MacroMouse

I'm republishing this post of June 23, 2008, as I feel it's so important to be thoroughly understood:

(New June 29) The World Finance Crisis & the American Mission, By Robert Skidelsky

To Fareed Zakaria at CNN___The World’s Last One-Hundred Years, Most Important Event

Hi Fareed, thanks for the program, it’s great___Keep up the fine work… As to your question; “What’s the world’s last one-hundred years, most important event?” That, transactions’ mathematically factually, would definitely be Nixon’s `71 and `73 decisions to end the gold std. and the Bretton Woods system, and replace them with the longest era of currency tariff manipulations of nations’ trading systems, the world has ever known___Almost all the world’s excess off-shoring, excess arbitraging, hedging and speculation, is controlled by this one famous inane, freely-floating exchange’s, decision era. This has evolved into the system of extreme currency tariffs and subsidies, of between 400% and 800% actual ppp(actual purchasing price parity, and not the false purchasing power parity) exchange rate differences, between the developed world and the under-developed world, especially when Japan’s over-valued, and the BRIC’s(Brazil, Russia, India, China), and satellites, under-valued currency tariffs and subsidies are considered, at the extremes. The extreme economic senility, of trillions of dollars, of capitalist system costs added, by this “Kabuki Shadow Banking” mafia-capitalism’s imbalanced system, hasn’t been seen since China and Japan, some 600 and 400 years ago had such imbalanced currency systems’ standards, with China at 10 to 1, and Japan at 6 to 1, silver to gold ratios, when the West was at 14.5/15 to 1. History clearly records the devastating results of these collapses, when just semi-free, yet vastly imbalanced currency systems’, trade was first, large scale, tried, between the East and West. It wasn’t pretty…

Extremely imbalanced currencies, ARE, Extremely High Trade Tariffs, and opposite direction Trade Subsidies…!

The world can handle 10% and 20% imbalanced currencies. It can not handle 400% to 800% true PPP Currency Imbalances. The Derivatives $596(now $592, down from a high of $684) trillion markets(now fast expanding, notional transactions turnover trading value, per year___BIS numbers) simply put far too much financial pressure on Capitalism’s Aggregate System Operations’ Costs, as is now being clearly witnessed in our financial markets…

Unless we take down the extreme global currency tariffs and subsidies systems, by instituting a new “International Financial Architecture” re-balancing system, of sliding time scaled, self-balancing laws, capitalism is mathematically transactions guaranteed, to fully collapse, with all the system and currency raiding, taking place, by none other than Nixon’s, originating and now fully grown, Corporate Currency Raiding Mafia-Economists & Co... The show continues…

Dr. Paul Einzig’s complete works, some 65 books, verify the above facts, along with hundreds of other historical financial economists’ books and facts …

It’s time for America to awake…

Lloyd Gillespie
(a polymath, autodidact economist)

p.s.
As you'll have noticed, I wrote this warning before the Sept. collapse...

(NEW) Krugman's Nostalgianomics, by Brink Lindsey I agree more with Paul Krugman than Brink, but this paper offers many facts, otherwise...

“CHARLES SANDERS PEIRCE” by Josiah Royce, with W. Fergus Kernan

(Note)Extremely clear and concise ideas and graphs’ explications presented. (Exact Logic = Numbers = Analogical Graphs = A Universal Analogical Language of Genericity = Possibility of A Perceptual Wisdom of Analogical Pragmaticism)

“The upshot of the first phase of the proof(pragmaticism) is that logical goodness is goodness of inference and goodness of inference, which is validity, is to be understood as conformity to an ultimate end. This advances the proof because Peirce is interested in the nature of belief or assent insofar as it is voluntary. Voluntary belief is belief that is subject to the check of logical criticism through the criticism of inference. Since inference is a purposive activity which controls belief, belief in general must have a purpose. A reasonable conjecture, which Peirce makes, is that the nature of belief can be uncovered by finding out its purpose [36] and that its purpose can be understood by investigating the aim of reasoning in general.” Jeremiah McCarthy

Many following this blog may ask, “Why is he tying so much philosophy and physics in with his economics?” That’s a reasonable question and here’s the answer. Twenty-five years ago, I discovered an entirely new economic model possibility, for our ailing world. After several years of relaying my ideas, I came to realize I possessed no real(exact logic) mathematical proofs for my system, so I started searching, but where was I going to look, as I knew the world’s mathematics systems were so corrupted? Thinking it over, I decided physics may offer the best shot, because I could see the graphical models of their maths, but this proved a dead end as well, just as economic maths had, earlier. Then I decided to return to my much earlier studies of philosophy, as I knew they contained the largest library of laws and mathematical ideas’ histories. Since I knew I couldn’t find the information elsewhere, I started re-stumbling through the past’s greatest and not-so-greatest philosophers. Continue...

(New)The Greatest Swindle Ever Sold By Andy Kroll
"Can Future Systemic Financial Risk Be Quantified? Ergodic Vs. Nonergodic Stochastic Processes" by Paul Davidson

Fabius Maximus | May 21, 2009 This financial crisis has revealed much about America. About the operation of our government. About our ruling elites, and what they consider important — and who they believe should pay for their mistakes. And about the American public. Our passivity and ignorance (don’t know, don’t care).

If we choose to be sheep the best we can hope to get is a shepard. More likely we will get wolves. This is the natural order of things, and neither shepards or wolves are criminals. The most common reaction to these hard facts has been to whine about it. Perhaps instead we should consider not being sheep.

Some prominent conservatives analyze the situation

Perhaps the most astonishing aspect of the crisis has been that of prominent conservatives. As we see in this conclave talking on the Glenn Beck Program: “Destined to Repeat“, Fox News, 10 April 2009 — Red emphasis added. Excerpt:

GLENN BECK, HOST: There are undeniable parallels between what has happened in the past on our planet and what is going on today. And tonight, we’re going to cover a lot of them. I hope that you come away from tonight’s program with a deeper understanding of how some of the most infamous events in history started with the best of intentions. …

BECK: All right. Our country is not being controlled by jackbooted fascists. But like I said, during George W. Bush’s term, the groundwork is continuously being laid to take us there if the train goes off the tracks. History shows us that it only takes two simple things for fascism to rear its ugly head, and it can happen virtually overnight: fear and hunger. A temporary crisis is almost always a precursor to a much, much more permanent one.

So, with that in mind, let me show you the four main things that we’re going to be talking about tonight. First, we’re going to take you to Russia, where under communists like Lenin and Stalin, their revolution pitted peasants against the rich, the poor against the wealthy. They were basically saying, “Eat the rich! They did this to you! Get them! Kill them!”

These days, the comparison, demonstrators are rioting in front of the G20, unions protesting in front of AIG, an organized mob, buses showing up at the houses of the evil AIG executives. It’s a different style, but the sentiments are exactly the same — find ‘em, get ‘em, kill ‘em! They did this to you!

…

RGELLATELY, AUTHOR, “LENIN, STALIN & HITLER”: Well, the Russian Revolution came at the end of disastrous First World War, and the people were hungry and there was a great desire to get out of the war. Lenin came back to Russia — brought there by the Germans, incidentally — to try to bring about a revolution, and he did it cunningly by offering poor peasants land, people bread, and the army peace. And with those three slogans, he managed to obtain rather quickly and easily victory for the Bolshevik Revolution in October — old style, October 1917.

Now, what happened after that, of course, is that there was a war was in the countryside and basically he promised the land to the poor peasants, who were then invited to take land from the churches, from nobility that were better off. And what they did, of course, was think actually that the communists were going to let them keep the land. So, they became firm backers of the Russian Revolution, the poor peasants believing that now the land that they thought was rightly theirs for so long now was theirs finally to keep.

