A brief look at the middle east

Israel's losing. Sorry, but Billmon's got the right of it when he notes this is a political dance of 'small wars' - wars for political gain, and not the wars of extermination of which we in these United States seem enamored. The "winner" is the one who was doing best when the cease-fire is forced from above. And best is not least determined by comparing what is done against what was supposed to be done.

Israel, that vaunted powerhouse militarily, has withdrawn from the towns in which it was fighting.

For what it's worth, I don't see a ceasefire imposed soon. I think the Israelis need/want to get SOMETHING out of this - enough to get at least some of their terms, and appear to still have teeth. Because if a cease-fire is imposed tomorrow, they come out looking like, well, like everyone else in the middle east.

I expect the fighting will go on another week or so at least. And I expect Israel to try and do something to 'pull it out' - to once more make all jaws drop and have everyone acknowledge that this nation is one that is too dangerous to fully awaken its fury.

I just hope they keep it in Lebanon.

forest, trees

OK, I'll say it. The question of whether we're getting ready to enter higher inflation or a depression and how severe it'll be and all that is a secondary item. Much less the question of 'what is inflation/deflation'. Oh, they're still fascinating to me and I'll be playing with them, but these are NOT THE PRIMARY FOCUS at this time.

Here's the deep skinny, boys and girls. We're going to have a recession. The questions are how soon, how deep, and how long. The inflation/deflation muttering is a feeder for the main questions.

We are entering a recession.

Housing sales (quantity) are declining. Prices are still climbing (though slower) but total dollars (price times quantity) has flatlined. (National Real Estate Association reports - and let's face it, they're cheerleaders for sales, not doomsayers.)

Foreclosures.com is one of several places noting that nationwide, active foreclosures are up almost 50% from this time last year. And to make it worse, there's a backlog in almost every state of foreclosure filings awaiting processing. They range from 10 to 500 percent of what's already filed, and I can't get enough hard data to guess what the actual nationwide backlog might be, but again foreclosure.com estimates the 'real' number is between 100 and 150% increase over this time last year.

Bankruptcy filings are on the rise. Nationwide they're up 20 to 25% (estimate based on various summation reports) from last year. Georgia reports that there's a backlog of filings THERE as well. Georgia may be an exception - it is, after all, consistently one of the leading five states in foreclosure filings - but it's still worthy of attention.

Inflation (price) numbers are climbing unchecked. Bonds aren't showing a trust that the Fed's got it under control. The last quarter's report for sales of manufactured goods shows declining production and constant or increasing inventory - a glut of stuff unpurchased.

Frankly, the question in my mind isn't how long till it hits, it's how long till the one we're entering is recognized by most people. Remember that "official recognition" is done by the NBER looking BACK, not forward.

Oil is creeping upward. I'm guessing we'll cross the $3 per gallon line and not look back by the end of August. (Yes, I know we passed it in some areas a year ago. I'm speaking nationwide now, where it's seen as a barrier touched but not yet broken.) That's assuming nothing gets 'more special' in an oil-producing region.

Food is, well, if you've been to the grocery store you know. Even if you're a Walmart shopper, the grocery bill's gone up noticeably.

And wages aren't going up to match. Without money and without a way for the majority to reasonably borrow money, businesses aren't going to sell. The 'solutions' are for prices to fall or for wages to climb.

All of these are reaching the critical point - have reached it, as it's beginning to show instead of being "if this goes on." So by my measure, we've entered a recession. And it will last till prices drop or wages climb (or both).

The only questions remaining are how deep and the how long. For what it's worth they're related but not conjoined - it's possible that it can be shallow and long (or deep and short), though that's difficult.

I think "how deep" is going to depend on the bankruptcy and unemployment numbers. My GUESS on that is that it's going to be visible and painful but not catastrophic. Oh - and I have this sneaking suspicion that while a lot of unemployed will go bankrupt, a lot of bankruptcies won't be due to unemployment.

