Fictional Reserve Barking invites Keynes and Godley  to Dinner 

Fictional Reserve Barking (FRB), not yet completed its first anniversary from inception, has assumed the role of one of the most daring commentaries on national and international political and economic policy on the B-sphere. Admittedly sympathetic to post keynesian monetary theory, FRB has again challenged the reasonableness and timeliness of everyman's expectation that Central Bankers cause and hence should solve all the problems of Government and Public Finance. In its December 31, 2011 issue, FRB has demonstrated again why it is considered a must and best read for economic policymakers and pundits alike. Never faltering from its underlying prescriptive mission, FRB continuously substantiates the empirical legitimacy of its optics, realigning and calibrating vision as the facts require, but never wavering on the paradigm invoked.

To say that Fictional Reserve Barking and its prolific author Circuit, is merely a keynesian sounding board is to demean the intellectual prowess of its endeavor. To even suggest is to stunt the brilliant insights that Circuit and moreso the FRB's Wall of Fame profess. And Wall of Fame it is! Among the cherished heritage FRB preserves and promotes, one finds classic Keynes, Galbraith, Godley in continuous medley with such contemporary classicists Lavoie, Seccareccia, Volcker, Bernanke, Wolf, Wray, Krugman, Mosler, Lerner,  the BIS. Never admonishing, always respectful, FRB is a classical Podium of Great Policy in the making.

As one of its readers noted a while back, FRB never assumes as own the merit of others: it is by far the most serious and integral online conversation in political economy in the language, similar to Martin Wolf of the Financial Times for both scope and depth, and come the day, as notorious.

You may not agree with the script , but you never move on offended. Accessing FRB is like sitting back for a brilliant and enjoyable conversation over the dull-made-glamorous. There was a time when accountants and investment bankers were boring. Then they became glamorous-pin-up persons for the young and ambitious. History has shown them rich yet infamous and forever dull. FRB makes policymakers, economists and central bankers the new pin-ups: exciting, audacious, bright and magnanimous when they have courage, but not necessarily rich. Therein lies the rub! or is it the crux?

The latest FRB commentary on the role of the Bank of Canada in defining economic policy and delimiting monetary responsibility from fiscal initiatives, and then going on to analyze the impact of deficit spending on household and business investment is a superb application of Godley's sectoral balance to Canadian political economy and the planning process for 2012 Canadian public finance.

Take the time to savor the latest Classic on Carney, Household Debt, Bank of Canada and Government spending:

It'll change the way you look at economic policy.

Happy New Year.

Fitch winks a AAA...

On August 16, 2011, Fitch Ratings confirmed its AAA rating for the US sovereign debt. Whether it was an anti-climactic no-brainer after witnessing the fiasco of the S&P downgrade, or Fitch corporate insight that it may just be too early to throw the towel in on US sovereigns given the response the markets gave to the rival's downgrade is irrelevant except to seers and their jury. In fact,  the sequitur- Treasuries rose in price and equities tumbled,  the dollar surged as capital flowed into the US for the short term was predictable. Meanwhile, an overly cautious European financial system and European AAAs tried to make sense of their own regional fiasco in light of this US resurgence. It was a perfect storm for Fitch to stall on, without sinking.

Analysts Messrs. Riley, Olert, Renwick and Fitch management should be commended for their approach and narrative: 

"The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of US's exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks'."

The narrative accompanying the affirmation reflects a humble appreciation of the mission of the Rating Agencies, a subtle recognition that the US financial structure can accommodate internal and external tensions and 'shocks', support the demands of its financial and trade partners, and a realistic understanding of the US position as underpinning the global economic system. It was a reasonable call in the case of the United States- a sovereign that could not default, although Fitch nudged away from that premise by mitigating the controversy with ' the risk of sovereign default remains extremely low.'  Notwithstanding the wink,