But of course, that was complete illusion, and within no time at all, the situation went from bad to worse. So, think what would happen if you draw off the best farmers, you kill off the best farmers — what do you think is going to happen next? What happens next is a famine.

BECK: And that’s exactly what happened. And I see this parallel with AIG and then the bankers and everything else — hate them, hate them, they did this to you, you’ve got to get them, you know, kill them off, put them in jail, take their money, whatever. Who is going to run these things? There are — they have expertise that most don’t.

Let me — let me go to Amity. Do you have any or anybody — is anybody watching the news today and seeing things that don’t have to repeat? But when you, as a historian, and you know history, don’t you look at today and go — wait, wait, wait? Everybody knows what we’re doing, right? Everyone is aware this is dangerous territory that we’re — that we’re walking down.

AMITY SHLAES, AUTHOR, “THE FORGOTTEN MAN”: Yes, Glenn, there is a variant of what you said before — politicians who can’t remember the past condemn the rest of us to repeat it. So, you get the feeling in Washington, they haven’t thought about what government can do before. I prefer to call it “statism,” the ever-expanding state what we’re talking about, which then corrupts, when then sometimes leads to war. And yes, I see, when we look at companies and blame them, no good outcome because those companies are also often the source of our prosperity and our return to prosperity.

So, you can be mad at certain AIG executives that they didn’t forego their bonus or that they were too lawyerly in writing it all out this winter and tricking people with Congress. And yes, there are bad people at all companies, but if we blame AIG, we also hurt a lot of other companies.

For an analysis of Amity Shlaes brand of economics see An important and politically significant guide to the Great Depression (30 April 2009).

I recommend reading the complete transcript to take a full measure of its nuttiness. We have gone through the greatest financial crisis since the 1930’s — the first global recession (wars do not count) — and there these people show no awareness of the need for fundamental reforms. Also, comparing America to the last days of the Czars is nuts.

Most bizarre: in response to tepid discussion of changes, they invoke the ghosts of Communism and Fascism. Revolution and famine. If we jail some senior bankers, our system will collapse because nobody else can run those institutions. This is too crack-pot for serious analysis, but Matt Taibbi does find important meaning in it for all of us.

A reasonable person’s remarks about these conservatives’ analysis

Excerpt from “The peasant mentality lives on in America“, Matt Taibbi, posted at The Smirking Chimp, 14 April 2009:

This must be a terrible time to be a right-winger. A vicious paradox has been thrust upon the once-ascendant conservatives. On the one hand they are out of power, and so must necessarily rail against the Obama administration. On the other hand they have to vilify, as dangerous anticapitalist activity, the grass-roots protests against the Geithner bailouts and the excess of companies like AIG. That leaves them with no recourse but to dream up wholesale lunacies along the lines of Glenn Beck’s recent “Fascism With a Happy Face” rants, which link the protesting “populists” and the Obama adminstration somehow and imagine them as one single nefarious, connected, ongoing effort to install a totalitarian regime.

This is not a simple rhetorical accomplishment. It requires serious mental gymnastics to describe the Obama administration — particularly the Obama administration of recent weeks, which has given away billions to Wall Street and bent over backwards to avoid nationalization and pursue a policy that preserves the private for-profit status of the bailed-out banks — as a militaristic dictatorship of anti-wealth, anti-private property forces. You have to somehow explain the Geithner/Paulson decisions to hand over trillions of taxpayer dollars to the rich bankers as the formal policy expression of progressive rage against the rich. Not easy.

… It’s been strange and kind of depressing to watch the conservative drift in this direction. In a way, actually, the Glenn Beck show has been drearily fascinating of late. It’s not often that we get to watch someone go insane on national television …

After all, the reason the winger crowd can’t find a way to be coherently angry right now is because this country has no healthy avenues for genuine populist outrage. It never has. The setup always goes the other way: when the excesses of business interests and their political proteges in Washington leave the regular guy broke and screwed, the response is always for the lower and middle classes to split down the middle and find reasons to get pissed off not at their greedy bosses but at each other. That’s why even people like Beck’s audience, who I’d wager are mostly lower-income people, can’t imagine themselves protesting against the Wall Street barons who in actuality are the ones who fucked them over.

… But actual rich people can’t ever be the target. It’s a classic peasant mentality: going into fits of groveling and bowing whenever the master’s carriage rides by, then fuming against the Turks in Crimea or the Jews in the Pale or whoever after spending fifteen hard hours in the fields. You know you’re a peasant when you worship the very people who are right now, this minute, conning you and taking your shit.

Whatever the master does, you’re on board. When you get frisky, he sticks a big cross in the middle of your village, and you spend the rest of your life praying to it with big googly eyes. Or he puts out newspapers full of innuendo about this or that faraway group and you immediately salute and rush off to join the hate squad. A good peasant is loyal, simpleminded, and full of misdirected anger.

And that’s what we’ve got now, a lot of misdirected anger searching around for a non-target to mis-punish — can’t be mad at AIG, can’t be mad at Citi or Goldman Sachs. The real villains have to be the anti-AIG protesters! After all, those people earned those bonuses! If ever there was a textbook case of peasant thinking, it’s struggling middle-class Americans burned up in defense of taxpayer-funded bonuses to millionaires. It’s really weird stuff. And bound to get weirder, I imagine, as this crisis gets worse and more complicated.

Conclusion

This puts America in a tough spot. The core of the loyal opposition has gone crazy. The Administration in power continues the policies of the old Administration. To whom do we turn if the economy fails to recover in the second half of 2009? To ourselves. It’s our government. It’s our nation. It’s our responsibility.


--------------------------------------------------------------------------------
Originally published at Fabius Maximus and reproduced here with the author's permission.

This is an excellent article of our financial mess. I fully agree with Satyajit Das...

Second Lesson of the GFC: Whatever It Takes!
Satyajit Das | May 18, 2009
Socialist WIT

The severity of the crisis was underestimated initially. Ben Bernanke, Chairman of the US Federal Reserve in March 2007 stated during Congressional Testimony: "At this juncture, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained." In April 2007 US Treasury Secretary Henry Paulson delivered an upbeat assessment of the economy: "All the signs I look at show the housing market is at or near the bottom… The U.S. economy is very healthy and robust."

The grande mal seizure of financial markets in September and October 2008, with the bankruptcy of Lehman Brothers, a large US investment bank and near collapse of AIG, the world’s largest insurance group, highlighted the seriousness of the problems. Since then national and international "committees to save the world" have implemented a bewildering and ever changing array of measures to try to stave of economic collapse.

The actions – dubbed WIT ("What it Takes") by Gordon Brown, the English Prime Minister - have been focused on trying to stabilise the financial system and maintaining growth in the real economy.

Governments and central banks have moved to remove toxic debt from bank balance sheets, inject share capital to cover losses from bad debts and also guaranteed the bank’s own borrowings to allow them to continue to raise deposits and borrow. Bank of England Governor Mervyn King recently summed up the nature of the UK’s support for the banking system memorably: "The package of measures announced yesterday by the Chancellor are not designed to protect the banks as such. They are designed to protect the economy from the banks."

Governments have provided large amounts fiscal stimulus and support for the housing market (in the US). In addition to the normal "automatic stabiliser" effects of reduced tax income and higher social welfare spending in a recession that push budgets into deficit, governments have launched new spending initiatives focused on infrastructure and direct payments to those most affected by effects of the GFC. Central banks have cut interest rates to levels not seen for decades.

It is not clear whether the actions taken will have the intended effect. As John Kenneth Galbraith noted: "In economics, hope and faith coexist with great scientific pretension".