I think we'll see a huge spike in bankruptcies from the 'upper middle/lower rich' classes. These are the folk who had incomes high enough to speculate on housing. They used some alternate mortgages to get second houses or pieces of condo developments with the plan of selling them at a profit to pay for their own houses. What they're not prepared for is the change in the bankruptcy law plus the changes in income tax law. Yep, I'm about to digress, but I'll keep it brief.

Standard mortgages are "non-resourced". That means that if you default on the debt, the only thing the creditor can seize to pay off the debt is what the debt was for - the property. However, a lot of special mortgages are "resourced". In other words, the creditor can place liens on (try to seize) OTHER assets if the primary asset is insufficient to cover the cost.

Say you have a $200,000 mortgage and you've payed zero principle. You default. The bank sells the property for $100,000. Non-resourced, the bank eats the other $100,000. Resourced, and the bank puts you into receivership (seizing just about everything you own PLUS a portion of your wages) till the other $100,000 is recovered.

Taxes - Foreclosure losses are treated as income. Let's take that example just above - the bank foreclosed, and you have $100,000 remaining. This time it's non-resourced so the bank can't touch it. The IRS considers it income - income that's ineligible for capital gains writeoffs. Add it to the wages and tips line, kids.

Here's the way the whole thing will go together for most people. Let's assume they did an 80/20 loan - 100% in two loans - on a $200,000 house. The 80 is almost certainly non-resource, the 20 is resourced. They've paid zero principle, and the bank seizes the house and sells it for $100,000. Let's assume the bank is honorable and applies the recovery at 80/20 - it might even be requiered by law, but as I understand it this is only true in some states. So there's $80,000 on the resourced and $20,000 on the non-resourced still remaining. The bank seizes $20,000 of the owners other goods and income, and the IRS taxes the owners for $80,000 of surprise income this year. The ex-owners aren't paying as MUCH as they were before (yet), but they've incurred a debt they're not getting out of short of bankruptcy. Notice that if the bank has its choice it'll put the foreclosure recovery wholly againnst the non-resource debt. That way instead of $100K + $20K, they get $100K +$40K. Sure, the owners "only" have $60K in surprise income to be taxed, but losing $40K of other property is unlikely to be a pleasant experience.

The thing is, it's the wealthier households who are able to do this. But if they're wealthy ENOUGH they're going to be able to weather the losses or hold the properties through the decline - unless they got greedy. Oh, there'll be families earning $50,000 who scraped together the gamble, but they'll be exceptions. No, you'll see a wave of upper middle/lower rich getting the shaft this time.

And that's going to play hob with businesses and with unemployment. And in the long run with politics as well. (If a conservative [R] is a liberal who got mugged, a liberal [D] is equally a conservative who lost his job in a recession.) So much for the digression.

I expect unemployment to exceed 6%. I think the nation's resilient enough that it'll not break double digits, but if it reaches 8% I'm going to get worried about complications.

I think I'll ponder more, but that's my first thoughts.

a Hello to Bayers.

Austin Bay got me to join Trent Telenko of WindsofChange.net in writing an analysis of the missile that hit the Hanit. I figure I might have a visitor or two check in here, and I want to welcome you all. And for my regular readers (all two or three of you) I invite you to check the others out.

You should all realize that Trent and I are pretty close to polar opposites on the political spectrum. We've sat in a room discussing politics without killing each other - or even threatening violence - so I don't guess either of us could call the other rabid supporters. We just vehemently disagree on some core assumptions, and these in turn frequently give us different conclusions.

Which is why Austin asked us both to write it. He thought that where we agreed could be considered solid, and the dual viewpoints of our difference could be enlightening regardless of your starting point.

Anyway, to the new folk, welcome. I am a generalist. Everything interests me some. So you're going to find cabbages and kings if you go back far enough in the archives. And if you decide I'm not your cup of tea - either by my bias, or because I write too infrequently, or because of how I write - it was a pleasure having you visit.

Republican Georgia?

Just food for thought.

If Tuesday had been November's election and all the splits were counted for a sole candidate of 'that' party, Georgia's statewide elected officials would be Democrats. See the numbers here.

