Apocalypse Tao: Austerity Hits the Export Economies

Agence France-Presse, via MSN News, calls our attention to the typically under-stated way in which the 2nd trumpeter plays his solo*:

Ni hao ma, beeyatch?

Large-scale strikes have hit China in recent weeks, as workers resentful about low salaries or lay-offs face off with employers juggling high costs and exports hit by lower demand from the debt-burdened West.

Politburo member Zhou Yongkang said authorities needed to improve their system of "social management", including increasing "community-level" manpower.

"In the face of the negative impact of the market economy, we have not formed a complete system of social management," Zhou said in a Friday speech to officials reported by the state Xinhua news agency at the weekend.

"It is urgent that we build a social management system with Chinese characteristics to match our socialist market economy."

China's economy grew by 9.1 percent in the third quarter, down from 9.5 percent in the previous quarter.  Manufacturing -- a key engine of growth -- slumped to its lowest level in nearly three years last month, amid slowing demand from the European Union and the United States.

Beijing has started to implement measures to boost lending and spur growth in the world's second largest economy.

China's central bank last week reduced the amount of money banks must keep in reserve for the first time in three years, after earlier easing lending restrictions on more than 20 small banks nationwide.

Analysts have warned that China's huge army of factory staff -- many of them migrant workers -- will be the first to feel the effects of the global slowdown.

Ji Shao, a Beijing-based labour expert, told AFP recently she had visited Shenzhen and expected many small firms to shut down due to high costs, difficulty accessing loans and the global downturn.

Last week, more than 1,000 workers at a plant in China's commercial hub Shanghai went on strike for at least two days, some clashing with police, to protest at staff being laid off, the US-based China Labor Watch said.

In November, more than 7,000 workers went on strike at a factory in the southern province of Guangdong -- China's manufacturing heartland -- clashing with police in a protest over layoffs and wage cuts.

Details and images of many of the recent strikes have emerged first via Twitter-like "weibo" social networking sites that Chinese authorities are struggling to purge of what officials call "rumours" and "false news."

China has the world's largest online community, with more than half a billion Internet users, and as such news of unrest quickly spreads round the country despite the government's strict censorship regime.

Glossa McGonagalica:

*What--you weren't thinking you could run an export economy under an austerity-induced global demand slump, were you?

What's The Difference Between The 'Greatest Generation' and The 'Generation of Swine'? About $684 Billion a Year.

The words of John F. Kennedy's inauguration speech still echo forth today for those Americans who are willing to listen:

" . . .  Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty. . . . "

Beautiful stuff without a doubt.  But is it still true?  The 'Greatest Generation', Kennedy's generation, the generation that suffered the deprivations of the Great Depression, fought on the front lines against fascism during WWII and pioneered the Civil Rights movement is approaching their century mark and has nearly, if not quite entirely, departed the national stage altogether.  How well have their Boomer and X'er heirs honored their legacy?

A Generation of Swine

Not too well at all it seems, if you've been monitoring the latest dust ups about the deficit reduction commission.  Though I wouldn't blame you at all if you haven't; by and large it's been more of the same from Republican'ts.  Just one long litany of proposed hatchet jobs, both to vital programs that support the working class and retirees and slash the tax load of the mega-rich.  They're currently using refusing to renew unemployment benefits and threatening to make regular Americans work an extra 5 years in order to pay for yet another handout to their wealthy patrons*.   Despite a roll call of high-profile economic experts and even business moguls warning against the damage that Republican policies will do to our national infrastructure, the middle class and the economy in general, the Right Wingers seem just about Hell-bent on the "Roadmap to America's Ruin".***

Wisconsin's own homegrown homunculus, Paul Ryan, will become House budget chief in January, which should be a profound shock to anyone with a working appreciation for morality or intelligence.  Having thoroughly shit all over himself by begging for an $800 + billion bailout for his patrons, the atavistic bankster failures AIG and JP Morgan Chase, he not only had the cojones to run interference to prevent attempts to check their excesses, but now he claims the mantles of down-home populism and economic savvy.  Oh yeah, and he's trying to repeal the law that allows parents to insure their college-age children and keeps insurance companies from denying coverage at will.  Just one more chapter in the life of an American 'patriot'.