King Canute Addresses the Waves

The pretence of global co-ordination in policy responses, reiterated at increasingly frequent G20 summits, does not accord with the reality of individual actions.

Ireland’s anxious reaction to a "run" on Irish banks prompted a blanket government guarantee on bank deposits. This, in turn, led to a flight to Irish banks forcing the implementation of similar arrangements in other countries. The "electronic herd" did not notice that Ireland was guaranteeing deposits totaling over 200% of its own gross domestic production ("GDP") calling into question its ability to honour these commitments if called.

There have been constant shifts in policy. TARP might well stand for Temporary Asset Relief Program (rather than its real name - Troubled Asset Relief Program) as there have been a succession of wholesale changes in the strategy.

The financial initiatives have not led to a significant easing of credit conditions. This reflects the fact that the capital provided is only sufficient to cover continuing losses but insufficient to restore normal lending and financial activity.

Money supplied to banks is not flowing into the real economy. Banks need funds to pay off maturing borrowings of their own as well support assets coming back onto their balance sheet (known by another three letter acronym - IAG - involuntary asset growth). Companies have also drawn down debt facilities, as their own financial position has deteriorated, requiring the banks to finance these requirements.

Governments and central bankers have become frustrated at the failure of policy actions to help the resumption of normal financial activity. Where governments have taken substantial stakes in banks, there is a noticeable drift to "directed lending". Central banks and governments are increasingly bypassing the banking system and providing finance directly to businesses. The Federal Reserve may soon issue credit cards to all Americans under its own brand.

The debates miss the point that debtors still have too much debt and are not able to service it. Until the debt is written down and restructured, credit growth may not resume.

In the TARP Oversight Panel Report of 8 April 2009, Professor Elizabeth Warren observed: "Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury’s …. approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from non-functioning markets for troubled assets. On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth".

The stimulus packages create different challenges. Well-intentioned infrastructure spending will take some time to have any meaningful effect. Skill shortages in key areas of expertise may slow down implementation. The need to avoid "leakage" where spending flows to overseas recipients in a globalised world is also paramount politically. The return on inadequately targeted infrastructure investment is also not necessarily high

Governments must also borrow to finance their spending. Many countries implementing fiscal stimulus packages already have large budget deficits and also substantial levels of outstanding public debt.

In 2009, governments around the world will have to issue US$3 trillion in debt. The US alone will need to issue around US$ 2 trillion in bonds (a staggering US$40 billion a week!). This compares to around US$400-500 billion of annual debt that the US has issued in recent years. This debt must be issued at record low interest rates.

China, Japan, Europe and other emerging countries have been major buyer of this debt. It is not clear whether they will continue to buy US government bonds, at least at previous levels. Wen Jiabao, China’s prime minister, provided a reminder of the importance of this issue in February 2009: "Whether China will continue to buy, and how much to buy, should be in accordance with China’s needs, and depend on the safety and protection of value of foreign exchange." Yu Yongding, a former adviser to the Chinese central bank, recently sought guarantees that the value of China’s US$682 billion holdings of US government debt won’t be eroded by "reckless policies". He asked that the US "should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way."

At best, the tsunami of government debt may crowd out other borrowers exacerbating existing financing problems. At worst, there is a risk of a collapse of the growing "bubble" in government debt markets as investors refuse to purchase debt at current rates triggering additional losses. In January 2009, long-term interest rates moved up sharply as markets started to absorb the import of government initiatives. As James Carville, Bill Clinton’s campaign manager, once noted: "I want to come back as the bond market. You can intimidate everybody."

Current initiatives resemble the "hair of the dog that bit you" cure where ingestion of alcohol is the treatment for a hangover. The current problems can be traced to high levels of debt accumulated by banks, consumers and companies. In effect, this debt is now being replaced by government debt. Simultaneously, the debt fueled consumption of consumers and companies is being replaced by debt funded government expenditure.

Adjustment in the level of debt and asset prices is part of process of through which the global economic system re-establishes itself. Governments and central banks can smooth the transition but they cannot prevent the necessary adjustments taking place. Like King Canute, central bankers and finance ministers cannot hold back the tide.

Multiplication by Zero

Like an athlete using drugs to enhance performance, the global economy used debt and financial engineering to enhance global growth. Increasing stimulus was needed to maintain performance in an unsustainable Ponzi scheme. The removal of performance enhancing drugs has exposed fundamental weaknesses.

A simple way to think about value in the global economy is in terms of Irving Fisher’s transaction equation:

Real Economy = Financial Economy

Where

Real Economy = Quantity of Good times Price of Goods

Financial Economy = Money Supply times Velocity of Money
Therefore:

Quantity of Good times Price of Goods = Money Supply times Velocity of Money
The financial economy represents claims on the earnings and cash flows (both current and future) from producing and selling real goods and services. The financial economy consists of the money available and how rapidly the money can be circulated through the global economy (velocity). Banks provide much of the velocity of money in the economy through its borrowing and lending activities where a small amount of capital is leveraged to create larger amounts of money in the form of debt.

Recent economic prosperity was primarily driven by growth in the financial economy – increased money supplied by central banks augmented the rapid growth of and innovation of financial techniques within the banking system that increased the velocity of circulation. This increased the value of the real economy by increasing prices and also stimulating the expansion in the supply of goods and services.

The GFC has sharply reduced the financial economy, specifically it has decreased the velocity of money. As any student of mathematics knows anything multiplied by zero is itself zero.

The reduction in the financial economy necessitates a corresponding reduction in the real economy, initially in prices and ultimately by reducing the quantity of real goods and services. Falling prices of financial assets (claims on real goods and services) and, more recently, reductions in production volumes reflect the required economic adjustment process.

Government actions, however well intentioned, seem primarily to be based on the recognition that Ponzi or pyramid games are only bad if they end. All efforts are now seemingly directed at keeping the game going for as long as possible!

In 1976, James Callaghan, the Prime Minister, delivered the following grim assessment of Britain’s economic situation that is still relevant today: "We have been living on borrowed time. We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists."

Government actions, however well intentioned and significant, may entail pouring water into a bottomless bucket.

© 2009 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

This article draws on the ideas first published in Satyajit Das "Built to Fail" in The Monthly (April 2009) 8-13

“We should chiefly depend not upon that department of the soul which is most superficial and fallible (our reason), but upon that department that is deep and sure, which is instinct.” - Charles Sanders Peirce

Far too much about history has been stated in narrow analytical diatribe, inconcise nonsense, and pure empty rhetoric… Why? Are we really that dense? A simple first example; Aristotle___Most think he’s great because he wrote about a beautiful system of ethics, true enough, but what about his non-sensical silly-gistic proposition/predicate logic, or whatever you want to call it? Then along comes Kant with another beautiful system of ethics and arithmetic liberty, but what about his wedge driven between the “logica utens” and the “logica docens”? Was there any need of these two great minds dividing our natural senses so miserably? So nefariously? Then, just as the world is starting to come out of its stupidity, with Boole, DeMorgan, Jevons, Peirce and Shroader, along comes Frege with more of the same old divisions of logical sense/nonsense(and conflation), which has continued through Cantor, Piano, Russell, Wittgenstein, Carnap, Quine and Chomsky, ruling most of modern intellect. Oh, and don’t let me forget Hegel___That wonderful over-worshiper of state. Neitzsche? Another life hater. Beautiful story, ‘ain’t’ it…?

