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Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

In the 1970s economists started to incorporate rational expectations into their models and not long after the seminal Kydand & Prescott (1977) article named Rules Rather than Discretion: The Inconsistency of Optimal Plan was published. Their work has been driving the mainstream macroeconomic debate ever since. The question raised in this debate is how policy-makers can credibly commit to promises made today when future events may cause short-term pain if restricted by stringent rules from taking action?

For example, in the Treaty on the Functioning of the European Union Article 125 it clearly states that “the Union [or any Member States] shall not be liable for or assume the commitments of central governments, regional, local or other public authorities…” it also says in Article 123 that “[o]verdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States… …in favour of Union institutions… …shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.” Both rules are there to credibly commit to not bail out EU nations either through ECB inflation or with other member states tax euros. Needless to say, after SMP, OMT, ELA, EFSF, ESM, maturity extensions and interest rates reductions these rules turned out to be useless. Rational actors obviously adapt their behaviour accordingly as the European Union turns into tragedy of the commons where moral hazard abounds. Actually, the whole monetary union has been a monetary tragedy of commons since its inception as credit expansion in one country did not have any of the adverse effects associated with either falling exchange rates or gold outflows. The euro area essentially incentivises maximized inflation with no natural correcting mechanisms apart from gargantuan capital consumption that goes along with it.

Such adverse outcomes have naturally led economists to revisit the “Rules vs. Discretion” debate in terms of monetary policy. The Fed Oversight Reform and Modernization Act (H.R. 3189 passed House November 19 2015) explicitly states a rule on how the Federal Reserve should conduct its monetary policy. According to H.R. 3189 the Federal Funds rate shall be calculated as sum of the following a) the rate of inflation over the previous four quarters, b) one half of the percentage deviation of the real GDP from an estimate of potential GDP, c) one half the difference between the rate of inflation over the previous four quarters and two percent and d) two percent. For those of you privy to economic history, you see that this is the original Taylor rule as proposed by John Taylor in 1993.

In the chart below we have calculated this rule and compared it to the actual federal funds rate. Historically they have tracked each other relatively well as witnessed by the narrow red and blue areas. This was also a time when the US economy was thriving, so people naturally look at the two time series and concludes that the only way to get back to uninterrupted prosperity is for monetary policy to return to its old ways. From about 2000 we see two large and persistent red areas suggesting monetary policy was too accommodative relative to underlying fundamentals. The first large red area created the biggest bubble the world has ever witnessed. In response to that calamity, the Federal Reserve created an even larger and more protracted red area as represented by the second difference to the Taylor rule implied funds rate. What kind of bubbles and misallocations this policy experiment created only time will tell. Adding forward guidance, QE and MEP to the equation, the federal funds rate has probably been even lower as shown with the so-called shadow rate in the chart.

This obviously does not sit well with our money masters in the Eccles Building as it put the blame squarely on them for creating the deepest recession since the 1930; so they come up with their own versions of the Taylor rule. We calculated also their version of the rule (green line) with emphasis conveniently focused more on the so-called output gap. However, even with this rule today’s funds rate should be more than three per cent. To rectify such blasphemy, former chairman Bernanke made his own calculation, and unsurprisingly, this particular estimate follow the actual rate perfectly. 

In our view it is beyond doubt that the FOMC is the main culprit for today’s over-leveraged, unstable low growth environment, but it is still interesting to note how even rules can provide such dramatically different conclusions. It does not give much credence to the whole rule vs. discretion debate when the rules themselves are discretionary applied.

The point being missed completely by both sides of the debate is that economics is not a natural science, but a social one. It is impossible to construct scientifically valid rules to an ever changing social system. The optimal rule in 1993 is not optimal in 2001 nor in 2008.

Let’s look at one of the key input variables in Taylor rule calculations; namely the potential GDP used to estimate the output gap.  This is instrumental for policy-makers when they set their rate of interest, either rules based or discretionary determined.  While the layman may feel inundated by concepts like potential GDP they are immensely simple trend calculations. In less than five minutes we created a potential GDP series just as good as any by regressing real GDP versus time and extrapolating from that.  Believe it or not, but this is what drives monetary policy actions directly affecting billions of people and trillions of transactions every day. From the distance between the trend calculation and actual measured GDP (which is both a poor metric for a nations well-being and subject to large revisions) policy-makers fix the most important price in the whole economic system; the intertemporal coordinating mechanism between saving and investment. These are highly educated people who would balk at the very idea of fixing prices for, say, gasoline, but have no qualms with fixing the rate of interest. It is also interesting to see how potential GDP falls as actual GDP falls. Excel will give you a circular reference error if attempting the same trick, but such inconsistencies does not seem to bother our central planners.