...Fitch also wagged the finger

Ten days later,  on  August 25, 2011, Fitch London Research Paper  released its conclusions on the global consequences of a hypothetical "double-dip recession" in the US.  At the time of  the original affirmation, August 16, 2011, Fitch had also confirmed its intentions to review the fiscal state and projections of the US economy in light of the latter's own commitment to reduce its deficit. The position Fitch advocates by its affirmation of the maximum rating is not as daring as some observers would judge. The reserve status of the US currency, the depth of the US markets, and the intrinsic ability of the US to satisfy its monetary obligations vis-a-vis its creditors, even in light of slowing economic growth and domestic political tension-all warrant the Fitch AAA affirmation and the ensuing qualified caution as to an imminent review, given the integral role the US plays in sustaining global economic stability. In this context, the Fitch London Research report is a timely and welcome sequitur to the affirmation of AAA.  It reiterates and confirms the soundness of those fundamental considerations that Fitch tabled and examined in the first instance to arrive at its maximum rating. It also interposes a scenario testing the consequences of a major slowdown in the US economy.  The analysis quantifies the direct, and to a much more limited extent, warns of the second round effects , including inter-financial sector effects, of a hypothetical 'double-dip' recession in the US. Fitch concludes that no country will be insulated from the adverse impact of a further deterioration in US economic activity. First, but not foremost, is China and the combined domino impact of a slowdown in the US and a commensurate drop in GDP in China on world economies will be formidable. The greatest effect of the US slowdown will be on its adjoining geographic trade partners Mexico and Canada, and seemingly the consequence will be 'severe'. The most intense will be to small and open economies. That the healthy state of the US economy is a sine qua non catalyst for any global recovery is emphasized to the point that Fitch underscores that the US dip could tip the major advanced economies into recessions, and this includes a fragile Europe and a taxed Japan. The Fitch announcement out of London preceded the prouncements by the world's leading financial figures at the 2011 Economic Policy Symposium sponsored by the Federal Reserve Bank of Kansas City and held in Jackson Hole, Wyoming  from August 25, 2011 through to August 27, 2011. Not only did it assemble central bankers and senior policymakers, but it also gave the world an opportunity to listen to a battered field's rising stars with daring visions among which named: Mr. Dani Rodrik and Mme.Esther Duflo.

The Fitch release set a balanced and cautious mood for the world's markets and audience, thereby permitting global policymakers to ponder the complexity of a situation that required serious reflection and sound discernment in a reserved setting. 

FitchRating acted very responsibly and very professionally.

h/t Fitch

US Sovereign Downgrade by S&P: Buffo!

On the evening of Friday, August 5, 2011, Standard and Poor’s, in an act of Bravura, downgraded United States Sovereign Debt rating to a AA+ from a AAA while reaffirming its A-1+ rating on US short term, notwithstanding their $2-trillion math-error! Bravura?  More Buffonata! than Bravura! This move had to some extent been discounted by global markets. Suffice to note the past week’s session drops in all major bourses. Those drops may also pre-empt the impending confusion and instability that will characterize the upcoming weeks' sessions on most security markets, especially from Asian and European markets which, opening after watching the announcement, should experience a tumble, but not a crumble.  

Todate, Moody’s and Fitch Rating have shown caution in this regard reserving their assessments for later.

The analysis by Mark Zandi of Moody's on fiscal sustainability,  tax reform and responsible compromise demonstrates the type of level headedness that is required by Credit Rating Agencies when they approach new paradigmatic scenarios, because de facto, the current US Debt situation invites paradigmatic shifts in methodology and optics.

Sovereign Balance Sheet is not a Corporate Balance Sheet. There are overwhelming incidences of political discretion that can neither be reduced to a quantitative measure nor can they be appreciated as stand-alone components for a measurement standard. The deficit cannot be isolated from the trade-off matrices that configure the US relationship to its broader sphere of influence within the domestic and  global political and economic network.   

Apart from a global audience whose appetite was partially satisfied by the Washington deal, the winners of the Washington tug-of-war will be investors. The basic premise that some investors will be precluded from future purchases is unrealistic. Most institutional players have portfolio criteria that permits purchases on any security rated a AAA to peers by at least one or two of the Big Three. Flight from US Treasuries is also very unlikely because there is no other safer investment haven in the world than the United States.

On the downgrade, markets will bid up the AA+ US Treasuries; many investors will pull out of equity markets leading to their decline resulting from the failure of corporate equities to compete with rising sovereign debt.  The US Dollar could appreciate for a time, as timely capital inflows into the US on purchases of US sovereigns dominate foreign exchange markets. At one point, given all things equal, markets will reach a state of equilibrium: the USD should subsequently  fall into a lethargy . How far down must the Dollar fall before the J-curve comes into play is anyone’s guess. US manufacturers are no longer very competitive on global markets. Marshall-Lerner conditions may no longer prevail in an orthodox manner- what previously worked and set precedents may no longer apply to current conditions.  Ultimately, a drop in the currency increases the existing deficits and dissembles interest for the de-facto guarantor of most of the world’s assets. Moreover,  core expenditures cuts may dramatically affect a large number of sectorial players in energy, financials, defense, health and transportation as well as state, municipalities and para-government agencies.

