Sean King

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Knoxville, Tennessee, United States

Saturday, November 27, 2010

Foreclosure Fiasco

Treasury department says the foreclosure process is "more F'd up than we thought." Okay, they didn't actually say it that way, but that's what they meant.

Glenn Reynolds:

"Of course...[Obama's] not a Muslim. If he were a Muslim, he’d have to believe in something greater than Barack Obama."


Ouch.

Benjamin Powell:

The pilgrim's real thanksgiving lesson, and how private property saved them.

Stephen Green...

...repeats the false "debtors love inflation" meme.

As the folks over as Daily Reckoning have noted, this is only true for those very few debtors who actually retire their debts with the increasingly less valuable cash. But permanent debtors, such as the United States and most other sovereigns, not to mention many consumers and businesses, never pay down their debt significantly. Rather, they simply refinance it as it matures. Thus, with the prospect of sufficient inflation, that refinancing will happen at much higher rates of interest. And, given our current debt load, rates at even 1990's levels would be enough to sink us.

This idea that inflation benefits debtors has got to go.



UPDATE:>At the end of his post to which I orginally linked above, Mr. Green responds to my critique as follows:
When ten trillion dollars pays off half the national debt, or buys a pair of shoes, who gives a good got-dam about the interest on the re-fi?


I'm not sure that I understand his point (which is undoubtedly more of a reflection on me than him). I believe he is saying that, once the price of goods reaches a certain point, interest on the re-fi no longer matters.

But I think it does for the simple reason that, in a severely over-leveraged economy, skyrocketing interest rates will prevent prices from approaching the levels he supposes in the first place. When private sector leverage is great, spiking interest rates results in massive defaults by those debtors who can't print their own money (i.e., debtors in the private sector). And, where that private sector debt is significantly greater than government debt, such massive defaults can only be deflationary as money "disappears" in a reverse multiplier effect.

For instance, as Robert Prechter has noted, between September 2008 and June 2010 (or the period of QE1), the Fed (here in the US) purchased $2.46 trillion of bonds with money that it manufactured out of thin air. And yet, this increase by Fed was more than completely offset by deleveraging in the private sector such that total US debt outstanding declined by nearly $300 billion during the same period. In other words, the private sector paid down or wrote off nearly $2.75 trillion of debt during a period when the Fed was only able to "create" $2.46 trillion of new debt money to offset it. Most of this decline in total debt was due to write-offs and not pay-downs, so had interest rates spiked during the last year rather than continuing their decline, the numbers would be far, far worse.

However, in defense of those who argue that "inflation is good for debtors", it must be noted that there are some limited scenarios (which don't seemingly apply to present day Europe or the US) that might be the case. One such scenario occurs when government debt as a percentage of GDP is quite high, but where private sector debt levels (business and consumers) are much lower--for instance, where government debt is running, say, 100% of GDP, but total business and private debt only accounts for maybe 50% of GDP. In this scenario, governments can "steal" productivity from the private sector through modest inflation.

They do this by having the central bank purchase the government's debt with invented (notice I don't say "printed") dollars. These newly invented dollars, used to buy government debt, find their way to banks where they are subsequently loaned out to productive entities (businesses or those who work for them) time and again via the multiplier effect. Businesses and consumers readily borrow the available money from the banks under these circumstances because their current debt burden is modest and easily serviced. Thus, taking on more debt gives them an opportunity to grow their business or finance their lifestyle without significantly raising the odds of default. This multiplier effect results in the supply of dollars in the economy increasing at a much faster rate than the supply of goods, bidding up the price of goods and creating inflation. People's incomes and spending rise (in dollar terms if not in true spending power terms) as a result of this inflation, and this increases tax revenues in dollar terms. Thus, government receives more dollars with which to retire and/or service its debt, at little or no cost to itself, all thanks to this inflation which acts as a hidden tax on the public.

But, this scenario isn't possible where the productive sector of the economy is so debt laden that it already struggles to service its current debt load, and this is undoubtedly the situation that US and much of peripheral Europe finds itself in today. Private sector debt in the US (and much of Europe's periphery) dwarfs government debt many times over. The private sector in these countries is already struggling to service existing debt levels even with interest rates a unprecedentedly low levels (as evidenced by record high defaults, foreclosures, and bankruptcies and subsequent bank failures). Thus, in the present scenario, any additional liquidity injected by central banks through monetization of debt won't find its way into the economy via new/additional loans and therefore can't create inflation via the multiplier effect. This will be true for the EU for the foreseeable future regardless of whether Germany decides to go it alone or not.