Voters in Democratic primaries outnumbered Republicans in the statewide primary counts by about 6:5. Yep, this isn't just in the Governor race (where 13% of the Republican voters voted against Perdue) but in the "Big Deal in the Media" Lt Governor race. Reed and Cagle between them didn't pull as many votes as the four candidates for Democratic Lt Governor Nominee pulled.

I think it's worth a lifted eyebrow. It does cause a bit of disconnect with the 55-60% approval rating the present governor has in the polls.

back to "inflation"

I think it fair to note that the austrian school of economists don't ignore credit in their money definition. They just call it a money substitute. Overuse of credit is supposed to be part of the normal cycle.

My problem with the monetarists - the austrians - is that they pick and choose data that supports them, and for the most part ignore things that don't sustain their positions instead of modifying the theories. For what it's worth I've seen this of Keynesians as well, but I'm picking on the austrians right now.

The best example I can think of right now is to start with this article from the Capital Speculator, which could get one all excited. It shows that during the 1970s, when there was a surge in CPI, it was preceded by a surge in the 12-month growth rate of M2 - money supply. An almost classic example of the Money supply is Inflation and CPI a consequence argument. Unfortunately, this (PDF FILE) is a page from the St. Louis Fed that shows the same data since 1989. There have been surges in the M2 at least as great - without a match in CPI. In fact, the most extraordinary change in M2 comes near the END of the 2001 recession. Cause and effect go which way?

I'll keep poking at it, of course, but it's pretty obvious that the followers of Mises aren't 100% right. Unfortunately neither are the Keynesians...

surrounded by idiots

I begin to realize PT Barnum was the master of understatement. "There's a sucker born every minute" indeed.

Three of Georgia's counties held a referendum on FairTax. That's HR25 - you'll have to search at http://thomas.loc.gov to get it, I can't direct link a cgi-search result.

Anyway, Cobb, Gwinnett and Fayette counties held referendums on FairTax, and over 85% said, "Yes". Suckers.

FairTax. Everybody increases their takehome pay by about 25%. Everything they buy goes up by about 10% - food, clothes, EVERYTHING. In addition, some things jump by 30% - things like rent and cars and gasoline and doctor visits.

Here's the core of the con. The following are exempt from paying the sales tax:
a) Any "legitimate" business expense;
b) investments;
c) anything purchased to be resold;
d) fees (expense based), dues, and gifts/contributions collected by non-profits and charitable organizations.
AND
Everybody gets a check from the government equal to 23% of the national poverty level. At the present ~20,000 that's about $385 per person every month.

BUT
The government is expected to collect as much as it did before all the income taxes (including corporate) and estate taxes and all of that were eliminated.

Now to really catch the con you have to remember that somewhere over $200,000 you quit spending as much of your paycheck on "stuff to use" and more of it on "investments". As a result, this is FairTax in a nutshell:

Corporations quit paying taxes.
The Rich quit paying most taxes.
The Poor still don't pay taxes.
Who is left to make up the difference?

well, given the median household income of those three Georgian counties, 85% of the people will say, "Me, Me."

idiots.

Another inflation number

Recall from the last post that the Austrian school of economists says that inflation isn't the change in price, it's the change in money supply. Now I'm a bit confused as to what is considered money in their school, so I looked at it in two fashions.

First, I looked at the M3 rate - which is no longer reported as of March of this year. However, for as long as it lasted the number's been pretty clear. 9 to 10 percent inflation annually - a 9 to 10% increase in M3 every year - for the past 20 years.

But it's my opinion that some things not measured are also money. For example, loans and derivatives of loans outstanding. Off to the treasury - office of the comptroller (occ.treas.gov) for information.

During the Clinton reign, the total Austrian inflation was 6-7% except for 1998 (almost 10%) and 1999 (just under 9%), with 2000 going back to 6.7%. Under president Bush the rate's been 8 to 9%.

Let me be upfront - I could be double-pulling numbers. In other words, numbers in M3 may show up in the other values as well. And for that matter, I know the austrian argument would be that outstanding debt may be related to velocity (frequency a dollar is used) instead of supply. However, it's my opinion that such a loan is a creation of money instead of a recycling of it - it's the paying off of the debt that starts the recycle chain.

