Recognizing who\what Really Controls Interest Rates

Just in case there was any doubt about what really controls interest rates, the past couple of months should dispel any lingering doubts.  The Federal Reserve(The Fed) is without a doubt in full control of interest rates going up or down.

Back in spring, the Fed hinted that it was going to ease up on "Quantitative Easing" or QE3.  Quantitative easing, for those who don't know, is the Fed trying to flood the market with dollars by buying stocks and bonds(*True Story)  They call it Quantitative Easing to make themselves sound smarter than you(*Not a true story).

So guess what happened?  Interest rates have been steadily rising this summer.  Despite that, many people mistakenly believe that interest rates are determined by a "Free Market" or by "bond vigilantes".  The only time "the market" really gets involved is when they start trying to guess at what the Fed is going to do.  That was demonstrated last Wednesday.  The Fed said nothing, the market reacted as if that meant interest rates were going to go up.

The policy implications for this are immense.  I won't get into all of them on this little post.  But let's just start at the bottom.  The Fed sets interest rates.  That is a fact, one that cannot be denied.  Whether or not that is desirable is a different argument.  But, right now, the only thing standing between a 0% interest rate, or a 40% interest rate is a whole bunch of wealthy, well-connected bankers.

No amount of budget deficits or surpluses can change that fact.  Granted, the bankers may make their decisions based on federal budgets or the health of the economy.  But the decision is still in the hands of a small number of people, not "the market".

Sony will win

As the Wii U, PS4, and Xbox One come to tangle in the next round of the console wars, Here is my bold prediction:  The PlayStation 4 will win the next round of the console wars.

PlayStation One and PlayStation 2 were the top selling consoles worldwide of all time.  The PlayStation 3 was set to be huge, but then the Wii came along and blew everybody away in the last round.  So why do I think sony will be back on top?

Here's what I see.  The Wii won because it was revolutionary.  It's working name was even "Revolution". It expanded the video game market instead of competing for the existing one.  It was different.  Games were excited, non-gamers were interested.  Eventually PS3 and Xbox started making back some ground, but they never caught up with the Wii's original sales and are virtually tied for second.

But now, the Wii U is old news.  It's touchscreen controller is more an evolution than a revolution.  It still uses Wii controllers.  It's working name was Wii 2, and the end product reflects that.  While the Wii U will benefit some from past success, there is not as much buzz about it.

The other competition is Microsoft's xbox One.  Originally, I thought Microsoft was going to win.  They were going to concentrate on better and better online features and integration.  Instead, they are locked into a boxing match with their own customers.  They're adding and removing features and pissing of different groups.  I can't help but think that all this confusion is going to hurt them.

All of Xbox controversy wouldn't hurt Microsoft as much if they were the only game in town like Windows on PCs.  But Sony is making huge strides to catch up with Microsoft's online advantages.  Sony is also making lots of other new changes.  You can read about them here.  Nothing is revolutionary, just evolutionary... just like the other 3 consoles.

So here it is.  All the consoles made evolutionary steps, I believe Sony made more.  And in addition, Sony isn't repeatedly pissing off large groups of users.  I believe Sony will find it's way back on top their fourth round of the console wars.

When did Following the Constitution become Optional?

Could someone please tell me exactly when following the constitution became optional?  In the last week I have heard Senators openly call on the president to violate a citizen's rights.  Some prominent figures have demanded that the government act like following the Bill of Rights is optional and can be decided on a case by case basis.  It is my humble opinion that every American citizen has certain unalienable rights that cannot be taken away without due process.  I never thought that would be a controversial opinion to hold in the United States, but apparently it is now.

I think we have all been horrified by the Boston Marathon bombing.  Made even worse by the high profile manhunt that resulted in shootout and dead police officers.  Because of the heinous nature of the crimes and the high profile, Senators and media figures are calling to throw away the constitution when dealing with the American citizen that did these awful things.  I'm going to type that again, because it is an important point.  Dzhokhar Tsarnaev is an American citizen.  And that (should!) guarantees him the right to due process - no matter how terrible his crimes.