That is, unless these governments do away with a central bank altogether and begin to truly print their own money, in the literal sense, using this new money to retire or service its debts (as in the Weimar Republic or Zimbabwe). While such a move to directly print money is possible and is certainly not unprecedented, even talk of it would instantly trigger fears of hyper-inflation, resulting in an almost immediate spike in interest rates in any newly issued private sector debt. This spike in rates would in fact likely precede the actual introduction of the printed money into the economy, or at least would coincide with it. Thus, increases in money supply due to the government actually, directly, and literally printing money to pay its debts would be immediately offset by drastically higher rates. While this rate spike wouldn't matter too, too much to the government (which can simply print even more money to pay its interest), it would have catastrophic consequences on the still over-leveraged private sector of the US or EU, both of which would be required over time to refinance already unmanageable debts at the new skyrocketing rates.

Unable even to make the necessary interest payment on the debt under these conditions, private sector defaults, bankruptcies and foreclosures would become the rule rather than the exception. Banks would fail at an even faster rates. Government expenses would increase drastically, (due to the cost of bailouts, funding the social safety net, etc.) while its tax revenues would collapse as the economy shrank (due to failed businesses going bankrupt). This would trigger the need for the government to print yet more money to pay its bills, which spikes rates further, resulting in a vicious cycle that decimates the private economy.

And, because the private economy's debts dwarf the government's, the money/credit exiting the system as a result of the collapse of the private sector dwarfs in dollar terms, at least for quite some time, the amount of new money printed by the government to pay its debts/bills. The result is a massive, write-off driven deflation of the entire economy.

Thus, unlike in the Weimar Republic or Zimbabwe examples, runaway inflation is all but impossible where the private sector is already over-leveraged (as is the case in the US and EU today) before the government intervenes. In short, before inflation could even gain a foothold in these countries, their governments would be faced with a deflationary collapse of their entire economies due to a collapse in the private bond market.

Depending how these governments react to such a deflationary collapse, runaway inflation might surface once things hit bottom--that is, once the vast majority of currently outstanding private debt is written off or paid down--but only once this happens. Thus, the key insight is this: When the private sector is as severely over-leveraged as it is in most of the Western world, inflation, if it comes at all, only does so after an extended period of deflation. And, this fact won't change for the peripheral EU nations regardless of whether or not Germany bails on them, and no matter how much they "quantitatively ease".

And so, I stand by my original statement: The idea that inflation is "good for debtors", at least overextended debtors, has got to go. Fortunately, significant inflation is a virtual impossibility in over-leveraged economies, as I have explained, but a government-generated fear of it (in the form of higher interest rates) may very well turn what would have been a slow, bearable, deflationary slide (a la Japan) into an outright deflationary collapse (a la the United States in 1930's, or worse). Thus, with all respect to Mr. Green, interest rates on the re-fi do matter in an over-leveraged economy, for they are the very thing that will prevent governments from taking (or at least successfully implementing) the inflationary measures that he anticipates. We need not worry about $10 trillion shoes anytime soon, at least not until AFTER a deflationary collapse (be it gradual, which is preferred, or sudden).

Should we really be spending our time...

...and money charging people like 77 year-old country singer Willie Nelson with possession? Er...seems like we've bigger fish to fry.

Did Stalin Commit Genocide?

So asks Ilya Somin.

Well, he did systematically kill millions and millions of people from undesirable ethnic and/or religious backgrounds. But, hey, that's not genocide, Ilya. Stalin was a Leftist. Genocide is when those on the so-called right systematically kill millions and millions of people from undesirable ethnic and/or religious backgrounds.

How Law Pivot Could Disrupt the Legal Field

Well, the legal field is ripe for disruption.

Unfortunately, I'm guessing the establishment will attempt to use ethics rules to preserve the status quo.

Regulation Benefits Big Business

In this case, big agribusiness.

TSA Giving You a Hard Time About Photographing or Filming a Security Checkpoint?

Here's some advice that might help.

The Right to Bear Arms

Woman killed man who shot husband during South Knoxville home invasion robbery attempt.

Ten Questions for Ray Kurzweil:

UN Seeks to Ban Free Speech

readwriteweb.com:
In a move that will give states and other parties who are offended by free speech precedent to further restrict it, the United Nations has again passed the resolution forbidding "defamation of religion."

This is its third time through the Byzantine U.N. voting process. Allegedly put forward to protect religion from, well, people saying mean things, the resolution was tellingly put forward by Pakistan on behalf of the Organization of the Islamic Conference, not a group renowned for its defense of minority religious practice.

So, take any stupid idea and call it a religion and, presto, no one can criticize it. Brilliant!

It's Like the Big Bang All Over Again

Physicsworld.com:
Circular patterns within the cosmic microwave background suggest that space and time did not come into being at the Big Bang but that our universe in fact continually cycles through a series of "aeons". That is the sensational claim being made by University of Oxford theoretical physicist Roger Penrose, who says that data collected by NASA's WMAP satellite support his idea of "conformal cyclic cosmology".

