Medical Marijuana Initiative Falling Short in Florida

As
expected
, it looks like Amendment 2, which would have
made Florida the first Southern state to approve medical use of
marijuana, is falling short of the 60 percent support it needs to
pass. With 69 percent of precincts reporting, the
results
are 57 percent in favor and 43 percent
against. John Morgan, leader of the Amendment 2 campaign,

said
he would try again in 2016 if the vote was close to the 60
percent threshold for constitutional amendments.

Twenty-three states and the District of Columbia
recognize
marijuana as a medicine, with rules ranging from
strict (e.g., New Jersey) to loose (e.g., California). Amendment 2
would have moved Florida toward the California end of that range,
allowing
marijuana use by patients suffering from nine specific conditions,
plus “other conditions for which a physician believes that the
medical use of marijuana would likely outweigh the potential health
risks for a patient.” 

Support for Amendment 2
plummeted
 between July, when a Quinnipiac University
poll found that 88 percent of voters favored the measure, and
October, when a Gravis
Marketing poll
 found that just 50 percent did. Opponents,
aided by $5 million in donations from Republican casino tycoon
Sheldon Adelson, argued that the regime established by the
initiative would be tantamount to general legalization, which they
said would lead to horrors such as
date rape
facilitated by pot cookies. 

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Maddow Calls Marijuana Legalization a ‘Clear Partisan Issue’

MaddowMSNBC talking head and relentless Democratic
partisan Rachel Maddow just suggested marijuana legalization as one
issue with a clear partisan breakdown. Did you know Democrats are
pro-pot and would surely legalize it if only those pesky
Republicans would let them?

To be fair,
it is true
that more Democrats support marijuana legalization
than Republicans. But long-time readers of Reason know
that it’s quite a bit more complicated than that. Younger voters
by-and-large support legal weed, regardles of their party
affiliation. Medical marijuana is increasingly supported by
Republicans; those in the conservative fold are also more and more
likely to favor
letting states set their own drug policies
rather than be bound
by federal government mandates. And while rank-and-file Democrats
are indeed more enlightened on pot than their Republican
counterparts, national Democratic leaders—including the one
currently occupying the White House—have done very little to honor
their base’s desire for less restrictive drug laws.

In fact, there is little doubt that Sen. Rand Paul, a
frontrunner for the Republican presidential nomination in 2016,
supports a more sane approach to drug policy than does Hillary
Clinton, the likely Democratic presidential nominee. Just today,
Paul said that if D.C. voters wanted to legalize marijuana
they were welcome to do so
.

Bottom line: Support for drug decriminalization is rising on the
right, and some Republican leaders are taking initiative on the
issue. To be sure, many Republicans remain hopeless drug warriors,
but so do many Democrats. If Maddow wants to recast the
growing left-right consensus
on the insanity of marijuana
prohibition as some kind of partisan thing… well, maybe her
viewers like that sort of analysis, but it’s cynical and
dubious.

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America Votes: The Midterm Elections

“Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other” – Oscar Ameringer

And so it begins…

The key states:

State of Play:

House: 435 Seats, 400 Undecided, Results: Republicans 25 – 10 Democrats (1 Incumbents Lost)

Senate: 100 Seats, 32 Undecided, Results: Republicans 34 – 34 Democrats/Independents (0 Incumbents Lost)

*  *  *

Details:

As WSJ reports,

Senate Minority Leader Mitch McConnell of Kentucky won a sixth term Tuesday as his party eyes its best chance in eight years to take control of both houses of Congress.

 

Mr. McConnell’s win against a strong Democratic challenger marks the first big election result of the night and positions the 72-year-old as the Senate’s next majority leader if Republicans manage to wrest the chamber from the Democrats in Tuesday’s midterm elections.

 

Hoping to capitalize on an unpopular president and a favorable political map, the GOP needs a net addition of six seats to gain sway over the Senate.

 

“Victory is in the air, we’re going to bring it home tomorrow night,” Mr. McConnell said at a closing rally Monday in Louisville. “After six years of borrowing and taxing and spending and regulation, these people need to be stopped, and it starts tomorrow night.”

*  *  *

Republicans have their first pick up of the evening:

Rep. Shelley Moore Capito defeats Democrat Natalie Tennant in race to succeed 5-term Democrat Jay Rockefeller, who is retiring.