Regardless, it's pretty obvious that by Austrian definitions, inflation has been just under 10% for quite some time - a lot less than the official government rate of ~3%. (Of course, that's massaged too, but that's another post.)

Now, IMO there can be good reasons for money supply to increase. Let's start with 1000 people producing 1 good apiece and a money supply of 10,000. Nominally, everything costs 10 units. Now if the population increases to 2,000, each still producing 1 good apiece, we have two choices. We can deflate the prices to 5 units each by keeping money supply constant, or we can inflate the money supply to 20,000 and keep prices constant. Each has benefits depending on circumstances not considered. All else being equal I prefer a constant in prices, so I consider it a 'good reason' to inflate the money supply.

But our population isn't increasing at 10% per year, so the increase in money supply is... wrong.

economic theorizing

Yep, back to economics. I feel as though I'm getting a bit of understanding, but I'm not there yet. Hence, a return. This time, though, I'm not playing the predictive game. I'm noodling about with a monetary theory. Actually it might be a broader theory than that, but let's leave the label alone for now.

I need to start with a definition and a formula.

definition. Money is anything that is used as a representation of barter between parties displaced in time, space, and intervening trades.

formula. QxV=M, where Q is the aggregate Quantity of goods and services, V is the value of the nominal median of the aggregate of goods and services, and M is the aggregate money supply.

Now, the Austrians say that inflation is an increase in M, and whether the equilibrium is maintained by an increase in Q, V or both is immaterial. The Keynesians say that an increase in V is inflation, and again whether the balance comes from Q or M is immaterial. I personally am getting real tired of the word inflation (and its antonym deflation) given the homonymic situation and the arguments over the "one true definition" it engenders. So I'm not going to call anything inflation or deflation yet. Instead, I want to examine some apparent truisms of the model.

Truism. No agency controls the entirety of any aggregate.
Consequence: A change by an agency of the portion of an aggregate within its control can be balanced by a change in either of the other two aggregates AND/OR by a change of another component of the same aggregate. To use an example, if a nation cranks up its printing presses (M), it could result in a corresponding increase in V, and/or in Q, and/or in a decrease of another M such as credit.

Truism. All aggregates are worlds within worlds. The Q, V, and M of a nation are a subset of the global QVM. It is possible for an equilibrium change at a smaller level to be contrary in both composition and direction to one of which it's a set. Thus, the US could be experience a severe increase in V and M while the world sees things as not changing or balancing in a different fashion - for example, decreasing the portion of Q that is the US and so keeping global M stable.

Stumbling issues - what, exactly, is Q and V (and M for that matter). I keep discovering that some things can fall into both categories. For example, are loans M or V (or, for those exchanged as goods, Q)? No, that's silly. They're almost always M, and usually contribute to V. I suspect that an outgrowth of this will be an indicator of the aggregates likely to be affected by a given component. Again, if loans are reduced (thus cutting M), there's likely to be a sympathetic effect in some aspect of V.

Employment is mostly Q while wages are mostly V. Actually, I begin to think that wages are almost entirely V. They're implicity tied to one another in an odd way that is contrary to the normal method maintaining equilibrium. Normally I would expect the any changes in Q due to V to be reciprocal. However, increasing wages (increase of V) tends to have a corresponding increase in employment (increase of Q), which necessarily forces an increase in M. Equally, changes in wages tends to have a disproportionate affect on the aggregate as a whole - that is, eventually an increase in wages causes an increase in V. In other words, the worry of the fed that increased wages will cause inflation (keynesian OR austrian) is confirmed. It's just a question as to whether it's direct (increasing wages causes increase of V independently, and M moves to keep up) or indirect (increasing wages increases Q which increases M which pulls V up as M overcompensates.)

Oh - over-compensation. I think all the aggregates have what is simply described as a sort of inertia. They don't really want to change. And while they prefer to remain steady, they don't stop on a dime once moving. I think (look at all the guesses in this) that for the most part the likelihood of a component affecting the aggregate depends on the size of the component relative to the whole and the severity (both speed and distance) of the change.