Contagion

The world is waking up once again to the fact that the European Union is on the brink.

In just the last few days, both Spain and Portugal have implemented severe austerity measures, insisting that they won't need a bailout. Gee, where have I heard that before? Let's see, maybe it was in Greece just days before they took a bailout? Or was it Ireland, which just two weeks ago insisted that it didn't need a bailout?

The problem is that no one believes the lies anymore, and so they are taking rational steps to protect themselves. With Spain's economy alone being more than twice the size of Greece's, Portugal's, and Ireland's combined, it's getting increasingly difficult for the EU to stem the tide.

And, pretty soon we need to start talking about Italy which, like many European nations, was immersed in anti-austerity rioting this week.

It's only a matter of time before Germany decides to bail on these guys, and then it's all over for the Euro.

UPDATE:> More than 100,000 march in protest of Irish budget cuts.

Forget the Demons, Fear the Demon Hunters!

vibeghana.com:
A 72-year-old grandmother suffered one of the most barbaric of deaths when she was burnt alive by a mob at Tema Site 15 after being accused of being a witch.

A student-nurse, who appeared on the scene, attempted to rescue the old woman from her ordeal but the woman died of her burns within 24 hours of arrival at the Tema General Hospital.

Five people who allegedly tortured and extracted the confessions of witchcraft from Ama Hemmah before drenching her in kerosene and setting her ablaze have been arrested by the Tema Police.

But the suspects, including an evangelist, denied the crime and claimed that they were rather praying to exorcise the evil spirit from the deceased, Ama, when the anointing oil they had applied to her body caught fire.


Read the whole thing.

And then there's this:
Okay, this isn't exactly one of those warm and fuzzy stories that we enjoy so much around this time of year. In fact, it's the complete opposite. It's creepy, chilling, and just downright heartbreaking. Last night, actor Michael Brea, who had appearances on the hit TV show Ugly Betty, brutally murdered his own mother.

And it's not even the fact that he murdered his own mom that's the most disturbing. It was how he explained it afterwards, saying that it was an act of God and that he wasn't killing her, he was killing the demons inside of her.


Again, read the whole thing. Freaky stuff.

Big Sale Over at 23andme.com

Learn your deep ancestry and genetic health risks for only $99 (plus $5/mo for updates). Normal price is $500, so this is a big deal. Makes a cool Christmas gift.

Wednesday, November 24, 2010

Megan McArdle goes "down on the farm"...

...in China:

There is nothing to cure you of the romance of farming like a visit to a poor farming community. As someone whose grandparents came off the farm, I have a healthy respect, even a reverence, for what farmers do. But it is hard, backbreaking work, unremitting and too often unrewarding. Rice cultivation is even more labor intensive than the produce-and-animal-husbandry of my ancestors. Anyone who can force themselves to get up in the morning and spend all day in a rice paddy deserves your utmost respect.

The farmers we visited are, we're informed, about average for China these days. They have running water, electricity, and cable television. Each person farms about 1.5 mu, or roughly a quarter of an acre, with three seasonal crops: two of vegetables, one of rice. The fact that they can get three crops out of that little amount of land tells you why China has so many people.


Read the whole thing.

Gene Therapy

Complete melanoma remission in mice was achieved with gene therapy to turn up the immune system against the cancer.

Wow!

Chinese government...

...worries about the price of bread in China.

Deflation

New home sales fell to near record low in Oct, and the average price is lowest in seven years.

Sunday, November 21, 2010

Climategate: One Year Later

Anthony Watts:
Sitting here now, one year later, it’s becoming difficult to remember the importance of that release of information, or even what information was actually released. Many were only introduced to the scandal through commentary in the blogosphere and many more came to know about it only weeks later, after the establishment media had a chance to assess the damage and fine tune the spin that would help allay their audience’s concern that something important had just happened. Very few have actually bothered to read the emails and documents for themselves.


Few have browsed the “Harry Read Me” file, the electronic notes of a harried programmer trying to make sense of the CRU’s databases. They have never read for themselves how temperatures in the database were “artificially adjusted to look closer to the real temperatures” or the “hundreds if not thousands of dummy stations” which somehow ended up in the database, or how the exasperated programmer resorts to expletives before admitting he made up key data on weather stations because it was impossible to tell what data was coming from what sources.

Few have read the 2005 email from Climategate ringleader and CRU head Phil Jones to John Christy where he states “The scientific community would come down on me in no uncertain terms if I said the world had cooled from 1998. OK it has but it is only 7 years of data and it isn’t statistically significant.” Or where he concludes: “As you know, I’m not political. If anything, I would like to see the climate change happen, so the science could be proved right, regardless of the consequences. This isn’t being political, it is being selfish.”