 

Republicans need net gain of 6 seats to take control of Senate; analysts long had seen W. Va. pick-up likely for Republicans

 

Capito in 2000 became the first woman Republican to represent W.Va. in Congress; she is daughter of state’s former gov., Arch Moore

*  *  *

 

 

 

h/t @LibertyBlitz




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Anatomy Of A Failing State: Japan’s Budgetary Nightmare

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Once the global economy rolls over into contraction, the tide will recede and Japan's fiscal and monetary bankruptcy will become painfully apparent.

What do you get after 25 years of stagnation and Keynesian Cargo Cult monetary stimulus? A failing state, that's what. The intellectually bankrupt ruling Elites of Japan have no solution for Japan's slow stagnation, as real reform would diminish their wealth and power.
 

So their only "solution" is to double-down on monetary stimulus: flood the enfeebled Japanese economy with more credit and fiscal stimulus, a.k.a. building bridges to nowhere: Japan's Monetary Pearl Harbor.

But reality isn't as immobile as failed policies. While Japan's ruling Elites fiddled away the past 25 years propping up sclerotic cartels and phantom loans, Japan's population has aged and its primary sources of wealth creation have atrophied.
 
We can see these trends in Japan's national budget. Before we dig into the numbers, we need to note that Japan's Ministry of Finance routinely announces an austerity budget for the next fiscal year around 92-95 trillion yen (TY), and then supplemental spending during the fiscal year pushes actual expenditures up to 100 TY.
 
According to Highlights of the Budget for FY2013/2014, the initial 2013 budget was 92 trillion yen, while the actual 2013 spending came in 10 trillion yen higher, at 102 trillion yen.
 
According to Japan's government looks to trim budget deficit, the national budget has hovered around 100 trillion yen for years.
 
So we have to take these 2013 spending estimates as lowball estimates that are 5%-10% below actual spending.
 
REVENUES: 92.6 trillion yen
Tax revenues: 43.0 TY
Other revenues: 4.0 TY
Government Bond Issues (borrowing): 42.8 TY
 
EXPENDITURES: 92.6 TY
National Debt Service (interest & bond redemptions): 22.2 TY
Social Security: 29.1 TY
Other: 41.2 TY
 
Debt service and Social Security are 120% of tax revenues. In other words, tax revenues don't even cover debt service and Social Security.
 
An astonishing 46% of the governments budget is borrowed money. Even with near-zero yields on Japanese government bonds (about 1%), 51% of tax revenues in 2013 were spent on national debt service.
 
The 2014 increase in the national consumption tax rate from 5% to 8% is expected to raise an additional 6 trillion yen of revenue in 2014, but that remains to be confirmed. If history is any guide, increases in national consumption taxes (a.k.a. value-added taxes or VAT) fail to generate the expected windfall of additional revenue, as consumers spend less.
 
Since Japan's GDP fell an astounding 6.8% after the tax increase took effect in April, it seems likely the revenues will disappoint official expectations.
 
Even if this new revenue comes in as expected, the amount being borrowed to fund government spending will only drop a modest amount, from 42.8 trillion yen to 41.2 trillion yen. Yee-haw.
Meanwhile, national debt service is expected to rise from 22.2 trillion yen to 23.2 TY.
 
It's difficult to see the tax increase as a panacea, as borrowing barely declines and debt service costs actually increase.
 
For context, we need to look at Japan's tax revenues, borrowing and spending over the past decade. Only then can we see why Japan is a failing state: tax revenues are as stagnant as the real economy, while spending rises as Japan's population of retirees soars.
 
In the decade since 2005, tax revenues actually declined slightly while annual borrowing increased by 8 trillion yen and expenditures rose by 10 TY. Virtually all of this increased spending comes from higher Social Security costs, which rose from 20 TY to 30 TY as the demographics of Japan's aging population inexorably pushes retirement and healthcare costs up.
 
You see what's happening: tax revenues are unchanged while interest and Social Security costs keep rising. A relatively modest increase in the consumption tax triggered a major meltdown in Japan's gross domestic product, and the planned increases in this tax from 8% to 10% are attracting criticism: Next consumption tax raise painting Abe into a corner.
 
If it turns out that the tax hike generates little additional revenue, Japan's path to failed-state will be set: a stagnant economy generating stagnant tax revenues, a central state that funds half its spending with new debt, and rapidly rising social welfare and debt service costs that are already consuming all the tax revenue and then some.
 
