Thursday, December 16, 2010


I'm pretty bearish on the US over the long run. Timing is everything, however, so selling US Treasuries may not be a good idea, as 'wrong' and 'too early' are the same thing, in spite of what historians think (TBT is an etf short US Treasuries).

I know, many people have thought things would peter out before, and we are wealthier than ever, so the optimists have historically been correct, but things change. In the 1970's people were sour on capitalism and were wrong. I remember talking to my old Northwestern professor Robert Eisner, a famous Keynesian, and he noted that in the 1980's there was basically a huge re-education among his kind, that Marxism/Socialism was not going to overtake capitalism, and capitalism by itself does not self destruct. This was not a minor shift in opinion, but a major one, because the pessimists expected another Great Depression all the time. It is easy to forget that back in 1975, 1980, the Marxists thought it was the endgame for capitalism. Ten years later when the Wall fell, they basically retreated to Scandinavian-style welfare states as their objective, quite a change over ten years.

I'm sour on American democracy, and as the American Founders noted, every democracy has committed suicide, ergo, we need a democratic republic. The difference between a democracy (where we are going) and a democratic republic (where we started) is that the masses are kept one-step away from decision-making in a democratic republic. The masses are stupid, having an average IQ of only 100, a whole standard deviation below that of your average college grad of 115, and this is below that of George W. Bush, who most people think is the world's biggest idiot--they have no idea what average, let alone below-average, is. People basically think profits and social value are inversely related, so basically most successful innovators and entrepreneurs are parasites, much as the Nazis thought Jews were parasites because they were successful, as opposed to being a key component of pre-WW2 German excellence. The masses are morons, and pandering to them is like letting your kids stay up late: no one is happy the next day. We are basically making policy for everything real-time via Nielson ratings.

The US has been living off Ponzi schemes (Social Security) and a growth in government too long. Our federal deficit is 10% of GDP, and as interest rates are historically low, there is no incentive to try to reduced this. The states have similar problems, making this much worse than it appears. Further, the debt is significantly underreported because of off-balance sheet items like social security and pensions. No one can turn away the simple redress of paying out huge amounts to people who's only claim is being pathetic. The problem is that while we have an appetite for a certain amount of GDP, the ability to get that out of GDP via taxes is not straightforward: there is a Laffer Curve. Sure, you can raise taxes to 90% and people will still work; they just won't tell the government about it at the same frequency, as the rampant tax avoidance in high-tax countries like Greece and Italy shows.

Consider the following expenditures that recently ran across my browser. They exemplify our inability to say 'no':

Washington DC schools are an abject failure: poor performance, $20k/child expenditure. In response, voters ousted the reformer mayor in favor of the status quo, and this week a new $100MM secondary school building was proposed.

The Pigford settlement decided to give $4.6B to Black farmers for discrimination. They never proven an actual case of discrimination, it just is proven statistically, and through threats of being called racist. Given that criteria--disproportionate success--bank loan recipients (of course), econ PhDs, traders, quants, computer programmers, and bloggers, all discriminate against black people, meaning, I am daily awash in rampant discrimination, and thus all of my acquaintances are racists. I find this accusation offensive, because calling someone a 'racist' is the modern-day version of calling someone a witch: demeaning and nonfalsifiable. An estimated 95K plaintiffs will receive payments even though only 33k black farmers existed during the time Pigford targets, implying a remarkable extra-effort by racist FDA bureaucrats. To scutinize this give-away is considered evil, because the Chinese are giving us the money to spend.

The Obama-McConnell tax bargain with an extension of a tax credit for ethanol that costs about $6 billion a year, and with an extension of a tariff on ethanol imports. Ethanol is so uneconomical that Congress supports it three different ways — with a mandate for its use, a tax credit to subsidize it, and a tariff to keep out competitors. Even Al Gore and Obama science adviser Stephen Chu now admit this is a boondoggle, but it continues. Sugarcane yields about eight units of energy for every one unit invested to grow, harvest and convert the cane into ethanol; corn is 1:1.4. So, of course, we put tariffs and quotas on the more efficient sugarcane to help American farmers. In October, the EPA approving an increase in the amount of ethanol — a hydrophilic, corrosive, low-heat-content fuel — that can be blended into the U.S. gasoline supply from 10 percent to 15 percent.