Or the email where he broke the law by asking Michael Mann of “hockey stick” fame to delete a series of emails related to a Freedom of Information request he had just received.

Or the email where he wrote: “If they ever hear there is a Freedom of Information Act now in the UK, I think I’ll delete the file rather than send to anyone. We also have a data protection act, which I will hide behind.”

Or the other emails where these men of science say they will re-define the peer review process itself in order to keep differing view points out of the scientific literature, or where they discuss ousting a suspected skeptic out of his editorial position in a key scientific journal, or where they fret about how to hide the divergence in temperature proxy records from observed temperatures, or where they openly discuss the complete lack of warming over the last decade or any of the thousands of other emails and documents exposing a laundry list of gross scientific and academic abuses.

Supercomputers will "fit in a sugar cube",...

...IBM says.

Liberty is Just Too Dangerous To Entrust to the Common Folk

PopSci.com:

The Obama administration is considering disabling cell phones in American cars, aiming to cut down on distracted drivers and cell-phone-related road deaths.

Transportation Secretary Ray LaHood, the nation’s preeminent anti-distracted-driving crusader, said in an interview on MSNBC yesterday that federal officials are looking at technology to disable cell phones inside cars.

“I think it will be done,” LaHood said. “I think the technology is there and I think you’re going to see the technology become adaptable in automobiles to disable these cell phones. We need to do a lot more if were going to save lives.”

Peace and safety first. Liberty last.

Cyborgs?

Scientist develop an artificial retina that's more capable of restoring normal vision. It's got a ways to go, but given the Law of Accelerating Returns, "bionic" vision will be here before you know it.

Follow the first link above for some cool pictures.

Hell Freezes Over

First the Mormons give a little on homosexuality, and now the Pope gives a little on condom use.

Whodathunkit?

Mogambo Guru makes a point...

...that I've made previously:
You can tell that I am scornfully dismissive of anybody who says that “inflation reduces the burden of debt,” because such a scheme only works for a debtor whose income keeps up with inflation AND who pays down the old debts with cash.

Otherwise, I can’t imagine how it would work, and nobody has ever explained it to me, as I would really, really, really like to know how I can borrow money at 5%, and then “reduce the burden of my debt” by borrowing money at 10% (interest rates having gone up in response to the inflation) to pay off the 5% debt just because inflation is high! Wow! Must be part of the “new math”!



Fortunately though, unlike Mogambo Guru, I don't think inflation is in the offing anytime soon, the Fed's best efforts notwithstanding.

Read more: The Madness of Inflating Away the Debt Burden http://dailyreckoning.com/the-madness-of-inflating-away-the-debt-burden/#ixzz15wVZ0QC0

The Bailouts Continue

This time, it's Ireland.

My question is which US state will be the first to fall? California is the obvious choice. Maybe a little too obvious.

If I Hadn't Seen It, I Wouldn't Have Believed It

TSA strip searches little boy in line at airport:



What kind of a fascist state are we living in?!

To make matters worse, there's apparently no reliable way of identifying pedophiles among TSA agents!

On a related note, John L. Smith bemoans the constant searches of his disabled, wheel-chair-bound daughter.

And then there's this heart-breaking story:
A retired special education teacher on his way to a wedding in Orlando, Fla., said he was left humiliated, crying and covered with his own urine after an enhanced pat-down by TSA officers recently at Detroit Metropolitan Airport.

“I was absolutely humiliated, I couldn’t even speak,” said Thomas D. “Tom” Sawyer, 61, of Lansing, Mich.

Sawyer is a bladder cancer survivor who now wears a urostomy bag, which collects his urine from a stoma, or opening in his stomach. “I have to wear special clothes and in order to mount the bag I have to seal a wafer to my stomach and then attach the bag. If the seal is broken, urine can leak all over my body and clothes.”
On Nov. 7, Sawyer said he went through the security scanner at Detroit Metropolitan Airport. “Evidently the scanner picked up on my urostomy bag, because I was chosen for a pat-down procedure.”

Due to his medical condition, Sawyer asked to be screened in private. “One officer looked at another, rolled his eyes and said that they really didn’t have any place to take me,” said Sawyer. “After I said again that I’d like privacy, they took me to an office.”

Sawyer wears pants two sizes too large in order to accommodate the medical equipment he wears. He’d taken off his belt to go through the scanner and once in the office with security personnel, his pants fell down around his ankles. “I had to ask twice if it was OK to pull up my shorts,” said Sawyer, “And every time I tried to tell them about my medical condition, they said they didn’t need to know about that.”

Before starting the enhanced pat-down procedure, a security officer did tell him what they were going to do and how they were going to it, but Sawyer said it wasn’t until they asked him to remove his sweatshirt and saw his urostomy bag that they asked any questions about his medical condition.

