The Most Expensive Election Ever

The GDP of Nicaragua: $6.4 billion; the cost of the US presidential election to the two candidates: $6 billion, or $20 in petty cash per every US man, woman and child.

2012 Election Cost

From Bloomberg Briefs:

Today’s U.S. elections may be the most expensive in history, with a total of $6 billion being spent by the presidential candidates and contestants for seats in the Senate and House of Representatives, according to the Center for Responsive Politics in Washington. That is 120 times more than the cost of the 2010 U.K. election and almost equivalent to the annual GDP of Nicaragua.

In other words, the admission price to this year long tragi-comical farce is about $20 per person. Not bad considering the amount of entertainment



GDP: A Theater of the Absurd

How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA’s deflator for Personal Consumption Expenditures (PCE) and quite a bit different from the better-known Bureau of Labor Statistics’ inflation gauge, the Consumer Price Index (CPI).

The Lower the Deflator, the Higher GDP

At the bottom of this post is a note showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP.

GDP Four Ways
There are four ways used to calculate GDP using four different deflators.

  1. GDP deflator (the official number) : GDP +1.86, 10-Year Moving Average +1.7
  2. PCE deflator (personal consumption expenditures) : GDP +1.13, 10-Year Moving Average +1.6
  3. CPI deflator (consumer price index) : GDP +1.05, 10-Year Moving Average +1.4
  4. John Williams’ Shadowstat measure of inflation  : GDP -10.50, 10-Year Moving Average -5.1

  5. The first three charts are all similar looking but charts 2 or 3 seems more reasonable than the official numbers. Here are two of the charts.

    Real GDP Using PCE
    PCE GDP 2012-05

    Shadowstats GDP

    Williams GDP 2012-05

Alternate Nonsense

In reality, Shawdowstats GDP calculation is nonsense. For Williams to be correct one would have to believe the economy was in a recession the vast majority of the time for the last 25 years.

Williams has a huge following, mainly by the hyperinflationist crowd. Williams himself has been predicting hyperinflation for some time.His hyperinflation calls missed by a mile. The dollar is strengthening, consumer credit is  sinking, and treasury yields recently made 60-year lows.

This is what happens when you fail to take into consideration:

  • Credit conditions
  • Global economic conditions 
  • Printing by other central banks especially China 
  • Currency instability in Europe 
  • Untenable situation in Japan

  • Williams makes all of those mistakes, being far too US-centric in his analysis, and compounds the errors by using a methodology that produces the absurd results shown above and also by confusing unfunded liabilities with debt.

    $1.06 Trillion of Consumer Debt is Currently Delinquent

    Note that according to the May
    HOUSEHOLD DEBT AND CREDIT report by the Fed, consumer credit other than student debt is contracting. Also note that $1.06 trillion of consumer debt is currently delinquent, with $796 billion seriously delinquent.

    Think that will be paid back? I don’t. And hyperinflationists fail to understand the deflationary ramifications.

    I agree that the US has a day-of-reckoning coming, but the entire fiat global financial system fueled by insane levels of fractional reserve lending will come crashing down at the same time.

    That is why I am a deflationist.

Global Derivatives Market at $1,200 Trillion Dollars

Some estimates put the size of the global derivatives market at $1,200 trillion dollars (that’s $1.2 quadrillion)… 20 times larger than the global economy

If you are paying attention you know that the size of the derivatives market dwarfs the global economy.  But how big is it really?

For years, there have been rumors that there is over a quadrillion – one thousand trillion dollars – in notional value of outstanding derivatives.  But no one really knew.

Even though the Bank of International Settlements regularly publishes tables showing the amounts of different types of derivatives, some of the categories are ambiguous, and so it has been hard to get a good handle on what’s really out there.

For example, one blogger wrote last year:

Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.

Smart guys like bond trader Jeffrey Gundlach said last year that we’ve got a quadrillion dollar derivative overhang, the government hasn’t done anything to fix the basic problems in our economy, and so we’ll have another crash.

Paul Wilmott, one of the world’s leading derivatives experts, who has written numerous books on the subject, estimated the number at $1.2 quadrillion.

According to Wilmott, who holds a doctorate in applied mathematics from Oxford University, $1.2 quadrillion is the notional (i.e. paper) value of the worldwide derivatives market. To put that in perspective, the world’s annual gross domestic product is between $50 trillion and $60 trillion. The derivatives market is 20 times the size of the world economy.

