Has California Lost The Mandate of Heaven?

In Chinese history, natural disasters were viewed as portents that the The Mandate of Heaven (tianming or “Heaven’s will”) had been withdrawn from the ruling dynasty. Broadening this concept a bit to regional dominance and power, we might ask: has California lost the Mandate of Heaven?

How many conflagrations does it take for it to sink in that the Golden State has lost its lustre in some profoundly karmic fashion?

How many messes of human excrement on our doorstep does it take to realize the situation will never get better, it can only get worse–much worse?

How many power blackouts, traffic gridlocks and mandatory evacuations does it take for those in denial to accept that the Mandate of Heaven has been withdrawn?

Young residents of the state have never experienced the velocity and depth of California’s famous busts. The last real spot of bother in California’s economy occurred almost 30 years ago in the early 1990s. Since then, it’s been one boom after another.

California’s cycles of enormous booms followed by equally gargantuan busts date back to the first Gold Rush. The eventual collapse of mining shares and overpriced real estate in San Francisco was epic, and Mark Twain’s account of his chest full of mining shares going from a tidy fortune to zip-zero-nada is a rueful reminder of how quickly fortunes can turn in the land of boom and bust.

It’s deceptively easy to take a pencil and ruler and extend a boom into infinity: the number of iPhones sold (always up), Apple’s quarterly earnings (always up), property tax revenues (always up) stocks’ multiple expansion ((always up) and so on.

California’s vast chattering class has ridden the IPO/VC/tech-monopoly/ stock buyback bubble for so long that it can’t believe the bubble could ever burst. This class lives in enclaves protected from human excrement, the addicted and the deranged, and in an information enclave of me-too tech/entertainment boosterism.

But as Benoit Mandelbrot showed in his book The (Mis)behavior of Markets, markets and human behavior are inherently fractal, i.e. chaotic, which means there are limits on the predictability of markets and economic trends.

Thus the chattering class has no inkling that the masses can cancel their Netflix, Disney and Apple subscriptions as easily as they signed on. Once jobs, tips, bonuses and gigs dry up, the tech-entertainment giants will find expenses are still rising while revenues are cratering. Once revenues and profits crater, it’s harder for management to justify borrowing billions more to fund more stock buybacks.

Extending booms into infinity doesn’t track reality. The last real recession circa 1990-1991 blew a $20 billion hole in the California state budget, and accounting for inflation and growth since then, we can expect a $35 – $40 billion hole being blown in the budget once the IPO / tech bubble collapses, as the state is heavily dependent on capital gains taxes for much of its income tax revenues. (There is no long-term capital gains rate in California; all capital gains are taxed as ordinary income, a rate that quickly hits 13.3%.)

Once capital gains dry up, the state is in a fiscal crisis with no solution.

And if the state can’t solve the homeless crisis with current spending in the hundreds of millions, then what will happen when the revenues dry up? What will happen if the homeless population doubles or triples? Look at the social havoc generated by the homeless population in San Francisco, which is roughly 1% of the total populace (around 9,000 homeless and a total population of 860,000.)

Phase transitions are intrinsic to systems displaying self-organized criticality such as markets and human behavior. Everything seems fine on the surface, and there’s no pressing need to sell the house and move away; there seems to be plenty of time until the phase transition kicks in and suddenly everything has changed for the worse, and so much faster than anyone expected.

At that point, it’s too late: there’s no bid for overpriced decaying bungalows, overpriced tech stocks, etc. Just like Mark Twain’s chest of mining stocks, the transition from being worth a fortune to no-bid near-worthlessness can be sudden indeed once California loses the Mandate of Heaven.

Beneath the surface, pressures are building and resilience is eroding, and when the tipping point is reached the transition will not be gradual and controllable, it will be non-linear and uncontrollable.

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Will MMT Work as Intended, Or Will It Trigger the Collapse of “Money”?

Modern Monetary Theory (MMT) is presented as a means to painlessly fund the large-scale infrastructure / alternative energy spending the nation needs to rebuild and modernize.

While most people support the goal of useful fiscal stimulus (as opposed to paying people to dig holes and fill them), the question remains: Will MMT work as advertised?

Rather than dismiss it out of hand, I’m trying to approach the subject without ideological bias.

What Exactly Is MMT?

The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity–there is capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.

In other words, the only thing standing in the way of broad-based, socially beneficial spending / progress is a lack of money (funding).

