US of A.

There are some misguided economist that believe in the long run, US trade policies are good for the US. The term “long run” is so ambiguous. The world is a small and constantly shrinking. We know that global politics and behavior of people has, in effect, removed the term exogenous from economic theory. People build on known earthquake zones and near active volcanoes. There are regions that are constantly being battered by strong hurricanes. Global production has triggered global warming so that droughts and floods will increase in numbers and intensity. Current Middle East crises has resulted in economic warfare by oil producing countries. In the “long run”, the US may be replaced by:







from What's New


I bet Adam Smith thought that in the “long run” the world would be a better place.

Federal Reserve and Monetary Policy: Free Markets and Global Starvation(?)

Class warfare is in progress. Rove's remarks about Democrats not being traitors means that the McCain method has been used to stagnate upward class mobility. Bush and Rove turned a political struggle into an economic struggle. This is part of the cause of class warfare. The most important cause is that the US economy has attached an ever increasing value to land that produces no output. See previous entry (Chavez's Curve Ball) and Neoclassical Theory of Production for an explanation of topological invariants.

The world needs more oil. Free markets will find a strategy that is both efficient and generates wealth. Free markets don't know when to stop. Let's look at trade (see Transformation and Trade section of Neoclassical Theory of Production).

This topology theory assumes that all markets/countries have their own topological space/manifold. In the case of expanded communities or as Greenspan calls it “home bias”, has been removed, there exist a transformation that is due to the convolution of independent labor probability densities. What needs to be discussed is the topic of trade or, in other words, specialization.

Basic axiom: Each market/country topological manifold represents the same object.

This axiom means that all econo-political-social topology spaces can be transformed into each other. I will make the assertion that one can form a topological manifold that is diffeomorphism. This is the easy way out in showing the Trade aspect of globalization and its incorporation into the topology of global production. See my blog Neoclassical Theory for math.

The pullback (push forward) bases transformation is a representation of the real exchange rate. The pullback (push forward) bases transformation merges the purchasing power and the trade, non-trade definitions of real exchange rate. This assumes the nominal exchange rate (e) is independent of the bases vectors. One can look at the diagonal elements of the pullback (push forward) bases transformation as a representation of “the real exchange rate” of that bases vector element and the off diagonal elements as a some sort of technological change, if one exists.

A good example of this is sugar into ethanol. If a bases vector includes oil and sugar then the pullback (push forward) bases transformation represents the change in cost of oil produced in market A over the change in cost of ethanol produced in market B and the other diagonal is the change of cost of oil produced in market B over the change in cost of ethanol produced in market A.



Placing more productive agriculture land over to producing energy will in turn put pressure on adding marginal land to use. I'm including all crops that can be turned into energy and husbandry that can be used for bio-mass conversion (Soylent Green is People!!!!!).

Energy is inelastic. The free market will test this by giving a high profit margin in producing energy not food. More developing countries will take to this “cash crop”, leaving food production behind. Such a move will be inflationary, along with the accompanying inflationary expectation, in agricultural and animal commodities.

Our so-called elected officials will not do a thing until energy and food prices are sky high and people begin to revolt, in mass, on the streets of the “good old US of A”.