Saturday, July 23, 2011

Not Understanding Frightens Me


I seriously disagree with President Obama when it comes to civil liberties. I do disagree when it comes to Afghanistan. I don't think the process of going to war with Libya was flattering.

However, the left wing blogs I read are on fire with what the President was offering the other side on a silver plate. So he is right: He is willing to take a lot of heat. In fact, should the Republicans have agreed, there's a good chance this compromise would have made him a one-term president. You know, he has no spine and stuff like that.

So, what is the Right thinking? Do they want to bluff until the very, very last minute? When is the very, very last minute?

Comparing this to EU politics is frustrating and funny at the same time. EU politics are difficult to understand, but everyone is willing to compromise. We just got a compromise that included 17 countries, the ECB and the IMF. Most of the leaders of these countries are taking a lot of heat over what they agreed to.
US politics, on the other hand, are trivial to understand. But the two parties are unable to compromise. And while I would very much like to appear bi-partisan, it is very, very hard to argue that the responsibility for that is with both parties.

So what will happen? Well, the US is not going to default anytime soon. If in doubt the president will argue along the 14th amendment, just like President Clinton already proposed.

The real problem is not this deficit talk. Should some rating agencies, let alone all of them, downgrade US debt, a lot of institutional investors will have to get out of US papers. That might very well start an avalanche. But it probably would not.

The real problem is that US is unable to compromise for the foreseeable future. Just like California, whole US is paralyzed. And borrowing 40 cent of every dollar is already the worst deficit in the developed world, by far. I argued before, in my parable, that the US interest rates will remain low for an extraordinary amount of time. And then, suddenly, they will spike into the sky. It will be swift, but the aftermath will not be painless.

The story becomes really twisted when you think of Euro bonds. The reason most investors bet on US papers is that there is no alternative. It's a ponzi scheme: Investors do not buy 15-year US papers, because they think that they will get back the money from the US, but because they think that other investors think, that other investors think (insert loop), that these papers can be sold to other investors.

Should the EU (have to) introduce Euro-bonds there will be a sudden alternative. The Euro is already 20% more expensive than it should be from a PPP point of view. It's a bit crazy, but the EU's strength could be the trigger for the US's sudden decline. And, of course, that decline would devastate the EU as well, and the rest of the world, including China. Add some Saudi vs Iran war with frightended Israel in the center of it and remember Pakistani nuclear weapons in terrorists' hands. I'm not a pessimist - I just like to think this chain reaction through ..

What will happen? Nothing during the next few months or years. Eventually, however, FED and ECB will start printing money like mad, because that is the only way out of this mess. The last time problems of that scale were solved with inflation, we got a world war. Not solving this with inflation isn't a solution, either. The only thing I can guarantee you is that we won't get a world war. We'd rather get a decade of economic decline, hunger, misery and civil wars.

Anyway, I should remain careful with predictions, because I still don't understand the Republicans' grand plan. I hope there is one ...


  1. The Republicans grand plan is to oppose Obama and the democrats. They don't care about what it takes to win. We're not a country with a sharp political divide, we're a country who's in a cold civil war.

    Default, bankruptcy, and such things are what is required, in the far right GOP mentality, to save the country from "socialism." (Socialism here being pretty much what every other country on earth calls "civilization".)

  2. Due to gerrymandering, well over 90% of congressman are reelected. You are much more likely to lose your seat by being too moderate and someone more extreme beating you in the primary - both on the right and left. So a congressman doing something that is bad for the country & his/her party may still be doing something in their short-term political interest.

    As horrible as the current situation is, I don't think the US's "worst deficit in the developed world" is quite as obvious as you do. E.g., if you consider Greece part of the developed world. And the US's debt to GDP is high but not near worst by any means.

    Perhaps it is also a question of how far along the process is. I.e., nobody I saw on CNBC thought the Greece solution was permanent - does it last for a couple of months or until 2013? I.e. is the US passing a same-old, same-old debt limit increase really a solution?

    The argument is not that the current Republican behavior is not stupid; rather than it is not that much worse than business-as-usual stopgaps. And is at least trying to address the Achilles heel of democracy - spending public monies on "bread and circuses" to appease the masses. The solution to US or California or Greek financial situation or the middle east should be a rational compromise. But in the real world, perhaps things will just careen along until things are so bad that something radical *has* to be done.