“One agent watched as the other used his flat hand to go slowly down my chest. I tried to warn him that he would hit the bag and break the seal on my bag, but he ignored me. Sure enough, the seal was broken and urine started dribbling down my shirt and my leg and into my pants.”


These stories are truly outrageous. I predict things will get violent sooner rather than latter if more reasonable heads don't prevail.

The UK Gets It

Charles Sizemore:
Mr. Cameron is giving Mrs. Thatcher a run for the money as the biggest revolutionary to hold office in Britain in the past 30 years.

While the United States under the presidency of Barack Obama continues to post astronomical budget deficits that put the long-term stability of the country at risk, Mr. Cameron is unleashing austerity measure on Britain that would make him look like a villain in a Charles Dickens novel. Bah, humbug!

The UK’s planned budget cuts of £81 billion ($128 billion) over four years are the equivalent of 4.5% of projected 2014-15 GDP. These are just the cuts, mind you, not the budget itself. The Financial Times calculates that similar cuts in the United States would be about $650 billion, equal to the projected cost of Medicare in 2015!

Saturday, November 20, 2010

Tyler Durden:

For us, the Fed’s decision to initiate a second round of quantitative easing was not really motivated by a desire to lead the United States and the world out of the current economic crisis, but rather from the need to save US banks and their top officials from the consequences of an unimaginable mess (or deceitful system), which was built up over at least the past decade. The only deliberate thing here is the decision to sacrifice precisely the very same Fed itself. This was decided not only to save big financial corporations and their leaders, but also to lay the ground for either a world Federal Reserve, a sort of SuperFed, or (if the former fails) at least one for a North American Fed that would rise out of the ashes left by the existing Federal Reserve, now destined to explode as a result of hyperinflation.


Read the whole article, "Currency Wars And The Fed’s Demise".

"Don't Touch My Junk":

Mormon Church Liberalizes Position on Gays

It seems that homosexual thoughts and feelings are now tolerable, but not actual gay sex acts.

Robin Phillips has some thoughts on the Mormon church's long and interesting history with sexuality, and he is disturbed of its evolving sense of morality.

Not to be overly defensive of the Mormons or critical of Robin, but evolving morality is a complaint that could be levied against every major faith. At least in this instance, the evolution in question is toward tolerance rather than less.

Chinese government...

...worries about the price of bread in China.

We're with the government...

...and we're here to help make sure that you don't kill yourself drinking:

Four Loko, a popular alcoholic energy drink, has been a hot topic for quite some time in media reports, which linked at least one fatal incident to drinking the beverage.

The U.S. Food and Drug Administration sent a warning letter on Nov 17 to request four companies to stop selling caffeinated malt alcoholic beverages including the one producing Four Loko.

The FDA said the caffeine added to their malt alcoholic beverages is an unsafe food addictive.

I'm pretty sure that last word should be "additive", not "addictive."

But anyway, given the tragedies that result from people doing stupid things, it's hard not to be sympathetic to such laws at the gut level. But then our brains should kick in and we should remember that if we are not free to be stupid, then we are not free. As Ronald Reagan said:
"Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves."

UK to Relatives of Deceased Nuclear Workers:

Hey guys, UK government here. We're really sorry for secretly mutilating the dead bodies of your relatives over a 40 year period in order to avoid any possibility of cancer lawsuits.

Why Am I Not Surprised?

CNBC.com:
Despite a long and deep recession, the collective personal wealth of congressional members increased by more than 16 percent between 2008 and 2009, according to a study released Wednesday by the Center for Responsive Politics.


Well, membership has its privileges, I suppose, such as a blanket exemption from insider trading laws. Sweet deal, if you can get it.

Two Medical Breakthroughs This Week?

First, a new drug is amazingly effective at decreasing LDL and increasing HDL.

Second, a simple surgery may cure those with chronic, drug-resistant high blood pressure.

Both look promising, but more studies are needed.

This Chart Should Worry the Short-Term Hyper-Inflationists:



Inflationists argue that the Fed's continued "printing" of money must lead to inflation--i.e., more dollars chasing fewer goods equals higher prices. But, that's not necessarily so since the Fed isn't actually printing anything. We constantly here about "Helicopter Ben Bernanke" being able to "drop dollars from helicopters" at will, but that's not actually how the Fed acts (or can act). Rather, the Fed can only indirectly to impact money supply by seeking to expand the amount of credit in the system, which it has tried to do with all its might for two years now without much success.

