Draining the Swamp

Here is a provocative post by Charles Hugh Smith in which he asserts that no fixes are possible, the system must inevitably crash and burn, etc. Charles is part of a cottage industry that has been making this prediction for, in his case, about ten years. Jeremiah recalls hearing the same predictions during the civil rights struggle, then again during the eighties, and – of course – the millennium.

Virtually none of the thousands of emails I receive present a few policy tweaks as credible fixes.

We write “provocative” because, while Jeremiah often feels America has passed the tipping point – his goal is to find solutions. Here are four big ones that all attack the root cause, namely too much money available to too many crooks in Washington.

  • Repeal the federal income tax. The central government should be funded by tax collection at the state level. That’s how America worked for the first hundred years. This would reduce the size and power of the central government.
  • Bring back Glass-Steagall, or something like it, to keep retail banks from speculating. Allow investment banks to go under, if they make bad bets. If they’re “too big to fail,” then break them up under monopoly law. This would avoid a repeat of 2008, and also curb some moral hazards.
  • Speaking of Carter Glass – end the Fed’s dual mandate and restore its original role as a lender of last resort. No “taming the business cycle,” inflation targeting, or other hocus pocus. This would curb moral hazards like hedge fund welfare, and also make it harder to hide bad fiscal policy.
  • Transition Social Security toward a defined contribution system. That way, the account would follow the contributor, and the system wouldn’t depend on a permanently young population. This would deprive Washington of a big slush fund, and also avoid a fiscal crisis.

Charles is correct insofar as no one has the political will to make these changes, but – there’s a difference between lacking ideas and lacking nerve. Our job as voters and activists is to keep the solutions top of mind, and then demand leaders who will implement them.

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Gini Index Revisited

We have reported on income inequality before, and linked to Ironman’s wonderful chart, here. Now, since Nick Hanauer has warned of an impending revolution, we felt we should take another look at the data.


This is twenty years of data, adding the latest two points. It is from the census bureau’s table H-4, household Gini for all races. Note that this is zoomed a little, since the range is actually 0.00 to 1.00.

Does this look like “pitchfork time” to you? No, it looks much more like Martin Armstrong’s view – inequality is a scapegoat for the government’s mishandling of economic policy.

The pensions created for those in government drive the cost of government up exponentially with time

The bureau’s own language is telling. For 2011, they describe a 1.5% increase in inequality (from 0.470 to 0.477). Don’t panic – the “annual percentage rate of change in inequality” fell back to zero for 2012. Can “seasonally adjusted” be far behind?

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Drubbed by China, Again

The OECD is back with another of these humiliating studies. This one is on “financial literacy” among high school students. The U.S. summary is here, the full report is here, and this nifty chart is from the Financial Times. The OECD bar chart, like the one we presented before, is on page 62 of the report.


The report states, quite reasonably, that high school students are about to face important financial decisions. For example – if you spend six figures on a degree in journalism, how long will it take you to pay off the loan? If high school teaches nothing else, it should teach how to make that decision. Jeremiah described the college education scam here, and here.

More than one in six students in the United States does not reach the baseline level of proficiency in financial literacy.

The funny part is – China is notionally a communist country. Nothing in Marxist Leninist theory teaches how (or why) to compute Net Present Value. We are reminded of that Economist piece in which the interviewer asks, pace John Cleese, “not much of communism is it?” to which the party spokesman replies – communism is what we say it is.

See also: The Road from Serfdom

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Gaza News Roundup

Jeremiah always encourages you to find diverse news sources and different points of view. Regarding the ongoing violence in Gaza, you can hear the Israeli bias on Fox, and the Palestinian bias on NPR. An evenhanded roundup of opinions is here, at Al-Jazeera.

The firing of rockets from the Gaza Strip has led to a situation that threatens to cause a spiral of violence and counter-violence

For the record, Jeremiah tends to agree with the Germans. Gaza suffers for the provocations of Hamas. Al-Jazeera tends toward the other opinion, but they deserve credit for presenting both.

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The Ecology of Money

What heartless person does not favor raising the minimum wage? Certainly, everyone wants to give underpaid workers a break. Unfortunately, minimum wage laws cause unemployment. See here, and here. We would like to believe wages can be raised by fiat, with no side effects, but that’s just wishful thinking.

You may think that raising the wage simply means less profit for the capitalists, but it’s not hard to see the link with unemployment. Employers will raise the bar for hiring new people. They will look to reduce staff, and maybe use automation. Finally, not all Subway franchisees can absorb higher costs. Some will shut down – losing those jobs, plus jobs with their suppliers.