Seriously, though, Paulie's list of failures must loom large in the annals of the history of those of us born in the late '60s through the early '80s.  Most social historians call these folks "Generation X".  But Hunter S. Thompson, perhaps my favorite American writer of all times had a much more descriptive and apropos name for us, the "Generation of Swine", reflecting the utter moral and intellectual pollution of a generation, raised to be Reaganauts with the crude lack of self-awareness that is pleased to call cutthroat robbery "magic of the free markets". 

We've already talked in this post about Ryan's shameless pandering to Big Money interests.  Economist Paul Krugman calls Ryan's centerpiece fiscal plan a "sham" that leaves a $4 TRILLION budget deficit over ten years while increasing the tax burden of 95% of Americans.   The chief economist at Moody's, Mark Zandi has warned of the major negative impact Ryan's proposed program cuts will have on GDP.  And this blog itself has unmasked on numerous occasions Ryan's lack of analytical rigour and the utter falsity of his consistent rhetorical themes.**

Just How Trashy Are We As A Generation?

At the risk of piling on, I thought it might be fun to once again quantify in actual dollars and cents the extent of the hypocrisy and stupidity of the Right Wing-friendly "Generation of Swine".  Voilà:  a high-level comparison of the likely annual impact of various tax policy alternatives being bandied about, plus three of my own Kennedy-inspired scenarios.  Included are:

1.  Let the Bush era tax cuts (often referred to by the legislative acronym 'EGTRRA') expire.

2.  Renew the Bush era tax cuts altogether, à la Ryan and the Republican'ts.

3.  Renew the tax cuts for all but the elite, as promoted by the Democrats.

4.  Return to the tax rate regime of 1965, after Kennedy's historic reforms.

5.  Return the elite to the '65 regime, let EGTRRA expire for everyone else.

6.  Return the elite to the '65 regime, but renew EGTRRA for everyone else.

You'll never guess which of these policies turns out to be both least fair (i.e., increases income inequalities) and least effective in combating the deficit.  I'm dying to tell you, and you can skip ahead to the conclusions section if you like, but you may want to cast an idea on the why's and wherefores, too.

The Technical Stuff

You may want a little background on the techniques I used to perform the calculations.  I'm more than happy to provide additional detail upon request, but I'll keep it brief here and confine myself to a broad conceptual overview of methodology and reference to the workbook with the detailed calc's.

Historical data comes from the IRS, the Bureau of Economic Analysis, and Taxfoundation.org. ^  Where projections and allocations were necessary due to limits on historical detail available, they have been made upon well-established statistical correlations of no less than 60%.  You'll find narrative comments, citations and hyperlinks to the relevant sources within the workbook.

You should know, however, that this calculation focuses on the tax liability before the Alternative Minimum Tax ("AMT") and tax credits.  I don't think this limitation impairs the usefulness of the analysis much, given that the IRS requires calculation of AMT and tax credits AFTER performance of the basic tax liability calc I've done here.  The intention of this analysis to focus on the broad, sweeping statutory RATE changes between the tax regimes--not petty discrete items like the myriad of arcane credits that pepper the tax code like specks of fly shit on the lamp shade of a crappy Motel Six room.

I also focused only on the three filing statuses that comprise over 98% of all federal income tax returns and tax--Married Filing Jointly, Single and Head of Household.

And you may find it interesting to know that the procedures I used to test this workbook included reconciliation to actual historical data.  For 2007, the most recent year for which I have the most comprehensive information, the workbook varies from historical fact by less than 6/10 of 1%.  Not too shabby. 