In the view of MMT advocates, a blindingly obvious source of funding is already available: the federal government can issue however much new currency it wants, and so the government could fund large-scale socially useful projects if the political will to do so was present.

We have to pause at this point and distinguish between borrowing money to fund projects, which is the current model, and issuing (printing) new currency.

In the current model, the federal government sells Treasury bonds and uses the proceeds to fund government spending. The Treasury pays interest on the bonds, and this mechanism — interest due on borrowed money — creates a “governor” on spending: as borrowing rises, so do interest payments, and as interest payments rise, this crimps other government spending.

The other mechanism in the current model is the central bank (Federal Reserve) can create currency out of thin air and buy Treasury bonds. This is a form of monetary stimulus, i.e. a way to inject new money into the financial system.

When the central bank creates money out of thin air to buy newly issued Treasury bonds, this is called “monetizing the debt”: in effect, the central bank creates money out of thin air and transfers it to the government by buying Treasury bonds.

The basic idea of MMT (as I understand it) bypasses both paying interest on newly issued money and the artifice of central bank monetization: instead, the Treasury issues new currency directly.

This removes the “governor” of interest payments, freeing the Treasury to issue cost-free currency in virtually unlimited quantities.

The Arguments Against MMT

Various historical studies have concluded that hyperinflation does not occur when governments must pay interest on their debt; the danger with rising interest and debt is default, not hyperinflation.

Hyperinflation arises when the supply of goods and services — the output of the economy — remains roughly the same while the supply of currency skyrockets. As money increases but the sum of goods and services available for purchase remains flat, the value of existing money declines accordingly.

If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency). If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.

Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.

This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.

This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating. This generates inflation, which impoverishes everyone using the currency.

MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But as noted earlier, rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy. Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.

The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.

I honestly don’t see any intrinsic limit on political expediency. Politicians need to be forced to say, “I know your need is legitimate, but the money’s simply not there.” Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn’t an economic process, it’s a political process.

This is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.

A second concern is the entire notion of “slack” in the economy — untapped capacity. Have you noticed the “help wanted” signs in every Home Depot and many other retail outlets and restaurants? We read about millions of people who aren’t working, but if they wanted to work, or had to work, why are there so many unfilled positions? The answers are complex: the wage being offered isn’t sufficient incentive, the unemployed don’t have the requisite skills, etc.

In other words, in some important ways, the economy appears to be very close to full capacity. New programs such as The New Green Deal will basically be poaching experienced workers from existing projects, driving up wages (good for workers) which can generate a wage-price spiral (bad for everyone who can’t demand higher incomes).

My third concern: as someone with 45 years of construction experience, I am keenly aware that the vast majority of the infrastructure and New Green Deal spending many people see as socially beneficial requires skilled labor. Rebuilding bridges, electrical grids, etc. all require highly specialized labor. Installing solar arrays also requires trained workers with physical stamina.

The process of training a large new workforce is time-consuming and expensive, and doesn’t necessarily generate new goods and services. In other words, it’s inherently inflationary as it puts new money into the economy but doesn’t increase the goods and services — at least until the newly trained workforce starts generating goods and services.

My fourth concern is related: ultimately, “wealth” (as measured in new goods and services generated by capital and labor) is generated by increasing productivity, via investment in greater efficiencies.

Much of the spending people want — repairing bridges, supplanting natural gas electrical generation with solar or wind, and so on — are not necessarily increasing productivity: the repaired bridge carries the same number of vehicles as it did before, so there is no increase in productivity.

In other words, efficiency and productivity are core dynamics, yet the MMT process is fundamentally political, and politics has little interest in efficiency or productivity. It is, as noted above, politically expedient, with a default setting to put off tough decisions into the future.

In the private sector, return on capital and the productivity of labor and processes are the core dynamics. These rationalize decisions to prioritize efficient use of capital, labor and resources. Absent this rationalization, resources can be squandered for politically expedient reasons. In other words, capital, resources and labor can be mal-invested, which brings up the opportunity cost: all the capital, labor and resources squandered on “bridges to nowhere” and other pork-barrel projects are no longer available for truly productive use.

The key question here is: How do we harness our intrinsically scarce capital, labor and resources to increase productivity and socially/ecologically beneficial investments in a sustainable way?