Monetary policy may seem technical as clever people debate among themselves whether the optimal policy rule should be one part inflation and one part output gap or one part inflation and two part output gap with various degree of flexibility in its interpretation. In reality it is just a bunch of academics looking at an extremely simplified mathematical representation of the world under the pretense of knowing the consequences of their actions. They do not. It is all made up as they go along and the repercussion for their hubris will be borne by all of us. It is glaringly obvious to us that the extraordinary decisions made by our money masters over the last decade will end in an extraordinary correction of malinvested capital. Applying the scientific method of natural science on a social system is the gravest error of them all.

Federal Reserve delenda est  

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A month ago, Virgina governor Terry McAuliffe signed a controversial order into law which restored voting rights to more than 200,000 convicted felons in Virginia. At the time we noted McAuliffe's close relationship with Hillary, and opposition comments that his action "doesn't speak of mercy. Rather, it speaks of political opportunism," and African American support in the state. All of which is by way of background as CNN reports today that McAuliffe is now being probed over questionable donations made to his campaign (from a Chinese businessman) during his time as a board member of The Clinton Global Initiative. We have three simple words: quid pro quo?

A month ago, the Richmond Times Dispatch reports, Governor Terry McAuliffe today signed an order to restore voting rights to more than 200,000 convicted felons in Virginia.

The order applies to nonviolent and violent felons, and according to a confidential draft of research for the order obtained by the Richmond Times Dispatch, is authorized under the Constitution of Virginia. Why this surprising announcement now? As Reuters says, the "move that could help the Democratic nominee in November's presidential election."

 

In other words Hillary's elections chances just jump thanks to the support of convicted criminals as at least one state allowed them to vote. Expect many more states to follows.

 

McAuliffe tweeted a photo of himself signing the order in the state capital of Richmond, surrounded by members of his administration and others. "Virginia will no longer build walls and barriers to the ballot box – we will break them down,” McAuliffe said in a message on his Twitter account.

 

 

We are sure the correlation between the following chart of support for Clinton separate by race and the 200,000 felons in Virginia was just a coincidence

So imagine our surprise when CNN reported today that during his time last year as a board member for The Clinton Global Intiative, McAuliffe may allegedly have received illegal (large) campaign contributions…

Virginia Democratic Gov. Terry McAuliffe is the subject of an ongoing investigation by the FBI and prosecutors from the Justice Department's public integrity unit, U.S. officials briefed on the probe say.

 

The investigation dates to at least last year and has focused, at least in part, on whether donations to his gubernatorial campaign violated the law, the officials said.

 

…

 

As part of the probe, the officials said, investigators have scrutinized McAuliffe's time as a board member of the Clinton Global Initiative, a vehicle of the charitable foundation set up by former President Bill Clinton.

Among the McAuliffe donations that drew the interest of the investigators was $120,000 from a Chinese businessman, Wang Wenliang, through his U.S. businesses. Wang was previously delegate to China's National People's Congress, the country's ceremonial legislature.

"Neither the Governor nor his former campaign has knowledge of this matter, but as reported, contributions to the campaign from Mr. Wang were completely lawful," said Elias.

 

Wang also has been a donor to the Clinton foundation, pledging $2 million. He also has been a prolific donor to other causes, including to New York University, Harvard and environmental issues in Florida.

 

U.S. election law prohibits foreign nationals from donating to federal, state or local elections. Penalties for violations include fines and/or imprisonment.

 

But Wang holds U.S. permanent resident status, according to a spokeswoman, which would make him a U.S. person under election law and eligible to donate to McAuliffe's campaign.

 

Neither Wang nor his company used to make the donations have been contacted by U.S. investigators, according to the spokeswoman.

*  *  *

Of course, it's probably all just coincidence but it does raise yet more questions about Hillary's 'charity' and her honesty.

Finally, with the web of coincidental illegal activities surrounding Clinton closing in; one might wonder if a) this is the establishment preparing to take her down and run Biden at the Convention, or b) The FBI is lashing out at having been quietly blocked from the email investigation?