In order to maximize memory utilization for the workbook I did not include a lot of tables for historical AGI information--which seems in keeping with the forward-looking orientation of the estimates the workbook was created for anyhow.  You will be happy to know that the algorithms I've used to project the excluded data also seem to be pretty decent--I ended up within 4% of the total liability for 2000.  Kinda all right, especially when you consider that most high-quality statistical studies have margins of error of +/-5% (i.e., an error range of 10%).

The Shocking Truth:  The "Generation of Swine" Come Up $684 Billion Short

Table 1.

Wow.  Can it really be that self-proclaimed fiscal hawk and lottery arbitrage advocate** Paul Ryan has backed the wrong pony once again?**  That his plan not only fails to "pay any price, bear any burden, meet any hardship" in order to assure the survival and the success of the middle class or its economic liberty against the relentless market forces of plutocratic banksterism, but it also doesn't do shit to address the budget deficit.  Hmm.  How could that be?  Maybe Ryan's an idiot or maybe he just doesn't give a damn about the American nation.  It's all the more humiliating when you consider that unemployment was a lousy 4.5% in 1965 (see table #1 here).

Just for laughs, I've also included below a table splitting out the shortfall vs. the '65 tax regime attributable to the elites and one chart each graphically illustrating the billions of dollars and millions of jobs Ryan is throwing away and the ridiculously small income sacrifices expected from the uber-rich by even the most radical alternative.

Table 2.

Chart 1.

Chart 2.

Recommendation

Call and your representatives and senators immediately and often telling them that you know what a horrible idea Paul Ryan's budget plans are.  And let them know that you know what you’re talking about.  Send them a copies or links to the information available on this blog.  Send them a link to the Senate testimony of Mark Zandi, Chief Economist at Moody's, to the effect that tax increases for the rich are tantamount to robbery of the middle class and that continued support of government programs like Social Security and Medicare is vital.  Send them a link to the Congressional Budget Office's report that renewal of the Bush era tax cuts would add bring the national debt up to 100% of GDP by 2020.  Email this stuff to your friends, family and acquaintances.  Whatever you do, don't keep this information to yourself.

Footnotes

*During this last election cycle, Paulie boy was a big favorite of the banksters.  His clients included not only Goldman, but CITI, Bank of America, JP Morgan and a host of other F.I.R.E.  (i.e., "Finance, Insurance and Real Estate sector) companies and trade groups.  In fact, he got about $246,000 or 25% of his total PAC money from these guys.  See details here.  Who knows how much else he got INdirectly through Orwellian-ly named PACs or individual contributions?

**  Paulie's support, unwitting or otherwise, of banksters' counterfeiting operatins discussed here.

      His inability to identify the sector with the highest fiscal mutliplier here.

      His lottery-like fiscal program, costing trillions of dollars and millions of jobs discussed here.

      The wicked, lying Laffer Curve myth destroyed here and here.

***Ryan's good friend Grover Norquist just about announced his intention to destroy America over the public airwaves.

^ Yeah, these guys have a reputation as a conservative think-tank advocating tax cuts.  But what I was looking at here wasn't their analyses, but their re-publication of historical statutory rates, which were not available in any convenient form at www.irs.gov/ .

Would Henry I Have Castrated Goldman Sachs?

Even primitive medieval economies understood the importance of guaranteeing the integrity of currency;  Henry I of England imposed the penalty on castration on counterfeiters.

Bad money drives out the good” – Gresham’s Law

Gresham’s Law is the formal name economists give the common sense notion that counterfeiting is a bad thing and should not be encouraged.   The upshot is that the phony money undermines your confidence in all the money in circulation, even if the bogus bucks are a relatively small portion of the total ‘dollars’ in circulation. 

You need to KNOW for a fact just how much real, tangible value you can expect to receive in exchange for those ‘dollars’, and that’s entirely independent of any action on your part.  At least in the short term that’s entirely dependent on how your fellow market participants perceive the value of that currency.  Even if you accept some shiny beads as payment in a real estate deal, you shouldn’t really be shocked when you’re evicted for offering the same as a rental payment to your new landlord the following month.