MMT’s diagnosis is that a lack of currency is the primary problem. The MMT solution assumes the new currency can be efficiently invested within the existing political system without disrupting the increasingly precarious existing financial system.

While the appeal of MMT is self-evident, it seems to me that both the financial and political systems are broken in ways that MMT, no matter how it’s managed, cannot fix.

The problem is we’re misallocating capital, resources and labor on a vast scale. That’s the problem. Adding more currency and capacity/”growth” doesn’t fix this problem, it actually makes it worse.

If we look around at the trillions of dollars in recently issued currency floating around the world looking for a yield, the trillions poured into asset bubbles that only benefit the few at the top, the billions of gallons of fuel wasted in traffic jams and other consequences of “endless growth on a finite planet”, the gargantuan waste of capital, resources and labor squandered in maintaining a “growth at any cost” Landfill Economy of mindless consumption, regardless of consequences, it’s hard not to see MMT as a “green” Band-Aid for a profoundly broken, wasteful, unsustainable system.

MMT leaves the existing status quo essentially untouched and adds a new layer of newly issued currency and spending, and a new layer of “growth” and consumption, consumption that no matter how socially beneficial is still an additional burden on the planet.

In effect, MMT is another attempt to preserve a dysfunctional status quo by adding another layer of newly issued currency and “growth.” More “growth,” even the sort envisioned as “Green,” is simply adding to a destructive system. What’s needed is a radical reduction in consumption and a diversion from a consumerist Landfill Economy to one driven by incentives other than “more of everything” in the name of “growth.”

As longtime readers know, I see a new system of private-sector currency, DeGrowth and decentralization and the institutionalization of a more sustainable (i.e. less perverse and destructive) set of incentives as the only set of solutions that can fix what’s broken in the current socio-economic model.

But that doesn’t mean MMT won’t be tried, as the three engines of “growth” over the past 20 years — soaring debt, financialization and globalization — all falter.

To sum up: MMT is presented as the solution to the “problem” of insufficient government funding, but that’s not the real problem: the real problem is the purchasing power of the fiat currency that will be issued in the trillions of dollars.

This essay was first posted at PeakProsperity.com, where I am a contributing editor.

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Talk Nation Radio: Mark Isaacs on Peace Activism in Afghanistan

Mark Isaacs is the author, among other books, of the new book, The Kabul Peace House, which we discuss, and which describes a community of peace activists in Afghanistan. Mark is president of Sydney PEN, an affiliate of PEN International, a worldwide association of writers which defends freedom of expression and campaigns on behalf of writers who have been silenced by persecution or imprisonment. He speaks with us from Australia. His website is markjisaacs.com

Total run time: 29:00
Host: David Swanson.
Producer: David Swanson.
Music by Duke Ellington.

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On Bragging About Murdering People You Turned into Terrorists

You cannot promote the rule of law by loudly bragging about committing murder. You cannot end terrorism by committing terrorism. Here is a U.S. president openly proclaiming that he has committed murder in order to let people be afraid they’ll be next. If anything fits the definition of terrorism, that does. The U.S. public cannot see it because (1) whatever the U.S. does is good, (2) Trump’s fans support anything he does, (3) loyalists of the Democratic Party believe that any crimes Barack Obama committed can never be crimes even if Trump commits them. But this crime is not just accepted; it’s a point of pride — a way to feel superior to other countries that have not murdered any terrorists or even created any terrorists to murder.

It is not a matter of anyone’s opinion that the United States has sought the overthrow of the Syrian government for years. The trouble is that the U.S. public is not excited about destroying Syria; it’s excited about destroying ISIS. So, for years now, the U.S. government has sought to appear to be attacking ISIS while attacking the Syrian government. This does not seem to have changed. Killing the leader of ISIS — six times thus far — builds U.S. public support for the war. But the war is to overthrow the government of Syria, or — if that can’t be done — at least to steal a bit of its oil.

The Democrats will jump at any opportunity to avoid impeachment, but just as the U.S. government as a whole has pretended to put everything into attacking ISIS, while actually aiming at greater control of the world and of the U.S. public, the Democrats have pretended to put everything into attacking Trump, while actually aiming at pleasing the same corporate oligarchs he serves. The trouble for the Democrats is that the public now expects Trump to be impeached, and killing Baghdadi won’t change that. Nor will it change significantly the situation in Syria or Iraq.