The 9/11 first Responders Bill allocates $5B to cover 50,000 responders and survivors, creates a mandatory spending program until it sunsets 10 years from now. basically, free medical for everyone who did anything related to the cleanup of the 9/11 disaster. If you go to the 9/11 site, you'll see a bunch of medical studies, with lots of analysis of methodogoly and 'post traumatic stress', but nothing demonstrating any effects on lungs, etc. (see here.

These are all examples of spending when you think you have an infinite amount of money: you don't make priorities, you simply spend on pathetic target groups to show you are doing something. You know, like the $220MM BP spent on sand berms to catch oil in the Gulf that captured 1k of the 5MM barrels released of the spill. They had to do something according to The Mob.

As long as interest rates are low this will continue. Like the 'affordable housing initiative' that targeted historically disadvantaged groups--who were historically denied housing because they could not afford it--it was impossible to change this without something major happen (alas, the FHA has yet to get the memo). So, something major will happen, and it won't be an internal re-evaluation, it will be solved via inflation or default. Meth addicts don't turn around until they hit bottom.


Taylor Conant said...

Hi Eric,

Were you using TBT symbolically or were you actually suggesting people buy TBT?

Do you have any concerns about TBT being "broken" or being constructed in such a way that it might not accurately track the (inverse) performance of US Treasuries over an extended period of time?

Is this the right time, or not? Why (or why not)?

I share your sentiments.

Anonymous said...

The question is, how are we supposed to prudently invest and save in this environment? I have even heard plans for the Gov't to take over 401ks in a swap for bonds. Argentina did something like this.

Seems like burying gold and bullets is the best option. Well the bullets may be paranoid. I hope.

Guillermo said...

I think it's pretty clear from the way you usually write that the call to buy TBT is symbolic, and I wholeheartedly agree.

I was never an enemy of government spending on an ideological level. I'm not the kind of person who rails against big government complains of bloated public sector because they are too big a piece of GDP. My main complaint is very simple: I don't trust them to be able to allocate resources efficiently from a top-down approach. That is, they can't throw money at the problem and expect it to have an NPV > 0.

While the situation generally makes me sad about the lost potential, I always try to find a bright side. I've been an avid follower of the wastewater industry for a while, and I've seen an increase in the rate of privatization recently. That's a bright spot. Wastewater treatment is an industry with the potential to have a huge value-added to the economy, and I think privatization will allow for high value-added capital spending that the public sector was unwilling to provide. In addition, proper upkeep, energy recovery and anaerobic digestion techniques have the potential to bring down operating costs tremendously while bringing positive externalities to surrounding areas.

I don't know much about other government-run industries, but if this one is representative, a budget crisis that forces state and local governments to sell-off assets that can be better managed privately might just be a silver lining.

Anonymous said...

Funny, but after decades of capitalism ascendant, average real income is the same as it was in the 70's.

Don't worry about the masses -- they believe what they are told to believe, and vote accordingly. The plutocrats are firmly in command.

Anonynmous #5 said...

I don't know, even the Kenyan Usurper Anti-colonialist Marxist Socialist President hasn't been able to raise taxes. Not even on millionaires, not even on bankers, not even with the backing of the most powerful people on the planet (poor black people).

Things may not be as bad as you think. Wealthy elites still have a fighting chance, even in our dystopian society.

Anonymous #5 said...

By the way, you generally seem like a very intelligent, thoughtful person. I'm always flabbergasted that you seem to think that political correctness and racial guilt directly led to the collapse of Lehman Brothers and the $180 billion taxpayer bailout of AIG. The level of ideologial commitment here is astounding.