Is it true? How would you tell truth? Really, tell me… Napolean existed___True. Stalin existed___True. Hitler existed___True. Mooselini existed___True. Hussein and Bin Ladin existed/exist___True. Is this the type of truth the world really believes? Is there any real truth of “Power”? Does anyone on Earth know what the truth of “Power” really is? Is power logical to itself? Yes. Is power ethical to itself? Yes. Is power truthful to itself? Yes. Is power honest to itself? Yes. Is power all the above to a majority of its citizens? Yes, more often than we care to think about. Believe me, Caligula and Machiavelli have no one-up-ness on most of the modern world, it’s just that now, we do it all with the power systems of money___The Corporate Military Industrial Complexes.

Let’s take an eclectic look at historical power, through the eyes of logic, math, philosophy and money, Ok? What made it all go wrong? Simple question___Complex answer. Let’s rephrase it. What made it all go mathematically so wrong? That can be answered. Let’s look at the actors and players, mainly from history’s most influencial source___The academics. At least, most of them think they’re the most influencial source of change and refinement. Why is it we have such genius arithmetic scientists, and yet such meager philosophers of the mathematical sciences? Is it accidents of history, the complexity and time study constraints of history, or possibly the laziness of philosophers to truly learn the requisite maths, to more effectively describe mathematical histories’ and meta-histories’ truths?

Looking back at the early Greeks, we find great advancements by the geometers and the Pythagorean Schools, up until Aristotle. Then___What happened? The Pythagoreans had developed a most advanced triadic math and logic, with a necessary “mean terms”. They had the “Triadic Law of Mean Terms”___“The Triadic Principle”. This was a very pragmatic system of math and logic as attributed to them by Socrates, and much of Plato’s dialogues. Even Aristotle’s early work on the Nicomachean Ethics was excellent work, when he was still influenced by Plato and the Pythagoreans, but things shortly changed. The change, due to much critical Greek antagonism, may have forced Aristotle to try and sure up his philosophy, but without the genius influence and help of Plato, Aristotle went down a very confusing and false road. He separated the “logica utens” and the “logica docens” into two entirely distinct schools of thought, with his three laws of logic, and the main fault being the “Excluded Middle”. This put his logic in direct opposition with Pythagorean Triadic Logic and Math, with a new less powerful Dyadic Logic and Math. Archimedes tried to salvage it, as did Eudoxas, Nicomachus and Apollonius, and later the Arabic speaking nation-states, with their “Houses of Wisdom”, also tried to salvage the early Greek ideas, yet to no avail, when Averroes came along. Aristotle’s logic won the day, over the more able Triadic Logics of the early Pythagoreans, as the early Greek and Byzantine knowledge systems slowly crept into Europe. Could this have been different? Why was it so disasterous?

We all know the history by now. The “Port Royal Logic” School accepted the less capable and confusing “Dyadic Logic” and “Math Systems” of the Aristotle influenced schools. Even Galen had clearly shown the faults of much of Aristotle’s system, and the Arabic peoples, up to Biruni and Avicenna, clearly tried to right the wrongs, to no avail, so we finally ended with two distinct logic and math systems and schools of thought, right down to this day, but more of the history needs mentioning. Many mathematicians and true working scientists, through the years , always followed the true Pythagorean, Euclidian and Archimedean Schools, but most philosophers of, and many more falsely influenced scientists and mathematicians followed the more confused logic, arithmetic and (modal schools, which the Byzantine’s had created). Then along comes the enlightenment, to pull the wool fully over everyone’s eyes, for many years to come, with Descarte’s further separation of mind and body, etc., etc., and finally to the point everything was so confusing, Kant came along to try and straighten it all out. But, he ended separating the “Utens” and “Docens” even further___Nice try, but no ringers. Oh, there was his excellent mathematical ethics and liberty papers, but the true philosophical and final sense separation was devastating for logic and math systems for the next 150 years. You see, math and true mathematical logic are of the “logica utens” and most philosophers describe this true a priori ground as though it’s of the “logica docens”, and herein lies all the confusion.

Now, was this accidental or pure laziness, on the part of the philosophers and historians? I can’t truly answer this, but if life’s experiences are any guide, there’s a good percentage of all trades, crafts and professionals that are just plain lazy and downright slackers, so my money is on history really being controlled by this lazy-slacker element of all societies___Period…! The bad runs both up and down hill. No matter how brilliant anyone wants to think the professional classes are, that’s not my experience of life, at near 64 years of age, and this is why the human element of any system’s success is dubitable, unless we can turn much of society’s bad elemental powers over to properly algorithmatized computers___I have no faith in humanity changing, even if they realize their lives are at stake. I think there’s just far too many lazy-slackers who just wouldn’t believe it if the “Bear” were staring them in the face. They’d say, “Nice Bear”.

Well anyway, after Kant got through trashing the system, along came Hegel kissing up to the state, and a metaphysical “Notion”, after Kant had already created the “Thing In Itself” boogy-man. There’s really a ‘lotta’ interpretation in those two ideas, kinda like Wittgenstein’s “Private Language”. Yeah, I admit we all do have private self-languages, but that’s not what ‘Witt’ meant, and we all know that. As I mentioned earlier, others came along in time to straighten the world mess out, but America’s invasion by Europe’s WWI and WWII hoards of professional miscreants clobbered us, and down to the bottom of the barrel went Peirce, and his student Veblen, to only be replaced by English and European mediocrity, ending the only true and valid “Triadic Systems” revival, at that time possible.

Luckily, the last few decades have begun to change the world intellectual picture, even if it’s still but in the periphery, Peirce’s, Jevons’, Veblen’s and Keynes’ views are coming back into vogue, through the new heterodox schools. It only takes a quick Google search to verify this___millions of hits, thank ‘god’, when all epistemic and cognitive searches are done. So let’s take a quick look at the possible revival of “Triadic Ideas” as relates to the “Semantic Web” possibly not being so parasitic on the “Pragmatic Web” in our highly possibly better future.

How can we best represent global power systems? Capitalism? Socialism? Communism? Social Contracts? Contractarianism? Nationalism? Or Social Democratic Capitalism mixes? Taking an eclectic view, allowing a triadic isomorphic systems logic, which would recognize our better nature’s priority over our higher nature’s ego, we may have a shot at a new and total understanding. Are any of these systems true? Are any of these systems value validity preserving___sustainable? We’re certainly going to have to admit the present system has failed, or at the least terribly mis-fired. Are we going to have to rebuild it? Replace it? Coddle it? Or outright change the entire system for something entirely new? Does anyone really know about Keynes’ total system of “International Exchange Clearing, Bancor and Emergency Jobs Banks?” Does anyone even truly realize we have the computational ability to figure new systems from a future model’s arithmetic completion position? Can anyone even believe this? There’s lots of talk of adopting amalgamations of old tried and failed systems, but not much of Keynes’ true “Middle Way.” What if there’s an even better “Middle Way” compatible with the yearnings of entire generations’ better nature’s and higher natures? Surprise___There is, and has been for years. I, Paul Davidson and Jane D’Arista have been offering just such systems for years, but where’s the eclectic understanding, high enough, to see the possibility of a “Semantic Web” evolving the “Pragmatic Web” to a really new and true “Knowledge Web?” Not just more of the same, but a full-fledged, benign, algorithmic computerized system, capable of eliminating the un-necessary parasitic powers, that now rule the world economies to madness. I’d suggest studying Macromouse, The Awakening of the American Mind, Paul Davidson’s massive body of academic work, or Jane D’Arista’s ideas, then maybe we’ll have a chance.

There’s no sense me re-writing it all here again, as it’s all been posted at these sites. Charles Sanders Peirce, and his relational quantification logic, is the key mind to putting together all the “Triadic Isomorphic Logic” necessary to accomplish the above…

A Song___A Plea...