Can Japan continue down this path indefinitely? Many believe the answer is "yes," but we cannot base the next 10 years on the previous 25 years. Since Japan's financial bubble popped in 1989, the Internet and China greatly boosted global growth, enabling Japan to live off its well-oiled export and debt machinery.
 
But the engines of global growth have reached diminishing returns, and a prolonged global recession looms just ahead. Playing games such as devaluing Japan's currency and monetizing Japan's ballooning debts with freshly issued money does nothing to fix the rot beneath the bright neon lights of superficial wealth.
 

Once the global economy rolls over into contraction, the tide will recede and Japan's fiscal and monetary bankruptcy will become painfully apparent.




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McConnell Holds on in Kentucky, Other 7:00p.m. Results

Senate
Minority Leader Mitch McConnell (R-Ky.) holds
on to his seat
against Democratic challenger Alison Lundergan
Grimes. The Libertarian candidate, David Patterson, currently has
2.35 percent. (Results
here
).

In South Carolina, Republican Nikki Haley was elected to a
second term as
governor
.

Get results all night at Reason 24/7 and at the 24/7 Twitter feed.

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Goldman Shows “Equity Bust” Risk Highest Since 2008

With the equity market back to near-historical highs, Goldman Sachs' Jan Hatzius revisits his analysis of the predictability of asset price busts. The main predictors of busts are past asset price appreciation and past credit growth, followed by a rising investment/GDP ratio. Hatzius warns that their model says that the further US equity price gains of 2014 have pushed the risk of an equity bust back up – as the chart below shows to levels not seen since 2008/9.

Goldman's "equity bust" model is back at levels last seen in 2008/9 – though obviously well off the peak levels, as the main factor holding down the risk of another bust, especially in the housing market, is the weakness of credit growth since the crisis.

 

The Goldman "Bust" Model

Earlier this year, we presented an analysis of the predictability of equity and housing market busts in advanced economies, focusing particularly on asset price downturns that are associated with a recession. With stocks back to near-record levels, it may be a good time to revisit that analysis.

 

To recap, our analysis uses quarterly data for 20 advanced economies on house prices, equity prices, and a set of economic and financial variables that have been found to correlate with the risk of future busts. We define an equity bust as a year-to-year decline in the quarterly average of real equity prices of at least 20%, and a housing bust as a decline of at least 5%. If the condition for an equity or housing bust is met in quarter t, we date the crisis as having started in quarter t-3. A recessionary bust is defined as a bust that involves a year-to-year decline in real GDP either in the same quarter or up to four quarters later. A deeply recessionary bust additionally requires that the year-to-year decline in real GDP exceed 2%. Our empirical analysis then tries to identify economic and financial variables that predict–or generate and "alarm"–for a bust 5-9 quarters later.

 

 

Exhibit 1 shows our estimation results. In order to facilitate interpretation, all coefficients are expressed in terms of the impact of a 1-standard-deviation increase in an explanatory variable on the probability of a bust, relative to a starting point at which the probability is at its average level. The size of a coefficient is therefore a reasonable proxy for its economic significance in predicting busts, while the z-statistic (in brackets) is a measure of the statistical significance.

 

Exhibit 1 shows that the single most important predictor is past equity price appreciation, followed by a rising investment/GDP ratio and high equity volatility. Our interpretation is that many equity busts are simply the counterpart of prior periods of strong price appreciation, and in this context it is not surprising that big moves downward are more likely when volatility is high. The sizable effect of a rising investment/GDP ratio may reflect a negative impact from excessive capital spending on corporate profitability or the broader dangers posed by an unsustainable homebuilding boom.

*  *  *

Jan Hatzius is careful end with somewhat of a silver lining though…

The expansion has already lasted longer than the median expansion historically, but we still seem to be quite far from the overheating or financial imbalances that historically precede most US recessions.

 

Thus, we expect the current expansion to last longer than average and view the risk of recession over the next few years as fairly modest.

*  *  *
So the model says "worry" but Goldman "thinks" everything's fine.