By 2012, unless deemed progress is made on the deficit front, markets may be confronted by another adverse assessment of the US Debt situation that could trigger another downward spiral and so on.

So returning to rational predicaments.
When is the Big Sell-Off.
How much has already been Shorted.
What is the option to a Big Sell-Off.

As with any rational and conceivable counterfactual scenario, the market must review the effects of the day-after.

Firstly, if a AA+ still attracts investors, then the S & P  Grid is substantively superfluous, because it does not deter investors, it merely panders a price peg.

Secondly, if it really considers US Sovereign Debt as relatively compromised in relation to other options (what similar options are there?), then S&P should be integrally considering a reassessment, if not a downgrade, of every major holder of US securities: reassessing the actuarial liability of every pension fund, the unit value of every mutual and the stability of every Bank in the world carrying US Treasuries especially the those of the UK, Canada and the Caribbeans, as well as the holdings of the Governments of China, Japan and Taiwan, since the integrity and liquidity of their respective financials are now compromised.

Thirdly, trading partners' current accounts may find themselves as compromised by the US deficit reduction plan as US domestic players. They, and their own nationals, may indeed have to envisage a weaker investment profile than anticipated in face of such a contagion as their own economic growth falters and begins staggering.   

Finally, the effect of contagion within the American political and administrative system is even more immediate. Municipal, state and other domestic secured borrowers will not only find their investments more expensive to finance, they may actually find themselves excluded from markets. The impact of the above is extremely onerous on regions and communities attempting to recover. It is even more onerous on the American people as households will be forced to pay more for their debt. What appeared as an enterprising improvement in household wealth in the last quarters may quite rapidly deteriorate into ephemera.

There appears to be no end to the downward spiral. The downgrade weakens the Dollar, and eventually adversely skews expectations on Dollar Assets, further defeating the Dollar Stability Paradigm. Why would anyone hold Dollar assets under such conditions.  It is somewhat irrational to advance a rational argument that impels an irrational decision. Theoretically, the world should dump dollars; but no coordinated action has been exercised yet. Is the premise false or are the components of the dilemma flawed. Probably a combination of both. As to the premise that the downgrade weakens the Dollar and the Stability Paradigm is weakened, there is some truth, but there is no  real dilemma since there is no credible option to the dollar, except for the esoteric: Gold, and that should experience an early surge next week, or short date moves to the Swiss Franc or Yen. If one buys into the Gold Niche, then the predicament is: should we not revert back to the Gold Standard.

Perhaps, the real issue is that no one cares about the one S & P evaluation in the case of US Debt because 'safe haven' should be given more value than the nature or size of the deficit. Or perhaps, as reality sets in, investors will realize that the US will continue refinancing its interest payments at a higher cost indefinitely, and the principal is far enough out that it will not affect their immediate results, and in turn will be itself refinanced. So enough for intergenerational considerations!Circuit theory  and modern monetary theory can certainly clarify the situation at hand and suggest reasonable solutions. We are de jure dealing with a perpetual money printing process.

As bond yields rise, equity markets sell-off,  and since interested liquidity is not abundant these days, the market promotes its own volatility, prefers the selloff to being hostage to an uncertain future 12 months down the line-the US debt-limit problem will resurface in 2012. One hears the snickers of a community of free-loaders and free-riders. In the end, one witnesses a run to les paradis artificiels of gold and similar glitters. Metals follow course and a manufacturing sector that had tolerated an adverse and unexplainable peak in prices, experiences once again a surge in commodity prices, a drop in demand -the combination of which dampens their recovery. Layoffs follow. Companies close and household wealth plummets. We are in the third phase of the Great Recession, or Phase One of the Great Collapse. For workers and their families, it is inconceivable that this happen in and to the United States.  

Did S&P cynically engage in a Marketing bravado of 'I was First' or 'We blew it last time, and we got hammered by the US Government-it's our turn now!!! '

If so, then it's ironic that Nemesis should be invoked in this farcical manner. Showmanship is not publicly responsible. To be sure, what the Rating Agency contends is that it is simply acting in accordance with its professional responsibility, intending Hayek and claiming unintended consequences  with respect to the outcomes in performing its mission.But markets have short memory spans; they were ready to crucify S&P a few years ago for negligence; now they'll take the free ride they offer.