Yet, we have yahoos lie Senator Lindsey Graham calling for him to have his citizenship revoked and treated lie an 'Enemy combatant' so that there doesn't have to be a trial.   John McCain and others has called for not giving an American citizen his Miranda rights.  For McCain, this is not the first time he has done so.  Sean Hannity wants to torture an American citizen and do so without a trial.  So much for the 4th, 5th, 6th, and 8th amendments in the Bill of Rights... (try to walk past the Ann Coulter Statement in that last link where she wants an American citizen  arrested for what they wear - that absurdity is WAY beyond the scope of this post)

To be clear, I think that the Boston Marathon bombers are horrible people that deserve whatever they get.  Thanks to the high profile of the case, I can be reasonably certain that Dzhokhar Tsarnaev is one of those bombers.  I shouldn't have to say this, but I have to, to keep people from accusing me of being a "terrorist lover" or "America hater".  I will not get emotionally upset if bad things happen to him.  It is the next person, the less high profile case, that I'm concerned about.

Our rights don't exist to protect guilty parties such as Tsarnaev, they exist to protect the innocent and falsely accused.  If the government has the power to take away certain rights from the guilty - without trial - what prevents it from doing the same to the innocent and falsely accused?  We cannot let the government say that since somebody is a horrible person they don't deserve his constitutionally guaranteed rights. Why? because without a trial how do we know he is guilty?  That is my concern and is the thing that everyone should be concerned about.

If the president has the power to declare a guilty person an "enemy combatant" and swooped off to a secret prison to be tortured - all without a trial -, he also has the power to do it to an innocent person.  If we give the president that power, that means we are only one sociopath getting elected president away from a dictatorship.  If the president can declare ANYBODY an "enemy combatant" what is to stop him from doing that to his political enemies?

I am not an expert in liberty, constitutional law, or history, but these are very basic arguments.  These are foundational principles of our country. These arguments can be grasped by any middle schooler in a basic government class.  These are the things that concerned our founding fathers and lead them to create the Bill of Rights.  It scares me that they aren't grasped by prominent members of the media and long time U.S. Senators.  An even scarier thought is the possibility that they do know them and are purposely ignoring them.

Dzhokhar Tsarnaev must have his full rights as a U.S. citizen(because he IS a U.S. citizen) protected because it is the only way to guarantee that the rest of us will have them.  Any arguments about denying Tsarnaev his rights because he's a bad person or a public danger is, at best, an extremely short-sighted view.  At worst it is emotional manipulation by a future dictator.

TSA: 3.5oz of Toothpaste = terrorist, 2.36 inch Knives = Patriot

Are you kidding me? The TSA is now going to be allowing some small pocket knives on airplanes. Meanwhile I still can't take a decent tube of toothpaste through(and lord help you if you caught with a sealed bottle of water or pop!).  Coming from someone who has lost a 20oz bottle of pop, a full tube of toothpaste, was "detained" for a 3 inch philips-head screwdriver, and who won a random "full baggage search" in front of everyone, I feel much safer now.  I might be stuck with overpriced soda from airport shops, off brand toothpaste, and limited hardware, but at least the guy sitting next to me on the airplane can stab me in the eye (with his 2 inch blade) when I tell him about all of America's "freedoms".

This also doesn't mean any other security will be loosened. If you want to ride on a plane in this country, You'll still have to decide between either someone taking naked pictures of you, or a full body pat down. (If you're really lucky, you'll be among the few who have to endure both!)  If you're among the 99% of americans who like to both ride an airplane and thinks their "right to privacy" extends to their body, there is some good, slightly less publicized news.  There is a small pilot(pun intended) program for those to have "expedited" screenings by going through a voluntary "pre-screening".  Of course, the program is currently only for frequent flyers and other "preferred" airline customers.  You'll be contacted shortly if you are eligible.  (Apparently when it comes to getting government permission to retain ones dignity at the airport, Jet-setting millionaires, corporate execs, and traveling sales people get to be in the front of the line)

One last piece of good news, the nude photo scanners might be going away.  Well, not entirely.  They're staying, but being changed(those that can) to display a cartoon like drawing of the person's body - golly I feel better already.  Now all I have to do is endure the (likely) cancer causing radiation.