A Clear and Present Danger to the World Economy

The size of the derivatives market is a significant threat to the global economy. It is complex, unregulated, and it ought to be of concern to world leaders. Even the U.S. Treasury can’t bail out banks to the tune of $1.2 quadrillion, or even $600 trillion, if that more conservative number makes better sense.

How big is the risk to the world economy from these derivatives? According to Wilmott, it’s impossible to know unless you understand the details of the derivatives contracts. But since they’re unregulated and likely to remain so, it is hard to gauge the risk.

Another kind of market conduct that makes markets volatile is what Wilmott calls positive and negative feedback loops. These relatively bland-sounding terms mask some really scary behavior for investors who are not clued into it.

Wilmott argues that a positive feedback loop contributed to the 22.6 percent crash in the Dow back in October 1987.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in write downs that lead to the collapse of Lehman Brothers in September 2008.

Credit default swaps were largely responsible for bringing down Bear Stearns, AIG, Washington Mutual and other mammoth corporations.

Unexpected changes in interest rates could cause a major bloodbath in interest rate derivatives.

There have not been any reforms or attempts to rein in derivatives. The highly touted Dodd-Frank financial legislation didn’t really change anything to do with derivatives. The fundamental problem is that derivatives trading is hugely profitable for banks and insurance companies. It is a profit source they are not willing to give up easily.

The big banks claim that the huge amounts of derivatives themselves is unimportant because these are only “notional” values, and – after netting – the notional values are deflated to much more modest numbers.

The problem with netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank. The best example of how the flaw behind netting almost destroyed the system is AIG. The insurance company was hours away from making trillions of derivative contracts worthless. The U.S. Treasury stepped in with hundreds of billions of dollars to shore up the market.

The point here is that the risk of default in the derivatives market is much greater than publicly represented. It may only take the failure of one “player” in the market (i.e. an AIG) to bring the whole house of cards crashing down.

Seven Fallacies of Mainstream Economics

The Global Financial Crisis (GFC), the extreme inequality of wealth world-wide, the materialism of modern life – seeming over consumption for consumptions sake and the environmental abuse we shower on our planet are not accidents, nor are they unavoidable consequences of the natural order of things.  They are the result of the modern practice of Keynesian economics, which makes fundamental errors of accounting, evidence, perception and theory.

Many of these fallacies have been observed for decades by a dissenting fringe of economists and informed others.  Their message is drowned out by the relentless repetition of the mainstream mantra.  Many people may be uncomfortable with economists’ pronouncements, but few seem to realize how frequent and basic are the errors, or how far-reaching the consequences.  Here are seven of the primary fallacies.

  1. The measure of economic success worldwide is growth of Gross Domestic Product (GDP).  But, GDP is simply the total of all activity involving money, with no accounting taken of whether the activity is useful, useless or even harmful.  The costs of disasters, pollution and “defensive expenditures” like insurance are added to the GDP.  A proper accounting would use a balance sheet and subtract the costs from the income, as every shopkeeper understands.  As a result exploitative and polluting activities are encouraged because they boost GDP. GDP also measures purchasing using borrowed money just as purchases made with savings or income. That begs the question, is spending borrowed money a viable measure of productive activity?
  2. Clear evidence of poor performance is ignored.  Growth, unemployment and inflation measures since 1980, have not been as good as those in the 1950s, 1960s and 1970s.  In the economies of the west the unemployment averaged 3.2 percent for those early years, inflation averaged 4.5 percent and GDP growth 4.9 percent.
  3. Money and debt are excluded from economic models.  Money is excluded because economists treat economic exchange as barter, claiming money is only a neutral intermediary.  Debt is excluded because private debt is claimed to have little influence on economic performance.  Economists claim “one person’s debt is another person’s asset”, so net purchasing power is not changed by loans.  That would only be true in a barter economy, or if banks only loaned from savings deposits.  However, banks create new money to make loans, so purchasing power is boosted and money is no longer neutral.  Because banks have been deregulated and the banks’ incentive is to increase debt, private debt has increased dramatically over recent decades.  It was the collapse of a mortgage debt bubble in the U.S. that triggered the GFC.  Their discounting of debt is why most economists failed to see the GFC coming, and have little idea how to recover from it, as they are demonstrating in Europe.
  4. Modern free-market theory, called the neoclassical theory, predicts the economy will always be close to equilibrium.  If that were true it should tick along steadily and sudden changes should only occur in response to large external events like natural disasters or wars.  Yet many times over the past two centuries financial markets have suddenly collapsed without any external cause.  Some of the more recent examples occurred in 1987, 1997, 2001 and 2007.  In 1987 stock prices dropped by 30-40% in a day, though thirty percent of the world’s factories had not been bombed overnight.
  5. The neoclassical theory is based on assumptions that are patently absurd or clearly shown by other disciplines to be untrue.  Among the patently absurd, it is assumed our collective guesses about the future are accurate, yet people in 1890 could not have conceived how cars, airplanes, two world wars, nuclear weapons, computers and digital communication would radically transform the world.
  6. It is assumed that people are innately individualistic, competitive and coldly “rational” calculators.  However psychologists have clearly documented our tendency to favor cooperation by punishing cheaters, even at a personal cost.  Almost every mammalian species lives in groups, and social groups have an innate, and healthy, tension between individualism and cooperation.  Most people understand they are better off if they balance their own wishes with those of their family and community.  We are obviously strongly motivated by love, envy, fashion and insecurity, and marketers ruthlessly exploit these foibles.  Psychologists have also clearly documented our tendency to other “non-rational” behaviors such as weighting a risk of losing more heavily than an equal chance of winning.  Neither the fashion industry nor the marketing industry would exist if economists were right.
  7. Economists assume there are no economies of scale beyond a point of diminishing returns, ignoring the lesson of Henry Ford’s assembly lines.  Economies of scale allow the biggest firm to undercut other firms and grow faster, until it dominates a market.  The existence of many such dominating firms, such as Microsoft, McDonald’s and Facebook, is also ignored.