---

Trudeau, Captain, my Captain

 
An earnest Mr Justin Trudeau displays humble dispositions when asked by CBC's simpatica  Ms. Heather Hiscox whether he plans or considers running as leader of  the fragmented Liberal Party of Canada. Among his depositions he lists his riding groundwork and door-to-door exchanges, the ethnic community overtures and interactions, and expresses  his filial relation to a former Liberal Parliamentarian of nineteen years and Prime Minister of Canada,  recognizing the importance of hereditary links but voicing his own desire to go beyond the de facto to affirm a more independent political identity.  His entourage was probably satisfied with the Riding outcome.  Mr. Trudeau should neither dismiss history nor sidestep his genetic dowry, nor should he attempt the detour.  Machiavelli humbly suggests in the first chapter of the Prince that hereditary princes are well-disposed and are more effective in managing and relating to their constituencies when their ancestral predecessors were admired. Not to blindly follow that cleverest of advisors, but perhaps Mr. Trudeau should voice his roots more auspiciously and audaciously by anchoring his own platform within an historical continuity. The large majority in all cross-sections of the Canadian population will appreciate the prowess and filial piety.  Mr. Trudeau is the son of Pierre Elliott Trudeau and he possesses, by nature and some nurture, a degree of eloquence and savoir-faire that should make him a fine politician. Those that liked the Trudeau legend will most likely appreciate the son; those that didn't were probably not liberals-in that case it matters not! False modesty is a particularly bad tactic especially in the ensuing context of  leadership reflections  In Mr. Trudeau's case, it may fuel the smirk and finesse the smirch of petty skeptics and cynics who would doubt the credentials of the incumbent Mr. Justin Trudeau, and cry out "feign". Above all, false modesty  is often viewed by Main Street as contained pretension and leaves a blundering stain when it spills over onto a classic Waterville-Maine Hathaway.

The column's Subject-designate ‘Trudeau’ is intentionally ambiguous. The invocation is a variant to Walt Whitman's classic 'O Captain! my Captain!' -  well-known to most filmgoers as Mr. Robin Williams' lesson in life in the remarkable film Dead Poets Society.  Walt Whitman wrote the poem as a commemoration of both great triumph and great loss- which duality ultimately defines the intrinsic duplicity of life. According to some the commemoration has roots in the end of the American Civil War and the ensuing assassination of Abraham Lincoln respectively. The poem, however, is moreso an intergenerational eulogy consecrating the creative force of responsible action and daring leadership traditions handed-down and embraced respectively from elders to youth, from parents to children, from a nation to a community and from peoples to other peoples.

Yet, what Whitman inspires, Machiavelli's Discourses cautions: It is not titles that ennoble men;  it is men that ennoble the titles. In the latter Chapters of Book III of that classic read, Machiavelli recommends that leaders and captains, and there is no distinction between the two in Machiavelli, must possess exceptional qualities and skills. They must be both inspiring and trustworthy, and they must also be strategically and tactically competent-acquainted with their theatre-understand the contours and tradeoffs of the terrain. They must have the ability to organize and communicate effectively, the courage to listen attentively; the wisdom and prudence to respect and protect values that are not necessarily one’s own. They must, above all, know how to benefit from one’s own and other’s triumphs and failures, and better still, if great triumph and great failure.  

Although the National leadership is certainly for the valiant, what worked at the riding level may not be immediately commutable to the national terrain. What worked for Mr.Trudeau at the Riding level was the Name. Ethnic communities are very loyal polities with intergenerational memories, prone to appropriating their mythic ascendants, even resurrecting political colors. History warrants some caution; especially Canadian electoral history.

However, it may be the appropriate time to assume a captaincy in wake of the Liberal dirge. Mr. Trudeau will certainly be more effective in the short term and better off in the long run.

The leadership of the current Liberal Party commands not only a national but also an international theatre and audience. The role of leadership must be representative; it must convey impassioned resolve, sound judgement and responsible action. Its theatre is not only defined by local historical constitutionally designated geographies, but often extends to foreign terrains where the regional and hemispheric interests and values of their audiences may be quite sensitive by what is said and done, or not said and not done,  and where complex socio-political economies can be affected inadvertently in Canada by Canadians. The leader must master the polite and incorrect, mitigate the banal and the serious, weighing the measure of a people’s aspirations with their realities.

The leadership of the Liberal Party requires weather-worn individuals-analogous to what Polynesians called the ‘watermen’. According to tradition, it takes some time to become a ‘waterman’. This may not be Mr. Trudeau's moment to lead the Liberal Party of Canada. His time will come. The coming parliament's term for Mr. Trudeau is a welcome start.

The Liberal Party of Canada, notwithstanding its frailty, does have some very good ‘watermen’.