The Fed influences the amount of credit in the system by purchasing US Government securities (or in extreme cases other assets) with money that it is legally allowed to create from thin air. But this money doesn't belong to the US government or the private sector free and clear (as if it had been dropped on them from a helicopter). Rather, the bond that the government sold in exchange for the money must one day be repaid to the Fed with interest. So, all the Fed has accomplished in buying the bond is to increase the total amount of debt outstanding in the system beyond the level it would have been without the Fed's intervention.

That's all well and good, but it doesn't necessarily expand the amount of money/credit in the system to inflationary levels--that is, it doesn't necessarily result in more dollars/credit chasing the same amount of goods. For instance, as Robert Prechter has noted, between September 2008 and June 2010 (or the period of QE1), the Fed purchased $2.46 trillion of bonds with money that it manufactured out of thin air. And yet, this increase by Fed was more than completely offset by deleveraging in the private sector such that total US debt outstanding declined by nearly $300 billion during the period. In other words, the private sector paid down or wrote off nearly $2.75 trillion of debt during a period when the Fed was only able to "create" $2.46 trillion of new debt to offset it. And, this decline in total debt was mostly attributable more attributable to write-offs than debt being paid down.

Furthermore, the Fed's ability to purchase debt is not unlimited. There are practical, and more importantly political, constraints that limit just how much government debt it can purchase.

In short, QE1 failed to inflate the economy, and there's no reason to think QE2 will turn out differently. In fact, there are reasons to think the opposite, such as the chart above comparing US core inflation since the start of the burst of its real estate bubble in 2004 to Japan's core inflation since the start of the burst of its own real estate bubble in 1989. Like the US, Japan has engaged in "quantitative easing" many times over the last decade (and on a scale that dwarf's the US's), with the only result being...disinflation and even deflation, not inflation. This is because Japan's private sector deleveraged at a faster rate than the government could sell debt to Japan's central bank to offset it. The same thing is now happening in the US, and based on the above chart, the US appears to be right on track for a "lost decade" of deflation like Japan.

And, this is what one would expect when debt has reached a saturation point. With total US debt around 300 percent of GDP, debt servicing cost is a great burden even with crazy-low interest rates. The private sectors isn't clamoring for more loans these days, not matter how cheap the Fed makes them. It realizes that even a minor shock to the system, such as interest rates returning to the rather modest early 1990's level, would be enough to trigger massive defaults and involuntary deleveraging throughout the system. The only way to protect themselves is to hoard cash, which is exactly what both corporations and private individuals are doing. Hoarding and/or loan defaults can only be deflationary as less money/credit chasing the same amount of goods/assets must ultimately mean lower prices.

We are constantly told in the press that deflation is bad--far worse than inflation in fact. But I suppose that depends on who you are. If you are a banker who has overextended credit, you'd (contrary to popular belief) much prefer moderate inflation to moderate deflation. With inflation, the bank is at least likely to get repaid, albeit with less valuable dollars. The lower value of the repaid dollars will reduce the net rate of interest that the bank originally anticipated earning, but at least it gets repaid! Like all lenders, banks are concerned about the return on their money, but they are even more concerned about the return of their money. Inflationary environments typically result in fewer loan defaults than deflationary ones, which is one reason why Central banks, contrary to popular belief until recently, seek to create modest inflation rather than prevent it.

But, if you are an over-extended debtor, a deflationary environment is far better. Deflation will lower interest cost and reduce your debt burden. Deflation lowers your operating costs or cost of living over time. And if you're one of the unfortunate ones who gets laid off or goes out of business, your debts will (painful as it is) be forgiven in bankruptcy and you'll get a fresh start (a la General Motors).

In short, when credit has been overextended as it undoubtedly has over the last 15 years, inflation benefits bankers and hurts debtors, and vice versa for deflation. This explains why the Fed desires inflation. Fortunately, if Japan is any example, it will fail.


UPDATE:> For another look at just how ineffective the Fed has been at increasing money supply despite all its "money printing", see the blue line on this chart.


ANOTHER UPDATE:> Annual core US inflation drops to lowest rate ever in October.


YET ANOTHER UPDATE:> This video pretty much explains things in an informative and highly entertaining way:

Tuesday, November 16, 2010

Calling Out Lance Wallach

Some time ago I called out attorney Jay Adkisson for unprofessionally marketing his services by: (1) terrifying the public into thinking the IRS is out to get them, and (2) suggesting that his firm was the only one who knew how to keep them out of trouble. Regrettably, such marketing tactics are becoming more and more common.

Consider, for example, this article by Lance Wallach titled "The dangers of being 'listed'". The article is clearly designed to be alarming. For instance, the opening sentence begins, "Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble." He tells us the purported reason in the next sentence: "In recent years, the Internal Revenue Service has identified many of these arrangements as abusive devices to funnel tax-deductible dollars to shareholders, and classified these arrangements as "listed transactions." He goes on to impugn the motives and competence of other professionals who assist the public with such plans by remarking "[t]hese plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life-insurance commissions." Mr. Wallach clearly attended the Jay Adkisson school of self-promotion.