It's not like the collapse of high-profile financial institutions was some under-the-radar event. And in terms of cause and effect, the only way you can blame the government for the failures of these capitalist enterprises is the "cooties" theory of intervention, by which a misguided government intervention in one area necessarily impairs decision-making everywhere else. But a financial system that can't deal with a housing bubble without seriously damaging the entire global economy can apparently never fail, it can only be failed. It was the government's fault for triggering an inevitable housing bubble that market participants had no way of predicting.


AHWest said...

Good comment overall, but I disagree with the idea that the problem is with the mob and its average intelligence. The problem is the dominant philosophy and ethics that our age has embraced. The average man in 1776 embraced a worldview that encouraged them to fight for individual rights and liberty. Today's dominant philosophy is much more collectivist/altruist in nature, and its embraced most ardently by folks with 120+ IQs, educated by Ivy League schools, and reading the NY Times.
Time to re-read Atlas Shrugged.

Anonymous said...

Governments are not some passive channel of the masses, or the elites for that matter. They are conspiracies.

Public opinion matters some, but that's true even in a dictatorship. Successful dictators care a lot about public opinion.

Anonymous said...

Blacks are less intelligent than other races. Are we supposed to believe this does not have an impact in the real world?


The average person does not resent the "rich" so much as they resent those highly intelligent people who learn to use the law to expropriate wealth or arbitrage moral values. Both activities work to destroy the society as it had previously existed.

The most intelligent, successful crooks fastidiously abide by the law rather than break it. In fact, they often lobby to have the laws written to their advantage.

Or we have the case of the new entrepreneur who opens up a brothel. Wonderful! Free exchange and economic growth! Yet not everyone sees it that way, and I think for good reason.

After taking into account these crony capitalists, it is clear that many of "the rich" are in fact parasites who do real damage to total production and wealth.

Eric Falkenstein said...

AHWest: I agree that egalitarianism is more problematic than a lack of intelligence. However, egalitarianism directed via plebiscites (direct democracy) has to make sense to someone who is not very analytical, making it much worse (eg, the oil berms, ethanol, make sense at 30k feet).

Anonymous #5 said...

The average man in 1776 embraced a worldview that encouraged them to fight for individual rights and liberty.

In 1776, this oh-so-principled lover of individual rights and liberty also *owned slaves*. Our amazing founding fathers solved the problem of slavery by engaging in short-term compromises that kicked the can down the road for a few decades until there was a bloody war with more than half a million casualties.

Blacks are less intelligent than other races. Are we supposed to believe this does not have an impact in the real world?

I have a hard time believing that the impact can be honestly said to include things like a $180 billion government bailout of the world's largest insurance company. Or a massive real-estate bubble in Ireland or Spain. Or a collapse of the Icelandic currency.

Anonymous said...

The Jews were not a key part of the German Industry / they were harmed primarily due to the World Jewish Congress (declaration) / also due to the horrific habit of massive slaughter that the Europeans had fostered for hundreds of years. If it had not been Jews, it would have been another group. Unfortunately, the Jews were associated with being an independent power structure, and they were not believed to assimilate into society.

Anonymous said...

From the film, Airplane,...

Looks like I picked the wrong day to quit smoking.

Looks like I picked the wrong day to quit drinking.

-Lloyd Bridges

Looks like I picked the wrong day to short TBT.

-Eric Falkenstein

Anonymous said...

Anonymous #5 said:

You have no idea of the power of black people in this country. Though they only constitute about 15% of the population and less of the potential electorate (because many black males in the south have been disenfranchised due to felony convictions), they are basically the ruling class of the world (I'm not sure how all the black males in prison or disenfranchised contributes to their immense power, but trust me and Eric, it does). The whole world financial crisis is due to CRA, and the reason we have CRA is because Congress voted for it, and the reason a majority white Congress (nearly 100% white Senate) voted for it is because of this immense power black people wield. Now I know some of you skeptics may wonder why these powerful black people have such high unemployment rates and so little money and such high incarceration rates and poor health and longevity compared to whites. Again trust me and Eric, this is all part of their devious plan to take over the world.