The economic and mathematical truth___Paul Davidson; http://econ.bus.utk.edu/davidson.html
The deflationary debt truth___Irving Fisher; http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf
The historical economic truth___Robert Skidelsky; http://www.skidelskyr.com/books/

Imagination___There’s More to `Utens’ Than First Meets the Eye…

When the Solution to the Financial Crisis becomes the Cause, by F. William Engdahl

The Realities of Understanding Capitalist Free-Trade, vs., Communist Controlled Trade, Intents and Practices…
National Security Alert #3___The Republic Destroying Democracy, Fix…

[Note], (Realize these are trading transactions turnover values. Total, possibly real/notional, values are about $54 trillion globally, a bit more than real global GNP, but then how much real GNP is, % wise, derivatives? That's the real question?)

US Treasury Secretary Tim Geithner has unveiled his long-awaited plan to put the US banking system back in order. In doing so, he has refused to tell the ‘dirty little secret’ of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.

The Geithner Plan, his so-called Public-Private Partnership Investment Program or PPPIP, as we have noted previously is designed not to restore a healthy lending system which would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets without demanding they change their business model. Yet, one might say, won’t this eventually help the problem by getting the banks back to health?

Not the way the Obama Administration is proceeding. In defending his plan on US TV recently, Geithner, a protégé of Henry Kissinger who previously was CEO of the New York Federal Reserve Bank, argued that his intent was ‘not to sustain weak banks at the expense of strong.’ Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.

The ‘dirty little secret’ which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.

In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.

One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from Government regulation.

At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner’s old boss, Larry Summers, is President Obama’s chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.

The ‘Dirty Little Secret’

What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?

This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.

This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.

Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize’ the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.

F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order; and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is due out at end of April. He may be reached through his website, http://www.engdahl.oilgeopolitics.net

New, Important; Must read A Tale of Two Depressions, by Barry Eichengreen, Kevin O'Rourke
{New, Important} Can Future Systemic Financial Risks Be Quantified? Ergodic VS Nonergodic Stochastic Processes, by Paul Davidson

The Pragmatic Maxim___“Consider what effects, that might conceivably have practical bearings, we conceive the object of our conception to have. Then, our conception of these effects is the whole of our conception of the object.” C.S. Pierce

The Triadic Maxim___Any Idea; “Arithmetically check all possible effects, against all possible premises, and the combined results will be the total actions of the idea.” Me

“The Eclectic Ontological Geometry of Global Markets and Transactions…”

Fetters of the mind blind us so that we cannot see a solution to this crisis
Fabius Maximus | Apr 1, 2009

We know so little. This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories. In the realm of public policy that is nowhere more salient than economics. Which brings us to what might be the primary similarity between our situation today and the Great Depression.

Contents;

1.History
2.That is was; what about now?
3.Afterword and for more information

History;

Back then policy makers were bound by what economist Barry Eichengreen called “golden fetters.” For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard. That is, going off the gold standard was a necessary (not sufficient) prerequisite for recovery. They did so fearfully, not knowing what lay beyond this step into the unknown — under the force of events.

“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.” — Ben Bernanke, Essays on the Great Depression (2005)

“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy - even in the face of total catastrophe.” — Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009 ……….”E&T” refers to ”The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997

What was mysterious to them, we can see this with the clarity of hindsight. As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009: (Check link for graph, "The Great Slump Revisited")

The Earlier You Abandon Gold Standard, and Start Your New Deal, The Better...

Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.

What about now?

In 1930 mainstream economists were confident they knew what to do. Now we know that most were wrong. If this were 1930, today’s economists would know exactly what to do. But that was then; this is now. The world has changed since then. Some share the confidence of their predecessor in 1930.

{W}e know what to do and how to do it to keep the world economy out of a depression. — Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009

Our leaders have implemented the conventional remedies. Over the next 6 - 9 months we will see the results (lags are long in complex modern economies). They seek to restore the status quo ante-Depression, the post-WWII financial regime. Perhaps they will be successful.

Or — might there be an equivalent set of cognitive fetters, so that we cannot see the systemic factor that must be changed to end the downturn?

Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.

I believe there is an obvious candidate, one similar to that of the 1930 gold standard: the US dollar as the reserve currency. This is a foundational element of the post-WWII world. Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value. But that era is ending. As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegmony: monetary and militarily.

We do not want to let go that role. Nor does most of the world want us to do so. Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending. The last such transition was 1914 - 1945; nobody enjoyed it.

The clock is running on the “developed world” — Japan, Europe, and America. All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads. A new world looms ahead. We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.

Afterword — and an important note about comments to this post

This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.

“Consider what effects that might conceivably have practical bearings you conceive the objects of your (best possible liberty)conception to have. Then, your conception of those effects is the whole of your conception of the (best and highest possible)object(a priori arithmetic liberty).” The pragmatic maxim, C.S. Peirce plus my bolded additions...

The Isomorphic Gates of Perception

“His maxim will be this: ...The elements of every concept enter into logical thought at the gate of perception and make their exit at the gate of purposive action; and whatever cannot show its passports at both those two gates is to be arrested as unauthorized by reason. " Charles Sanders Peirce

P=NP Incomplete___The Maximal Triadic Axiomatic Truths, And Un-Truths

"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
"Time and space are modes in which we think and not conditions in which we live." Albert Einstein
"A priori arithmetic is the greatest philosophy knowable to humanity."
“There exists no mind or machine, sufficiently powerful, to process finity and infinity, simultaneously!”___Proofs below…
“The highest probability, of the highest possibility, is the only possibility.”

“Logic is rooted in the social principle.” Charles Sanders Peirce

“No man can communicate the smallest item of information to his brother-man unless they have … common familiar knowledge; where the word `familiar’ refers less to how well the object is known than the manner of knowing … Of course, two endless series of knowings are involved.” C.S. Peirce

Fabius Maximus | Jan 8, 2009

NEW, March 4, RISK AND UNCERTAINTY IN ECONOMICS, By Paul Davidson, Editor, Journal of Post Keynesian Economics
New, Feb. 24, High Noon: Geithner v. The American Oligarchs
New, Feb. 15 IMF official says the world’s advanced nations are already in a depression, by Fabius Maximus
New, Jan. 30 The Economic Mind of Charles Sanders Peirce, by James R. Wible
New, Jan. 30 A Situation Report About The Global Economy, As The Flames Break Thru The Firewalls, by Fabius Maximus
New, Jan. 28 The Debt-Deflation Theory of Great Depressions, by Irving Fisher
New Some thoughts about the economy of mid-21st century America, by Fabius Maximus
New Economics is not a morality tale, by Fabius Maximus
New The Economic Crisis and the Crisis in Economics, by Simon Johnson

Pluto asks here: “what does Fabius think of Paul Krugman’s article in the NYT?”

Here is the article he mentions: “Fighting Off Depression“, Paul Krugman, op-ed in the New York Times, 4 January 2009 — Excerpt:

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

… Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy - well, you can see where this is going.

It’s not a bad article, as a statement of the by-now blindingly obvious (about which Krugman has repeatedly warned). Readers of this site knew this several months ago. Here are excerpts from posts on the FM site, which new readers might find of interest.

The US economy at Defcon 2, 11 March 2008 {Note: we did almost nothing}:

As a result of #1 (deleveraging}, our financial fabric is ripping. Weak links have been breaking one by one over the past year or so. As each link breaks, there is more stress on the remaining links. The tear is getting longer and wider due to several positive feedback loops. In general, everybody’s (households’, businesses’, investors’ and creditors’) tolerance for risk decreases, and the inevitable reactions slow the economy.