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Desperate Pols and Pundits Play the Election 2014 Race Card

Last night on
The Independents
, the co-hosts had the kind of discussion
about race and Election 2014 that you just won’t see anywhere else
on cable news. Includes bashing of Ben Stein, Woodrow Wilson, and
Sen. Mary Landrieu (D-Lousiana), among others:

Tonight there will be no Independents, as Scott
Shackford
mentioned earlier
, though you can see Kennedy in the same time
slot being called upon during election coverage from Fox Business
host Neil Cavuto.

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Gordon Tullock, R.I.P.

The great
economist Gordon Tullock
, who contributed greatly to the
intellectual zeitgeist of libertarianism thanks to his role, along
with Nobel Prize-winning economist James Buchanan, in developing
the “public choice” school of economics, has died at age 92, his
colleagues are reporting on Twitter.

Peter Suderman blogged earlier today with a video in which
the
brilliant Tullock explains
why it doesn’t much matter if you
vote.

Tullock was, among other accomplishments, the intellectual
father of the concept of rent-seeking, summed up
well by David Henderson
. An excerpt:

It has been known for centuries that people lobby the government
for privileges. Tullock’s insight was that expenditures on lobbying
for privileges are costly and that these expenditures, therefore,
dissipate some of the gains to the beneficiaries and cause
inefficiency. If, for example, a steel firm spends one million
dollars lobbying and advertisingfor
restrictions on steel imports, whatever money it gains by
succeeding, presumably more than one million, is not a net gain.
From this gain must be subtracted the one-million-dollar cost
of seeking the restrictions. Although such an expenditure is
rational from the narrow viewpoint of the firm that spends it, it
represents a use of real resources to get a transfer from others
and is therefore a pure loss to the economy as a whole.

I wrote about the importance of Tullock and Buchanan’s
contributions in a libertarian context in my 2007 book
Radicals for Capitalism
.
Excerpts:

[Buchanan] and his old partner Gordon Tullock, with whom he did
the early foundational work in the school of economics that has
come to be known as Public Choice, have unquestionably given
libertarians a valuable intellectual and ideological tool. Buchanan
and Tullock helped build a professional consensus and a rigorous
scholarly apparatus around the notion that—despite what many
economic professionals used to assume—the behavior of government
agents can fruitfully be modeled the same way we model individual
behavior in markets; that is, as largely motivated by maximizing
the personal utility of the government worker or politician, not
some empyrean concept of the “public good” or an overall “social
welfare function” that a technical economist could calculate.

As Tullock explains it, “the different attitude toward
government that arises from public choice does have major effects
on our views on what policies government should undertake or can
carry out. In particular, it makes us much less ambitious about
relying on government to provide certain services. No student of
public choice would feel that the establishment of a national
health service in the United States would mean that the doctors
would work devotedly to improve the health of the
citizens.”….

The Buchanan/Tullock public choice approach also came to be
known as the “Virginia School” of political economy because of
Buchanan’s formative years teaching at the University of Virginia.
(Buchanan had been, unsurprisingly, an economics student at the
University of Chicago.) The Volker Fund was one of the early
supporters of the Thomas Jefferson Center for Studies in Political
Economy and Social Philosophy that Buchanan ran there, and helped
them bring in other libertarian thinkers such as Hayek and Italian
legal scholar Bruno Leoni for half-year stints. Buchanan sums up
the libertarian implications of his research program: “The Virginia
emphasis was, from the outset, on the limits of political process
rather than on any schemes to use politics to correct for market
failures.”….

Tullock was a curious character in addition to his great
intellectual accomplishments; he once troubled himself to write a
letter to the editor to Reason wondering on that
age-old intellectual conundrum: in Lord of the Rings, why
didn’t they just give the ring to a flying eagle to deposit in Mt.
Doom?

His colleagues long believed he deserved his own Nobel Prize. He
will be missed, but his insights will be undying.

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Thoughts On Election Day: Relax, Both Parties Are Going Extinct

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Whichever side emerges victorious, both Republicans and Democrats should face up to a much bigger truth: Neither party as currently constituted has a real future. Fewer and fewer Americans identify as either Republican or Democratic according to Gallup, and both parties are at recent or all-time lows when it comes to approval ratings. Just 39 percent give Democrats a favorable rating and just 33 percent do the same for Republicans. Not coincidentally, each party has also recently had a clear shot at implementing its vision of the good society. If you want to drive down your adversary’s approval rating, just give him the reins of power for a few years.