Ok, that's the outline. We'll see how it works over time. Specifically, I want to ponder what it says about the confluence of oil (a very large V with lesser increase in Q) and housing (Q, V and M?) But that's prediction and I'll get to it later.

A digression

Valerie [Plame] Wilson's back in the news, and in the midst of a discussion I realized there's a question that's never been asked (AFAIK) which could shed immense light on the whole issue of her 'exposure'.

When did Valerie Plame resign from Brewster and Jennings?

From the "I don't know she's a NOC" point of view:

We know she worked for the company as an energy consultant from its inception in 1994 to AT LEAST 1997. We know she'd been pulled back to the United States in 1996, but she was still working for B&J when she first met Wilson at a dance held at the Venezuelan Ambassador's embassy in DC. So she didn't "leave the company and come home". Which means the neighbors and cocktail circuit knew her for at least a while as Valerie Plame of Brewster and Jennings. The reason THAT is critical is the still-ongoing claim that "really", the people in the know knew she worked in some way for the CIA because she drove to Langley every day for work and all of that stuff.

If Valerie Wilson nee Plame took maternity leave from B&J in 2000, it pretty well kills that line of thought, because is strongly supports the allegation that she (and the CIA) was still maintaining the NOC status for future use.

Let me add a separate point. Because of a pet theory I'll not say the reverse is true - that if she left B&J shortly after marrying it means she was giving up the NOC. No, to chase that I'll want to know what the issuer name was for the paychecks that went to her bank every month. If it was US government, then yes. If it was from yet another company, or more in support of my theory she didn't GET a paycheck, the NOC is sustained.

What, didn't get a paycheck? Yep. Way back in the archives (if it's still there) is my pet theory. Wilson's consulting company was a new NOC base. Plame's paycheck could be a 'monthly retainer fee'. Trips overseas for her are done by having Wilson see a client, and she coming along to continue enjoying the international jet-set life to which she'd become accustomed. Who pays attention to the businessman's wife who's playing tourist or seeing old friends?

Now the full breadth of my suspicion is that the paycheck will read from Wilson's consulting company. Remember, the husband gave up his secure wage and retirement benefits just a few years short of being eligible for them to start his own company. When that happens, already employed wives typically do one of two things: Keep their own paycheck and benefits as a safety net; join their husband as a partner/employee to help make it work. Valerie Wilson was an energy consultant with several years of experience. Putting that niche skill and her personal contacts (old friends and acquaintances) to use helping the husband's business succeed just makes sense. But I can't prove it, and I'm not sure I want to do so. It just works, simply and cleanly.

All that said, I've started looking for the answer to one simple question.

When did Valerie Plame/Wilson resign from Brewster and Jennings?

Healthcare changes

Billmon writes of the event that may actually bring about changes in our healthcare structure, but with cynicism rampant predicts what the change will actually be. To summarize - healthcare industries are losing money when 'normal' predictions are they should be gaining. And the changes will be cut the loss points - specifically, either close the emergency rooms or (more likely) change the laws that require service to all that arriveand prevent gaming those requirements. (The payment of ambulance services to take the patient an extra 45 minutes away, or just rolling the bums out into the parking lot for 'later'.) And in his cynicism (and not so hidden hope he's wrong) he speaks of watching for the newest 'grassroots' program - say, "Consumers For Affordable Health Care" - to start up.

He missed. He missed the avenue, and he missed the fact that the assault is already underway. Why take the front door when the back door's standing open?

In this case the back door is the rage against illegal immigrants. Medicaid recipients are supposed to be asked point-blank if they are illegal immigrants, and required to provide proof they're not. The rules have been getting tighter and tighter since that 2003 addition, and there are discussions in several states of making such a requirement an across-the-board one. Come to the hospital and in addition to your proof of insurance or ability to pay and your proof of self you get a requirement for proof of citizenship or legal residency. That makes it more difficult to USE the emergency room - and there's plenty of evidence this works to reduce the load already. If further cuts are needed, increase the consequences. Failure to provide will result in an additional fee for investigation. Or multiple proofs, of which at least one must be photo ID.

Nothing so blatant as revoking the laws that Billmon saw passed. Nope, just taking advantage of fear and anger.