… Massive government intervention must occur soon, or the eventual cost of mitigation will rise several fold. The current tools of fiscal and monetary stimulus plus mild intervention (the “super SIV’ and “Hope Now” plans) are grossly inadequate to the scale of the problem. But this downturn may be evolution in action, the consequences of our past actions. If so, what damage will the government do attempting to prevent the inevitable?

A solution to our financial crisis, 25 September 2008 {Note: we did almost nothing}:

The policy response of our leaders has been inadequate, up to and including the Paulson Plan. Their actions have been incremental and reactive in nature. While each step has been larger than its predecessor, all have been reactions to the past dimension of the crisis — not the future. That is, our leaders have been “behind the curve.”

Paulson and Bernanke have taken actions that would have been effective if applied 2 or 3 quarters earlier. Borrowing a metaphor from emergency medicine, they have squandered the “golden hour“, since the crisis started with the collapse of the mortgage brokers in December 2006.

Correcting this flawed procedure is the first step. Doing so at this late date will require immediate and drastic actions. The severe effects of the recession — now affecting the developed nations, perhaps soon the entire world — will soon be felt, further destabilizing the economy and the financial system.

Recommendations (click links for more information about each)

Stabilize the financial system. (first aid)
Stabilize the economy. (emergency medicine)
Arrange long-term financing for steps #1 and #2 with our foreign creditors. (finance the treatment)
The last opportunity for effective action before disaster strikes, 3 October 2008 {Note: we did almost nothing}:

The end of the post-WWII debt supercycle started with the collapse of the mortgage brokers in December 2006. Since then the government has made aprox 15 initiatives to stop the deterioration of our financial system. The super SIV, 3.25% in cuts to the federal funds rate, FHA Secure, Hope Now, a $120 billion tax rebate, massive expansion of access to the Fed’s discount “window”, TAF auction, TSLF, PDCF, the Bear Stearns bailout, the nationalization of the GSE’s and AIG … and now the TARP (aka the Paulson Plan). Don’t bother looking up the acronyms, they will all soon be forgotten.

All too small, too late. Incremental and reactive, responding to critical problems of last month — irrelevant to the current situation. This is a recipe for disaster. Like in the US 1929-1933 and Japan 1989-1996 — delaying the necessary large-scale response until the problem was no longer manageable.

Now the US financial system is seizing up. The machinery remains, but the gears no longer turn. Most of you have no idea to what I am referring, but you will learn over the next few weeks. To use a bad medical analogy, the financial system has had a cardiac arrest.

The new President will need new solutions for the economic crisis, 9 October 2008:

However, we must prepare for the possibility that the economy will be in a severe recession — or even depression — when the new President takes office in January. A depression does not mean like the 1930’s — the Great Depression. There is a large gap — usually ignored by analysts — between the severe post-WWII recessions (1973-75 and 1980-82) and the horror of the 1930’s. The frequent depressions of the late 1800’s lie in that gap, and for various technical reasons we may now be experiencing one of those.

… The new President must be prepared to immediately take action after inauguration. There is no time for the usual drill: search for staff, redecorate the Oval Office, have meet-and-greets so the new officials get to know each other, schedule meetings to formulate a plan and build support. The damage to the economy will be terrible by that time these things are completed, and (worst case) the economy still might be sliding downwards. Also, any plans will require time for Congressional approval and implementation, and plus lag times until results appear.

Then there is is the bad news. The conventional solutions which the new Administration could easily put into effect — fiscal and monetary stimuli, plus devaluation of the dollar to stimulate exports — probably will not work (in the sense of sparking a recovery of the economy). Let’s defer the reasons why until a later post, and consider the implications.

… These are {recommendations for President Obama} to do, not arranged in a sequential order. … We do not know if these things are even possible, esp (2). An unprecedented crisis requires extraordinary responses.

Status report on the financial crisis: we’re at a critical point in time, 10 October 2008 {Note: we did almost nothing}:

An economic downturn has 3 stages, each with a different goal.

First Aid — Stabilize the financial system to avoid a depression. {UPDATE: TOO LATE; WE MISSED THIS WINDOW}
Treatment — apply fiscal and monetary stimuli to mitigate suffering during the recession and get a global recovery in 2010.
Recovery — restructuring and reforms to prepare for the expansion after 2010, and the new world beyond that.
Yes, 2010 is the earliest reasonable date for a recovery IMO from the most severe global downturn since WWII. Policy errors could length the downturn, of course.

The economy is in shock. The effects of this will soon become visible, 11 October 2008 {Note: we did almost nothing}:

This is like Cardiogenic shock, caused by the failure of the heart to pump effectively. The US economy went into cardiac arrest early last week, as the flow of money (the blood” of the economy) slowed due to a near-collapse of the financial system (its “heart”, but not its soul). If not restarted, the economy will slide into a depression (GDP decline of 10% or more) in a few weeks (perhaps months).

The coming collapse in business spending - made visible today, 15 October 2008:

Smart managers react quickly and strongly to changed conditions. Unfortunately, when those conditions are a systemic event visible and affecting everyone their actions re-enforce the event. Positive feedback. This creates much of the business cycle’s volatility, the big swings. The “dampeners” of Keynesian economics, contra-cyclical monetary and fiscal policy, fight these in order to maintain equilibrium.

The US economy must go to Defcon 1, 13 November 2008 {Note: we did almost nothing}:

Summary: We are on the brink of an economic disaster like nothing since the 1930’s. Here is a sketches (nothing more), of guesses as to what we can look forward to. While the past guesses on this site have proven accurate, these might prove too pessimistic. Or too optimistic.

… {After the financial crisis} the effects ripple from the virtual economy (financial markets) to the real economy. Americans have reduced their spending. Hundreds of companies around the world have announced falling revenue — and responded with cutbacks in employment and capital expenditures. Tens of thousands are doing the same, but outside the media spotlight. Most of this will hit in the early months of 2009. We must move the US to Defcon One, a war-like mobilization of resources.

Situation report: global economy, December 2008, 19 December 2008:

Viewpoints about the crisis have coalesced into three camps.

The “normal global recession” camp. Just another cycle, US GDP down perhaps -3% peak to trough.
The “worst recession since the 1930’s” camp. A bad scene, but the world’s governments are now on the job. Fiscal and monetary policy will do the job, again. US GDP down 5% or so. See this example.
The “worse than worst” scenario. Government policy might not work — or it might work but only with long lags. Uncertainty rules; the outcome is unknowable.
Those in the first two camps believe that the worst of the crisis has passed in that its course now runs in familiar channels. The small minority in the third camp believes that the world has changed. The post-WWII is ending.

National Security Alert

By Robert Skidelsky

Global leaders are once again reminding themselves of the insights of the Cambridge academic who helped relaunch the world economy after the Second World War. He deserves to ride again, writes his biographer Robert Skidelsky

Keynes, as portrayed by Low in the New Statesman of 28 October 1933; reproduced with permission of Solo Syndication

John Maynard Keynes has been restored to life. Rusty Keynesian tools – larger budget deficits, tax cuts, accelerated spending programmes and other “economic stimuli” – have been brought back into use the world over to cut off the slide into depression. And they will do the job, if not next year, the year after. But the first Keynesian revolution was not about a rescue operation. Its purpose was to explain how shipwreck might occur; in short, to provide a theoretical basis for better navigation and for steering in seas that were bound to be choppy. Yet, even while the rescue operation is going on, we need to look critically at the economic theory that takes his name.

In his great work The General Theory of Employment, In terest and Money, written during the Great Depression of the 1930s, Keynes said of his ideas that they were "extremely simple, and should be obvious". Market economies were in herently volatile, owing to un certainty about future events being inescapable. Booms were liable to lead to catastrophic collapses followed by long periods of stagnation. Governments had a vital role to play in stabilising market economies. If they did not, the undoubted benefit of markets would be lost and political space would open up for extremists who would offer to solve economic problems by abolishing both markets and liberty. This, in a nutshell, was the Keynesian "political economy".