Not exactly a super-complimicated egghead theory fresh out of some high powered thinktank.  This is, and has been since time immemorial, just basic, fundamental stuff. Christ, Gresham could see it and he grew up before the invention of toilet paper.

So why can’t Paul Ryan (R-WI) and the other Republican’ts see it?  Why do they seem so oblivious to the Wall Street counterfeiting operation that's hamstringing the economy?

Two Simple Ideas
To truly understand the Ryan-enabled counterfeiting scheme, you have first to understand a little more economic theory.  Just two simple concepts should make this all clear.  Read these carefully, because they'll help you get a whole lot more out of the rest of this piece.

1.  Money isn't just the green stuff you use to pay for your morning coffee.  It's also the stuff in your checking account, your savings account, and money market accounts.  That's basically what egghead economists call "M2".  And "M3", the broadest definition of money even includes some larger deposit and money market fund balances and other longer-term instruments, the valuation of which depend crucially on the creditworthiness of the instituion at which they're held.  The idea is that, in theory, the value of these items is so un-controversial that they are all expected by be accepted on an equal basis with the old fashioned coinage. 

Before you go on to the rest of this article, be sure that you really understand the potential gap between appearance and reality for these two:  M2 is, if not actually printed by the Treasury Department is at least guaranteed by the FDIC up to $250,000; with M3 you're often taking your chances on the strength of some corporation's balance sheet.  Good luck with option #B, there.

2.  Money doesn't do you any good if you don't use it at some point.  An old workmate of mine used to have a colorful turn of phrase to describe the possession of something that is ostensibly praiseworthy but practically useless:  "That's like tits on a boar hog."  Economists have a more formal way to discuss the extent to which nominal money may or may not in actuality be like "tits on a boar hog":  The Velocity of Money.  The Velocity of Money is a measure of just how often a particular dollar gets spent during the year, and the more often the better. 

As a radically simplified illustrative example, let's imagine a small, isolated island where the only recognized medium of exchange is the conch shell.  You can't really print them at will, so at least in the short term there are a finite number of conch shells in circulation.  While that's great from the point of view that there's next to zero possibility of counterfeiting them, the downside is that only 1 person can own any specific conch shell at any given point--implying some real severe limitations on our island economy's ability to expand.  You and I can't both have the conch to spend; either you spend it on a new bamboo cross country bicycle or I spend it on a Starbuck's coconut latte.  Can't have both.

Well, actually, under certain conditions, we CAN have both--just not at precisely the same time.  See, if the material resources and skills of the islanders are broad enough, it's just possible that I am an expert maker of bamboo cross country bicycles and that you are a top notch coconut cafe barrista.  I can accept the conch shell from you in exchange for the bike, and later you can accept the shell back in exchange for the coffee.  We have exchanged this one, single conch shell twice within the day, both doubling the Velocity of Money for our currency and increasing our Gross Domestic Product ("GDP")by one bicycle and one coffee.

Economists have recognized this mutually beneficial relationship between GDP and the Velocity of money that they've come up with a simple equation to describe it:

GDP / Money Supply=The Velocity of Money

So one decent thumbnail statistic you can use to monitor the health of the economy is the Velocity of Money as measured by M2.  The higher the better, because it means that money is going to practical use.  And it correlates fairly well with employmnet--the faster M2 moves, the lower the unemployment level.  For the period that statistics are available, the correlation is about 67% between M2-fueled Velocity and employment, and even greater, 77%, between the change in M2-fueled Velocity and employment.  See details here.

On the other hand, M3 is cearly the bad guy; growth in M3 actually INcreases UNemployment.  See details  here.

And, as if you hadn't already noticed the how the Dow Jones is topping 11,000 once again while unemployment remains flat, here is absolute proof that the Reaganauts' "magic of the markets" actually destroys the economy:  Increases in the Dow strongly correlate with increase in job-icidal M3.  See details here.