Would any fair person reading the headline and opening paragraph of Mr. Wallach's article conclude that it is only certain types of 419 plans, 412(i) plans, captive insurance arrangements, and Section 79 plans that are "listed"? Maybe, but I doubt it. Reading the opening sentence again, it seems clear the article was written to cause anyone "who previously adopted 419, 412i, captive insurance or Section 79 plans" to think that they are now "in big trouble" thanks to greedy advisors who have led them down the primrose path.

Mr. Wallach would also seemingly have us believe that other professionals are conflicted while he is objective. But, simply reading the virtual "autobiography" he provides at the end of the above-linked article shows that his own motivations in writing the article are hardly selfless:


Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and his side has never lost a case. Contact him at 516.938.5007,wallachinc@gmail.com or visit www.taxadvisorexperts.org or www.taxlibrary.us.


Mr. Wallach is clearly a self-promoter extraordinaire. Once we understand this, and once we understand how Mr. Wallach makes a living (he tweets that he is in the business of "[d]efending & protecting businesses & financial professionals from IRS audits, insurance & brokerage firms..."), then it becomes clear why he fails to emphasize in his article that not every 412(i) plan is a listed transaction, nor every 419 arrangement nor every Section 79 plan. In fact, contrary to his implication, 831(b) captive insurance companies are not listed transactions at all! Why does he not make these facts plain?

The reason is obvious. This article, and others like it, are clearly designed to drive inquiries to Wallach's firm. The more people he alarms, the more inquiries he receives, and the more likely he is to develop business.

Don't get me wrong, I have no objection to self-promotion, and I don't blame Mr. Wallach for pursuing his own self interest. But I do resent the alarmism that results from Mr. Wallach's lack of full-disclosure on these points, and I especially resent his implication that other advisors were improperly motivated by commissions whereas his own fee-based (?) motives are somehow purely benevolent.

Mr. Wallach is clearly a knowledgeable and respected professional, one who shouldn't need to engage in such unseemly marketing practices.

If Mr. Wallach or his defenders would like equal time, they are free to reply via comments to this post. I will be sure to post any such reply.



UPDATE:> Heavens to Betsy, when I said above that Mr. Wallach was a "self-promoter extraordinaire", I was understating things considerably. His self-promotion borders on megalomania. This from his website:

"Lance Wallach, Managing Director, is the nations [sic] leading expert on employee benefit plans, tax problem resolution and IRS audit defense."


That's a bold statement by itself, but that's not the half of it. Under the "life insurance" tab on the same website, I find this:

"Lance Wallach, Managing Director, is the nations [sic] leading expert on life insurance, annuities,
retirement & financial planning for business
executives, sports figures, entertainers, affluent
families and successful entrepreneurs."


Wow! And to think I've never heard of him till recently.

The only thing we can say with certainty that Mr. Wallach is not the "nation's leading expert" on is...grammar. (Oh wait, that last sentence wasn't very grammatical, was it?)

Monday, November 15, 2010

I Think They Get It!

Christian Science Monitor:
Representatives of the loosely organized tea party movement urged GOP leaders in a letter released Monday to abandon their fronts in the culture wars – issues such as gay marriage, school prayer, and abortion – and instead focus their new electoral power on individual liberties and "economic freedoms."
***
"If the Tea Party wants to remain true to its limited government principles, then it strikes me that the default position would be less government and more personal freedom, whether the issue being dealt with involves economics or so-called 'social issues,' " writes Doug Mataconis on the Outside the Beltway blog. "At some point this unnatural split in the GOP's view on freedom will have to be reconciled."


Yes it will. And fortunately, there's no reason why doing so should be all that difficult. The trick is simply remembering that the purpose of government in a free society is not to compel people to behave in ways you want, but to prevent people from compelling you to behave in ways you don't.

This means that we must be prepared to permit individuals to do things that we find ill advised or even morally or religiously abhorrent so long as they don't directly harm others in doing so. The only way to insure that government doesn't interfere with the way that we want to live our lives is to prevent it, as much as possible, from interfering with how others live theirs. A government powerful enough to impose our world view on others is, by definition, also powerful enough to impose some other world view on us.

Thus, I agree that conservatives should abandon the political culture war in favor of broader principles of liberty. But, that's not to say that we must remain silent on contested matters or ignore behaviors that we perceive as immoral or unjust. Rather, we must simply take the war to the streets and fight it block by block, or rather individual by individual, rather than in the halls of government. We must recognize that, if we are to convince others to adopt our way of thinking/acting while remaining true to our principles, our criticism must be so reasonable and so compelling that it is effective even without the aid of governmental coercion. We can no longer allow governmental compulsion to substitute for the hard work of persuasion. When we have abandoned this principle (and we too often have), we become just another of the many thugs fighting over the same governmental gun.