These ideas were a challenge to the dominant economic models of the day which held that, in the absence of noxious government interference, market economies were naturally stable at full employment. Trading in all markets would always take place at the "right" prices - prices that would "clear the market". This being so, booms and slumps, and prolonged unemployment, could not be generated by the market system itself. If they did happen, it was due to "external shocks". There were many attempts to explain the Great Depression of the 1930s along these lines - as a result of the dislocations of the First World War, of the growth of trade union power to prevent wages falling, and so on. But Keynes rightly regarded such explanations as self-serving. The Great Depression started in the United States, not in war-torn Europe, and in the most lightly regulated, most self-contained, and least unionised, market economy of the world. What were the "external shocks" that caused the Dow Jones Index to fall from 1,000 to 40 between 1929 and 1932, American output to drop by 20 per cent and unemployment to rise to 25 million?

He set out to save capitalism, a system he did not much admire, because he thought it the best hope for the future of civilisation

We can ask exactly the same question today as the world economy slides downwards. The present economic crisis has been generated by a banking system that had been extensively deregulated and in a flexible, largely non-unionised, economy. Indeed, the American capitalism of the past 15 years strongly resembles the capitalism of the 1920s in general character. To Keynes, it seemed obvious that large instabilities were inherent in market processes themselves.

John Maynard Keynes was a product of Cambridge civilisation at its most fertile. He was born in 1883 into an academic family, and his circle included not just the most famous philosophers of the day – G E Moore, Bertrand Russell and Ludwig Wittgenstein – but also that exotic offshoot of Cambridge, the Bloomsbury Group, a commune of writers and painters with whom he formed his closest friendships. Keynes was caught up in the intellectual ferment and sexual awakening that marked the passage from Victorian to Edwardian England. At the same time, he had a highly practical bent: he was a supreme example of what Alasdair MacIntyre calls “the aesthete manager”, who partitions his life between the pleasures of the mind and the senses and the management of public affairs. After the First World War, Keynes set out to save a capitalist system he did not particularly admire. He did so because he thought it was the best guarantor of the possibility of civilisation. But he was always quite clear that the pursuit of wealth was a means, not an end. He did not much admire economics, either, hoping that some day economists would become as useful as dentists.

All of this made him, as his wife put it, "more than an economist". In fact, he was the most brilliant non-economist who ever applied himself to the study of economics. In this lay both his greatness and his vulnerability. He imposed himself on his profession by a series of profound insights into human behaviour which fitted the turbulence of his times. But these were never - could never be - properly integrated into the core of his discipline, which spewed them out as soon as it conveniently could. He died of heart failure in 1946, having worked himself to death in the service of his country.

The economic theory of Keynes's day, which precluded boom-bust sequences, seemed patently contrary to experience, yet its foundations were so deep-dug, its defences so secure, its reasoning so compelling, that it took Keynes three big books - including a two-volume Treatise on Money - to see how it might be cracked. His attempt to do so was the most heroic intellectual enterprise of the 20th century. It was nothing less than the attempt to overturn the dominant economic paradigm dating from Adam Smith and David Ricardo.

He finally said what he wanted to say in the preface to The General Theory: "A monetary economy, we shall find, is one in which changing views about the future are capable of in fluencing the quantity of employment and not merely its direction." In that pregnant sentence is the whole of the Keynesian revolution.

Keynes's understanding about how economies work was rooted in his theory of knowledge. The future was unknowable: so disaster was always possible. Keynes did not believe that the future was wholly unknowable. Not only can we calculate the probability of winning the Lottery, but we can forecast with tolerable accuracy the price movements of consumer goods over a short period. Yet we "simply do not know" what the price of oil will be in ten, or even five, years' time. Investments which promised returns "at a comparatively distant, and sometimes an indefinitely distant, date" were acts of faith, gambles on the unknown. And in that fact lay the possibility of huge mistakes.

Classical economists could not deny the possibility of unpredictable events. Inventions are by their nature unpredictable, especially as to timing, and many business cycle theorists saw them as generating boom-bust cycles. But mainstream economics, nevertheless, "abstracted" from such disturbances. The technique by which it did so is fascinatingly brought out in an argument about economic method between two 19th-century economists, which Keynes cited as a fork in the road. In 1817, Ricardo wrote to his friend Thomas Malthus: "It appears to me that one great cause of our differences . . . is that you have always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them."

To this, Malthus replied: "I certainly am disposed to refer frequently to things as they are, as the only way of making one's writing practically useful to society . . . Besides I really do think that the progress of society consists of irregular movements, and that to omit the consideration of causes which for eight or ten years will give a great stimulus to production and population or a great check to them is to omit the causes of the wealth and poverty of nations . . ."

Keynes sided with Malthus. He regarded the timeless equilibrium method pioneered by Ricardo as the great wrong turning in economics. It was surely the Ricardo-Malthus exchange he had in mind when writing his best-known aphorism: "But this long run is a misleading guide to affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

Ricardo may have thought of the "long run" as the length of time it took storms to disperse. But under the influence of mathematics, economists abandoned the notion of time itself, and therefore of the distinction between the long run and the short run. By Keynes's time, "risks", as he put it, "were supposed to be capable of an exact actuarial computation". If all risks could be measured they could be known in advance. So the future could be reduced to the same epistemological status as the present. Prices would always reflect objective probabilities. This amounted to saying that unregulated market economies would generally be extremely stable. Only very clever people, equipped with adequate mathematics, could believe in anything quite so absurd. Under the influence of this theory, governments withdrew from active management and regulation of economic life: it was the age of laissez-faire.

Keynes commented: "The extraordinary achievement of the classical theory was to overcome the beliefs of the 'natural man' and, at the same time, to be wrong." It was wrong because it "attempts to apply highly precise and mathematical methods to material which is itself much too vague to support such treatment".

Keynes did not believe that "natural man" was irrational. The question he asked was: how do we, as rational investors, behave when we - unlike economists - know that the future is uncertain, or, in economist-speak, know that we are "informationally deprived"? His answer was that we adopt certain "conventions": we assume that the future will be more like the past than experience would justify, that existing opinion as expressed in current prices correctly sums up future prospects, and we copy what everyone else is doing. (As he once put it: "Bankers prefer to be ruined in a conventional way.") But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes" when the news changes. "The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation."

But what is rational for individuals is catastrophic for the economy. Subnormal activity is possible because, in times of crisis, money carries a liquidity premium. This increased "propensity to hoard" is decisive in preventing a quick enough fall in interest rates. The mainstream economics of Keynes's day viewed the interest rate (more accurately, the structure of interest rates) as the price that balances the overall supply of saving with the demand for investment. If the desire to save more went up, interest rates would automatically fall; if the desire to save fell, they would rise. This continual balancing act was what made the market economy self-adjusting. Keynes, on the other hand, saw the interest rate as the "premium" for parting with money. Pessimistic views of the future would raise the price for parting with money, even though the supply of saving was increasing and the demand for investment was falling. Keynes's "liquidity preference theory of the rate of interest" was the main reason he gave for his claim that market economies were not automatically self-correcting. Uncertainty was what ruined the classical scheme.

The same uncertainty made monetary policy a dubious agent of recovery. Even a "cheap money" policy by the central bank might not be enough to halt the slide into depression if the public's desire to hoard money was going up at the same time. Even if you provide the water, you can't force a horse to drink. This was Keynes's main argument for the use of fiscal policy to fight a depression. There is only one sure way to get an increase in spending in the face of falling confidence and that is for the government to spend the money itself.