Okay, got all that?  We want our money supply to be good; more M2 less M3.  Because the healthier our money supply, the faster it turns, and the lower unemployment is.  Policies that surrender the public's regulatory function over financial markets create more bad M3.  Focus on that, 'cause you're going to need to in order to keep yourself from being fleeced by Paul Ryan's buddies at Goldman Sachs.*

Gresham's Law Redux
Do you see now how Wall Street's loosey-goosey, under-regulated Wild West approach to securities marketing is tantamount to counterfeiting?  By getting the likes of Paul Ryan to stonewall against any and all attempts to regulate financial markets, that leaves walking shitstains like Goldman's Fabrice Tourre to get real hardworking Americans to throw billions and trillions of the good green stuff at him in exchange for bogus "securities" that are supposed to be invested for their retirements.  By preventing the American government from effectively policing its own monetary system, Paul Ryan is enabling Wall Street banksters' efforts to flood the country with bogus M3.

Yeah, maybe the "Fabulous Fab" will get away with a slap on the wrist, a fine to be paid out of some executive malpractice insurance fund.  But even if he does get convicted and does real time**, it'll all be too late.  It couldn't stop him from forging hundreds of millions of dollars in fraudulent M3--and decisively undermining everyone else's confidence in the U.S. monetary system.  Not that Fab's the only one.  Far from it.  Any account of the highlights (or lowlights) of the bankster perp walk, in my opinion, would not be complete without mentioning:

Magnetar:  This Chicago-based financial firm bundled tens of thousands of bad mortgages into M3 securities and fraudulently market them to the public--all the while making a bet with JP Morgan Chase* that the mortgages would default. 

AIG:  Ryan eventually voted (pleaded is more like the word) for the $80+ billion handout to these fumblenuts who bet more on the ponies than they had in the bank in honest, god-fearing M2.

Upshot
There you have it.  Pretty simple.  Ryan's utter failure to address the real villains in this economic story, the under-regulared Finance and Real Estate sectors, has resulted in a perfect illustration of Gresham's Law.  Counterfeit M3 money is contaminating the economy, leading to a panicked sclerosis and seizing up of the nation's financial arteries, making good M2 money unavailable for down-to-earth productive small businesses and driving up unemployment. 

Far from doing anything to actually help the situation, Ryan's actually trying to shove yet MORE money into the corporate sphere by defunding America's popularly-elected government through big corporate tax breaks.  See my inaugural post on that very topic.

So my guess is that yes, Henry I would have castrated the Wall Street banksters and their Right Wing enablers.

A Call to Action
What can you do?  A lot, as it turns out.  Call and write your representatives and senators immediately and often telling them that Ryan's "Roadmap to Ruin" is a horrible mistake and a distraction from the real issue--punishing counterfeiters on Wall Street and introducing for-real regulation.  Don't take any guff.  You know that you know what you’re talking about.  If you have to, send them a link to this blogpost to clear it up if you don't think they're quite smart enough to get it without drawing a picture. 

Footnotes

*During this last election cycle, Paulie boy was a big favorite of the banksters.  His clients included not only Goldman, but CITI, Bank of America, JP Morgan and a host of other F.I.R.E.  (i.e., "Finance, Insurance and Real Estate sector) companies and trade groups.  In fact, he got about $246,000 or 25% of his total PAC money from these guys.  See details here.  Who knows how much else he got INdirectly through Orwellian-ly named PACs or individual contributions?

**Say, can a stay in a country club prison be considered "real time"?  If the worst punishment the state inflicts on criminals here is to limit furloughs to less than one week, stop prostitutes from trolling the grounds and limiting the amount of money perps can spend in the commissary, how bad can it really be?

[December 2, 2010:  See item #1 in Addenda, Updates, Revisions here regarding the updated calculation of M3]