BTW TBT is one of those f*cked up ETFs like USO which tend to go down in the long run regardless of what is happening to the underlying asset they are tracking. It can be smart to short TBT when rates are going down (since you benefit from the downward tendency), but you never want to go long TBT. You'd think a guy who writes a finance blog would know this.

Anyway, it is pretty obvious to the smart money traders that bonds are terribly oversold now (though today's action relieved some of that) and will probably continue to be oversold until next year, for seasonally oversold until next january. I'm not terribly fond of long anything, but I moved aggressively into intermediate treasuries (5 years or so) this past week. I expect rates to plummet in January. This recession has a long ways to go and rates are going to stay down for a long while. Inflation is irrelevant if the Fed is holding rates down. What matters is yield and roll-down. You can capture these and then be out of bonds (into cash) by the time the Fed eventually raises rates in a few years, then out of cash and into stocks once stocks drop to reflect the inflation and high-real-rates that are inevitable down the road (at least Eric got that right).

Eric Falkenstein said...

Insinuations I'm a flaming racist because I think Pigford's a fraud and housing policy was influenced by racial politics is to be expected--I'm against preferential racial politics, which makes me a 'racist' to the racial spoils industry. Indeed, that's what makes Black groups so powerful, because it is so easy to label people as racist, and this is quite damaging. The JournoList leaks showed that a Liberal tactic was to explicitly start calling random people racist to change the debate, and put people on the right on the defensive. It works if you are appealing to the masses, who I have no interest in pandering to. If you think that way, fine, I'm not running for office; you're wrong and I don't care to convince you why.

Further, making the racist accusation is bad enough, but under the cowardly shield of 'anonymous'? If you believe something and ashamed to state who you are, you are either an intellectual coward or not sure of yourself. Man up.

But I do not think that African Americans are powerful in the sense of dictating policy. The various Black lobbies, like the Teacher's union, and UAW, and all the others, are merely symptomatic of sympathetic groups to which our government officials do not have the courage to say 'no'.

Anonymous said...

Excellent point Mr. Falkenstein. We need more intelligent, stalwart defenders of truth to come out of the closet and take a stand against the PC mafia that is destroying our nation.

Anonymous #5 said...

I don't know if eric's last comment was directed at me or not, but I don't see where I'm insinuating that anyone is racist (especially because it's such an unproductive debating tactic; and as a result I tend to let comments to the effect that blacks are stupider than other races slide, just because there are so many other statements that are blatantly wrong but that don't seem to be as morally tinged).

I think it's fascinating that the financial crisis seems to have only strengthened your belief that government is always the problem, never the solution. I think it's wrong to say that the housing bubble was caused by the community reinvestment act, but even if I grant you that we have a chain of events that follow -- an explosion of lending, securitization, credit derivatives, housing bubbles in other countries, investment bank blowups, etc etc -- none of which has anything to do with do-gooder egalitarian liberalism. And yet time and time again the story is that everyone in finance was doing the best they could, and the real villains are the community activists -- how could they not have known that they would create an unforeseeable housing bubble that would crash the global economy? Those guys are so disingenuous!

I'm not implying anyone is a racist, I'm just annoyed because I'm a bleeding-heart lefty who has spent a lot of time studying economics and right-wing arguments, and it's frustrating to see that these discussions only pretend to review the overall body of evidence. In actuality it all comes down to prior core values (egalitarianism is bad, do-gooding is suspect) and evidence that supports these values is repeatedly trotted out while vast quantities of other evidence are ignored. In short, confirmation bias. (I find the discussions of the financial crisis especially frustrating because the contradictory evidence is especially salient, you have to go out of your way to ignore it.)

I know this is your blog but I admire a lot of your writing which is why I bother to leave these long pointless comments when you get political.

Anonymous #5 said...

And finally, are there any groups of people that the government does have the ability to say no to? Other than people who work for hedge funds, is there any other part of the population that is disenfranchised and cut off from political participation? Maybe investment bankers? The defense industry? Energy company CEOs?

As a benchmark, Acorn is so powerful that they were put out of busiess by a punk kid with some misleadingly edited videos.

Michael Meyers said...

Eric, Eric!