This, in essence, was the Keynesian revolution. Keynesian economics dominated policymaking in the 25 years or so after the Second World War. The free-market ideologists gave this period such a bad press, that we forget how successful it was. Even slow-growing Britain chugged along at between 2 and 3 per cent per capita income growth from 1950-73 without serious interruptions, and the rest of the world, developed and developing, grew quite a bit faster. But an intellectual/ideological rebellion against Keynesian economics was gathering force. It finally got its chance to restore economics to its old tramlines with the rise of inflation from the late 1960s onwards - something which had less to do with Keynesian policy than with the Vietnam War. The truth was that "scientific" economics could not live with the idea of an unpredictable world. So, rather than admit that it could not be a "hard" science like physics, it set out to abolish uncertainty.

The "new" classical economists hit on a weak spot in Keynesian theory. The view that a large part of the future was unknowable seemed to leave out learning from experience or making efficient use of available information. Rational agents went on making the same mistakes. It seemed more reasonable to assume that recurrent events would initiate a learning process, causing agents to be less often surprised by events. This would make economies more stable.

The attack on Keynes's "uncertain" expectations developed from the 1960s onwards, from the "adaptive" expectations of Milton Friedman to the "rational" expectations of Robert Lucas and others. The development of Bayesian statistics and Bayesian decision-theory suggested that agents can always be modelled as having prior probability distributions over events - distributions that are updated by evidence.

Today, the idea of radical uncertainty, though ardently championed by “post-Keynesians” such as Paul Davidson, has little currency in mainstream economics; however, it is supported by financiers of an intellectual bent such as George Soros. As a result, uncertainty once more became “risk”, and risk can always be managed, measured, hedged and spread. This underlies the “efficient market hypothesis” – the idea that all share options can be correctly priced. Its acceptance explains the explosion of leveraged finance since the 1980s. The efficient market hypothesis has a further implication. If the market always prices financial assets correctly, the “real” economy – the one involved in the production of goods and non-financial services – will be as stable as the financial sector. Keynes’s idea that “changing views about the future are capable of influencing the quantity of employment” became a discarded heresy.

And yet the questions remain. Is the present crisis a once-in-a-lifetime event, against which it would be as absurd to guard as an earthquake, or is it an ever-present possibility? Do large "surprises" get instantly diffused through the price system or do their effects linger on like toxic waste, preventing full recovery? There are also questions about the present system that Keynes hardly considered. For instance: are some structures of the economy more conducive to macroeconomic stability than others?

This is the terrain of Karl Marx and the underconsump tionist theorists. There is a long tradition, recently revived, which argues that the more unequal the distribution of income, the more unstable an economy will be. Certainly globalisation has shifted GDP shares from wages to profits. In the underconsumptionist tradition, this leads to overinvestment. The explosion of debt finance can be interpreted as a way of postponing the "crisis of realisation".

Keynes did not have a complete answer to the problems we are facing once again. But, like all great thinkers, he leaves us with ideas which compel us to rethink our situation. In the long run, he deserves to ride again.

Lord Skidelsky is the author of "John Maynard Keynes" (three volumes), published in hardback by Macmillan

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Here's a certified mailed letter to Obama. It was returned with a note, "Due to security, Not accepting mail". Now, how is this supposed to be an open administration of people participation, when I haven't been able to receive any response of any transmission forms, for over six months? Something's drastically wrong here. Hey Obama, can't you afford to hire someone, anyone, to open or answer your letters and e-mails...?

Lloyd Gillespie
lloyd.gillespie@gmail.com
207-701-____

Obama for America
P.O. Box 8102
Chicago, IL 60680
(866) 675-2008

Hon. President Elect Barack Obama,

Congratulations, congratulations a thousand times over. You’ve shown the nation how to see common sense, once again___Thank You… You’ve made the nation realize real change is necessary, and desired___No-one could have achieved more… The nation has realized “Markets are more than profits”___They must have a proper law mechanics… You’ve alerted her to the fact, “Markets can not be supported by drastically imbalanced currencies”___They require balanced PPP’s(purchasing price parities)___Globally… You’ve further alerted her to the fact, “Markets can not function, while tax havens gobble and hoard profits”___This must be changed. You’ve also alerted her to the fact, “Markets cease functioning when a nation out-sources its jobs”___This must be rectified… Further still, you’ve alerted her to the fact, “Markets cease functioning when free-trade meets its limit of cheap labor”___This is a law of free-trade limits, i.e., “You can only free-trade, until cheaper labor out-trades you”…

You now have the awesome responsibility of “Market-Maker In Chief”, along with “Commander In Chief”… I mention this to you with no small sense of seriousness, as you will need the key, and proper, economic and financial advisers, to deal with the seriousness of what’s to come. I’m not writing this for my own personal interests, as I only wish to offer a few very important academic names, I’ve been following for years. I personally know these people have correctly forward forecasted the present economy, as I have also, since the early `90’s. They have credentials, which I do not, as I’m a polymath autodidact___that’s beside the point. Of all the economic advisors, presently employed/advising you, none have the proper “Market-Maker” academic intelligence the present job requires, or will require. I know them all, and have tried to influence a few, in the Clinton Administration, in the `90’s, about the ever-increasing global transactions’ bubble, then forming, with no success___The truth I warned them of, is now known by all. If they didn’t act then, why should we expect them to act, correctly, now?

As number one economic advisor/Czar, it should be America’s premier academic “Market-Maker” economist, Dr. Paul Davidson, from the University of Tennesee: http://econ.bus.utk.edu/davidson.html Subordinate to Paul Davidson should be Jane D’Arista: http://www.fmcenter.org/site/pp.asp?c=8fLGJTOyHpE&b=246644 and Chris Whalen: http://www.rgemonitor.com/us-monitor/254213 They should be the head micro/macro financial/monetary architecture economists, as the rest of the world has already stated their desire of a new “Bretton Woods II”. These are America’s foremost, truly Democratic, thinkers on the “BW II International Financial Architecture”. A secondary subordinate team should be made up of Nouriel Roubini: http://www.rgemonitor.com/index.php and Marshall Auerback: http://www.jpri.org/publications/critiques/index.html as they also correctly predicted most every move the present market has taken, over the last five years. I know them to be factually true and accurate, and I trust them, as should you. I have nothing vested in any of these names___I just know them to be who you need to succeed, and only they will do, as to their specific intelligences/informations/knowledges, as relates to what I know our nation, and the world, will absolutely require___Global derivatives’ mechanics absolutely requires the above people’s extensive knowledge of...

I trust you Mr. Pres. Elect Barack Obama, as I can clearly see your heart guides your intellect, to the true analytical middle ground judgment necessary, to lead us out of this mess. I have simply offered you the compulsory, complimentary, bottom-up/top-down economic help, I know you will absolutely need…

Please approach your present team carefully, with this information, as many will be rather jealous and angry, at outside names being suggested. Some of them know who I am also, as we’ve directly corresponded. I, myself, look for nothing but the proper people placement, as per above. Of course, the choice is yours, but I know, not vetting these names, would be a grave error…

Thanks for your time,
Life-time economic investigator,
Lloyd Gillespie, age 63
http://macromouse.blogspot.com/

p.s.
If possible, these names should attend the Nov. 15, D.C. Conference, if you could make that possible, as this meeting will only be the first of many required, on into your administration, most likely culminating in a months’ long conference, as did the first BW I, in 1944. Many of my ideas, backing/supporting you and your ideas/goals, are listed at: http://theawakeningoftheamericamind.blogspot.com/ and on my Obama Blog at: http://my.barackobama.com/page/community/post/lloydgillespie/gGxkcm