    Similar to Enlightened Dictator vs Democracy, "no new taxes" is inferior to what could and should be done. But it is arguably better than what would have been done by politicians.

    In a world where, in addition to the Middle East, people are starving to death in a country with nuclear weapons, I think the opportunity for violence in the next couple of decades is low but not zero.

  3. Hagu, when I wrote 'worst in the developed world' I was referring to the 40 cent per dollar that is debt. This is the most important number, in my opinion. 100% of GDP debt is not necessarily a problem. Nor is 10% of annual GDP. The problem is that 40% of all spending is debt, and the inability of the US leaders to change this.

    These debt talks aren't a problem. Most probably there will be some solution soon. If not, the President will use the 14th amendment. And even if he doesn't, the aftermath of default will make congress pass a package a few weeks later, at most.

    The real problem is that we have proof now that even under the heaviest pressure the parties cannot come together to reduce the deficit.
    Add the fact that few economists think that the US economy is going to grow strongly in the coming years.

    The Greek solution is not permanent, but it's not such an existential problem. If necessary the EU could carry Greece along for forever. Greece is less than 2% of EU GDP. That would even work for Greece, Ireland and Portugal combined for a time.

    The real problem are elections and parties that don't like the EU. If enough such parties can get elected, the EU will be politically dissolved. That's not even a big immediate problem for the citizens. It would just marginalize EU's influence on the 21st century. I wouldn't like that, but small countries can often do well, too, as we know.

    Alternatively the EU can always introduce Euro bonds to solve the immediate crisis. That seems the current direction. Euro bonds without meaningful restructuring of the EU would turn out to be a critical medium-term problem that si hard to solve.
    However, Eurobonds do solve the current crisis - instantly.

    The problem with Pakistan and the Middle East is that they depend on the US. Should the US retreat over night from these parts of the world (for whatever reason), it will produce unbearable economic and political problems.

    The problem with China is that they still depend on US for exports. In a second world-wide great depression, China would not be able to keep the economy growing at 8%.

    Alternatively, the only way to do it would be massive government interventions that would increase the already too high inflation. Inflation means big problems for poor people to eat. And poor people that cannot earn enough money to eat, are the root of all revolutions. And a revolution in China, as much as I would welcome it on the one hand side, spells economic disaster for the rest of the world.

    These are the chain reactions I worry about.

  4. It might be a cold civil war here, but it's not between Rs and Ds. That's just the shadow play for the camera. The real fight is statist vs. libertarian, Big Brother government vs. its own people. It's a tension that exists in most governments, really. It's just coming to a bit of a head here because the underlying math of deficit spending and exponential functions are accelerating the dysfunction of government on the whole.

    And perhaps the rest of the world is happy with socialism, but that's not what America was founded on. Otherwise we would still be British. Some Americans might want it, but perhaps that's another cold civil war; the Euro-wannabes vs. the Old Schoolers (patriots). There's even a pretty clear geographical divide along those lines, as it happens; the coastal and northeast areas are pretty solidly Euro-wannabe, and the rest of the country prefers the American way.

    I do see a curious parallel in MMO space, actually. It's the difference between "equal opportunity" and "equal results" that we see in fights about "welfare epics" and the elitism we see in a great many discussions, from WoW leveling speed to EQ rose-tinted glasses. Those who have worked the hard way (equal opportunity) don't want socialism (equal results) to intrude on their happy little achievements.

    *Those people* shouldn't have what *I* have, because they didn't put in their time.

    But, but, it's not *faaaaaaaair*, so gimme gimme!

  5. If Germany is socialist, then I misunderstand that term, Tesh. :)

    I also think the reason for independence was not to escape the UK socialism. UK's welfare programs were non-existent in 1776, I think.

    Anyway, to spend, but not raise taxes is useless. It doesn't even help to reduce the government. The Atlantic wrote about it recently.

    [..]deficit spending is worse than a tax increase, because you've got to pay for it eventually anyway, with interest. Meanwhile, you've created in the public mind the illusion that the level of government services they're consuming is cheaper and less burdensome than is in fact the case. If you hold the line on taxes but not the deficit, you're making big government more palatable.