Taleb takes on the whole school of what he calls the Harvard/Kremlin top-down planners who advocate policies that try, with awful unintended consequences, to decrease the fragility of things.

Jeremiah is not here to lecture you about economics. He is, rather, a connoisseur of inconsistent thinking. What would happen if your local parks authority wanted to dam the creek, and make a trout pond? Well, everyone knows that the park, the creek, and the trout, are part of an ecosystem. People would protest.

Nassim Taleb writes about how ecosystems are naturally resilient, left to their own, but may behave unpredictably if you disturb them. We cite Taleb here, because for him this is a general rule about systems. Americans, while we have respect for ecosystems, do not recognize the same rules apply to the economy.

In fact, Adam Smith discovered the interdependent network of commerce long before one was discovered in nature. Charles Darwin, lacking a word for ecosystem, wrote “political economy of nature” borrowing Smith’s term.

Policy makers today are supremely confident of their ability to prune and shape the economy. They print money, fix wages and prices, and bail out failing companies. Voters have faith in this ability, because they want to believe the government can help them. Jeremiah is not so sure. Imagine the Army Corps of Engineers run amok, damming rivers and leveling mountains.

Everybody knows “you can’t fool Mother Nature,” but we continue to believe in the free lunch.

See also: You Are Worth More

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Safe for Democracy

As you may know, demonstrations are planned to demand free elections in Hong Kong. This seems to have popular support, and may be permissible under the Basic Law. Coverage in FT is mainly about tactics – should protesters blockade the Central financial district, or no?

Pro-democracy activists fear that even with open voting, the list of candidates will be dictated by Beijing.

Comments on the topic have tended toward a referendum on democracy itself, and the assorted evils of the West. Here are some highlights:

  • Democracy is a scam whereby the West can remove inconvenient leaders and replace them with stooges.
  • Elected leaders in the West are idiots.
  • The latest survey shows Chinese respondents have a high level of trust in their government, versus a sharp decline for America.
  • The West got rich through exploitation, not democracy.

Jeremiah is not the best spokesman for American foreign policy, but he would like to assure his Chinese readers that we are sincerely pretty cultish about democracy. Our leaders are idiots, as the comment says, and we elect them regularly. President Obama has said, “go win an election,” on several occasions, as if that were the wellspring of legitimacy. If democracy is a poison, we imbibe it ourselves.

Brain surgeons are not elected but they rise through their merits. So why should the stupid but popular … have the legitimacy to lead a nation?

Our enthusiasm for democracy goes all the way back to the Roman Republic – and Greece, the cradle of our civilization. We believe that democracies are less likely to wage war, at least among themselves, and history reinforces this. Of course, Rome degraded into a dictatorship, and Egypt elected Mohamed Morsi – but our faith in democracy is undimmed.

Jeremiah insists that the people must have a right to choose their leaders, although he sometimes wishes this right came with an IQ test. Also, the more a government is constrained by laws, rights, courts, activism, and the media – the better it can withstand the occasional idiot. This brings us to the central paradox of democracy or, as we say, “you get the government you deserve.”

The Hong Kong activists are energized, and likely to vote responsibly. When people must fight to vote, they take it seriously. We Americans, who vote in low numbers and for stupid reasons, are badly suited to a democracy.

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Phony Class War

Here is a fun piece in Politico, facetiously addressed to the 1% from one of their own. It warns that a revolution is coming, and “we may not have time to board our jets and fly away to New Zealand.” This is a clever lie. The real elites will not only escape the revolution – they are in on it. Blood will be shed, as it always is, between the poor and the bourgeois. The Washington elite – they of the surveillance state and the militarized police – will merely consolidate their power.

The author seems to be warning his rich buddies that they should stop hogging all the money, as if that would free some up for rest of us. This is the zero-sum fallacy, once again. Jeremiah, and Lenin, sees it differently. Do you really believe that you are poor because Mark Zuckerberg is rich? He’s a billionaire, after all – think of all the poor children his money could feed.

The political forces blame the rich and this merely creates class warfare with no resolution for the future. Even confiscating all the wealth of the so-called rich will not sustain the system.

Here is a different perspective, from Martin Armstrong. He writes that big government, not the rich, is what has bankrupted the West. Whom to believe? Here are some things to think about:

You are not poor because of Mark Zuckerberg. You are poor because America has an incompetent and corrupt government. When people write about revolution in Politico, note that they are pitting us against each other.

See also: What Do You Want for Free?

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