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Steen Jakobsen, chief economist and CIO of Saxo Bank, says the US Federal Reserve is on the verge of making a mistake about its projected rate hikes. The Fed has given itself the option of hiking interest rates at its June meeting; but Jakobsen says he is sceptical about the proposals, arguing that the Fed is taking the recent improvement in US economic data as an uptick in overall momentum. Jakobsen says the economy is still performing significantly below its potential, but thinks the Fed wants to hike interest rates now so it can lower them at a later date.

“Data releases that are close to our expectations have little additional impact on the forecast, while data releases that deviate significantly from our expectations can lead to more         significant revisions of the forecast,” adding that "It is, therefore, important for market participants and households to be able to follow the data along with the FOMC and to understand how we are likely to interpret and react to incoming data."

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Submitted by Mike Krieger via Liberty Blitzkrtieg blog,

In a February post titled, It’s Not Just the GOP – The Democratic Party is Also Imploding, I noted the following: 

Yes, of course, Trump winning the GOP nomination marks the end of the party as we know it. After all, some neocons are already publicly and actively throwing their support behind Hillary. While this undoubtably represents a major turning point in U.S. political history, many pundits have yet to appreciate that the exact same thing is happening within the Democratic Party. It’s just not completely obvious yet.

 

While it might sound strange, a coronation of Hillary Clinton in the Democratic primary will mark the end of the party as we know it. There’s been a lot written about the “Sanders surge,” with much of it revolving around Hillary Clinton’s extreme personal weakness as a candidate. While this is indisputable, it’s also a convenient way for the status quo to exempt itself from fault and discount genuine grassroots anger. I’m of the view that Sanders’ support is more about people liking him than them disliking Hillary, particularly when it comes to registered Democrats. He’s not merely seen as the “least bad choice.” People really do like him.

 

The Sanders appeal is twofold. He is seen as unusually honest and consistent for someone who’s held elected office for much of his life, plus he advocates a refreshingly anti-establishment view on core issues that matter to an increasing number of Americans. These include militarism, Wall Street bailouts, a two-tiered justice system, the prohibitive cost of college education, healthcare insecurity and a “rigged economy.” While Hillary is being forced to pay lip service to these issues, everybody knows she doesn’t mean a word of it. She means it less than Obama meant it in 2008, and Obama really didn’t mean it.

 

Hillary is the embodiment of a sick and detested status quo. She stands for nothing, is nothing, and a vote for her all but guarantees both murder abroad and oligarchy at home. I think a large number of Bernie Sanders supporters understand this and won’t be going off silently into that quiet voting booth to commit ethical self-sacrifice despite the terrifying prospects of a Trump presidency. I think they’ll stay home, but they won’t sit there passively. They’ll be seething inside, and many will renounce the Democratic party forever. Many rank and file Republicans already came to such a conclusion years ago, which is precisely why the nomination was wide open for a man like Trump to capture. Democrats will do the same, and before you know it, political pundits will be tripping over each other to write about the death of the Democratic Party.

Fast forward three months, and the evidence of this reality is starting to flood in. As I’ve maintained for what seems like forever, a very significant percentage of Bernie Sanders supporters will not go quietly into that corrupt, neocon Hillary Clinton night. People have seen enough. They’ve had enough.

The latest proof come to us via New York Daily News columnist Shaun King. What he writes isn’t particularly earth-shattering or novel, but it carries weight for me due to Mr. King’s political history. As he shares with readers in his latest post, Here’s Why I’m Leaving the Democratic Party After This Presidential Election and You Should Too:

Right now, the Democratic Party, which I have called home my entire life, is deeply in love with money. Consequently, its leaders have supported and advanced all kinds of evil, big and small, in devotion to this love affair.

 

My sweet mother, who worked in a scorching hot light bulb factory for over 40 years of her life, introduced me to the party. While I’m not so sure it was ever really true, she taught me that Democrats were for the poor and working class of America. We waffled between those two groups ourselves, so for me, I chose to be a part of the party that represented us.

 

As a senior in high school, I attended my first political rally in 1996 as President Bill Clinton spoke at the University of Kentucky in his reelection bid. He was amazing.

 

In 1999, Atlanta’s first black mayor, Maynard Jackson, whom I loved and revered, recruited me to campaign for Al Gore and encouraged me to get involved with the party. As student government president at Morehouse College, I spoke at campaign events alongside Vice President Gore and his family and fought hard as hell for him to win. How he lost stung as much as the fact that he lost.