That's our forthcoming column.


 

TowverH

Mr. Harper, Machiavelli and Games

A previous  May 2, 2011 article distinguished between Mr. Harper's win and Mr Layton's victory. Pïerre de Coubertin's well-worn reserve in his London speech of July 24, 1908, phrases it best : "... l'essentiel [c'est le combat] ce n'est pas d'avoir vaincu mais de s'être bien battu" ('the essential thing is [..the contest] not to have won but to have fought well.').

The purpose was not to indulge in an affectation or pander pedantry.  There is good reason to distinguish between the political results. The same article commented on both results. The evident matter is the result of government; opaque is the matter of how the country will be represented in the Government.

Mr. Harper's win commends because it was masterfully planned and executed; it falls short because it was both a no-brainer and a no-contest. To his credit, hindsight tests him perfectly on both counts.

For those gamers who enjoy dabbling, consider the following.  Mr. Harper recognized the features of this election's zero-sum game;  democratic party politics do not configure a nonzero-sum game. There were only two bona fide players or opponents in this federal election: Mr. Harper and the Others. The Harper tradeoff was an option for/against a parliamentary majority. It was a non-ambivalent, unambiguous platform, for many outright outrageous- to other electors and some analysts, it even reaped of political suicide, until the last few weeks when it dawned on the more enlightened of the pundit class that Harper had foreseen the unravelling of the singular, most machiavellian scheme in Canadian political history. And I do not intend machiavellian as a demonic and caricatural fashion after the skewed readings of the Tudors, Elizabethans or french Renaissance,  but to that observer of human polities who neither conceived nor  framed the machiavellian moment now associated to his name,  to one of history's most brilliant political analysts, and "the founder and master of policy," who professed that political success is determined by courageous insight and calculated foresight-the combination of which are exceptional modes of great leadership or as Machiavelli contextually coins it "virtu".  

Mr. Harper's prerequisite for a win was  that the conservative electorate base would show up at the polls.The only way Mr. Harper could not win is if this original premise was overly presumptuous! Unfortunately for the Others, it wasn't.  His assumption was valid, the probability that  large regional contingents of conservative sympathizers would show up at the polls on election day was validated, and the game was played out with the  non-conservative base divided between three parties and ending up in two routs: the Liberal Party and the Bloc Quebecois.  A vote against Harper, was a split-vote, in other words, a half-vote! Well, math confirms that it takes twice the amount of non-conservative half-votes to supplant a whole conservative vote, and there weren't that many non-conservatives showing up, although there was a record turnout at the polls.

In this context, Mr. Harper's unwilling machiavellianism is more reminiscent of the rational deliberation depicting a Von Neumann-Morgenstern lottery. It is inconceivable to imagine anyone else in Ottawa in the same company as Machiavelli and Von Neumann with the exception of Conrad Black. Unfortunately the latter is not in Ottawa.  Mr. Harper, on the other hand, is in Ottawa. He does have a challenge in living up to that pedigree and fortunately, he is confronted by the optimally classical moment. 

The results of history will validate the rest. Whether Mr. Harper can rise above the storms that will characterize his term will depend on his leadership, because storms are already brewing on the horizon. Whether Mr. Harper can appease the expectations of Quebec that defined its fortune with the Others, will demand virtu...something that many pundits and dilettantes refuse to recognize he possesses in great quantity.

But then pundits, political dilettantes and  staffers, not only those in Canada, do not recall what fortuna and virtu denote and connote. Most recall, if at all, that Machiavelli  wrote the Prince and claimed that the end justifies the means.  There is a cultural tendency to predicate gratuitously and incorrectly the machiavellian moment to a world of intrigue, deceit and ruthlessness. Virtu is that responsibility and skill of leadership to improvise a novel vision in the face of fortune-a set of unforeseen novel events and circumstances. In Mr. Harper's case, fortune has presented the Federal Government with a Canadian dominion in which apparently, Quebec's constitutional dilemma is shelved and its traditional bloc voices are cloistered. Is Mr. Harper experiencing the last breath before the great plunge- an hyperbole to Tolkien's. Is this Quebec's tacit warning that if this doesn't work, then the Rubicon. What a Pyrrhic victory Election Canada 2011 would have been for Mr. Harper.

Personally, I think Mr. Harper is a stricter Machiavellian than the English and French Renaissance diminuitive traditions have transmitted, and as such, much more politically integral and constructive than anyone will expect. Mr. Harper is certainly, a reader of the Discourses, not of  the Prince.