Thursday, April 10, 2014

Family Dynasties (Patrimonial Capitalism?) To Control U.S. 21st Century (Clusterfuck Nation - Forward Guidance) Is the US or the World Coming to an End?

If you ask me who my favorite economists are, I have many to choose from. Presently I tend to read daily the opinions of Dean Baker, Paul Krugman, Ellen Brown, Paul Craig Roberts and Joe Stiglitz (if I have the time, of course) and the online paper, Wall Street On Parade. For spice I'll seek out essays by Marilyn Waring, Julie Nelson, Christina Romer and Carmen Reinhart.

I like to keep my reading lively.

Paul Krugman has a terrific essay in May 8's New York Review of Books on Thomas Piketty's new book Capital in the Twenty-First Century. Paul's an engaging, persuasive writer. So engaging that I'm going to read that book as soon as it hits my local library.

Why We’re in a New Gilded Age

Paul Krugman

May 8, 2014 Issue

Capital in the Twenty-First Century

by Thomas Piketty, translated from the French by Arthur Goldhammer

Belknap Press/Harvard University Press, 685 pp., $39.95

Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep.

It has become a commonplace to say that we are living in a second Gilded Age — or, as Piketty likes to put it, a second Belle Époque — defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work. In particular, he and a few colleagues (notably Anthony Atkinson at Oxford and Emmanuel Saez at Berkeley) have pioneered statistical techniques that make it possible to track the concentration of income and wealth deep into the past — back to the early twentieth century for America and Britain, and all the way to the late eighteenth century for France.

The result has been a revolution in our understanding of long-term trends in inequality. Before this revolution, most discussions of economic disparity more or less ignored the very rich. Some economists (not to mention politicians) tried to shout down any mention of inequality at all: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution,” declared Robert Lucas Jr. of the University of Chicago, the most influential macroeconomist of his generation, in 2004. But even those willing to discuss inequality generally focused on the gap between the poor or the working class and the merely well-off, not the truly rich — on college graduates whose wage gains outpaced those of less-educated workers, or on the comparative good fortune of the top fifth of the population compared with the bottom four fifths, not on the rapidly rising incomes of executives and bankers.

It therefore came as a revelation when Piketty and his colleagues showed that incomes of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality. And this discovery came with a second revelation: talk of a second Gilded Age, which might have seemed like hyperbole, was nothing of the kind. In America in particular the share of national income going to the top one percent has followed a great U-shaped arc. Before World War I the one percent received around a fifth of total income in both Britain and the United States. By 1950 that share had been cut by more than half. But since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.

Still, today’s economic elite is very different from that of the nineteenth century, isn’t it? Back then, great wealth tended to be inherited; aren’t today’s economic elite people who earned their position? Well, Piketty tells us that this isn’t as true as you think, and that in any case this state of affairs may prove no more durable than the middle-class society that flourished for a generation after World War II. The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.

It’s a remarkable claim — and precisely because it’s so remarkable, it needs to be examined carefully and critically. Before I get into that, however, let me say right away that Piketty has written a truly superb book. It’s a work that melds grand historical sweep—when was the last time you heard an economist invoke Jane Austen and Balzac? — with painstaking data analysis. And even though Piketty mocks the economics profession for its “childish passion for mathematics,” underlying his discussion is a tour de force of economic modeling, an approach that integrates the analysis of economic growth with that of the distribution of income and wealth. This is a book that will change both the way we think about society and the way we do economics.

Wall Street on Parade has a real zinger on Goldman Sachs this week.

Who'da believed it previously? (US?)