 

– From Nick Gillespie’s article: Relax—Both Parties Are Going Extinct

Like so many others out there, in the aftermath of the financial crisis of 2008, I became terrified about the future. I knew the financial system was a corrupt fraud (still is), and I became filled with fear as far as what might happen next. The fear wasn’t that a horribly dysfunctional and immoral financial system would come unglued, rather the fear was based in the uncertainty of the general public’s response.

Historically speaking, many of the worst political regimes are swept into power in a reactionary wave following the destruction of an older, flawed system. Hence the saying: Better the devil you know than the devil you don’t. Or even: The road to hell is paved with good intentions. In other words, if good intentions coupled with tremendous upheaval can cause a hellish outcome, imagine the potential impact of bad intentions within such an environment. Those were the thoughts that filled my head during those years.

Over time, I picked myself up out of the fear bunker. Not because the media told me everything was ok, and certainly not because the stock market was rising. I transitioned from my brief period of fear because I recognized it as the negative and useless emotion it is. Furthermore, I had taken some precautions to protect myself should the worst case scenario unfold, but beyond that, I concluded that you need to live your life and try to have a positive impact on the world, rather than shiver in a corner. In fact, that’s exactly what the status quo wants, an ignorant population terrified of everything, paralyzed in a corner. In such a state one can be more easily manipulated by propaganda.

The other thing that helped me become more filled with optimism about the future was the things I was seeing at the grass roots level. The grassroots response from both anti-Democratic establishment “progressive types” and anti-Republican establishment “libertarians” had striking similarities. On many of the most significant issues of our day, these two “activist” groups had a surprising degree of overlap. I first noticed it with the emergence of both the Occupy Wall Street Movement and the Tea Party. This venn diagram sums it up well:

Screen Shot 2014-11-04 at 11.16.22 AM

I expressed this perspective tirelessly, but it largely fell on deaf ears.

The defining moment where I think both sides finally realized how much they have in common, came last year when Rand Paul filibustered on drone strikes. I outlined my thoughts in the post: #StandwithRand: The Filibuster that United Libertarian and Progressive Activists. Here’ an excerpt:

Personally, I would have preferred the issue that united libertarian and progressive activists to have been the Federal Reserve, since it is the core cancer of this country and indeed the world. Without Federal Reserve funding, none of the awful things our government and multi-national corporations do at home and abroad would be possible, but you don’t always get what you want.  If civil liberties is the issue that does it, so be it.

 

I follow an eclectic group of people on Twitter.  Several of them are what would be best described as “progressive” journalists and activists.  When I witnessed several of them tweet in support of Rand Paul, my antennae shot up straight into the stratosphere.  Then I realized that Rand had quoted the work of several of them on the Senate floor (including one of my favorite journalists Glenn Greenwald), and I knew I something special was happening.

 

Ever since the dawn of Occupy Wall Street, I have pushed heavily to try to unite the “tea party” and OWS.  I recognized that at their core these two resistance movements had the same grievances with “the system.”  Unfortunately, the tea party was largely co-opted by mainstream Republicans, while OWS was crushed by the Department of Homeland Security and the FBI.  In reality, it isn’t about these two “movements,” rather it’s about ideas.  At this stage in the game, we have very established activists on both the libertarian and progressive side of things.  As someone that reads them all, I can tell you that the prominent ones on both sides are genuine, moral and intellectual.

 

What Rand Paul did yesterday was finally bring the public debate to where it needs to be.  In doing so, he united activists that are quite opposed on many issues (less than they think, but that’s for another day).  This is extremely significant and we need this momentum to continue.  Those of us that care about the core principles that made this country great need to stick together, find common ground and not allow the establishment to control the debate any longer.

A year later, we face another midterm election in which crony establishments from one of the two fraud political parties will be swept into power. I can still pretty much count on one hand the number of decent and intelligent members of Congress. Nevertheless, I strongly believe that the future belongs to those of us in the center of that Venn diagram.

Such thoughts were wonderfully articulated by the editor of Reason, Nick Gillespie, in a post from today titled: Relax—Both Parties Are Going Extinct. Here are some excerpts:

Whichever side emerges victorious, both Republicans and Democrats should face up to a much bigger truth: Neither party as currently constituted has a real future. Fewer and fewer Americans identify as either Republican or Democratic according to Gallup, and both parties are at recent or all-time lows when it comes to approval ratings. Just 39 percent give Democrats a favorable rating and just 33 percent do the same for Republicans. Not coincidentally, each party has also recently had a clear shot at implementing its vision of the good society. If you want to drive down your adversary’s approval rating, just give him the reins of power for a few years.