Despite being a liberty-minded person, I think could tolerate all of these things, or at the very least forgive those who impose it upon us, if I thought that it actually kept me and my family safer at the airport and on airplanes.  But, I really don't believe that. I think others have described it best when they call all of these procedures security theater.  They aren't designed to make us safer so much as make us FEEL safer.

The system is easy to game.  One can't have 12oz of shampoo because the shampoo might have been replaced with explosive liquid.  Assuming for a moment that one needs 12oz of this liquid, all you've changed is that to pull of an operation you need 4 guys with a 3oz bottle instead of 1 guy with a 12oz bottle.  We can have small knives as long as the handle isn't grooved nor locked in place?  No problem, I'll just put my blade in one handle when I go through security, but put it in a different handle once I'm on the plane and want to use it.  Those are just ways to get dangerous items on board without breaking TSA rules.  There is a good chance that whatever you need will make it through TSA screening thanks to all of it's mistakes.

All of these scanners and screenings seem like they are putting faith in technology instead of people.  There might be an incentive for that considering that the last Homeland Security secretary had ties to the company that sell the naked scanners.  Instead, TSA they may want to spend time concentrating on finding terrorists.  I understand there is a pilot program to try out the "Israeli" method which is to (horror upon horrer) TALK to people.  And if they act suspicious, then they go through additional security screening.  Of course, this is being floated as additional security on top of the useless measures used now, and not a replacement of it(facepalm!).

Now I understand that in Israel if you don't pass the first screening, things get hardcore fast.  We don't necessarily have to adopt the ENTIRE system, but talking to a guy and telling him your name, where you're going, and who you're traveling with seems less intrusive then losing my entire toiletres bag and getting a full body pat down.  We're pretty much already asked those questions by 2 or 3 different TSA agents at some point or another.

Even if the "talk to people" method wasn't implemented.  I'd still advocate for getting rid of most of these other measures.  No sense in making everyone "feel" safer when they're not.  I don't believe in a false sense of security.

The Farce That is Sequestration

Brace yourselves, The effects of the so-called "Budget Sequestration" are about to hit.  The two parties aren't going to compromise so the automatic budget cuts are going to hit and hurt the economy.  The media will probably ultimately blame the two political parties for not coming together to fix something that EVERYONE knows is going to be bad for the economy.

The actual economic damage is compounded by the other deficit-reduction measures that have already slowed growth, including a 2 percent payroll tax increase. All told, economists expect the sequestration plus last month’s fiscal-cliff deal to slow the pace of GDP growth by 1.5 percentage points. That’s no small change for an economy growing about 2 percent a year, particularly one that appears to have lost steam in the fourth quarter of 2012.
<snip>
The reality is that they are equally at fault: Both sides accepted the across-the-board cuts if they couldn’t agree to more sensible ones.

I don't blame the two parties for this mess.  I blame bad economics.  John T. Harvey has a good write-up of why this is going to be bad and why it's all unnecessary in his article Suicide by Sequestration.

As suggested above, many others have already gone into detail on where cuts will hit and how bad it will be. But, the overwhelming majority of this has been written based on the assumption that we do, in fact, need to cut the debt and deficit, just not this way. I therefore want to do what I’ve done so many times before in this blog: explain why this is a false and terribly dangerous premise. ANY reductions in the deficit are a mistake, not just those forced by sequestration. Below, I attack a number of the fallacies on which these contrary opinions are based (many of these have appeared before in this column–I’ll keep repeating it until President Obama listens!):
<snip>
For God’s sake, we have so many difficult problems facing us today. Why add to that by shooting ourselves in the foot–no, the head–by purposely reducing economic activity even more? To see how well this brilliant economic-recovery strategy works, just look at Greece, Spain, and the UK. Better yet, look at the US in fourth quarter of 2012. That negative growth, correlated as it was with a big drop in government spending, is a precursor of things to come.

I highly recommend reading the rest.  John explains better than I could so I won't repeat his points.  Instead, I'll try to answer his question of Why do we keep trying to do this to ourselves?.