The only way to avoid such fights while still protecting ourselves from thugs who won't is for conservatives to disable the gun--that is, to shrink the influence of government drastically. A tiny weapon is hardly worth fighting for and can't do great damage even if won.

And, the only way to shrink government is for true conservatives to maintain a strong and lasting majority in Congress, not to impose our will, but to prevent the thugs from doing so. Conservatives cannot do that without building a big tent.

Fortunately, the way to build a big tent, as the last elections have shown, is to oppose government in almost all areas, even areas where we might prefer it to act, and doing this has the additional benefit of shrinking the gun. For instance, why do Americans permit government to become involved in the issue of marriage at all (gay or otherwise)? Shouldn't marriage be between a person and his/her betrothed, and perhaps his or her God or church? Why does the state get a say? By removing the state as the final arbiter of marriage, and returning that responsibility to individuals or religious institutions where it belongs, conservatives can both shrink government and build a big tent party without sacrificing their moral or religious principles.

All this is to say that, if conservatives are to long govern, they must agree to move the culture war from the political battlefield to the social one. Conservatives must take up the hard work of persuading individuals to voluntarily behave in their desired ways, rather than seeking to force them to do so through governmental action. Taking this approach, conservative culture warriors can vehemently oppose abortion, and support adoption, but they cannot advocate that the state should compel all pregnant mothers to carry their babies to term. They can favor individual school prayer, but they cannot advocate that the state compel people to pray a specified collective one. They can discourage stem cell research in a variety of ways, but they cannot insist that the state forbid it. They can oppose gay marriage (if they wish), but they can't seek to ban it.

Only when conservatives disable the gun will they long control it.

A near-earth black hole that's only...

...31 years old. Wowsa.

Farragut Gets Term Limits

Yippee!

Retail Sales Climb More Than Expected in Oct

Or so says the Commerce Department.

Curiously, the Consumer Metrics Institute's Daily Growth Index shows just the opposite, with sales bottoming in Oct. How this divergence resolves itself over time will be telling.

Glenn Reynolds...

...was right again:

MY PREDICTION ABOUT AMERICA SUDDENLY BECOMING “UNGOVERNABLE” IF OBAMA FAILED has certainly been borne out. Now Newsweek asks: Is the Presidency too big for one man? Nope. Just for the inexperienced guy with no management experience that we elected. As Jay Cost wrote a while back “America is not ungovernable. Her President has simply not been up to the job.”


The dude is like psychic or something.

Wednesday, November 10, 2010

Whence Farming?

DNA evidence sheds light on the origins of European farming.

Msgr. Charles Pope...

...argues that the Universe's order is evidence of God's existence. This is a common argument, but as many have repeatedly noted over the years, orderliness cannot logically be evidence of a "first cause". For if God created an orderly universe, it must be because some part of God is orderly. And if the fact that something is ordered is evidence that it was created or designed, then God himself must have been created or designed. Thus, if we accept the "argument from order", we must conclude that God was created, as was his creator, and its creator, etc.

The "argument from order" simply kicks the can down the road. As with most logical proofs of God's existence, it results in an endless regression that ultimately explains nothing.

That's not to say that there is no God, only that he/she/it can't be proven through logic.

Licensing Madness:



I found the above video via Instapundit, and I was immediately reminded of this quote from Atlas Shrugged:

“Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal not in goods, but in favors—when you see that men get richer by graft and by pull rather than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed."


No, I'm not suggesting that barber licensing laws are harbingers of the end of the world, but when one in three Americans must obtain a license from the government in order to work, we clearly have a problem.

Monday, November 1, 2010

High Tax Rates Benefit Big Business

Why? Because they don't actually pay them, while the rest of us do. So high rates create yet another barrier to entry and give larger businesses another competitive advantage:

By employing strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich," Google cut its taxes by $3.1 billion in the past three years - moving most of its foreign profit through Ireland and the Netherlands to Bermuda.

Google's income shifting helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.


Is it any wonder that Google's founders (and most other billionaires) are big Democrats?

Something tells me that my small business couldn't employ the "Double Irish" or "Dutch Sandwich" strategies, and would probably be hounded by IRS agents if it tried.

The End of Liberty:



This video is a little too...propagandistic for me, but the facts it puts forth really aren't in dispute. And since the facts are frightening enough by themselves, I think the video would be even more effective without the scary soundtrack and sometimes over-the-top narrative.

One thing it does really well is demonstrate how/why increased regulation benefits big business at the expense of smaller, family-owned ones.