This latest post is way too pessimistic. While democracy is messy, it has a tendancy to self correct. Maybe you're too young to appreciate how past troubles have been worked through over time. Don't give up!

And most people are NOT morons, even with low scholastic IQ scores. Your PhD biasis is showing. There is more common sense out there than you think.


PS- the idea that wages have not increased since the 70's is NOT true.... while take home wages have not increased, total income, including benefits, has increased significantly.

Eric Falkenstein said...

Michael: I hope I'm wrong too. But if I'm not, I don't worry too much, because people like flux as much as stasis. Surely 1950's kids were more whiny than any generation, and they were the most well-off in the history of mankind. When I think about how much my ancestors moved around in the 1800's to get here, they all had tremendous stories. For the past century it's been easy, but people can adapt.

Dave said...


I think you underestimate the American people a little here, and I'm not sure your elitism is warranted in this context. I'm not attacking elitism per se (I remember your defense of it), but to argue that America is screwed because the masses have an average IQ of 100 elides two key points: 1) many of our most destructive policies have been concocted by those with extremely high IQs, and 2) the majority of Americans often opposes destructive elite policies.

A couple of examples: it has been the elites, not the masses, who have pushed an immigration policy (importing millions more poor, unskilled workers who will consume more in government resources than they pay in taxes) that makes no economic sense. It has also been the elites who colluded on the recent tax & spend bill, while the masses (via polls and the Tea Party) have expressed strong concerns about deficit spending.

Your idea that we are moving from a democratic republic (a form of representative democracy) to a form of quasi-direct democracy driven by snapshots of public opinion doesn't seem accurate either. Consider immigration as an example again. If government policies were really judged by popularity, The American Dream Act wouldn't even be getting a vote this weekend. And the TSA would have been disbanded as soon as videos of agents patting down girls your daughter's age hit the Internet.

You don't need to be a Mensa member to understand the dangers of living beyond your means, which is why so many average Americans have expressed concern about the deficit and the debt. The problem isn't the average Americans as much as it is dishonest elites who pander to them and make emotional appeals.

Our budget problems aren't so complicated that they can't be clearly explained, in broad strokes, to someone of average intelligence. Chris Christie has demonstrated that if you explain fiscal problems clearly and honestly, you can retain the support of a majority of voters even if you are proposing some austerity measures. I think if a president laid out the national fiscal picture in the same way Christie has in NJ, he would find similar support for reducing the deficit and the cutbacks and tax increases that would require.

Anonymous said...

"The Jews were not a key part of the German Industry / they were harmed primarily due to the World Jewish Congress (declaration) / also due to the horrific habit of massive slaughter that the Europeans had fostered for hundreds of years. If it had not been Jews, it would have been another group. Unfortunately, the Jews were associated with being an independent power structure, and they were not believed to assimilate into society."

What an ignorant comment. Jews weren't a key part of German industry? Emil Rathenau founded the German equivalent of General Electric. The discoveries of German Jewish scientists such as Fritz Haber also fueled German industry. German Jews were also highly assimilated, often more culturally German than Jewish (as in the case of the Warburgs, for example).

Patrick R. Sullivan said...

' generally seem like a very intelligent, thoughtful person.'

Which is the exact opposite of how you come across. You seem committed to exhausting every logical fallacy known to man.

dmfdmf said...

"People basically think profits and social value are inversely related, so basically most successful innovators and entrepreneurs are parasites..."

The source of this belief is the Zero Sum Premise (ZSP). It is an invalid generalization whereby people see that in order for the lion to survive the gazelle must die, the cattle eat the grass, for my football team to win your team must lose, etc. The general conclusion (and life principle) is drawn that in order for one to win someone else must lose and thus success is taken as prima facie evidence of exploitation. Of course, under Capitalism ZSP is not generally true and it is the job of the intellectuals (IQ > 115?) to teach and explain it to the masses but instead they choose to use it to exploit them.

Re no: The end of the road of the inability to say no to growing irrational demands is the destruction of the dollar and some type of dictatorship. I don't see how its avoidable now.