He goes on to describe a personal love affair with candidate Barack Obama. So this is a guy who bled Democratic blue his entire life — until now. Faced with an undeniably rigged and dangerously corrupt system, Mr. King came to see Senator Sanders as a true champion of reform, and Hillary Clinton as a disingenuous creature of a discredited status quo. As such, he “felt the Bern,” and proceeded to see the establishment of the party he grew up with act like a bunch of shady villainous thieves.

He explains:

“For the most part, they (the lobbyists) said, the DNC has returned to business as usual, pre-2008. The DNC has even named a finance director specifically for PAC donations who has recently emailed prospective donors to let them know that they can now contribute again, according to an email that was reviewed by The Washington Post.”

 

 

Campaign watchdog groups were furious. This is a disgusting and unnecessary reversion, but it gives us a real clue into how the Democratic Party sincerely sees money in politics. They love it. They certainly didn’t do this for Bernie Sanders. His campaign does not accept donations from SuperPACs or lobbyists and he’s won 21 primaries and caucuses without it. The Clinton campaign, on the other hand, is awash in this type of money.

 

In essence, Hillary Clinton and the DNC each wants us to believe that lobbyists and SuperPACs don’t expect anything from them in return for their money. This is the most basic, foolish, offensive lie they could ever tell. Of course they want something in return. That’s the business they’re in.

 

On April 18, the Sanders campaign wrote an open letter declaring that Clinton’s campaign was violating campaign finance laws through an unethical joint arrangement with the DNC. The Clinton campaign’s response was that she was actually raising money for down-ticket Democrats. Two weeks later, though, Politico released an amazing investigative report which found that out of the $61 million the Clinton campaign was raising for state parties, the parties were only allowed to keep 1% of it. You read that correctly. I’ll spell it out so that you know a digit wasn’t missing. They got to keep one percent of the funds she claimed she raised for them.

 

It appears to be a money laundering scheme. Do you remember when George Clooney said that Bernie Sanders and his supporters were right to be disgusted by the fact that some seats at the fundraiser cost $353,400 per couple, but that he could live with it because the money was mainly going to help smaller candidates win local elections?

 

He was wrong.

 

The thing is, though, the Democratic Party isn’t really very democratic. It’s sincerely just a machine for Hillary Clinton.

This isn’t just “sour grapes,” as Clinton surrogates contemptuously claim. This a genuine and painful admission from a critical thinking American citizen that the game is nothing more than a rigged sham.

We’ve all had such moments. I’m sure everyone reading this can recall precisely what event it was that “woke them up” to the false reality peddled to us by the mainstream media, politicians and corporate lobbyists (feel free to share your personal stories in the comment section). For me, it was the crisis of 2008 and its aftermath. It affected me so deeply, I quit my Wall Street job and within a year had moved from the place of my birth, New York City to Colorado. That’s what “waking up” does to you. It hits you so hard, you can never see the world the same way again. You might still be stuck in that same soul crushing job or geography for reasons beyond your control, but your perspective is forever changed.

For Shaun King and many other lifelong Democrats, 2016 is their year of waking up. It took Clinton vs. Sanders to shake them out of their slumber and admit the very troubling state of the Republic. It doesn’t matter when someone wakes up, what matters is that it happened and is happening.

To prove the point, read Shaun King’s closing paragraphs:

Whatever happens between now and the Democratic Convention – what’s next is that we form a brand new progressive political party from scratch. It has never been more clear to me that millions and millions of us do not belong in the Democratic Party. Their values are not our values. Their priorities are not our priorities. And I’ll be honest with you, I think too highly of myself, of my family, of my friends, and of our future, to stick with a party that looks anything like what Hillary Clinton and Debbie Wasserman Schultz are leading right now.

 

Clinton’s refusal to release the transcripts of her speeches to Goldman Sachs was the straw that broke the camel’s back for me. Her indignant and irrational excuses made no sense — particularly in light of the reports stating that the transcripts would ruin her campaign and made her sound like an executive at the company.

 

I’ll start where I left off — the root of all of this is the love of money. In this campaign, Bernie Sanders, with a ragtag group of misfits, proved to the world that another way exists. He has created a blueprint for us on how we build a political movement without the money from billionaire class and their special interests.

In my heart, I believe we are on the brink of something very special. It isn’t going to be the presidency of Hillary Clinton or Donald Trump either. It’s going to be what those of us who’ve seen a better way do next.