 

What’s going on? The short version is that political, cultural, and even economic power has been decentralizing and unraveling for a long time. Whether you like it or not, The Libertarian Moment is here, a technologically driven individualization of experience and a breakdown of the large institutions—governments, corporations, churches, you name it—that used to govern and structure our lives. The result is that top-down systems, whether public or private, right wing or left wing, have less and less ability to organize our lives. That’s true whether you’re talking about the workplace, the bedroom, or the bar down the street (that may now be serving legal pot). This is mostly good, though it’s also profoundly disruptive too.

 

Indeed, the signal characteristic of the past several decades of American life has been the ways in which all sorts of decision-making has been pushed outwards to individuals or end-users in whatever system you want to gin up. In virtually any commercial transaction, for instance, even budget buyers have far more information and leverage than they did 30 years ago (think of the immense difference in the experience of purchasing a car before and after Edmunds.comcame online).

 

Traditional authorities in social institutions such as churches wield less control too. Our world is in so many ways more based on voluntary exchange than ever before. As Albert O. Hirschman would put it, we’ve got more ways of exiting a given situation and giving voice to criticism too. That in turn leads to a premium on what the economic historian Deirdre McCloskey has recognized as the “sweet talk” of mutually beneficial exchange and persuasion rather than brute force. (Sadly, the fact of decentralization doesn’t mean that centralization by government and other large forces isn’t also taking place.)

As far as his last line here, I would argue that the forces of centralization see the threat they face and are aggressively doubling down where they can. Indeed, this battle of centralization vs. decentralization is the defining battle of our time. For more detailed thoughts on this, check out:

Networks vs. Hierarchies: Which Will Win? Niall Furguson Weighs In

Ex-CIA Officer Claims that Open Source Revolution is About to Overthrow Global Oligarchy

Now back to Nick Gillespie…

For liberals, it’s always 1965 and social justice is just one mega-entitlement program away from arriving. For conservatives, it’s always 1980 and the next tax cut will solve all problems forever. Each side can appreciate some but not all aspects of decentralization. Conservatives and Republicans can embrace it when it applies to some economic issues and to things like school choice, but they can’t abide the profusion of sexual and cultural identities and the diminution of authority in general. Liberals and Democrats may be more comfortable with some of the latter but then they want tighter and tighter controls and limits on all sorts of commercial transactions.

A key point here he fails to mention is that most of these self-described “liberals” and “conservatives” are actually from the baby boomer generation. These folks will inevitably fade away from a generational perspective, and millennials simply do not think in such terms.

Levin can at least diagnose the problem and recognize that this leads to an evacuation of traditional politics. In this, he’s years ahead of Vox’s Ezra Klein, the sort of liberal dogmatist who isn’t quite able to step outside of his own bubble. Klein recently wrote about how #GamerGate proves “the politicization of absolutely everything”. Don’t you see, wrote Klein, that “our political identities [have] become powerful enough to drive our other identities.” Sure, dead-enders are more bitter than ever. But what Klein can’t acknowledge is that fewer of us actually invest in our political identities. That helps explain why party self-identification keeps heading south and approval for political parties has been on the skids for a long time.

 

In a world where you can personalize and individualize your online experience, your clothing, your work situation, even your sexuality, why would anyone join up for ossified, rigid, centuries-old groups such as the Democrats or Republicans?

 

And that’s why the future of politics and policy doesn’t belong to doctrinaire Democrats or Republicans who want to control large swaths of everyday life. It belongs ultimately to the libertarian decentralists such as Paul who not only understand what is happening to America but are growing comfortable with it. Americans are increasingly wary of government’s power, and they don’t want it to teach a single set of morals either. Everything is proliferating and people just want a government that will keep people from starving on the streets and get out of the way as they go to the corner pot shop to buy edibles to take to their friends’ gay wedding celebrated by ministers who are not forced to do so.

Amen to that.

So my final conclusion on this, another election day sham, is to not get discouraged. Things are changing at the grassroots for the better. The battle of decentralization vs. centralization, networks vs. hierarchies, will not be easily won, but it will be won. Keep fighting.