Goldman Sachs Drops a Bombshell on Wall Street

By Pam Martens: April 9, 2014

The caribou have vanished on Wall Street and the wolves are in a feeding frenzy against each other. Yesterday, the Wall Street Journal reported that Goldman Sachs is considering shuttering its Sigma X dark pool, a business that brought in $7.17 billion from equity trading in 2013, before accounting charges.
There are only three reasons that a Wall Street mega bank shutters a $7 billion business instead of selling it: it’s crazy; its regulators told it to shutter it; there’s more bad news ahead about this business and the firm is trying to get out in front of the fallout. We know Goldman Sachs is only crazy like a fox, so that leaves options two and three.
On March 13, Bloomberg News reported that Goldman Sachs sent refund checks to some of its customers for trades that had occurred in August 2011 where it had failed to execute trades at the National Best Bid and Offer (NBBO), a requirement under U.S. securities laws. Whether that is happening routinely within dark pools is anyone’s guess since…well, they’re dark…and the Securities and Exchange Commission still doesn’t have a consolidated audit mechanism able to keep up with the market it is charged with overseeing.
What triggered this benevolent refund action on the part of Goldman Sachs has yet to be explained. Who discovered the errors is left unanswered as is why we are just learning about something that occurred in 2011 three years later.
There is also the major Goldman snafu that disrupted markets last summer. On August 20, 2013, Goldman sent thousands of erroneous trading orders for options into the exchanges, wildly moving prices in the opening minutes of trading. The problem was blamed on a computer systems upgrade gone awry. Most of the trades were cancelled by the exchanges involved but the matter evoked outrage at the top of the firm since it put Goldman’s customers on the other sides of those trades at risk and could have resulted in big trading losses and/or lawsuits to Goldman and alienation of key clients.
Ten days before author Michael Lewis went on 60 Minutes to discuss his new book, Flash Boys: A Wall Street Revolt, in which Goldman Sachs’ high frequency trading operations come under scrutiny, the President and COO of the firm, Gary Cohn, wrote an OpEd for the Wall Street Journal. In the piece, Cohn says that “A fragmented trading landscape, increasingly sophisticated routing algorithms, constant software updates and an explosion in electronic-order instructions have made markets more susceptible to technology failures and their consequences.”
Just how susceptible Goldman might be gathers some sunlight in Flash Boys. Two full chapters of the book are devoted to the prosecution of Sergey Aleynikov, a sympathetic character who loses his marriage, his home, his freedom, his career, his savings and is sentenced to eight years in prison for taking some high frequency trading code that he had created at Goldman Sachs when he left for another job. Aleynikov was arrested by the FBI on July 3, 2009 and despite an overturned conviction, he is still being pursued by Manhattan prosecutors.
Goldman’s high frequency trading system is characterized as a “bulky, inefficient system” and the code as “slow and clunky” in the book. Lewis writes: “Goldman had bought the core of its system fifteen years earlier in the acquisition of one of the early electronic trading firms, Hull Trading. The massive amounts of old software (Serge guessed that the entire platform had as many as 60 million lines of code in it) and fifteen years of fixes to it had created the computer equivalent of a giant rubber-band ball. When one of the rubber bands popped, Serge was expected to find it and fix it.”
Aleynikov’s conviction in December 2010 was overturned in a stunning decision by the Second Circuit Appeals Court which found that Aleynikov had neither taken a tangible good from Goldman nor had he stolen a product involved in interstate commerce – noting that at oral argument the government “was unable to identify a single product that affects interstate commerce.”
The Second Circuit’s detailed decision was delivered on April 11, 2012 by Dennis Jacob, the Chief Judge. There was the distinct impression that the three-judge panel was interested in sending a message to Goldman Sachs that it understood fully the nuances of this big Federal government prosecution.
Chief Judge Jacob wrote:
“Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce. Goldman had no intention of selling its HFT system or licensing it to anyone. It went to great lengths to maintain the secrecy of its system.  The enormous profits the system yielded for Goldman depended on no one else having it.  Because the HFT system was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offense under the EEA [Economic Espionage Act of 1996].”

Since Lewis provides a birds eye view into the inner workings of Goldman’s high frequency trading system in those two book chapters, even taking Aleynikov to a two-night dinner feast to discuss it with other Wall Street programmers in a mock trial to see if he really was guilty of anything in the eyes of a jury of his actual peers, Goldman’s secrets are now an open book and its slow, clunky system has lost a lot of its resale value.

Goldman has also lost its programming genius. Lewis shares the fact that a head hunter on Wall Street says that there are only 20 people on Wall Street that can do what Aleynikov does – and he is the best at it. Which might explain why the hounds of prosecutory hell have been unleashed on him.
Rather than allowing Aleynikov to get on with his life, he is now being pursued by the Manhattan District Attorney, Cyrus Vance, in what looks to some like malicious prosecution. (Only mid-level people have been prosecuted at any of the mega Wall Street banks while settlements and deferred prosecutions are handed out for far more egregious crimes.)
An appeal to dismiss Vance’s new charges on the basis of double jeopardy was rejected by a New York State court, finding that the state’s charges were different from the Federal ones, even though they were based on the same allegations. Aleynikov did win one court battle last October in the new case: Goldman Sachs will have to pay his legal expenses since he held the title Vice President. The court found that Goldman’s own bylaws require it to pay the legal fees of any officer named in a civil or criminal complaint related to their position at the bank.
Given the scrutiny that the Lewis book is drawing to Aleynikov’s prosecution, exactly what the firm was using this secret code to do in its proprietary trading operations, expect Vance to fold up his tent any day now in this highly questionable pursuit of “justice.”
When was the last time you thought that pricing was "funny" or that the economic statistics must be skewed (for some good reason, of course)?

For me it's every time I hear the latest economic news from the Fed gurus.

The first time was right after Reagan's tax cuts that made the U.S. deficit and debt balloon, and the cost of living for the lower classes skyrocket.

James Howard Kunstler always brings us the bad news. So, get a cool drink and brace yourself.