The economists that our leaders listen to keep telling them that budget deficits are always bad.  It's always bad to have debt for a household or business, so in theory, it should be bad for a national government.  It's a very powerful and emotionally convincing theory backed up by the metaphor of a household or business budget.  The people who keep pointing out that The Federal Budget is not Like Your Budget keep getting drowned out.

How powerful is this theory?  It's so powerful it drowns out common sense.  Let's take a different situation.  Let's say someone at the pet store tells you your fish tank should have no more than 3 snails for every 5 fish.  But your fish tank has 4 snails and 5 fish.  So you take away one snail.  But you notice that a week later your fish starting looking sickly and the water gets dirty.  You add back a snail and everything starts slowly recovering.  When you tell this to the pet store owner, he assures you "no no, you gotta take that snail away.  Your tank will get 'too clean'.  The 3 snails will eventually learn to clean more.".  So you go home and take the snail away again, but sure enough your tank gets dirty and the fish sickly.  How many times would you keep trying to take a snail away before you conclude that the pet store owner doesn't know what the hell he's talking about?  Well, if you're a congressman, at least more than 5 years!

We have experienced nearly 5 years of a trillion plus dollar budget deficit.  The entire time our economy has been slowly recovering.  The only times it has faltered is when congress has another budget or debt ceiling fight to cut the budget.  How long can this go one until more people start realizing that the economy is recovering and falters when we prematurely try to balance the budget?  If we were scientists and observed this many countervailing examples of our theory, we'd throw it out in a heartbeat.

But, we don't throw out the theory that "Budget Deficits are always bad".  Why?  Because the metaphor of the federal budget being like a household budget is just too strong.  We'll just keep telling ourselves that we "cut the 'wrong' things".  Apparently, they'll never conclude that it's the cutting itself that is 'wrong'.

Climate Change Deniers Funding

LiveScience has an article describing the source of funding for climate change denying think tanks.  One source is the use of a special type of trust by gasoil giants such as the Koch brothers.  They send money to this special type of trust and get a tax break since it's a "charity".  That "charity" then sends the money to think tanks that specialize in climate change denier propaganda.  500 million just from one person.

The website for Donors Trust provides some clues to their interests: "The current environment on university campuses values Diversitas over Veritas — but cultural diversity is a poor substitute for truth, which must be the prevailing aim of the university. And discovering truth is impossible without a commitment to freedom of inquiry and the broadest possible range of viewpoints — what we call intellectual pluralism.
"Typically, we provide top-notch professors with substantial seed capital, spread over three years. After these professors have demonstrated progress with their 'centers,' we assist them in identifying other funding sources — alumni, institutional or foundations — to sustain their efforts."

I find this claim particularly rich because an often used argument of climate change deniers is that scientists are fudging data just so they can "get rich" off of government grants. For example see here,

perpetuated by those with political agendas and those who grow rich from government grants

here,

Those who survive and thrive on government grants to investigate global warming are always going to tell us that the situation requires further analysis.

and here.

Global warming, which was mostly a scam invented by researchers looking for government grants

Well, with the revelations above, it appears that these groups might be projecting their own sins onto others.

A Gold Standard? How About a Labor standard?

For several decades the U.S. dollar was on some type of gold or silver standard.  Doing so anchored the dollar's value to something of value.  But why has it always been anchored to gold or some other precious metal?  Is there any reason why it has to be gold or precious metals?  It seems fairly arbitrary.   Maybe it's because it's rare and valuable?  In reality it though, the dollar - or any currency - could be tied to almost anything.  It could be precious metals, agricultural goods, or even consumer goods.  So why not set the value of the dollar to unskilled labor?  I think you'll find that we have all the advantages of price stability that gold provides, but also eliminate and reduce several other social problems.

Before describing how to implement a dollar that's on a "Labor Standard", let's review how governments maintained a gold standard.  First, they would have a reserve of gold.  Then they would declare that every so many dollars could be exchanged for so many ounces of gold.  For instance, 8 dollars for an ounce of gold.  At that point, the government must then constantly buy and sell gold to maintain it's value.