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Does this Black Swan look like a Grey Goose?

Does this Black Swan look like a Grey Goose?

Historical Backdrop:

In the previous 125 years of the Global economy, no two events overshadow the system fragility of the financial system as the economic woes of the 1920’s and 1930’s and the crisis of 2008.

The historical and economic memory of the post WWI and pre-WWII European economies certainly presents itself in an ominous way when dealing with the current situation in the EU.  Although, tangible and theoretical economic thought existed during the inflation/deflation of the said period, the role of the central banker was remarkably different. The Federal Reserve was created a few years after the turn of the last century.  Though theoretical economic theory existed, one could make an argument for the lack of functional experience in dealing with massive economic calamities.  

Unless you have been living in the far distant villages of Nepal (no offense) for the last 9 years, not one business day passes without a journalist discussing the implication of the crisis of 2008.  Considering society has a remarkable ability to enact our short term memories rather keenly, we rely on this piece of history quite well and effectively.

Recalling the notion of the Black Swan, as economists and traders we begin to search for the next potential Black Swan event.  

In this article we evoke history as an antidote for the nay-Sayers and as a scare-tactic for the optimists.

We show the intensity of true inflation and the debilitating power of deflation.  Below are graphs showing how high CPI was through the two crises’. Anecdotal evidence: 1) The inflation of the 1920’s was so severe that restaurant waiters in Germany during the 1920 had to announce menu prices every half hour to stay up to date on inflation indicators.  During the 2008 crisis, the need to divest from all asset classes, gold withstanding, hedge funds were buying the commodity to store in bank vaults as a just-in-case the world ends tomorrow move.

 

 

Looking at the historical CPI data, we see that the range in CPI during the 1930’s was in a range of positive 20 to negative 20 (US Data). In the 1980 through 2008 timeframe, the range of CPI was 15 to -5 (US Data).  If you compare the inflation indicator in recent years, CPI seems rather tame. Most recent CPI indicated 1.7 on an annual basis.

 

 

So clearly, we are not anywhere near crisis levels either on the inflationary or deflationary front.  Could this change rather quickly? Absolutely.

He are three scenario’s that could decouple optimism from the investor:

One: Central bankers overstate their presence and promote the inevitable inflationary environment.  One could argue that the goal of stimulus is to perhaps overshoot the 2% target.  The objective of central bankers is to also promote growth.  We know from historical evidence that public money has a much lower multiple than private funds (capex, corporations, small business, etc.).  The disastrous situation that could develop from stimulus alone is that there is an overabundance of cheap capital. In turn, causing inflationary pressure in a number of economies. As inflation gets out of control, rates climb to unsustainable levels, borrowers can no longer afford the higher cost of loans, and we will begin to witness recessionary and deflationary pressures.

Two: Selling the $4 Trillion fed balance sheet.  How does the fed orchestrate the sale of such a massive position? Laws of Demand and Supply teach us that an influx of supply will decrease the price of a unit.   Keeping in mind the inverse relationship of bonds prices and rates, we can infer that as prices drop the yield will climb rather quickly.  The caveat: A coordinated effort between the fed, global central banks, pension funds, insurers, and foreign entities to simultaneously purchase Treasures as the Fed is selling the positions.  We see that central bank coordination is quite likely judging by the recent Japan QE monetary easing a day and a half after the FOMC stopped QE3.  

Three: Deflation.  Granted we are not in the 1920’s and 1930’s.  But, the recent “decrease in inflation” does give credence to the deflation concern.  Can we slide deep into negative GDP, CPI, and PCE territory? Yes.  We do not want deflation.  There are a lot of indicators that need to coincide for this to happen.  Remember, our economies our more mature that 70 years ago.  At the moment, we do not have serious systemic risk on balance sheets that would cause severe panic in the markets.  

Having said this, concern exists.  If many investors believe in and find the proverbial Black Swan and take the necessary position against such an event, will it happen? Does this make the notion of the Black Swan obsolete? By definition a Black Swan is an unpredictable (dove tail) risk.  Think the effect of the Japanese earthquake. 

I argue that we have calculated the potential risks in the global economy and possible implication is not pretty.  This is under the assumption that the global central bankers completely mucks this up.  

 




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