Clusterfuck Nation – Blog

April 7, 2014

Forward Guidance

Guess what? There is none. Rather, the Federal Reserve practice of Delphically divulging its intentions ought to be understood as the master pretense of US economic life — the delusion that wise persons are actually in control of anything. The result of this guidance continues to be the mis-pricing of everything, especially the cost of money as represented in the operations of debt, and hence the value of everything denominated in money.

The interventions of our central bank have really been aimed at one objective: to compensate for the contraction of real wealth in an economy that replaced purposeful activity with Kardashian studies and tattoo art. Purposeful economic activity provides surpluses that allow for the repayment of debt. Kardashian study and tattoo art lead to entropic entrapment, aka, a death spiral of culture and economy. That’s where we are at. The debt is now eating us alive, and the central bank trick of piling on additional debt to mask the failure of repaying old debt is losing  its palliative punch.

One big problem with the Fed’s policies is that the mis-pricing of everything ends up being expressed in the very statistics (GDP, unemployment, inflation) that are used to justify further interventions that produce ever deeper perversities. That is, the Fed distorts prices, which distort statistics used to make policy, which prompt the fed to ramp up policies that further distort prices, a dangerous recursive dynamic. Since prices are the basic information for running an economy, we end up in a situation where nothing really adds up. The antidote to that has been pervasive accounting fraud — the covering-up of mis-pricing, pretending that things add up when they don’t.

The poster child for that, of course, is the US government, the operations of which are so saturated in falsity that the inspectors general in every branch and agency might as well just fling linguini against the wall to arrive at whatever conditional reality suits their bosses. The pretense extends to the largest financial institutions including the TBTF banks (their vaults stuffed with the detritus of epic swindles), to the giant pension funds, which were among the chief victims of the swindling, to the corporations dedicated to producing this-and-that, whose cost structures are so fatally impaired by all the aforesaid mis-pricing and accounting fraud, that they must resort to massive stock share buy-backs to maintain the illusion of being going concerns, to the millions of ordinary households running on maxed-out plastic.

These perversities have been in force for five years now, and “folks” — to use our president’s fond locution for the diabetic masses — are beginning to get nervous about the five-year duration of the so-called bull market. This refers to the stock markets collectively, which have generally only gone up since 2009 in an economic environment that can only be called unconvincing. The word “bubble” is heard more and more in casual chatter. Events like Friday’s tanking of the NASDAQ put people in mind of the ominous Four Horsemen.

One thing we really do know, as good old Herb Stein put it, is that things go on until they can’t, and then they don’t. Sighs of relief were heaved all last week when it appeared that the Obama/Kerry response to doings in Ukraine amounted, more-or-less, to a policy that might be called “Oh . . . nevermind.” Personally, I’m relieved that our leaders decided not to start World War Three over that, since in the aftermath there might be no human historians left on planet earth to record our monumental stupidity for the cosmic annals — something for our successors, the sentient cockroaches, to meditate on. But a certain nagging emptiness remains in that void of initiative. The spring zephyrs are finally caressing the tender hills and vales of upstate New York. Something is in that wind. I think I scent revolution.

Published as an E-book for the first time!
The 20th Anniversary edition
With an entertaining new introduction by the author

And how will this all end up?

According to PCR . . . badly . . . and soon.

Is the US or the World Coming to an End?

It will be one or the other

Paul Craig Roberts

2014 is shaping up as a year of reckoning for the United States.
Two pressures are building on the US dollar. One pressure comes from the Federal Reserve’s declining ability to rig the price of gold as Western gold supplies shrivel and market knowledge of the Fed’s illegal price rigging spreads. The evidence of massive amounts of naked shorts being dumped into the paper gold futures market at times of day when trading is thin is unequivocal. It has become obvious that the price of gold is being rigged in the futures market in order to protect the dollar’s value from QE.
The other pressure arises from the Obama regime’s foolish threats of sanctions on Russia. Other countries are no longer willing to tolerate Washington’s abuse of the world dollar standard. Washington uses the dollar-based international payments system to inflict damage on the economies of countries that resist Washington’s political hegemony.
Russia and China have had enough. As I have reported and as Peter Koenig reports here Russia and China are disconnecting their international trade from the dollar. Henceforth, Russia will conduct its trade, including the sale of oil and natural gas to Europe, in rubles and in the currencies of its BRICS partners.

This means a big drop in the demand for US dollars and a corresponding drop in the dollar’s exchange value.
As John Williams ( has made clear, the US economy has not recovered from the downturn in 2008 and has weakened further. The vast majority of the US population is hard pressed from the lack of income growth for years. As the US is now an import-dependent economy, a drop in the dollar’s value will raise US prices and push living standards lower.
All evidence points to US economic failure in 2014, and that is the conclusion of John Williams’ April 9 report.


TONY said...

Notice a lot of Armgageddon pieces in US media and blogs just now. Don't believe it's the 'end times' for a wee while yet.

Cirze said...

Armageddon for US, T.

And we know that having greedy morons as leaders are bringing it.