A change worth bragging about would be a real withdrawal, a disarmament agreement, a weapons ban, a peace treaty, nonviolent peacekeeping, actual aid, or improved lives for people in Syria. We haven’t seen any of those things.

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Lindsey Graham: ‘Steal Syria’s Oil to Pay for US Occupation!’

By Daniel McAdams, Ron Paul Institute for Peace and Prosperity.

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Senator Lindsey Graham (R-SC) has been chewing down his fingernails ever since President Trump’s first suggestion that US troops should come home from the Middle East. Last December, when Trump made it clear that he wanted to end the US troop presence in Syria and let the people of the region take care of their own problems, Graham took to an accommodating media (across the supposed ideological spectrum) to slam, damn, and threaten the president for even entertaining such a thought.

“Withdrawal of this small American force in Syria would be a huge Obama-like mistake,” Tweeted Graham on December 19, 2018. It was a typical neocon act of duplicity: how could Obama be blamed for “withdrawal” when he’s the one who got us into Syria in the first place? Getting out would be the anti-Obama – but Graham never lets facts get in the way of his neocon hysteria.

Graham followed up with this threat in his typical theatrical style:

President Trump — I will help you any way I can … but because you’re a Republican, I’m not going to ignore what I believe…I’m going to give you an honest evaluation. I was willing to support a Democrat if he followed sound military advice. I’m willing to fight a Republican if you don’t.

Translation: if you even think about keeping your campaign promises to pull back from US troops in the Middle East I will do my best to take you down.

Lindsey Graham ran for president on exactly these themes against Trump in 2016: more war, more regime change, more US troops across the globe. He never broke one percent in the polls and by December 2015 he scurried off with his tail between his legs.

Americans resoundingly rejected Lindsey Graham’s foreign policy of war and conflict and embraced Trump’s foreign policy of “bring the troops home” and “get along with Russia.”

After the shrill reaction to last year’s withdrawal announcement (including a hissy fit by his then-Defense Secretary James Mattis), Trump moved to accommodate Graham and others in the neocon camp, putting his troop withdrawal order on hold while his subordinates “explained” that Trump didn’t really mean what he said.

Supporters saw yet another “flip-flop” and shook their heads at the weakness at the top.

At the beginning of this month, however, as US troops found themselves caught in a crossfire between the military forces of Turkey, Syria, Russia, and the Kurds, Trump sprung into action and ordered the relocation and ultimate removal of US forces from Syria. He likely saved the lives of more than a few US troops.

Once again though, Graham took to attacking Trump, confident that the President doesn’t really mean what he says – or that he can be convinced by a few threats to change his mind.

Graham inexplicably warned that removing US troops who are illegally occupying Syrian desert territory thousands of miles from home would put the US at risk! He again took to the fawning, pro-war mainstream media to elaborate:

I think he’s putting the nation at risk, and I think he’s putting his presidency at risk…And I hope he will adjust his policies like he did before. That would be actually be a sign of real leadership.

Shorter Graham: Trump’s a wimp. He’ll back down as he did before and we’ll pat him on the head and assure him that being weak is actually being strong.

Unfortunately Trump seems to have forgotten just how unpopular Lindsey Graham and the other neocons really are among not only his base of support, but across the board among Americans.

As Senator Rand Paul (R-KY) puts it, Lindsey Graham has been “wrong on every foreign policy issue this century.”

So why listen to Graham?

While literally every single American not inside the Beltway or the MSM propaganda machine views Sen. Lindsey Graham as a complete idiot on foreign policy, he still seems for some reason to hold sway over President Trump. Not a week after this latest Trump attempt to make it clear that the US was not just moving some troops from Syria to Syria but getting out of Syria, President Trump just yesterday did another flip-flop and decided to actually ADD more military equipment  (and likely personnel) to Syria.

“We’ll take their oil,” was Trump’s message. And, sadly, in that he again let Graham take the lead in the neocon’s murderous danse macabre.

As Lindsey Graham said yesterday, we’ll send in more troops and then steal their oil to make them pay for us sending in more troops:

…By increasing the production of the oil fields, we will be helping our Syrian Democratic Forces (SDF) allies who fought bravely to destroy ISIS Caliphate. We can use some of the revenues from future Syrian oil sales to pay our military commitment in Syria.

That’s just what the neocons were arguing in 2002 as they pushed the war on Iraq. And we all know how that worked out. Trump is a chump for listening to Graham.

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