 

Don’t believe what anyone tells you — the ball is in our hand and we have more power than progressive people have had in a very long time in this country. I will fight for Bernie Sanders until he is no longer running for president.

 

After that, this will be my last election as a Democrat. I’m moving on and hope you do, too.

These aren’t the words of a man simply blowing off some steam. He isn’t a Bernie supporter who’s about to swap bumper stickers and start groveling to the plutocratic, neocon war criminal that is Hillary Clinton. He’s a man who sees the problem for what it, and bore witness to what happens to society when you continue to accept the “lesser of two evils” for multiple decades.

Shaun King and I probably disagree on most issues, and that’s ok. I’m not about telling everybody I know best and that everyone else is wrong. I’ve been wrong enough to know better. Rather, I’m about open dialogue, the rule of law and an equal playing field. I want a nation of courageous, independent, generous and informed citizens, as opposed to a nation of slobbering, submissive sheep. There’s nothing more offensive to me than the latter.

It’s important to understand that being a sheep has nothing to do with money or status. My life was overflowing with both back in 2009 when I voluntarily left the finance industry at the height of my Wall Street career. I was on the fastest track possible, yet when I looked at myself in the mirror I saw a sheep. Being a sheep is state of mind and nothing more. Shaun King appears to be done being a sheep. Let’s hope tens of millions more follow his lead.

Enough is enough.

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In a video that some accuse of being crass and tasteless while others say will provoke Hillary Clinton to finally respond to a topic that she has so far eagerly avoided, but is most likely just a foreshadowing of many more such attacks to come, Donald Trump on Monday released a clip that uses audio of two women who have accused President Clinton of rape to attack Hillary Clinton.

As reported originally by The Hill, the new black-and-white video plays audio of two women – Kathleen Willey and Juanita Broaddrick – who have made accusations against Bill Clinton.

It plays the audio against a black-and-white backdrop of the White House and an image of Bill Clinton with a cigar in his mouth. It then pivots to audio of Hillary Clinton laughing.

While Trump has previously sought to use allegations of sexual misconduct against Bill Clinton to attack Hillary Clinton, this is the first time it has been encapsulated in internet media, and seeks to provoke an angry response by his presidential challenger.

A Trump senior adviser warned last week Trump’s attacks would escalate after Trump accused Bill Clinton of rape.

So far Hillary Clinton has declined to respond to the attacks, instead focusing on Trump’s issue-oriented remarks and slamming him as a “loose cannon” on foreign policy, although if the clip generates enough publicity Hillary (and Bill) may have no choice but to open a very unpleasant can of worms.

Willey, who accused Clinton of sexaul assault in 1993, can be heard from a 2007 interview with Sean Hannity saying, “No woman should be subjected to it. It was an assault.”

The audio then shifts to Broaddrick, an Arkansas woman who accussed Clinton of raping her in a hotel room when he was Arkansas’s attorney general.

The audio of Clinton appears against a backdrop of the couple with the headline “here we go again?”

Is Hillary really protecting women?

A video posted by Donald J. Trump (@realdonaldtrump) on May 23, 2016 at 8:27am PDT

Which brings us to another point: as NewsBusters wrote last week, CBS co-host Norah O’Donnell hammered Ivanka Trump on Wednesday’s CBS This Morning when O’Donnell highlighted the New York Times piece investigating Mr. Trump and reminded, “It says many of the women interviewed, quote, ‘reveal unwelcomed romantic advances, unending commentary on the female form, a shrewd reliance on ambitious women, and unsettling workplace conduct.’”

O’Donnell pressed, “Is there unending commentary on the female form?” The journalist wouldn’t leave the subject, demanding, “But you have worked so closely with your dad. There’s another woman who is quoted in the article that says that Donald Trump groped her at a… meeting.”

 

Speaking of Hillary Clinton, O’Donnell demanded, “Do you think bringing up her husband’s past infidelities, this discussion, is worthy of a presidential campaign?” Regarding Mr. Trump, the reporter lectured, “He’s running against a woman, and he has said that he’s already using gender as a way to run against her.”

Meanwhile, on April 13, 2015, NBC had ample opportunity to ask Chelsea Clinton similar questions about her own father’s documented poor treatment of women, and yet the issue was never once breached.

Perhaps in order to at least preserve the illusion of objectivity, similar questions should be asked the next time Chelsea is being interviewed on prime time, unbiased TV.

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