The consequences of these errors are not trivial, they distort our perception of the behavior of economies.  Free-market theorists allow that there are “market imperfections”, but don’t appreciate that abandoning any of their central assumptions leads to radically different predictions of pervasive instability and unsteady behavior.

A new concept of economic behavior based on complex systems is developing on the fringes of economics.  Many insights are recounted in Eric Beinhocker’s book The Origin of Wealth (Harvard Business School, 2006).  There are also immediate overarching implications.  For example, there is not just one way to organize economies, there are many ways, and they can be tailored to the wishes of each human culture.

This article originally appeared on Steve Keen’s Debtwatch site.

The Mother of All Contrary Indicators

In what may be the mother of contrary stock market indicators, Bloomberg authors Steve Matthews and Tom Keene report Greenspan Says U.S. Stocks ‘Very Cheap,’ Likely to Rise.

Former Federal Reserve Chairman Alan Greenspan said U.S. stocks offer good value and are likely to rise as corporate earnings increase over time.

“Stocks are very cheap,” Greenspan said today at the Bloomberg Washington Summit hosted by Bloomberg Link, citing “a very low price-earnings ratio.”

“There is no place for earnings to grow except into stock prices,” said Greenspan, who served as Fed chairman from August 1987 to January 2006.

Alan GreenspanAnother valuation metric, known as the Fed model because it was derived from a July 1997 report from the central bank, shows U.S. equities are close to the cheapest level ever relative to debt. The technique compares the earnings yield for stocks with Treasury rates.

However, history shows Greenspan to be one of the biggest contrarian indicators in history.

Greenspan is a Contrary Indicator

Please consider:

  1. After warning about irrational exuberance in 1996, Greenspan embraced the “productivity miracle” and “dotcom revolution” in 1999. Mid-summer of 2000 Greenspan fell in love with his own analysis and was worried about inflation risks. Shortly thereafter the Greenspan Fed embarked on an incredible campaign slashing interest rates to 1 percent in panic over deflation. Greenspan is now trumping up the idea that credit conditions are like 1998.
  2. On May 21,2006 Greenspan said housing prices won’t fall nationally. We all know what happened shortly after that statement.
    In the late 1990’s Greenspan was worried about Y2K problems (slashing interest rates and adding fuel to the dotcom bubble). Y2K went off without even minor glitches.
  3. In 2001 Greenspan pleaded with Congress to adopt Bush’s $1.35 trillion tax cut. Greenspan’s rationale was the government would run a huge $5.6 trillion surplus over the decade after the cuts.
  4. In 2007 Greenspan was worried about inflation. How did that work out?

In a recent Interview with Jon Stewart Greenspan admits he and the Fed did not know what they were doing and blamed it on “human nature”.

No kidding! And that is why the Fed is always pursuing the wrong strategy, and why Greenspan is wrong again today.