For instance, if the market determines that an ounce of gold is worth more than 8 dollars, people are going to trade in their dollars for gold.  This will remove dollars from circulation and add gold to the market.  As that happens, the supply of gold on the market will increase and thus it's value will decrease.  The opposite happens to the dollar.  As dollars are traded in, less will be in circulation which means the remaining dollars are worth more.  These two trends will continue until the 8 dollars for an ounce of gold is achieved.

If an ounce of gold is worth less than 8 dollars then the government must buy gold until it's value is back to 8 dollars.  As the government buys more gold it's value goes up.  At the same time, the market is flooded with dollars which makes the value of dollars go down.  The government must continue to buy gold until the value of a dollar is back to 8 dollars for an ounce of gold.

The thing to take away is that to maintain the value of it's currency in a gold standard, the government sets the price first.  Then, once it's price is set, it let's the quantity of gold it buys and sells float according to the open market.  It's important to understand how this is different from most government spending.  Most government spending first sets how much it's going to buy (say number of cars for the FBI) it then let's the market determine how much it's going to pay(whatever the market price for a black SUV is).

Instead of anchoring the value of the dollar to the price of gold, Modern Monetary Theory(MMT) economists propose that we set the value of the dollar to the price of unskilled labor.  For sake of argument, let's say 8$ an hour for 1 hour of labor.  Just like in a gold standard where the government makes a permanent market offer of 8$ for an ounce of gold, in a labor standard the government would make a permanent job offer of 8$ for one hour of work.

With the dollar set to the labor standard, the government would set how much it's willing to pay any American citizen for an hour of work.  The open market would then set how much labor would accept the job offer.  If 3 million people are unemployed and are willing to work for 8$ an hour, then the government would hire 3 million people and find work for them to do.  If the private economy improves, and offers people more money to work for private firms, the amount of workers hired will go down.  If the economy declines, the number of people hired will go up as the private sector lays people off.  Inflation and budgets are automatically controlled as people move between government 8$ pay and private sector pay.

Doing this would provide the same advantage that a gold standard has which provides long-term price stability.  Deflation would always hit a floor, because as the labor market slacks, the government would pump money into the economy as it hires all the freshly laid off laborers.  Inflation could only get out of control in one unlikely scenario:  The private sector hires virtually all the labor on the market and still demands more.  I call this scenario unlikely because it's never been achieved in the united states with only the exception of World War II.  Even in that case, it required the government to spend massive amounts of money by buying items at the market rate.

In addition to long-term price stability, a labor standard provides the added benefit of giving work to people who are unemployed.  Another way that a labor standard is superior is that instead of unemployed people being idle, they can provide a benefit to society in whatever form the government desires such as in-class teacher assistants, librarian assistants, visiting the elderly and infirm, being part of a neighborhood watch, cleaning up streets, litter, and graffiti, etc.

Another thing that makes the labor standard superior to a gold standard is that labor cannot be stored.  Unlike gold, for every hour that a worker isn't working, value is lost that can never be regained.  So why would we "fully employ" gold that always maintains intrinsic value, but let labor stay idle?  If the private sector leaves labor idle, any value the public sector can get out of it can only benefit society overall.

Finally, the last thing that makes a labor standard superior is that it eliminates most unemployment and all the social ills that accompany unemployment.  Any unemployed workers that the private sector doesn't want, the government would hire if they are ready, willing, and able to work.

Of course, this diary is just using an alternate description of the Job Guarantee.  For more information on how that works, please see my diary: Job Guarantee:  Zero Unemployment Without Causing Inflation.  (I encourage you to read it before attacking the program.  Especially if you're going to use the tired, "zOMG! Socialism!" attack)  When talking about the Job Guarantee, most people get caught up in the social safety net aspect.  However, for those who worry about inflation, currency devaluation, etc, I wanted to write this alternative way of thinking about the same thing.  The dominant economic thought believes that inflation and unemployment must be balanced, but as I've tried to show here, Modern Monetary Theory shows that price stability can be achieved through full employment.