    I agree that there's a similar divide in MMO space. But there are many more divides there and I think the real divide here is simulation vs. game. That might just be my personal point of view, of course.

  6. *shrug* Just riffing off of Numtini up there. I no more equate "socialism" with "civilization" than I do "skill" with "epics".

    And yes, spending is the problem, not revenue.

  7. You both have extreme positions, Tesh.

    If you want a substantially different country, you can eliminate the deficit just with spending cuts. It is possible.

    Here is the US 2010 budget

    You need to save $1.12 trillion.
    Tell me what you want to cut, if you want. I am honestly curious ;)

  8. Statist vs. Libertarian? I'd add a "with all due respect", but frankly that would be a waste. Libertarianism is stupid. It is founded on the absurd notion that we can all just say "freedom and liberty" and it will be so. But it will not. If the government does not tell us what to do, the market will, or the corporation, or the mob boss. People desire power and inevitably some are better able to gather it than others, and from that comes oppression. We cannot eliminate it, but we can minimize it. A representative government can exert power, but in turn the people have power over it.

    I'd meant to save this for a post, and maybe I'll just repost it later, but I offer to you the story if cheese and liberty. It is 1940 and Britain needs an army, because of Nazis. Armies need food and cheese is an excellent one, so the British offer this excellent idea: ration and tax cheese, in order to have enough to fight the Nazis. Alas, there are a few too many libertarians. "Cheese and Liberty!" they cry. They explain that liberty, not more statism, is the source of freedom, and it sounds good, so we all agree to resist the oppression of the British government and reject the cheese rations.

    There is no army and the Nazis win the war. They in turn take all the cheese. And a few people as well. We write to the Nazis and explain freedom, but they reject the idea, no matter how convincing our arguments. Perhaps we would have been better off with a bit less cheese and a lot less Nazi, but alas, we wanted our liberty, and all of it, now.

    It's not a nice idea, that we cannot have total freedom, but it is true. Someone or something will always attempt to control us, so what we must do is ensure that we choose carefully, to pick leaders who are oppressive enough to protect us from those who are oppressive too much.

    The idea of a libertarian world is as absurd as a communist world of everything shared. It sounds nice, but it is fundementally at odds with human nature.

    As for equal opportunity vs. equal results, I suggest that you're being a whiner yourself. I doubt you were born an orphan in a gutter who built a business empire from a scrap of string you found. Instead, I imagine you had people to feed you and offer education, some of which may have even been paid for or regulated by government. So often I find that those who speak of "equal opportunity vs. equal outcome" have themselves been the beneficiaries of unequal opportunity and resultant unequal outcome. And when someone suggests a public school for that orphan in the gutter, you attack it as socialism and "equal outcome", when in fact it is the "equal opportunity".

  9. In a way, freedom is like capital. We can spend it or invest it. I can give up a little freedom now for a lot more later. I might offer some freedom up so that the FDA can mandate that food not be poisonous, and in return I gain the freedom to buy anything I wish, secure in the knowledge that it is safe to eat, a valuable freedom. Without that investment I would instead have a great deal more fear and uncertainty and would have to spend my trust very carefully. Maybe I'd only buy from General Mills, knowing that they have unpoisoned food, but who else? I wouldn't know, and the risk is too great to find out, so I eat General Mills and nothing else. I spent all my freedom on sheltering the producers and had none left to shelter myself, finding myself poorer for it. Meanwhile the prodicers are no better off with their earlier freedom, as competitors cannot arise when trying a new product risks death.

  10. Oh, my.

    Political talk is about as useful as debating someone's favorite color. For example, nothing I can say will change Tish's asinine philosophy even though it is blindingly obvious that the choice comes down to government vs corporations, and which of those two you would trust with your life. The former would conceivably care about your well-being (and vote) whereas the latter could have every economic incentive to ground you to dust. If it were profitable to destabilize the US economy, every business would have an obligation to their shareholders to do so.

    The profit motive works great when it aligns with the public's long-term interest. It is an insidious, corrupting force when it doesn't align. That is why you have car companies the government saved from bankruptcy complaining about higher fuel standards when making shitty cars for the next 50 years obviously is not going to work. It would be better if these car companies were in a race to see who could make the most fuel-efficient car, but they aren't and won't ever be because the shareholders wouldn't stand for 1% profits until the breakthrough compared to 5%+ profits today.

  11. Az, if you're going to take swipes ta my argument, you could at least read it and make sure you're not arguing against what you think is there rather than what I've written.

    Kleps is right, though, pure, unadulterated liberty (total freedom) isn't healthy either. There's got to be a balance. Thing is, both political parties are just arguing more about how to split the money pie, not whether or not they need to return it with the citizens or not to take it in the first place. They are pretty similar along the statist/liberty axis.

    Both of you, I'm not arguing for either extreme. I'm not a pure corporatist or statist (I don't trust either of them), nor am I a pure libertarian (that way lies chaos). I'm pointing out the battlegrounds that are more important than R vs. D. Nils is right, there needs to be a balance, but the arguments we get filtered through the media aren't about the things that need balancing, they are about petty egos and false hyperbolic positions.

  12. Oh, and Kleps, I do appreciate that you didn't drag my... heritage into this. I would note, however, that you're a bit misinformed about how I treat orphans. For future reference, I'll not delve into too much detail, but let's just say that they are surprisingly tasty for such skinny little buggers.

    Nils, you might find Boehner's angle to be interesting, though as is so often the case, the "truth" is probably less about what actually happened and more about who one chooses to believe.

  13. Tesh, I watched both press conferences, including the questions of the press.

    Now, Boehner might have a few points. Maybe the President is sabotaging the negotioations with last minute demands. But what for? Anyway, maybe that is true, maybe it is not. Who knows?

    Let's take a look at the points in the link you shared:


    I don't think that's new. I think the left insisted on tax increases since the very start to balance the spending cuts.




    Of course he did. Every single president in history tried to get a clean increase ...


    Obama says the same,. so what?

    In the end it comes down to tax increases. I think it is wrong to balance the budget in a way that makes non-rich people have less and rich people have the same. I think everybody should give something.

    In the last 10 years Germany grew its economy faster than the US. With more than double the tax rate. So don't tell me a little tax increase on the rich kills the economy.

  14. @Tesh: I must admit to total confusion on the "heritage" statement; from my perspective I cannot tell if it is sarcasm or not or whether there is a known heritage which I could have dragged into this.

    "They are pretty similar along the statist/liberty axis."
    I suggest a new graph with a pair of axes: one is state/not-state while the other is defend liberty/not-defend liberty. This is how we can reconcile the British state with its cheese ration and claims of liberty, by seeing that it is state, but it is state against a non-liberty state.

    Or we could go with one axis and make it democratic representation/not. It may also be a useless ideal (much like that of the communist or libertarian), but I believe that freedom comes from a representative state with sufficient power to defend the lives and freedom of its citizens. Sadly, the representative part is where we have so much trouble these days, with political games, an apathetic and ignorant populace, and fear-mongering by all sides.

    It is our, or at least my, since we're inundated with Europeans here, Constitution, a government document, which protects right to free speech, bear arms (as part of an ambiguously worded militia), assembly, and the like. In contrast, non-government groups have been more than happy to censor, disarm, and disperse. Not that government has been innocent, if I had to pick one single horrible failure of the Obama administration, it has been his apparent love of indefinite detention, but we can more easily vote out a government than a business. Or to put it how we might argue it, if a government censors we call them fascists and do something about it, while we call a corporation fascists and shrug, because it's just the free market.

  15. Last night I ran into a girl who said she was a conservative, but listened to NPR and hates FOX because she thinks they present the issues terribly. We talked a bit and agreed on the importance of government-run/funded education. I left me wondering what makes me a liberal and her a conservative if we're agreeing on what is clearly a socialist program while at the same time we're also agreeing that there are necessary roles for the market. Note that I said agreeing, not compromising, since anything can be compromised but not everything can be made to agree.

    Maybe the problem is that we're all turqouise, think the other person's claim that it is blue/green is wrong, but have been trained to think that turquoise is a weak political stance. I've taken to calling everyone a socialist, but to different degrees, since I've never met a market purist who was not crazy, lying, or evil. Of course the same would apply to any socialism purist.